SAA Unallocatable Debt Bill

Meeting report

FINANCE SELECT COMMITTEE
9 February 2000
SOUTH AFRICAN AIRWAYS UNALLOCATABLE DEBT BILL: BRIEFING; COMMITTEE PROGRAMME

Documents handed out:
South African Airways Unallocatable Debt Bill
Proposed Draft Programme for Select Committee on Finance ( see Appendix 1)

SUMMARY
The committee was informally briefed on the South African Airways Unallocatable Debt Bill which is slotted to be passed by the National Assembly on 22 February. Discussion of the Financial Services Amendment Bill was postponed indefinitely as it had not yet been brought to the National Assembly. The draft committee programme was issued.

MINUTES
South African Airways Unallocatable Debt Bill
Mr Molefe, in charge of Asset Management for the Department of Finance, explained the transaction which had necessitated the South African Airways Unallocatable Debt Bill. Prior to the corporatisation of South African Airways on 1 April 1999 the airline had a debt of R4.0575 billion and assets of the same amount, leaving it with a net asset value of nil. The effect of this debt was that SAA could not be sold to a strategic partner. In order for 20% of SAA to be sold to Swissair, a deal was made that R3 billion of SAA's debt would be taken over by the South African government and Transnet, the parent company of SAA. The government took on R1.3 billion and Transnet R1.7 billion of the debt. In return, both Transnet and the government would share in the profits of the sale of SAA. However, these amounts could not be set off against each other; the taking over of the debt and the taking of the profits had to be shown separately. The debt also included the costs of debt servicing since 1April 1999.

Discussion
The following questions were raised:
When would the profits from the 20% sale of SAA be paid into the government's revenue account?
Mr Molefe replied that Swissair had already paid for the 20% share of SAA but the delay was being caused by South Africa not yet having taken over the debt. They had a binding agreement with Swissair that on the 15 February they would receive a cheque from the company.

What effect will the transaction have on interest rates?
Mr Molefe said there would be no effect since this was only a debt swap.

Does this mean SAA is no longer being subsidised by government ?
Mr.Molefe's response was that presently government wholly owned Transnet and SAA was a subsidiary of Transnet. He felt that there was no longer a need for the airline to be subsidised because the company was experiencing a turnaround. He referred them to figures released in the media that morning. With some of these profits SAA was planning on leasing new Airbusses.

Mr Theron (DP, Gauteng) asked how this deal is influencing Transnet.
Mr Molefe said that by taking over the debt Transnet was in fact worsening their gearing by R1.7 billion. However there would still be profit sharing and Transnet would be receiving dividend income.

The question was raised as to how the market perceived the transaction.
Mr Molefe reiterated his point that SAA was trading very well. The effect was more on Transnet than on the market. There had to be consideration of other bonds which were not trading as well. For example pension fund stock which the previous government had raided for their own resources.

Mr Taabe (ANC, Mpumalanga) asked whether the transaction was necessary to make SAA profitable or could it possibly be retracted.
Mr Molefe said that the transaction could not be retracted since Swissair had transacted on the basis that it would be done.

Mr Theron asked whether restructuring at Transnet would cause job losses. Mr Molefe was unable to quote any figures. In the first week of December it was decided that an Interministerial Committee of officials from the Department of Finance and Public Enterprises should visit, study and formulate a solution for Transnet's debt. This committee would report back to the Minister in March.

Mr Marais (ANC, Free State) asked what has caused SAA's turnaround. Also, he asked whether transformation was well on course.
Firstly, Mr Molefe responded, the turnaround was caused by the taking over of the debt burden. Furthermore, Mr Coleman Andrews (CEO of SAA) had implemented a strategy which was influencing operations positively. The products offered by the airline were much more competitive and Swissair was a very strategic partner. A combination of these factors had resulted in the turnaround. Regarding the transformation at SAA, Mr Molefe could not comment since he was not involved at that level; it was a matter of corporate governance.

The Chairperson, Ms D Mahlangu (ANC, Gauteng) asked Mr Molefe to explain to the committee members the effect a delay in passing the Bill will have on the interest to be paid by the government.
Mr Molefe said that when the Bill was passed the government would take over the debt. At present Transnet is paying interest on R1.3 billion. The interest will in fact depend on when the Bill is passed. He emphasised that the transaction would have to be passed soon because if it goes to the next financial year Transnet will have to report a R1.3 billion debt on its books which worsens its gearing ratio.

Mr Theron noted that he had attended the previous day's Porfolio Committee meeting on this topic. He commented that SAA's 'arrive on time' strategy was working and its new partner was giving it world linkage. He said that one problem they did experience was that the airline had six different types of aircraft. There was now a move to standardise their fleet ,which would be more economical.

Financial Services Board Amendment Bill
The briefing on this Bill could not take place. The Portfolio Committee had communicated to the Chairperson that they had not discussed the Bill nor was it yet on the National Assembly programme.

Committee Programme
The committee looked over the proposed draft committee programme (see Appendix 1). The chairperson pointed out that the National Assembly would pass the South African Airways Unallocatable Debt Bill on 22 February. This meant that their planned formal consideration of the Bill scheduled for Monday, 21 February, would probably not take place. The meeting adjourned after the Chairperson dealt with house-keeping matters.

Appendix 1:
Proposed Draft Program
Subject to Change: 09/02/2000

Wednesday, 9 February 2000
09:30 - 11:30
Room S35, NCOP Wing
Briefing on the SAA Unallocated debt Bill (sec 75)
Invitation: Health Systems Trust

Monday, 21 February 2000
Room S35, NCOP Wing
10:00 - 13:00
Formal Consideration of SAA Unallocated Debt Bill (Sec 75)
Formal Consideration of Financial Services Board A/B

Wednesday, 23 February 2000
Room: E249, New Wing
10:00 - 13:00
Budget Day - Lock Up session (Documents to be provided and lunch will be served)

Note: The Select Committee on Finance will be invited to the following events during budget week by the Chairperson of the Portfolio on Finance.

Thursday, 24 February - Friday, 3 March 2000 Budget Week

Thursday, 24 February 2000
Preparation days

Monday, 28 February 2000 (Joint Meeting)
09:00 - 13:00
Room: E249 New Wing
Address by Minister of Finance and Directors-General of Finance and State Expenditure

14:00 - 17:00
E249, New Wing
Intergovernmental Fiscal Relations - Division of Revenue Bill Room: (Department of Finance and FFC)

Tuesday, 29 February 2000 (Joint Meeting)
09:00 - 13:00
Room: E249, New Wing
Department of Finance & SARS - Tax Policy

14:00 - 17:00
E249, New Wing
Governor of South African Reserve Bank - Monetary Policy Room

Wednesday, 01 March 2000
Room M201, Marks Building
10:00 - 13:00
Division of Revenue Bill

Friday, 03 March 2000
Room S12A, NCOP Wing
10:00 - 13:00
Adoption of Division of Revenue Bill and Main Appropriation Bill

Tuesday, 7 March 2000

Wednesday, 8 March 2000
Room S35, NCOP Wing
10:00 - 13:00
Briefing on Financial Institutions (Investment of Funds) Bill

Wednesday, 15 March 2000
Room: V226, Old Assembly
10:00 - 13:00
Formal Consideration of Financial Institutions (Investment of Funds) Bill
Supplementary Estimates

Tuesday, 21 March 2000 - Public Holiday

Recess: Friday 24 March - 3 April 2000

Members please take note of the following dates.
Dependent on urgent legislation these dates are secured for a visit to the Development Bank of South Africa (DBSA).
Thursday, 09 March 2000
Friday, 10 March 2000

Visit to the JSE : Friday, 14 April 2000
(An agenda is forthcoming.)