SAA Annual Report 2017
The hearing on South African Airways was attended by the Deputy Finance Minister, Mondli Gungubele, who had been delegated by the Minister of Finance to lead an oversight team from National Treasury to meet weekly with South African Airways during its grave financial crisis. The SAA CEO told SCOPA it was needed R4.8 million immediately, keeping in mind that SAA has no credit line, there is a cash ban and a gap between revenue and expenses, so there is a need for capital to sustain the operations. He said of the R10 billion paid by government in December 2017, R7.6 billion went to pay lenders and R2.4 billion was supporting working capital requirements.
The Committee sought clarity on the challenges facing the airline. The Committee asked why the airline had delayed submitting its annual financial statements in violation of the Public Finance Management Act. The Committee asked about the causes of the irregular expenditure of R125.9 million and the fruitless and wasteful expenditure of R40.4 million. The unlawful expenditure was attributed to interest incurred on late payments to service providers, lack of planning on aircraft returns and delays in finalising service contracts and employment contracts. The Committee advised the national carrier to review its supply chain management policy and to capacitate its procurement department.
It emerged that the airline was in dire need of digitalising its management systems to monitor contracts and payments to avoid some of the duplicate payments made and to check the renewal of contracts that resulted in evergreen contracts. The lack of trained and competent human resources and a lack of information technology based monitoring and control systems was the cause of most of the illegal expenditure the airline had incurred. It was revealed that five investigations had been carried out by independent investigative organisations at a cost of R28 million, but the Committee was dissatisfied with the information and demanded a comprehensive report on the findings of the investigations and the consequence management that had been carried out.
The SAA Chief Executive Officer said that it was difficult to attract qualified personnel to meet its needs because the brand had been tarnished by the negative publicity and the liquidity challenges. He reported that the airline had a debt of R9.2 billion, as well as liabilities amounting to R17.8 billion and, therefore, was unable to pay the principal debt and as such was only paying the interest. The airline had revenue of R30.7 billion but its financial obligations exceeded its income. He asserted that an organisation could only carry a certain amount of debt and for South African Airways, it had gone beyond what it could carry. Its weak balance sheet meant that it could not attract investment or loans and, therefore, had to rely on bailouts. The airline was making losses on all its domestic routes even though all the flights were full because the aircraft used were long haul and not suited for domestic routes. Only Mango was profitable on all its routes. Out of a fleet of 64 aircraft only nine were owned by the airline and the rest were leased.
SAA executives had received threats and the Committee asked how much had been spent on security after initial media reports indicated that a R35 million security contract had been signed. The contract details and the amount of money spent were not revealed for security reasons. Members called for a reasonable solution to the problem given that SAA was an ailing airline.
Members called on the airline to cut costs such as reducing the salaries of pilots who are among the best paid on the continent and to implement good governance structures. A Member suggested SAA look for concessional loans from institutions such as the Public Investment Corporation rather than from banks which charge high interest on loans.
The Deputy Finance Minister disclosed that the airline had a long-term turnaround strategy which would conclude in 2021 when the airline was expected to break even. The first phase of the strategy involved financial intervention, operational model intervention and corporate governance intervention. The bailouts would continue with a R4.8 billion bailout for 2017/18. This would be in addition to the R10 billion paid out for 2016/17. Without the bailouts the operations of the national carrier would grind to a halt.
The Chairperson, Mr T Godi (APC), recalled that in 2017 the Committee went on an oversight visit to SAA, and two areas were not visited, SAA Technical and Air Chefs. The Committee still had intentions of completing the visit if all things moved according to plan. The situation at the airline was grave and was a concern to Parliament and the country as a whole. The main task was to try and get the airline out of the hole that it had found itself in. The situation that SAA found itself in was the product of decisions, actions and omissions of particular individuals who had been entrusted with the responsibility of running the airline to achieve its strategic objectives. But what had happened was the opposite. The objective of the meeting was to ensure that Parliament achieved clarity about the challenges facing the airline and how a collective effort could assist in arresting the situation. Parliament was fully cognizant of the gravity of the situation and it was hoped that SAA would have the same recognition. The Committee was not interested in getting alternative facts but was only the real facts. Specific members of the Committee had been tasked with leading the engagement on particular focus areas and he invited Mr Ross to start.
Mr C Ross (DA) said there were grave problems at SAA particularly its solvency and liquidity. There were gross violations of the Public Finance Management Act (PFMA) in not submitting the financial statements timeously. SAA was audited by the Auditor General for the first time in 2016/17 but SAA did not submit its 2016/17 financial statements to the AG by the 31 May 2017 legislated deadline. The reasons advanced for submitting late on 31 October 2017 according to media reports were that there were challenges in confirming the going concern assumption. There was an expectation that the shareholder would inject R10.1 billion equity and that this would assist guarantee loans from the banks. He asked if this was not a manipulation of the audit outcome and asked why the statements were not submitted on time. SAA seemed to be waiting for improved liquidity before submitting the financial statements so that the figures could look healthier.
Mr Ross said it was important for the Committee to be aware that even people on the SAA Financial Committee had never seen the Integrated Report that was submitted to Parliament. It had not been formally submitted anywhere.
Mr Godi said he was aware of that but that he did not want the issue to cloud the discussion.
The SAA board chairperson, Mr Johannes Magwaza, said the comments made were pertinent to the situation that SAA found itself in. He requested the Committee give him the opportunity to explain the scenario that led to the situation in which the airline finds itself and then they could proceed with discussing the challenges.
Mr Godi said the Committee was aware of the context that led to the situation as the Committee had a broad engagement with the AG for almost three hours. He asked Mr Magwaza to answer the questions directly.
Mr Magwaza asked the SAA chief executive officer to respond to the questions.
Mr Vuyani Jarana, SAA CEO, replied that the reason for the late submission had to do with some of the subsidiaries, specifically SAA Technical. They had issues around constructions that they had to still process. It was not the main accounts that were delayed as they were already done. SAA Technical is a critical asset of SAA so it was important that it also completed its accounting before the consolidated financial statement was submitted.
On property and equipment, Mr Ross made reference to the AG audit report which stated that the SAA Group did not adequately reveal the value of its property and equipment according to international accounting standards. He asked why this was the case.
Mr Jarana replied that the practice at SAA had been to consider an aircraft as one whole asset. The AG demanded that each aircraft be broken down into components and then the value of the individual parts were to be aggregated to find the total value of the aircraft. Some parts of the aircraft can be new and others can be rotables which can be reconditioned and moved from aircraft to aircraft. Moves were already underway to effect the AG recommendations. The AG’s audit had given the airline insight on how to accurately valuate the assets.
Mr Ross asked for a break up of the components and an overview of the different components. He noted that SAA had 52 aircraft with 10 belonging to Mango and 2 belonging to South African Cargo. He asked if the breakdown into components specifically referred to the 52 aircraft belonging to SAA when broken down in components. He asked for the value of the break-ups.
Mr Jarana replied that the portfolio of the Group consisted of 64 aircraft but he did not have the total value with him.
Mr Ross asked the CEO if he could not supply the value of the aircraft.
Mr Jarana replied the whole accounting asset base was there, but what needed to be done was to re-evaluate the component level. The reconciliation of the new and old parts was what needed to be done. The values of the aircraft are in the database.
Mr Ross said the AG recommended that a detailed governance framework needed to be implemented by SAA and he asked if this had been done. The framework needed to spell out the management of spare parts, reporting requirements, a credible asset register and adjusting protocols to the system that is to be implemented. It speaks about doing a detailed analysis of spare parts. He asked how far the Group had gone in the implementation of the recommendations.
Mr Jarana replied that they had solicited additional support and were advanced with the implementation. Two registers were being reconciled, the SAP which is the primary source of records when transactions are carried out and a newer logistics system that allows the airline to be much more efficient called AMOS. In the implementation, the reconciliation between the two databases has created a challenge with the inventory. When the migration to AMOS was being done, some minor spares were left out which has created a problem. A process of cleaning up and reconciling the two databases is currently being undertaken.
Mr Ross said one of the root causes of the asset management challenges was understaffing which is what the Committee experienced when it did its oversight visit. Physical exercises such as verifications of assets become a challenge with understaffing and he asked if this was being addressed. He recalled that during the visit there were only three members of staff in the asset management unit and they were not well trained on the systems.
Mr Jarana replied that training was being conducted around AMOS although there were still challenges on the cleaning of the data. An inventory manager has been appointed to oversee the training and migration and the first review of the fiscal stock and inventory management was already underway.
Mr Ross asked if there were staff from the AG’s Office helping with the work and to assist with better audit outcomes. He asked if SAA welcomed that assistance.
Mr Jarana affirmed that the AG had a presence as part of the audit process at SAA. They welcomed the audit outcomes because they gave specific pointers of where work needed to be done and where improvements needed to be made, especially for systems controls, supply chain management and logistics. The relationship with the AG is collaborative. The SAA staff has to do the work of getting things right but the AG provides assurance that things are being done the right way. Additional support had also been appointed because there were concerns about the capacity of the finance office.
Mr Ross asked about the impairments saying the AG indicated that the root causes were the lack of policies and procedures in place to show how the impairments should be identified, calculated and disclosed for the various classes of assets at SAA. He asked if the CEO could give an indication of the reconciling of the journals in terms of the systems as it was quite important. He asked the percentage of leased aircraft from SAA fleet of the 52 aircraft and the impact they have for the valuation of the assets.
On the policy for the valuation of assets, Mr Jarana replied that a policy had been developed and it was being reviewed the two past weeks. Out of the 64 aircraft that the SAA has as a group, nine are owned and the rest are leased.
Mr Ross said the AG findings showed that SAA Technical measures its inventory at the lower of costs and he asked what value they place on the leased aircraft and what the value on the owned aircraft. The calculation is obviously different. He asked how the CEO foresaw the future structure of SAA between leased and owned aircraft to make SAA more viable as a business.
Mr Jarana said the question of the valuation of assets was driven by policy. The policy had been defined now and there was clarity. On the question of leased versus owned aircraft, the leasing and buying of aircraft was a financing decision and a product of the company’s financial position which is determined by the balance sheet. If the balance sheet is strong, it means there is the possibility of attracting financing from the banks keeping in mind that aircraft are booked five years in advance for production. If the balance sheet is strong, buying aircraft is a choice that is made. If the balance sheet is weak the only option is leasing aircraft. Most airlines globally operate with a mixed model.
Mr Godi interjected and said in the case of SAA, the aircraft had been owned by the airline but then a decision was made to sell them.
Mr Ross noted the decision the company had made to move from ownership to leasing of aircraft and asked Mr Jarana what vision he had – whether he was going to maintain the same policy or create a new policy and how that would affect the make up of the fleet.
Mr Jarana replied that SAA had engaged a new policy of valuating assets. Componentising aircraft might change the valuation and determine the way forward.
Mr Ross asked if the new policy required the shareholder to provide an equity injection of R10 billion.
Mr Jarana replied that the shareholder had made a pronouncement that SAA should find a strategic partner. On the equity injection, the shareholder would make a pronouncement.
Mr Ross said that general security of stock was weak at SAA which had resulted in thefts. He asked if there was consequence management for those that were found liable.
Mr Jarana replied that the main challenge involved putting systems in place as the AMOS database and the SAP database had not yet been reconciled. It was difficult to ascertain whether stock had been stolen because the physical count was still being done. There was also a possibility that some parts might be on the planes as some of them were rotables and could be reconditioned.
SAA Board chairperson, Mr Magwaza, agreed that the board was concerned as to whether there was theft at the airline. The Board had appointed a forensic team from among the board members to probe this matter because they had been receiving anonymous tip-offs from the public through e-mails and smses. The culture the Board was inculcating was one of zero tolerance towards fraud.
Mr Ross said the IT systems and governance structures were inadequate. He asked if the IT systems were outsourced and whether any help provided by the State Information Technology Agency (SITA).
Mr Jarana replied that the state of IT at SAA was a mixed bag with both internal and outsourced IT systems. He conceded that the level of technology utilisation was very low. They had two data centres with data backup but the problem lay in their being situated on the same campus.
Mr Godi asked if SITA was involved.
Mr Jarana replied that they were not involved.
Ms T Chiloane (ANC) asked how much SAA was spending on aircraft per month since they were leasing them.
Ms N Mente (EFF) asked why SAA could not have its own aircraft.
Mr Jarana replied that the current balance sheet could not support transactions for the purchase of new aircraft. They were still doing an analysis.
Mr Magwaza added that the Board would do a thorough job of analysing the possibility but that they would not do anything that would damage the balance sheet.
Ms Chiloane asked how long the period of the lease was.
Ms Mente requested that the CEO provide this information by Tuesday the following week.
Mr M Booi (ANC) said according to the SAA Integrated Report, SAA had to repay a loan of R8.9 billion, as well as other liabilities. He asked the CEO why Members should believe him that he can turn around the liabilities which were too much. He said asserted that SAA did not have capital.
Ms N Khunou (ANC) said SAA had revenue of R30.7 billion but it always needed bailouts. The leased aircraft were taking away all the money that was being made.
Mr Jarana disclosed that the balance sheet was very weak with R9.2 billion negative equity. It was impossible to buy aircraft using cash and even the bigger and more profitable airlines did not do that. Purchases of aircraft are made using the balance sheet. The loans that SAA had contracted were maturing in November, so there was a need to re-negotiate them. Every business had a maximum debt carrying capacity and at present, SAA was only paying the interest on the debts and not the principal. With the debt of R9.2 billion, SAA revenues were not able to cover the costs. That was why the R10 billion injection by the shareholder was required.
The root causes were identified by analysing all the routes that the airline was operating. All the domestic routes were loss making even though they were full. There was a need to increase the utilisation of the aircraft. Some of the aircraft being used on the domestic routes were not ideal because they were meant for long haul flights and they consumed a lot of fuel. Mango was profitable on all of its flights, but SAA was not.
Mr V Smith (ANC) making a reference to the SAA Integrated Report saying there seemed to be a discrepancy between what the board directors said and what the AG said about SAA as a going concern. There was a history of losses, debts and uncertainty about the future. The AG says there is a serious concern but the directors appeared to be saying the opposite. He asked the Deputy Finance Minister who was present why SAA should be bailed out until 2021.
Mr T Brauteseth (DA) said it was good that Mango was profitable on every route. He recalled that during the oversight visit to SAA, the sales department staff reported that when they advise that a route is not profitable it sometimes takes six months before change is effected. He asked why it takes so long.
Mr Godi remarked that it would not be possible to exhaust all the issues with SAA and that they would consider this meeting as a first engagement.
Mr Jarana replied that they were dealing with the history. Since November 2017, they had established an oversight forum chaired by the Deputy Finance Minister which meets weekly. It was looking at market rebalancing and a new framework for doing things.
Mr Brauteseth advised the CEO to listen to his staff as they had some good ideas.
Ms Khunou said she was glad the Deputy Minister was helping. The AG had identified poor record keeping and it was important that the internal auditor look at this.
Mr Jarana replied that they were trying to put systems in place for record keeping as previously records were kept manually and there was too much reliance on paper. Even records of contract cycles were kept manually. He attributed the poor record keeping to management instability at SAA.
Mr Godi asked where all the papers were kept.
Ms Khunou said SAA had a problem. Addressing the internal auditor, she asked him how long he had been at SAA and told him that the AG had said that he had failed.
Mr Siyakhula Vilakazi, SAA Internal Auditor, replied that he had been at SAA for six years and that most of the issues that had been raised by the AG had already been raised by internal audit. However, as internal auditors they were not part of the management as they had to maintain their independence in order to fulfil their functions.
Mr Jarana replied that one of the challenges facing SAA was capacity constraints. It was the AG’s first audit of SAA.
Ms Khunou said with a staff 10 071 there was no competence at SAA and there was a need for a skills audit report.
Mr Jarana agreed that part of the challenge was capacity and capability. Part of the strategy being adopted was to build a fit-for-future model airline with competent staff.
Ms Khunou pointed to the reported fruitless and wasteful expenditure of R40.4 million and irregular expenditure of R125.9 million in 2016/17 and asked if SAA did not have systems in place to prevent this.
Mr Vilakazi agreed with the assessment of the AG that the control systems were inadequate. He admitted that documentation was often missing and when procurements were done, it was difficult to identify possible areas of irregular, fruitless and wasteful expenditure.
Mr Godi remarked that the SAA legal department was manned by one person and contracts were done through letters of award.
Mr Jarana admitted that they had a challenge with systems and personnel particularly in the legal department. However, another person had been employed in the legal department. Another challenge for contracts was that the Board had made a decision not to award contracts longer than six months and that had created a backlog of contracts that needed finalising and renewing. It created a challenge even for internal audit as they could not keep track of contracts as there was no flagging system.
Mr Godi expressed surprise that the responses the members were getting appeared to suggest that SAA was a new entity. There were three drivers for irregular, fruitless and wasteful expenditure: Visa fines, claims from dissatisfied customers, suppliers charging interest on the late payments.
Ms Khunou cited the other challenge of duplicate payments to suppliers and service providers. She was concerned about employees who did not want to be vetted.
Mr Jarana replied that the money recovered from the companies that received duplicate payments. The second item was an over-payment for a contract management system that was not fully functional. A new system called Ariba would assist with supply chain management and contract management.
Ms Khunou argued that Auditor General South Africa (AGSA) had been in the SAA offices for 11 months and they knew what they were talking about. What the CEO was explaining was not the case and she demanded to know the supply chain managers and those companies with evergreen contracts. She asked the CEO to get to the bottom of the evergreen contracts that he had inherited. Without controlling those contracts, transformation would never happen because the same persons would be getting the contracts sometimes under different names.
The Acting Chief Procurement Officer, Mr Kenneth Pillay, said a manual process was put in place on the procurement side and on the payment side to control any transaction going through the system.
Ms Khunou asked how many staff members were working on the manual process.
Mr Pillay said there were 20 staff on the supply chain side and 10 on the finance side. They had put controls in place where before any payment is processed on the financial system, all checks and balances will be done to determine if a contract is in place and the values that have been paid to that contract. This is done to avoid duplication of payment. The duplicate payment report would be submitted to the Committee.
On the evergreen contracts, he agreed with Ms Khunou as contracts have come through from early 2000 and continued. The department is taking stock of every contract that is held by the SAA Group corporate and subsidiaries across the board, to find out when each contract started and to ascertain the necessity. There is a report. Some of the contracts are out of necessity as airports across the world use certain service providers, but some evergreen contracts do not make sense and they are busy investigating those.
Ms Khunou said it was only in South Africa where there are open skies. She asked how foreign airlines like British Airways who was profiting but the local airline is not. She said the country had institutions like the Public Investment Corporation (PIC) that gives loans with low interest and she wondered why SAA had to go to banks and pay such high interest. There is a need to stop sleeping as this is our country.
Mr Godi requested the Deputy Finance Minister of Finance to take note of the point on the open skies policy. In foreign countries, SAA does not enjoy the rights that are accorded to foreign carriers in South Africa. Other airlines are free to operate on any route in South Africa and yet SAA is bleeding and needs money.
Ms Khunou said SAA did not respond to the question on vetting
Mr Jarana replied that they had a portfolio of workers that had been vetted.
Mr Godi interjected saying they were aware that some staff members had been vetted but they were interested in those who had not been vetted including the previous CEO who had refused to be vetted. The Committee was only interested in knowing whether he had made any progress or not.
Mr Jarana replied that they had not yet acted on the matter. He would act on those who had not been vetted and report back to the Committee.
Ms Khunou said SAA had 1 237 Air Chefs and she understood there were other contracts for catering services. She asked how the two were differentiated.
Mr Jarana replied that Air Chefs was 100 percent owned by SAA and was part of the group as a subsidiary. SAA contracts with Air Chefs to provide all on-board catering services except for Mango. Air Chefs does the sourcing of the different components on their own.
Ms Khunou asked if Air Chefs was a government entity.
Mr Jarana answered in the affirmative.
Ms Khunou suggested spending an entire day at SAA to discuss supply chain management because she believed they were making a mockery of transformation. Most of the companies that failed to provide three quotations were African enterprises. These local enterprises needed to be assisted to conform to the bidding requirements, otherwise it can be taken for granted that SAA is not interested in transformation.
Mr Godi guided the meeting that there were many questions that could be asked on Supply Chain Management (SCM), but he wanted to give an opportunity to Mr Kekana to address his focus area.
Mr E Kekana (ANC) said he was disappointed with the responses thus far. He said the last time the Committee met with SAA, it was asked to investigate certain issues and to report back about their findings, but they were not giving information that had been requested beforehand. Comments such as ‘the matter is being reviewed’ were not helpful. The Committee just wanted to know why there were illegal contracts. SAA decided to appoint five companies to investigate this at a cost of R28 million, which was value for money, and yet SAA did not provide them with information. He asked why this was the case.
Mr Jarana asked for the names of the companies so that he could respond.
Mr Vilakazi, SAA internal auditor, said ENS investigators had been were appointed and they could not access some of the information because certain files could not be located. Some former employees may have left with the files. The same challenges were faced by the AG as were faced by the investigators.
Mr Kekana asked the internal auditor whether he had seen the report and what his impressions were.
Mr Vilakazi replied there were aspects of the report that he was not happy with, especially about evidence such as who they interviewed and where they did the inspections. All his concerns were communicated to the investigators. He agreed with them on matters such as procurement, contract extensions and areas where there were no contracts, but he was dissatisfied with the audit evidence provided to him
Mr Kekana asked the internal auditor what he did with the concerns he had expressed and whether he had reported to the management and Board.
Mr Vilakazi replied that he was happy with the findings of the Open Water Report and they were being acted upon. Individuals had been written to about consequence management such as suspensions. However, the investigations did not just involve misconduct, but also involved process issues. He was also happy with the Ernst & Young Report which involved contract management, as well as policy and systems control matters. The ENS report was divided into three categories and the first one was potential revenue losses, but they did not indicate actual revenue losses. The concern was how they came up with those estimates. However, those findings were not dismissed and the recommendations were being implemented.
Mr Kekana said he wanted to go through some of the contracts because he was being given general answers. He asked about concerns about the Air Chefs tender. A bidder raised complaints about the procurement process which he alleged was not fair, transparent and cost-effective. There was misconduct by an SAA employee who was involved in the tendering process. He asked what happened to the employee.
Mr Vilakazi replied that there were many investigations conducted around the Air Chefs tender. The investigation report recommendations were implemented because what was found was that the people who conducted the procurement process did not have the skills in documenting what was required from the potential bidders. When the report came out, the CEO approached the employee and asked why there were gaps in the tendering process. The employee resigned and left Air Chefs although his reasons for resigning were not clear. Some of the other employees in the procurement section of Air Chefs resigned on their own and others were let go. Those who were found to have done wrongs but were returned were put through disciplinary processes. The Air Chefs procurement section staff is now almost completely new.
Mr Kekana asked the internal auditor why he had problems providing that information because it was what the Committee had been looking for, but no report had been submitted.
Mr Vilakazi replied that he had prepared a report with all the information on the investigations, the outcomes and the action taken. The report had 11 investigations and had been submitted to the Committee, but he would go back and improve it.
Mr Kekana said agreement had been reached about closing some unnecessary SAA offices but nothing had been done about it.
Mr Magwaza replied that he shared the frustrations of the Committee and there was a need to address the outstanding issues. He said it appeared that there was a variance between the way SAA had prepared reports and what the Committee expected. He did not know if the Committee expected granular reports.
Mr Godi said the Committee needed specifics.
Mr M Hlengwa (IFP) said perceptions go a long way as to whether an entity is doing well. He asked the CEO to explain, confirm or deny the existence of a R35 million contract to provide security to senior personnel. It was alleged that procurement procedures were not followed.
Mr Jarana clarified that as early as December 2017, SAA executives started receiving threats and had approached the Board. Looking at the state of SAA, the Board invoked a process within the board charter so that the executives could be protected. Procurement processes were observed. He could not divulge further details in public due to the sensitivity of the matter, but he offered to brief the Committee behind closed doors.
Mr Hlengwa said that he was just looking for the actual figure and not looking to expose information that would compromise the security of the executives. There was a need to look for a solution that was reasonable and within the means of a struggling airline.
Mr Magwaza attempted to explain further, but he was stopped by Mr Booi who reminded him that he was not co-chairing the meeting but was appearing before the Committee to account. He was overstepping his boundaries.
Mr Hlengwa said during the oversight visit he interacted with the SAA staff and that it is a paper heavy institution. He asked how SAA was navigating technical innovation.
Mr Jarana disclosed that SAA only gets 15 percent of its business from digital platforms
Mr Kekana asked the CEO to explain the visa fines and how it is that they are unavoidable.
Mr Brauteseth said the focus of the Committee was public accounts and there was no need to delve too much into policy matters. The AG’s audit report indicated that there were massive compliance issues at SAA and that a service provider had been appointed to assist with internal controls. He asked the CEO how many people were in the internal audit department and the sort of support that was being given to them. He further asked why they were using consultants.
Mr Jarana replied that the internal audit team was not fully capacitated in competence or in number. The consultants were supporting the finance functions that had been flagged by internal audit. SAA was depleted of skills and they were trying to get new people to beef up the current staff.
Mr Brauteseth asked for a commitment on when its internal audit function would be up and running.
Mr Jarana replied that there are two instruments that are needed to build any organisation. SAA as a brand does not sell to top skills given what was happening in the public. It was a struggle to recruit top skills from outside. His experience was that people were not willing to leave good jobs to come and work for SAA. He said he wanted to be honest and transparent. SAA was using a three-pronged approach to resource skills. Firstly, to recruit top skills with experience; secondly, to get support from consultants and, thirdly, to get interim executives comprising retired people.
Mr Godi said Mr Brauteseth was asking for time frames.
Mr Jarana replied that they would recruit staff within the audit department within a period of three months.
Mr Brauteseth said if the Board had put together a proper plan they would have given him a proper date without the long explanation. He was not convinced and said SAA would come back the following year with the same story.
Mr Smith said he wanted to take a slightly different stance. He had been listening to the discussion and they had been talking to management. He wanted to remind the Board that they were the accounting authority and not management. He agreed with what Mr Brauteseth was saying. They should not have been asking the internal audit manager, but should have been saying to the accounting authority that they had a problem. According to the AG the Board had a problem. He was putting it to the accounting authority that they had a problem and most specifically to Mr Moosa because he was the chair of the audit committee and he had been in that chair since September 2016. Unless he got his act together, the Committee was duty bound to say that as a Board member he was becoming derelict in his duties unless he got his act together as the chair of the audit committee. The Committee was duty bound to say he was not doing his job as a director. That was how they should have been approaching the matter as a Committee.
Mr Smith said the AG in his audit report said for all the irregular expenditure of R125.9 million and the fruitless and wasteful expenditure of R40.4 million there was no evidence of investigations on these. That was the responsibility of the accounting authority. If they were unable to say to the Committee the investigations and consequence management had been carried out for irregular, fruitless and wasteful expenditure, then the Board has a problem. Going forward, the accounting authority must come to SCOPA understanding that they were going to be asked questions and the CEO and his team would be the support staff. He asked what investigations had been done on the R125.9 million for irregular expenditure and what investigations had been done on the fruitless and wasteful expenditure of R40.4 million. He asked if any investigations had been done and at what time.
Mr Moosa informed the Chairperson that he did not believe the Board had been derelict in its duties. If he had been found to be derelict, he was happy to leave the post.
Mr Godi replied that no one was suggesting that.
Mr Moosa said he just wanted to reject the assertion that they were derelict in their duties
Mr Godi said the point they were trying to make was that if there was a problem and it was persisting then they would be forced to say the Board was becoming derelict because it was the Board’s responsibility to fix it. It was not a finding that the Board had become derelict.
Mr Akhter Moosa, SAA board member and audit committee chairperson, said as far as the fruitless and wasteful expenditure was concerned, management was addressing the problem and there might be a further update. Management was closer to the matters. The audit management committee only meet four times a year. If there was any investigation into the fruitless and wasteful expenditure he was not aware of it. There was a lot relating to the irregular expenditure that pointed to a pattern at SAA and that was that they had been unable to retrieve any information for the AG to conclude the audit finding. Some of the other matters concerned contracts that had been awarded without following procedure. He was not aware that forensics had been specifically engaged to investigate those matters. He was aware that investigations had been conducted at SAA Technical where Open Waters had been engaged to conduct the investigation and disciplinary steps had been taken. Specifically on the question, he was not aware.
Mr Smith clarified that he did not say the Board was derelict but that they would be forced to declare that if things did not change. He reminded Mr Moosa that the PFMA requires the Board to conduct that investigation. It was not him asking Mr Moosa to do the investigation but the PFMA, and he was saying that he was not aware that an investigation had been done. Did he really expect Parliament to turn around and say to him well done? They were not going to do that. He was not complying with the PFMA and Mr Smith was entitled to say the Board was not doing its duty.
Ms Mente said that the disadvantage for SCOPA is that it deals with things that have already happened. The CEO was sitting with the same people that were working with the former CEO. The AG complained of leadership and cited different categories where leadership was lacking. She complained that the CEO was outsourcing expertise when the organisation did not have money.
Mr Jarana replied that they were outsourcing because of lack of capacity in finance.
Ms Mente said that the AG had indicated that sections 51 and 52 of the PFMA had been violated. She asked what happened to the violators and asked for their identities.
Mr Jarana replied that they were still conducting investigations as to who should be fined for the visa violations.
Ms Mente observed that Naledi Khumalo was dismissed but Phyllis Bennett was not fired. She wondered how someone who had resigned was able to access the procurement system. She urged management to get the money from her pension.
Mr Khomotso Chadi, SAA corporate governance and compliance officer, acknowledged the inconsistency in consequence management. He disclosed that in future the compliance department will also have power to discipline erring employees apart from the CEO.
Mr R Lees (DA) asked for confirmation that the R10 billion bailout was completed by 31 March 2018. For the new financial year there was provision for an R4.8 billion bailout to be paid to SAA. He asked when the first part of that R4.8 billion would be required in order to prevent SAA from grinding to a halt.
Mr Jarana confirmed that the R10 billion was paid in December with R7.6 billion going to pay lenders. R2.4 billion was supporting working capital requirements. Keeping in mind that SAA has no credit line, there is a cash ban and a gap between revenue and expenses. There is a need for capital to sustain the operations and discussions have been ongoing with Treasury as well as the banks on how they could have an open credit line. The long-range plan has been worked out with the break-even point being reached in 2021. The money was required immediately.
Ms Khunou said she was worried with the CEO’s answers, particularly on technical supervision. It was worrying that the airline was being sued on matters such as faulty in-flight entertainment in Brazil. She called for a reduction in the amounts paid to pilots because SAA was not just composed of pilots.
Mr Jarana responded that the in-flight entertainment used by SAA was no longer supported by manufacturers because it was old. When parts broke down service providers had to be sought to make those parts which was not sustainable as it was expensive and some parts just did not fit over a period of time.
On the high salaries paid to the pilots, SAA has regulating agreements with the pilots which were legal agreements and SAA could not unilaterally change them. This was why he was engaging with them so that an amicable solution could be found. He had organised a workshop where these matters would be discussed.
Mr Booi got concerned about the workshop and asked how much it would cost because the money belonged to the fiscus.
Ms Chiloane said Air Chefs had regressed and there was poor contract management at the airline. She was worried because she was not sensing any enthusiasm and energy from the responses coming from SAA. Five investigations had been carried out and yet cargo thefts continued. Whistle blowers had indicated that there was a syndicate that was responsible for cargo thefts and this was evident from some of the staff who were living beyond their means. She appealed to the SCOPA chairperson that they should meet SAA again.
Mr Vilakazi, responding to the comment on investigations, said the Open Water investigation had been finalised and 10 people had been suspended and letters to that effect had been sent. On cargo thefts, he said he was not aware of any investigation that had been carried out in the last 18 months and he emphasised that no investigation could be carried without him.
Mr Ross said the liquidity and solvency problems were expected because SAA cannot pay back its huge debt. It appeared that the focus had shifted from getting loan guarantees to getting bailouts. He advised that they should look to Ethiopian Airlines as a model of how to run an airline because it was profitable with a profit of over R4 billion. The airline was completely owned by the state but it was run by an independent management.
Mr Kekana advised that it would be better to conclude the matters that arisen in the first two hearings before addressing new ones. He warned that dealing with new matters would be problematic. He requested that comprehensive reports be compiled on the five investigations that had been carried out. The hefty payments to pilots werein the reports and it was clear that they were among the best paid in Africa and perhaps throughout the world. It was, however, not clear what the SAA executive committee was doing about it.
Mr Godi observed that the reports showed financial losses and he wondered from whose commission or omission they came. He said the losses could not be allowed to continue. He asked why each of the subsidiary companies of the SAA Group had a separate board. He cited SAA Air Chefs and SAA Technical as being notorious for violations. On the evergreen contracts, he asked how many times they had been extended and who was responsible for the contract extensions. On Ernst & Young, he asked who had ‘captured’ them because they had done nothing and yet they were back.
He asked the Deputy Minister to make the final remarks.
Deputy Minister of Finance, Mr Mondli Gungubele, said he would continue to inculcate the partnership between the SAA Board, management and the Committee. It was not a partnership that could be dispensed with. The crisis at SAA was grave and there was a need to have a workable turnaround strategy that would cut losses. It was important to place the airline onto a sustainable path. The gravity of the situation resulted in the Minister commissioning the Deputy Minister to have a Treasury team work together with a SAA team on a regular basis so that they could give attention to the challenges. Two or three meetings had already been held and a lot of work done. Lessons could be learnt from the success of Eskom before it started to experience its current challenges. Lessons include the centrality of a proper governance framework where the board and the shareholder converge; where there is a balance between government being worried about accountability and the board being worried about excellent performance and entrepreneurship. Finally, having a workable relationship which is what Mr Ross was talking about.
On the fiscus, the Deputy Minister said there is an entity owned by the state which is in a financial crisis. Naturally there should be set conditions that must be met before the entity is given financial support. The entity must demonstrate its commitment to get out of insolvency. That is a minimum requirement. He wanted to propose that the Committee be taken through the Long-Term Turnaround Strategy (LTTS) as that would answer a number of questions it had. The primary focus of the first phase is financial intervention, operational model intervention and corporate governance intervention so that there would be some comfort knowing that there were systems in place. The continuity of staff would always be determined by their performance. He proposed that the Committee send SAA deadlines for submission on issues of concern.
Mr Godi thanked everyone for their input and hoped that that the same team from SAA would come back to appear before them.
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