The Committee met with the Board of South African Airways (SAA) and officials from the Department of Public Enterprises (DPE), including the Minister, to receive a report back on the developments relating to the airline’s performance since the resumption of its operations in September 2021; matters related to the Auditor-General of South Africa (AG/AGSA); and an update on the progress of the Special Investigating Unit (SIU)’s investigations into alleged malfeasance at the airline; as well as on the strategic equity partner (SEP) acquisition process.
The Minister avoided providing the Committee with certain details of the sale deal between the Department and the identified SEP, Takatso Consortium, stating that he could not do so because the transaction was currently in the closed period. Furthermore, due to the fact that SAA operates within a competitive industry, he felt that certain information should be kept away from the airline’s domestic competitors, who could use it to their advantage.
The Committee Chairperson said that the Committee would discuss whether it would seek a legal opinion from Parliamentary Legal Advisors on the obligation for state-owned enterprises to report and answer Members’ questions on their management accounts, particularly during a closed period, in its next meeting.
Members continued to agitate for the Minister to provide specific details on matters such as the reasons for SAA’s R51 sale price and its management accounts and eventually concluded that these answers would have to be submitted in writing. Minister Gordhan agreed to do so, but not before he established which details the Department could share at this present moment in time.
With the announcement by the Board that it was considering expanding SAA’s operations in the coming year, based on its improved performance since the resumption of its operations in September 2021, the Committee questioned the government’s insistence to continue with the sale of the airline. Instead, it argued, that this improved performance, which occurred without the much-needed R3 billion capital injection from Takatso, was a sign that the government should retain its majority stake in the airline. However, the Minister disagreed with the argument and said that for government to retain full ownership of SAA, it would have to continue allocating money to the airline, placing further strain on its limited funds. This, he stressed, was unfeasible and could not be done.
Members questioned the Consortium’s ability to raise the R3 billion capital injection required, as it has been unable to do so since the signing of the Memorandum of Understanding in June 2021 between it and the Department. The recent resignation of Mr Gidon Novick as the Chief Executive Officer of the Consortium, and his subsequent comments that there has been a lack of transparency in the transaction, giving further credence to their doubts. In response, the Minister, after describing Mr Novick as a small and relatively minor partner in the Consortium, told Members that his comments should not be taken seriously, particularly as he still remained a partner in Takatso.
In addition, the Minister expressed his confidence in the Department’s work, thus far, to ensure that the Consortium had the capacity to raise the funds. However, he admitted that if Takatso was not able to raise the required capital, the department would have to explore other possibilities.
Minister Gordhan stressed that all parties wanted to conclude the transaction as soon as possible and had hoped to do so by December this year but this has been delayed by the various regulatory steps that still need to be taken. While he could not indicate when the process would be finalised, he assured Members that the department and SAA would provide them with an update of any developments or an announcement of its conclusion.
Even though he did not favour the idea, the Chairperson suggested that the Committee may have to organise a closed sitting, so that it could obtain all the sensitive information, which was important in ensuring accountability. Particularly as Members had to ensure that no scandal related to corruption, had occurred during the transaction.
A Member was not comfortable with the suggestion and requested that the sitting be an open one, as Committee’s mandate is to ensure that taxpayers’ money is spent correctly.
The Chairperson indicated that the Committee was meeting to receive an update from SAA and DPE on the progress of the airline’s sale to Takatso Consortium. In addition, he announced that the following day, Members would discuss the Parliamentary Legal Advisors’ legal opinion regarding the vetting of officials at the State Security Agency (SSA).
After welcoming the department and SAA officials to the meeting, he handed over to the Minister to make his opening remarks.
Opening remarks by the Minister of Public Enterprises
Mr Pravin Gordhan introduced each official present at the meeting. He reminded the Committee that during the last briefing, the Board Chairperson of SAA described the agreement with Takatso as a live transaction. The department still maintained that the transaction was alive, as the involved parties were finalising the details on the technical issues. Due to the sensitivity of the discussions, DPE would be able to provide the Committee with the details of the agreement of the sale.
Members would be briefed on four items. These were: SAA’s performance since the resumption of its operations in September 2021; matters related to the AG; an update on the progress of the SIU’s investigations into alleged malfeasance at the airline; as well as on the strategic equity partner (SEP) acquisition process.
Prof John Lamola, Interim Executive Chairperson and Chief Executive Officer, SAA, informed the Committee that prior to initiating its investigative work into SAA in January 2020, the SIU provided the airline with specialised forensic services. That work continued for some time concurrently with the Zondo Commission. Both the Board and Executive Management have been interacting with the SIU on its investigations into alleged malfeasance at SAA, as it has done with other matters, in an attempt to turn around the airline and bring about an ethical and legal management structure.
On 3 November 2022, SAA received a high-level progress report from the SIU on its investigations into 23 contracts at the airline, he told the Committee. These relate to the leases of SAA aircrafts during the 2015-16 financial year and procurement. The report further mentioned that the SIU was investigating all types of maladministration, such as: the history of abuse of travel rebate benefits offered to SAA staff, which is estimated to have cost the airline more than R100 million over the years; payments made to SAA vendors; the implementation of the SAA procurement policy; as well as any irregular, unlawful and improper conduct by officials, employees and former Board members.
Thus far, 32 individuals, including former Board members and employees, have been identified as persons of interest; however, no detailed information on the investigations was provided by the SIU because of the sensitivity of the cases and to avoid impugning the reputation of the listed companies, he said. Nonetheless, the SIU recently informed SAA that three of 32 cases have since been concluded and would be referred to the Special Tribunal in the coming weeks. Thereafter, each matter will be classified according to the crime committed. In these cases, it is the pursuit of civil litigation for civil recovery in each case and then handed over to the Hawks for further investigation.
In line with its mandate to create an ethical institution and to assist law enforcement agencies (LEAs) with their investigations, SAA has employed a full-time Investigative Officer. This individual worked with the LEAs on a daily basis.
The Board, which was appointed in December 2020 and fully took over SAA after it emerged from the business rescue process in May 2021, noted several challenges affecting the airline, which include: the procurement of jet fuel; aircraft lease agreements; irregular decisions made by the previous Boards relating to the procurement of certain goods, particularly high-item assets, and any conflict of interest between the staff and Board members in this regard.
Mr Fikile Mhlonto, Chief Financial Officer, SAA, told the Members that SAA has faced several challenges both in the past and present, especially with its going concern status. Due to the continued decline in the airline’s financial viability, the audit process for the 2017-18 financial year had to be halted. Subsequent to that, the then Board, with support from its Shareholder, decided to place the airline into business rescue. It was further agreed that once the airline emerged from the process, the audit would then be conducted.
The AGSA concluded the audit for the 2017-18 financial year at the end of 2021. This meant that there were four outstanding audits for 2018-19, 2019-20, 2020-21, and 2021-22, with the AG beginning with the first one in July of 2022. SAA acknowledged that conducting all four audits at once would place a strain on AGSA’s resources but it was committed to their finalisation by the end of February 2023 and their subsequent tabling (including Mango’s outstanding audit) in both Houses.
Since the resumption of its operations in September 2021, SAA has had 700 000 bookings, with an average of 2000 per day and 4125 flights per month. It currently operates flights from Johannesburg to Cape Town, Accra, Kinshasa, Harare, Lusaka, and Maputo – whilst it also conducts charters to complete its flight programme. Based on this performance, SAA was looking into the feasibility of adding new routes but this depended on its fleet capacity.
These numbers should be viewed with the fact that the airline has undergone significant restructuring since it exited business rescue 18 months ago. Furthermore, the income statement showed a month-to-month improvement in performance relative to the budget, as well as the bottom line. However, further details would be provided to the Committee after the audit reports are tabled.
The Chairperson asked if he had amended the information on the slide which indicated that SAA had 4125 flights per year, to rather state that this was per month.
Mr Mhlonto confirmed that he had done so.
Prof Lamola mentioned that the Board has instituted a systemic process to address the AG’s findings in the 2017-18 audit report, starting with the appointment of a Chief Internal Audit Executive, who, together with the Shareholder, is expected to report progress on a monthly basis. As part of its newly launched (May 2022) code of conduct, the Board and Executive Management has prioritised instituting an anti-corruption organisational culture.
The audit was done by a private company and it was the first one done in four years.
Adv Melanchthon Makobe, Deputy Director-General: State-Owned Companies, Governance Assurance and Performance, DPE, indicated that the department briefed SCOPA on the 10th of May 2022 regarding the disposal of 51% of its shareholding in SAA. The presentation also covered the business rescue process and the update thereof; the purpose of acquiring a SEP; the roles and responsibilities of the parties in the strategic acquisition process; and the selection criteria in selecting the SEP.
Presently the transaction is in the closed period, which precludes the department from communicating the finer details publically, he explained. Only once the transaction was finalised and an unconditional deal has been reached, could DPE share the details with both Parliament and the public.
Adv Makobe provided the Committee with an update on development surrounding SAA.
He began by providing Members with an update on the SIU’s investigations into SAA cases. On 3 November 2022, the SIU submitted a confidential high-level progress report to SAA, which indicated that 23 contracts or events were identified for investigation. The key focus areas for these contracts were: the procurement of, or contracting for aircraft disposals; maladministration in the affairs of SAA in relation to travel rebate benefits for qualifying beneficiaries and payments that SAA made to vendors; and any irregular, improper or unlawful conduct by officials or employees of SAA.
To date, three of the matters have been concluded and were ready for either filing with the Special Tribunal or prosecution by the National Prosecuting Authority. While the other 20 matters are under various stages of investigation and some have been referred to the Hawks.
Thereafter, he spoke on SAA’s operational performance from September 2021 to September 2022. Presently, SAA is servicing 8 destinations, these are: Cape Town, Durban, Accra, Harare, Kinshasa, Lusaka, Lagos and Mauritius. Having achieved a month-to-month income statement performance that was ahead of budget, SAA was deliberating plans to expand its destinations and frequencies.
SAA’s audit report for the 2017-18 financial year has been completed and made certain recommendations have been made to improve the airline’s capacity. Following on this, the Board decided to implement a corrective action plan, which amongst other things, looked to finalising the appointment of a Chief Internal Audit Executive, and for an anti-corruption organisational culture to be launched.
At the end of his briefing, he mentioned that Takatso Consortium was identified as the SEP of choice in 2021, which led to the signing of the Memorandum of Understanding in June 2021, and the sale and purchase agreement in February 2022. Certain regulatory steps still had to been concluded before the deal is finalised and announced to the public.
The Chairperson then opened the floor for discussion.
Mr A Lees (DA) said he was pleased that the Committee was able to physically meet with the Board. Thereafter, he asked the Chairperson if he should pose his questions all at once to SAA and DPE.
The Chairperson said that he should do so, and if he had any follow-up questions, he could ask them later in the proceedings.
Mr Lees asked where the Chief Executive Officer (CEO) was.
The Chairperson reminded him that Minister had, earlier, mentioned that Prof Lamola was both the Chairperson of the Board and the CEO of SAA.
Mr Lees was surprised that SAA paused the audit of its 2017-18 financial year because the business was no longer a going concern. As far as he was concerned, there was no regulatory framework that spoke to this. Subsequent to that, he disputed SAA’s claim that this had been the first year it had done an audit in four years, as one was conducted for the prior financial year and there were certain reservations regarding the AG’s decision to issue the audit report before SAA had released its annual report.
He described DPE’s refusal to provide details to the Committee on the deal with Takatso as unacceptable because a closed period did not apply to state-owned enterprises (SOE). No details have been announced for eighteen months, and the prior morning, the CEO of Takatso mentioned that even he did not know what was happening in the deal. Following that, he asked DPE whom it was speaking to in the Consortium and if it had excluded the CEO from the discussions. Thereafter, he proposed for the Chairperson, on behalf of the Committee, to demand that a copy of the details contained in the agreement be submitted to Parliament.
One of the key functions of the Committee was to ensure that due process is followed. As such, he asked that a full report on the process followed; who the other bidders were; and what the details of their bids were, be provided. Whilst not doubting the Department’s claim that the process was indeed followed correctly, he felt it was only fair for the Committee to be able to be provided with the details so that it is able to make up its own mind.
He believed that SAA was treating the Committee with disdain by stating that its performance had improved relative to the budget, as it is funded by the taxpayer. As such, he asked what the airline’s performance has been on a month-to-month basis and if it could provide the Committee with its management accounts. SAA and DPE’s reluctance to share detailed information with the Committee led him to think that there was a genuine attempt to clean up the operation. Going further, he indicated that even the previous CEO of SAA, Ms Dudu Myeni, provided the details of the airline’s financial performance.
Afterwards, he asked how SAA was funding its operations, as there were rumours that it has lost money, which was in line with business rescue plan’s prediction that billions would be lost over the first three years after its resumption of activities.
He then asked what happened to the balance of the R800 million appropriated by Parliament for Mango and whether it had been used to reduce the R3.5 billion emergency funding received from the government-owned Development Bank of South Africa (DBSA). If it had not been used, he asked whether it was returned to the National Revenue Fund or still in its account. It would be irregular for the money to have been used for other purposes.
Referring to the government guarantees issued to SAA amounting to nearly R20 billion, he asked what commitments were made through these and how much still remained with the airline.
Subsequently, he asked how many pilots had resigned since the restructuring of SAA and what their stated reasons were, as there were allegations that they have been unhappy. Following that, he asked whether SAA had stopped using its internal training facility to train pilots and forced them to pay for external training – which would enable them to keep their flying licenses up to date.
Thereafter, he asked how many former SAA employees had been re-employed after receiving their voluntary severance packages (VSP) and why they received one if they were still required by the airline.
Concerns have been raised regarding the dysfunctionality of the TPF SAA Sub-Fund Board, with the airline and the department attempting to appoint SAA managers to the body, instead of waiting for pension representatives to be chosen and appointed. This would give SAA complete control over the Board. As such, he asked what the current situation was.
After that, he posed four questions in succession. One, he asked the Minister why the Department’s motivations for saving jobs at SAA were not applied to Mango and SA Express.
Two, he requested that the Chairperson ask the Department to provide reports about what occurred during the flights from Johannesburg to Accra earlier this year (with the plane coming down because of fuel contamination and issues with the engine) and Brussels to Johannesburg (where vaccines were being carried).
Three, he asked DPE to confirm whether the allegations that SAA employees were being extended credit by the airline. If so, he asked whether the legislation permitted for it to do so.
Four, given the former CEO of Takatso’s uncertainty that Takatso will be able to raise the R3 billion capital injection, he asked what would occur if it was unable to do so. Surely, the Department should have guarantees in place for this possibility.
The Chairperson outlined that other Members would have the opportunity to engage in the discussion once the Minister, his Department, and SAA had answered the set of questions posed by Mr Lees.
Minister Gordhan reiterated that while SAA was a government entity, it operated within a competitive industry and with its collapse, this has only increased. Some of the competitors sought to gain an advantage over SAA. Due to these concerns, the Department was unsure if it could share details on the airline’s monthly performance and requested that the Board Chairperson responds to the question.
On the question related to the closed period, he denied that this was being used by the department to hide certain details of the transaction. Rather, it was a reflection of the Department’s difficult balancing of the business realities and the fact that as a public entity, SAA still had to account to the public. While not discrediting the process, the resignation of Mr Novick – whom he described as a small and relatively minor partner in the Consortium – and his subsequent comments was evidence of the sensitivity of the matter. Furthermore, he believed that Mr Novick’s remarks should not be taken seriously and questioned why he chose to resign from the Takatso Board, but remain as a partner.
Tackling issues of State Capture in the entity has not proved to be easy, as significant damage was done to the culture, procurement practices, and staff morale – with many leaving the airline. Both Management and Board had the difficult task of cleaning up SAA and creating a new airline that has values of integrity.
Regarding the allegations of unhappiness amongst SAA pilots, he disputed this and stated they are extremely happy that the airline was back in the air and to have kept their jobs.
Touching on the question related to the 2017-18 financial year audit, he mentioned that what occurred then was the past and since then, both the Board and the Department have taken decisions to get the airline to the point where it is now, while also maintaining its value. SAA was not an asset that the government wanted to continue to bail out. He further explained that the aviation industry has narrow margins, meaning that one mistake would lead to a faltering of the airline’s operations.
Still referring to the same question, he told the Committee that the Department previously indicated that from 2019 a discussion with the then AG took place, relating to the institution taking over the audits of SOEs. Where private auditors were involved, the AG would begin the transitioning process. Private auditors also played a role in not detecting the malfeasance that occurred during the State Capture years, whilst being paid millions of Rands. It was important that the AG has the capacity to conduct the audits.
On who the DPE has been speaking to within the Consortium, he mentioned that it has been in talks with the majority partner on the developments surrounding the deal. During these discussions, it was found that there may be a potential conflict of interest between the minority partner’s airline (Lift) and SAA. Despite that, DPE was confident that the transaction would be successful.
Regarding the expressions of interest by other potential SEPs, he indicated that much of this process occurred during the business rescue and Covid-19 pandemic period, which placed constraints on the department’s operating environment. Nonetheless, DPE previously informed the Committee that most of the work related to the transaction was done by the business rescue practitioner (BRP) and the Transaction Advisor. Non-disclosure agreements were signed between DPE and the Advisor, which may prevent it from providing a report on this information. However, he committed to establishing if DPE could obtain the advisor’s consent, for the disclosure of the details.
Answering the question on the state of SAA’s finances, he said that the only amount provided to SAA was the R2 billion that was part of the R10.5 billion, which was set aside for interim operations and the restructuring of the airline’s subsidiaries. The rest of the money would have to be used responsibly, but with the conclusion of the transaction, much-needed operating capital will be available to the airline, allowing it to expand its fleet and subsequently its destinations.
As far as he knew, the R3.5 billion DBSA funding had been used for SAA’s restructuring and not for Mango. The restructuring mainly involved the retrenchment of a certain number of staff members and the paying out of their VSPs. In fact, the same rationale applied to SAA was used in Mango, which was that staff members should be given money to assist them and their families.
Parliament’s appropriation formed part of the R10.5 billion allocated by the government, to reposition SAA Technical and Air Chefs (which he believed to have both been successful) while Mango took a different direction. Both Mango and South African Express were not given the same assistance because of financial constraints and the difficult environment caused by the pandemic. Furthermore, he added that the recovery of airlines depended on the funds at their disposal.
Touching on the question of the guarantees, he informed Members that National Treasury had provided guarantees worth R19 billion but in the case of SAA, the full amount was not utilised – much of which was linked to the loans financial institutions made to SAA over time. A small amount of the loan repayments remained, while the guarantees were at R374 million. This, he stressed, did not indicate how much money was still owed to the banks. To show its commitment to settling the creditors, National Treasury made an upfront commitment to them. Further information would be provided to the Committee, he said.
Regarding the reports on the flights to Accra and from Brussels, he stated that those issues had been covered by the Department during the meeting in May of this year, but they could be referred to once more.
On the allegation of SAA extending credit to its employees, he hoped that this was untrue, as it was not the airline’s role and neither was it any other SOE’s.
Referring to the question about what would be done if Takatso was unable to raise the required R3 billion, he indicated that if that were to occur, there would be no deal and DPE would have to explore other possibilities. However, he remained confident that enough work has been done by the department thus far, to ensure that the Consortium had the capacity to raise the money.
The Department did not want to compromise the transaction by sharing certain information until all the regulatory processes were concluded, he stressed. Furthermore, the transaction remained alive, with the government hoping to conclude it sooner rather than later.
The Chairperson mentioned that whether the 2018-19 audit was done by the AG or not, was not relevant to him, as the institution would have been the one to delegate the authority to a private auditor. The question was how to strengthen the capacity within the AG to conduct the four remaining audits. There have been discussions with the AG, who said there is an audit action plan in place to resolve those audits. He then requested that the outstanding questions be answered in writing.
Prof Lamola mentioned that SAA is an international brand in an industry that is subject to global dynamics and cycles. As such, the Board benchmarks the management of SAA based on the international airlines it interacts with, fully aware that the airline remains an asset of the people of SA, which is managed by the Public Finance Management Act (PFMA).
Regarding the airline’s month-to-month progress, he indicated that SAA’s quarterly reports, which contain detailed information, can be found in the National Treasury’s archives.
Referring to the question on the well-being of SAA’s pilots, he said that the Board and Executive Management were very fortunate to have retained the current contingent of pilots, considering the demand for their services in the industry. Several staff members within international airlines were laid off during the Covid-19 Lockdowns but as the industry has since rebounded, airlines have been unable to cope with the demand of passengers. As a result, airlines such as Qatar have offered SAA pilots competitive packages to obtain their services.
The Chairperson requested that SAA provide all the technical matters related to the wellness of SAA pilots in writing.
Prof Lamola stated that four pilots have resigned from the airline, two of which were for medical reasons. Presently, SAA has a total of 84 pilots, 44 of which are at the first office level. Black South Africans made up 25% of this contingent, which is up from 1% in 2020, while 52% are white South Africans, down from 98% in the same period.
Touching on the question related to whether SAA still offered its training programme to its pilots, he confirmed that the airline did indeed still have these facilities, and this was headed by Captain Vusi Khumalo. SAA was paying, in part, for the training of the pilots.
Answering the question on whether SAA had re-employed officials given a VSP, he explained that each time SAA leases new aircraft, as it has done recently (both of which will be in the air in a month’s time), former staff members with critical skills are recruited. Although, due to the Minister’s emphasis on cost containment, the airline has had to keep the staff complement at a certain number. No less than 10 such former employees have been reemployed on interim fixed contracts, out of a staff complement of 1000 individuals.
The two separate flight incidents had been investigated by the Civil Aviation Authorities and reports have been produced. No adverse findings were made against SAA on either of the incidents but remedial processes have been implemented to strengthen the airline’s safety management system.
He denied the allegations of SAA extending credit to its employees, stressing that the airline had no such policy. Disciplinary action would be taken against officials found to be doing so.
Mr Mhlonto, referring to the 2018-19 financial year audit, told Members that issues relating to SAA’s going concern were raised towards the conclusion of the audit, which required the Board and Management’s attention. As there were no ready plans to remedy these matters, SAA was placed in business rescue.
Thereafter, he confirmed that the AG did conduct SAA’s audit for the 2017-18 financial year.
As the Shareholder of SAA, DPE would have to provide guidance to Management as to whether it was permitted to share detailed reports on its month-to-month performance, he said.
A substantial amount of the R819 million appropriated funds remained with the BRP.
The Chairperson asked that SAA provide specific figures on this.
Mr Mhlonto said that SAA retained R85 million of the funds, whilst the remainder rested within the hands of the BRP.
Regarding the guarantees issued to SAA’s creditors, he informed the Committee that SAA was in the process of returning R377 million’s worth of the guarantees – which did not cover SAA’s debt and R80 million of which was designated to Mango – back to the National Treasury. Presently, SAA was looking into alternative solutions to return the guarantees before the end of this financial year. Banks faced certain exposures when a customer bought a flight ticket, he added.
On the dysfunctionality of the TPF SAA Sub-Fund Board, he mentioned that a process was underway to stabilise governance in the Fund. He committed to looking into and addressing the issues raised by Mr Lees.
Ms V Mente (EFF) said that she was not satisfied with the responses provided on Mango and found it disturbing that no clarity had been given on where the process was, particularly as it has been ongoing for over a year. Both the public, who require the low fare prices, and the staff have been affected by the developments at Mango. Following this, she asked that a comprehensive report be provided on this matter.
During the meeting held in May, the Committee stressed that it regarded SAA as a symbol for the country. Based on this, she believed it would be careless for DPE to explore other possibilities if Takatso could not raise the R3 billion capital injection.
After that, she asked what basis 51% of SAA was being sold for R51 to the Consortium, as its reported income for the 2016-17 financial year was R30.7 billion, with a loss of R2.7 billion – in that same financial year, the entity achieved a clean audit. The annual statement/report for the 2018-19 financial year, signed in 2022, showed that income stood at R29.4 billion, while losses amounted to R829 million. Furthermore, losses stood at R3 billion in the 2018-19 financial year.
Noting that SAA was looking to explore other destinations – which she took as a sign that the airline was on the ascendency – she asked the Board if it believed that the selling of its equity was a strategic decision, given the improvement in performance since the National Treasury’s cash injection. If so, she asked how decisions in the reconfigured airline would be taken and what risks the state faced.
During the meeting in May, the National Treasury indicated that while it was not part of the transaction the PFMA was not excluded in the sale. She expressed hope that this matter would be attended to by the Finance and DPE Committees.
Thereafter, she asked if the Board was appointed on an interim basis or would continue even after the sale.
Minister Gordhan pointed out that while SAA, in line with Schedule 2 of the PFMA, remained a public entity, it is also a commercial operator operating in a competitive environment. While the government has, in the past, sold its entities, and transferred a majority stake of its shareholding to a SEP. To assess the state of the SOEs, the number still required, and how many would require bailouts, the President established the Presidential SOE Council. This was also in addition to the work done by the Phiyega Commission.
Debt service costs remained the largest expenditure in the fiscus, with the National Treasury having to, largely through its revenue, address this, so as to provide confidence to the rating agencies of SA’s direction. Recently DPE met with two of the rating agencies to explain the government’s decisions on SOEs and their current state. To strengthen their capacity and financial viability, some departments have begun the initiative of consolidating entities that have similar functions. This was important because it would get rid of the duplicated roles, and support staff and move the entities away from the need to receive constant bailouts.
The government remained adamant about the need to sell 51% of its majority shares in SAA to the Consortium because it was not in the fiscal position to further fund the airline. Instead of privatising SOEs, the ruling party has decided to take the middle road, which is public/private partnerships. Doing so allowed the government to keep the SOEs so that they continue to serve the public interest while leaving the private sector with the responsibility to mobilise capital.
On what would be done if Takatso was unable to raise the R3 billion capital injection, he reiterated the earlier point that sufficient work has been done on a technical level by DPE for it to believe that the Consortium did have the capacity to raise the money. Furthermore, Takatso has shown its commitment to fulfilling this requirement.
Regarding the question of why SAA was sold for R51, he indicated that DPE would only be able to provide the details once the deal was secured. However, he did explain that the transaction had been structured in that way because during the interactions with the Transaction Advisor, the parties that expressed interest in the airline laid down simple conditions, which were: no political interference; that government clear all of SAA’s past debts; and the ability to bring their own management team.
In return, the government requested that they raise money for operating purposes. Any price tag had to accept that at the time, all of SAA’s planes were leased and not owned – with its only assets being office buildings – and the fact that the business was insolvent. To ensure that the public interest was safeguarded, DPE placed certain clauses in the agreement.
Touching on the income made in the 2017-18 and 2018-19 financial years, he cautioned Members from fully trusting the numbers provided by the previous Board. Nonetheless, he requested that the current Board Chairperson clarify the legitimacy of the figures referred to.
With the shortage of available seats, there is an opportunity to build aircraft that will fit the demand, he noted. Although, future expansion will take time to materialise.
He disagreed with the claim that the National Treasury was not involved in the process, as it formed part of the 2020-21 Inter-Ministerial Committee, established by the Cabinet, which has taken all the decisions that have led the airline to this point. In addition, he clarified that a legal opinion obtained by DPE stated that Section 54 (of the PFMA) was not applicable in this case.
Adv Makobe explained that when a company is financially distressed, usually it is placed in business rescue and the BRP will then make a determination as to whether it can be rescued or not. This was applied to Mango and it was determined that it could be rescued. A business rescue plan was approved by the creditors and an identified SEP has been submitted to the department, he announced. Due diligence will have to be done by DPE to establish the credibility of the partner.
Prof Lamola indicated that the Board retained a dynamic relationship with the DPE and it supported the transaction. To this effect, Management is doing what it can to finalise the deal. A BRP was appointed to reconfigure the airline and position it on a financially viable path in early 2020. Thereafter, in June of the same year, Takatso Consortium was announced as the preferred SEP. At the time, the Board supported the sale of the Shareholder’s majority stake in SAA to the Consortium because it believed that red tape prevented the government from being able to efficiently run an airline. For SAA to survive, both he and the Board felt that it required a management team not hamstrung by political interference.
The Chairperson questioned the Board’s reasoning to sell off the majority stake to avoid political interference because the government still had a 33% golden share to veto decisions taken.
Adv Makobe clarified that the 51% majority guaranteed Takatso more powers over the decisions taken, while the golden share would only apply to issues of national interest.
The Chairperson highlighted that issues of national interest involved political considerations.
Prof Lamola mentioned that in July 2021 the SAA Board, as the 100% shareholder and with agreement from all relevant stakeholders, decided to place Mango into business rescue. At that point, the airline had debts of R2.8 billion and unused liabilities amounting to R180 million. Presently, there are no employees at the airline, as they were either retrenched or given VSPs. The BRP has prepared a Section 54 (2) process (of the PFMA) which the Board is considering. With the identification of a SEP by the BRP, the processing of (potentially) rescuing Mango was underway, he added.
Mr S Somyo (ANC) indicated that there were four areas he wanted clarity on. One, he asked whether the process of transitioning SAA away from a Schedule 2 entity of the PFMA to one that will fall under Section 112 of the Companies Act would be finalised. In addition, he asked whether it was the government’s responsibility to ensure that the airline operates.
Two, he asked the Minister if, in hindsight, the deal could have been concluded earlier.
Three, he asked if SAA would potentially lose the licenses of the routes it currently operates on or if it had already lost some. Further to that, he asked what the future of those routes were, as the government could not continue to hold onto them.
Four, he asked the department how much of the R3.5 billion emergency funding it still had and if it was ready to account to the Committee for these finances.
Minister Gordhan explained that the PFMA and Companies Act each applied differently in the process. The section on business rescue in the Companies act concludes that when the transaction is concluded, the sales of the shares will not apply to the PFMA. Whereas in the case of Mango, the company (SAA) will be disposing of the entity, which, in line with the PFMA, required the consent of the Ministers of Finance and DPE.
On whether the process could have been concluded, he mentioned that the department originally anticipated concluding the process by December of this year, but due to the slowing down of the process by the lawyers involved, this would be delayed. Another contributor to the delay was the public attempts to undermine the transaction, such as the recent statements made by Mr Novick, which he believed to be politically motivated by various interest groups.
Furthermore, the exclusivity of the economy meant that a greater number of individuals wanted some involvement in the transaction, which made the environment even more difficult for the department to operate under. As such, it was important for the government to address this, through the creation of new opportunities, particularly for younger entrepreneurs.
Certain agreements between the department and the Consortium need to be reached once the current process has been finalised before the sale is completed, he said. For him, the deal needed to be concluded by December.
In response to the question on the status of SAA’s route licenses, he noted that these remained prized possessions of the airline. He requested that SAA address this question in further detail.
Regarding the R3.5 billion emergency funding, he said that DPE was of the understanding that this was a legal obligation it entered into once it agreed on the business rescue process and its subsequent plan. Furthermore, the obligation had to be met once the payments had been made. He was pleased with SAA’s efforts to reduce the debt owed to the DBSA.
Prof Lamola explained that the licenses SAA held are subject to the Licensing Act, which required that if a license is not exercised for three months, an Annexure L must be submitted – which is where the party in question will have to provide the International Servicing Licensing Council, as well its domestic counterpart, with reasons as to why a particular route is not in use and when flights would resume.
South Africa’s domestic aviation market is deregulated, which meant that an airline company did not require a license to fly on any of the routes, he highlighted. Pressure has been placed on SAA to re-open the Gqeberha route, however, it does not have enough aircrafts to do so – currently it only has seven. Once additional aircrafts are obtained, SAA will resume some of its other routes. In line with plans to recommence with certain international routes next year, a team in SAA has been tasked with conducting thorough assessments of routes and their profit yields, he added.
The Chairperson said that it was surprising that SAA decided to cancel its direct to Mumbai, India in 2015, when it had one of the largest Indian diaspora populations in the world.
Ms A Beukes (ANC) said that she had three questions. One, she asked whether there had been a positive change in SAA that the Department could measure, since it has emerged from business rescue.
Two, she asked whether there were processes and tools in place to monitor developments within the airline, in an effort to restore its dignity. Related to this, she asked if the Investigation Officer was appointed to deal with the old cases of malfeasance and maladministration in SAA or new cases that may arise.
Three, she asked when the Department planned to submit SAA’s outstanding annual reports, which the Committee required for oversight.
Minister Gordhan confirmed that the Board had made significant contributions to the airline, such as: ensuring that it relaunched in September of last year; reducing the staff complement; restructuring SAA Technical and Air Chefs; implementing credible measures to manage the finances, and introducing anti-corruption processes. However, much more work needed to be done in SAA and its subsidiaries. Nevertheless, he applauded Prof Lamola’s decision to step into the interim structure, so as to bring about stability within the airline.
While it will be difficult for the AG to complete the outstanding audit reports, the Department was aware that it had to be done so that they can be submitted to Parliament.
Prof Lamola praised Minister Gordhan, indicating that both SAA and the country should feel privileged to have him as the political head of the Department. Based on the shareholder compact, DPE conducts constant monitoring of SAA’s activities.
Referring to the question on the cases, he indicated that SAA appointed an advocate, who was the former lead investigator of the then Scorpions, to act as an intermediary between the airline and the LEAs and to deal with any instances of malfeasance in the entity. All submissions made by the advocate, he added, assisted SAA in entrenching a clean and ethical institutional culture.
In response to the question on the outstanding annual reports, he indicated that SAA, with the AG, is attending to the audit reports simultaneously. As the CEO, he has conducted monthly meetings with the AG, to provide it with the progress at the airline. During the Annual General Meeting held in September, SAA promised the Shareholder that the audits would be concluded by February next year. While it did want to conclude them by December, it could not because the AG also wanted to audit Mango’s financial statements. The lack of financial statements has affected the airline’s ability to lease aircraft.
Ms B Swarts (ANC) pointed out that the Minister’s responses showed that the SAA Board did have much of the information the Committee was looking for. Thereafter, she posed four questions to the Department and SAA. One, she asked how much of the R819 million appropriated by Parliament was allocated to the Mango BRP.
Two, she asked if the SAA had procured new systems that will prevent further malfeasance and irregularity from re-occurring in the entity; if not, what measures had been in place in doing so.
Three, she asked whether the supply chain management (SCM) consisted of the same staff complement or if it had since changed.
Minister Gordhan asked if the Committee could provide a list of the information it required on SAA as it was available but the Department would only be able to provide certain details.
Prof Lamola apologised if it sounded as if the entity did not want to share information with the Committee. Periodic reports have been released by the BRP to all of SAA’s creditors, which provide details on the amount the airline – and Mango – received during the business rescue from the National Treasury and how much had been utilised so far. These reports are public documents and can be accessed.
Both the Board and Management have insisted that the money be used prudently, hence they withheld R85 million of the appropriated for Mango from the BRP, whom they believed did not require the additional funds until the conclusion of the process. Both he and the Board felt that the business rescue process has gone on for too long. All the information related to this matter will be made available to the Committee.
On whether SAA has implemented new systems to prevent further malfeasance and maladministration at the entity, he indicated that the Board had not yet totally cleaned up the airline within the eighteen since it emerged from the business rescue. Corruption and maladministration were able to thrive in the airline previously, partly because it was overstaffed. With the reduction of staff from 4000 members to 808, the Board was better able to have relations with them.
25% of the original staff members in the SCM remained. An additional two staff members have been appointed and the process is currently underway to appoint a new Chief Procurement Officer, as the previous one recently retired. Six individuals in SCM now report directly to the Chief Executive Officer.
The current Board and Management team are managing SAA until the SEP took over.
The Chairperson asked if it was necessary for DPE to dispense its 51% majority stake in SAA if the airline was planning to expand its operations further. Following that, he asked if clarity could be provided as to why the shares had been sold for R51, particularly when the government had injected R10.5 billion into the airline.
Then he asked for clarity as to who and what constituted the Takatso Consortium; and who the major parties involved were.
In his final question, he asked if the SEPs had not asked for the financial statements before deciding to purchase the shares. If it had not, on what basis was it buying the entity, he asked. Furthermore, he asked if the audit had to be done before or after the entity is sold.
Minister Gordhan clarified that the Mumbai route was given away as part of the State Capture Project.
Explaining the reasons to place SAA in business rescue, he indicated that prior to 2019, financial institutions were willing to lend money to SAA before but due to its poor financial position, they declined to do so. Based on this, the then Board subsequently decided that it would ground each of the aircraft, but this was stopped after the department pleaded with the banks. Thereafter, in December 2019, the banks insisted that they would only provide the entity with finances if it was placed in business rescue, and the appointment of a BRP, as well as a Transaction Advisor.
The Department heeded the banks’ demands – mainly because the month prior, the government decided that its aviation assets needed to be restructured as it could no longer afford to bail them out – and on the 6th of December, 2019, SAA was formally placed business rescue. In line with the Companies Act, the BRP took over all of the Board, Management, and Minister’s responsibilities.
Noting that none of the business rescue processes could take place without post-commencement finance, the government decided to allocate R14 billion to SAA, he explained. SAA immediately required R5.5 billion in January 2020, to commence the process, but due to fiscal constraints, the National Treasury could only afford to allocate R3.5 billion. As a result, the government had to loan R2 billion from the banks. These two amounts were prepaid to the entity.
When deliberating on what needed to be done with SAA, the government had three considerations to make. One, to continue wasting money on bailouts to an entity that was losing money. Two, to discontinue putting money into the airline, and allow for the business to be liquidated and for there to be a fire-sale of its assets – which was something its competitors wanted. If this option were chosen, the government would have no right of refusal, meaning that if the SAA brand were to be sold, it would not be offered to the state first, rather, it would go to the highest bidder. In addition to this, the workers would have only been settled with R35 000, instead of the VSPs they received.
Option three, he indicated, was the business rescue. Business rescue by definition means the restructuring of an entity and turning it into a financially viable one. This, amongst other things, included the trimming down of the staff complement. While he was pleased by the progress made in recovering the airline, he noted that this could not guarantee that it would be sustainable without external assistance.
It was anticipated that R2 billion of the R10.5 billion, meant for interim flying costs, would run out earlier this year, but due to better-than-expected revenue generated and other circumstances, the amount was not fully spent. Regardless of this resurgence, the department still believed that there was a need for a SEP.
In response to the question on who and what constitutes the Consortium, he stated that Takatso comprises Harith General Partners, which is the majority partner – and has the greater share of experience, infrastructure, finances and credibility in raising money – and Global Airways.
Regarding why SAA was being sold for R51, he explained that this decision was weighed against certain factors. One, the business had no aircraft in its name and was insolvent. Two, what its potential resurgence would be. Three, the manner in which the golden share – which was not unique to South Africa and can be found in Australia and Britain – would be managed. He committed to providing a detailed report on the reasons for the price and other questions posed by Members, once the transaction concluded.
Due to SAA’s cost base before 2019-20, many of its routes became unprofitable. Any decision to expand a route remained dependent on its profitability to the airline. For SAA to grow it will need to obtain new aircraft, through leases, and upgrade its IT infrastructure to be at par with its domestic competitors.
Touching on whether Takatso asked for SAA’s financial statements before the purchase, he informed the Committee that audited statements were not the only way to judge the viability of a business – other mechanisms can be utilised as well. However, the Department will get a professional opinion on this.
Mr Lees saw the Minister’s comments that the R2 billion had not yet been totally utilised as a sign that the airline did not have extra funds, hence it did want to expose its month-to-month performance. SAA’s lack of funds after it emerged from the business rescue was presumed in the BRP’s plan.
He suggested that the R819 million appropriated for Mango may have been irregularly spent by Mango on its business rescue process.
Thereafter, he told the Department that he was informed that five pilots had resigned at SAA since September 2021, while another five were working on notice. Three of them were captains and the other seven were First Officers. After noting that five of them were black South Africans, he pleaded with the Department not to turn the issue into a racial one.
Then he asked how much SAA was paying to train the pilots.
Regarding the two flight incidents, he asked if the Committee could be provided with reports on these issues.
From what he was informed, it was not guaranteed that Takatso would be able to raise the R3 billion capital injection. Following on that, he asked if Takatso was a registered company; and if so, what its registered number was.
Afterward, he proposed that the Committee obtain a legal opinion from Parliamentary Legal Advisors on the obligation for SOEs to report and answer Members’ questions on their management accounts, particularly during a closed period.
While he was not satisfied with some of the responses, he was pleased that the Department and SAA appeared before the Committee.
The Chairperson said that the proposal will be discussed with the Parliamentary Legal Services the following day. While he did not like the idea, he suggested that the Committee may have to organise a closed sitting, so that it could obtain all the sensitive information, which was important in ensuring accountability. Particularly as Members had to ensure that no scandal related to corruption, had occurred during the transaction.
Ms Mente was not comfortable with the Chairperson’s suggestion and requested that the sitting be an open one, as Committee’s mandate is to ensure that taxpayers’ money is spent correctly.
She felt that it was incorrect to compare the sale of the government’s Telkom shares, to the SAA case, as the state remained the majority shareholder in the former. It was unacceptable that the Department did not provide answers as to what determined the price, particularly as it said, during the meeting held in May that ownership would be determined by the due diligence.
In the same meeting, the Department also stated that the government would be liable for the servicing of debt costs, but Takatso would have to raise capital, yet no money had been paid to SAA after eighteen months, which illustrated that the Consortium did not have the capacity to fulfill this requirement.
Thereafter, she asked why the AG and the National Treasury had not been presented with a document on the identification of the SEP, as was recently done with Mango. To her, this process seemed like a heist and not a transaction.
Ms Swarts asked if the BRP instructed the Department not to share certain information; if it had, how would DPE be able to provide the Committee with what it sought? Since the BRP was in charge of all of SAA’s functions, she asked whether it was the government’s responsibility to vet senior managers and the Board.
The Chairperson asked what the deadline is for Takatso to raise the R3 billion capital injection.
Minister Gordhan said some of the questions would be answered in writing. The Department would have to look into what can be shared there and provide it in a confidential note; although he agreed that such information should usually be made available to the public. He noted that while there were different perspectives on what should be done with SAA, both the ruling party and the government decided to obtain a SEP.
Referring to the question on Takatso’s deadline to raise the capital, he elaborated that the Consortium was not required to put any money into SAA because no deal had been agreed yet and the transaction was still subject to regulatory approvals. Only once the deal is consolidated will a fixed timeline be given to the Consortium.
Takatso is a registered company and is named Takatso Aviation Pty.
On Mango, he mentioned that the R10.5 billion was provided to SAA to assist in restructuring its subsidiaries, which have since lost business because other competitors in African states have developed similar capacity.
He supported the proposal for the Committee to obtain a legal opinion on the obligation for SOEs to report and answer Members’ questions on their management accounts, particularly during a closed period, and said that the Department would also seek one.
While it was true that the government was the majority shareholder of Telkom, entities such as the Public Investment Corporation – which holds shares in Telkom as well – are fiduciary entities that can take their own decisions.
The Department felt that BRPs in South Africa have not shown that they have the capabilities to manage airlines well.
The Chairperson requested that the Department provide the written responses in fourteen days. Ultimately, the Committee sought to ensure that there was transparency in the process and that it was done within the parameters of the Constitution and law.
He then announced that the SIU and Hawks would brief the Committee the following day.
The meeting was adjourned.
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