Airports Company of South Africa & Railway Safety Regulator 2006/07 Budgets & Strategic Plans: briefings

Meeting report

TRANSPORT PORTFOLIO COMMITTEE
28 March 2006
AIRPORTS COMPANY OF SOUTH AFRICA AND RAILWAY SAFETY REGULATOR 2006/07 BUDGETS AND STRATEGIC PLANS: BRIEFINGS

Chairperson:

Mr J Cronin (ANC)

Documents handed out:
Airports Company South Africa- Budget 2007 presentation to Parliament: Part

1, 2, 3 & 4
The Railway Safety Regulator Strategic Plan 2006/07

SUMMARY
The Airports Company of South Africa and the Railway Safety Regulator briefed the Committee on their 2006/07 Budgets and Strategic Plans. Members were concerned about security breaches at South Africa’s airports and sought clarity on the Company’s relationship with contractors and preparations for the 2010 Soccer World Cup. Members also raised concerns about charging railway operators for safety permits, recent railway accidents, disabled persons’ access to trains and the lack of disabled persons on the regulator’s board.

MINUTES
Airports Company of South Africa – Budget 2006/07 presentation
The presenters, Ms M W Hlahle (Managing Director) and Mr B Maseko (Executive Director) reported that business confidence in the Airports Company of South Africa (ACSA) was at a 25 year high and that growth continued to exceed economic forecasts. Its airport operations for 2006/7 would focus on infrastructure delivery and existing infrastructure capacity management as well as improved service levels. ACSA reported an 8.9% increase in passenger numbers. International, domestic and regional tariffs were expected to be reduced in 2006/07. As far as human resources were concerned, ACSA would focus on upping remuneration levels for scarce skills within the industry.

Railway Safety Regulator Strategic Plan 2006/07 presentation

 

The presenters, Mr M Moja (Acting Chief Executive Officer), Mr S Khosa (Chief Financial Officer) and Mr Parzera (Safety Adviser) briefed the Committee on the Railway Safety Regulator’s (RSR) main objectives in its strategic plan, which included improved safety of railways, the conclusion of co-operative agreements and promotion of harmonisation within the Southern African Development Community (SADC). Greater monitoring and compliance with Safety Permits was identified as one of the key measures required in order to improve the safety and security for rail users. Improved corporate communication and organisational development as well as better financial and human capital management were some focal areas for the RSR’s institutional development.

Discussion

Mr D Schneeman (ANC) noted that in the presentation Mr Maseko had mentioned the increased costs of construction. He asked ACSA to indicate how they intended to fund the increased costs of construction. What impact did this have on the permissions already issued by the board for capital expenditure? Would the permissions have to be reviewed? He asked the presenters to elaborate on the implications of this unpredicted expenditure.

Ms Hlahle explained that in terms of new projects there would always be this kind of fluctuation in price until such time as supply went down for the construction industry. However it was important that a company that had spent so much on capital expenditure tried to borrow more efficiently. As a result, air travel would become cheaper for the passengers and airlines.

Mr Schneeman queried the continued expansion and updating of Durban international Airport. He asked, if the Dube airport were going ahead, was the expenditure on Durban warranted?

Ms Hlahle explained that she believed that the reality of functioning in a regulated economic environment meant that capital expenditure plans covering five-year periods were a direct result of the current requirements of the business. The kind of expenditure seen at Durban International Airport was required immediately. This work could not be postponed. She highlighted the fact that Durban Airport lacked adequate parking facilities.

Ms Hlahle reiterated that ACSA could not afford not to put in place the kind of infrastructure demanded by the business. This was vital to ensure the delivery of services. The continual expansion of infrastructure at Durban Airport was part and parcel of any such agreement. ACSA continued to deal with the real demands of the industry while those discussions took place.

The Chair requested clarity on the Dube Airport Project. What progress had been made and what would the future of Durban International Airport be?

Ms Hlahle said ACSA had engaged with the KwaZulu-Natal province and the Department of Transport. Under the leadership of the Minister of Transport there had been a Memorandum of Agreement signed between Department, the province and ACSA. This attempted to finalise the details and reach an agreement regarding the best way to proceed with the Dube airport. She said that negotiations had focused on how to realise the Dube airport and how best to deal with the effects of this on Durban Airport. The agreement began to guide the parties towards the successful implementation of the project. It was however a complicated matter. They had to deal with the real demands of aviation in South Africa. She emphasised that the agreement signaled good progress.

The Chair said he believed this to be a cautious response, but he understood ACSA’s position. He commented that the Committee would soon want to hear further explanations from the Department. This would enable the Committee to gain a real sense of the progress on Dube Airport so that they could assess the viability of the project. He suggested that there were many questions to be asked about the viability and the likely future demand for two major air hubs in Gauteng.

Ms Hlahle suggested that the Department and ACSA should meet with the Committee specifically to talk about this issue.

The Chair agreed that this issue would be better dealt with in this manner where the Department, the KwaZulu-Natal Member of the Executive Council (MEC) and ACSA all met with the Committee. This would be necessary in order for the Committee to establish a comprehensive view on this matter. He noted that this was not just a matter of interest for the Committee but it was a matter of significant national interest. It was the Committee’s responsibility to address this issue.

Mr S Farrow (DA) agreed and expressed the opinion that it would be advisable for such a meeting to happen earlier rather than later.

The Chair said that the Committee was delighted that there was now massive spending on infrastructure not only in the transport field, but also in logistics infrastructure. There were some issues though. For example there could be potential shortages of skills and the effect of import parity pricing on key imports like steal and cement.

Ms Hlahle agreed, saying that skills were the biggest challenge. For example the level of supervision ACSA needed for the construction work was much higher than had previously been experienced. The construction providers had many projects to choose from and ACSA found that they were offering limited supervision to outbid other companies. Monitoring of the construction companies would ensure things were done on time and were of a high quality. The issue of skills shortages needed to be addressed.

The Chair asked how the issue of regulated permission and escalating costs was handled in terms of the regulatory dimension.

Ms Hlahle explained that ACSA had an independent economic regulator. His role was to review the previous year’s expenditure and analyse if ACSA had met its predicted capital expenditure. He would then accordingly set the permissions for the following period.

The Chair queried whether these permissions were treated as indicative rather than rigid.

Ms Hlahle explained that the permissions were indicative to allow for the successful management of the company.

The Chair said that in the Estimates of National Expenditure there had been a deficit reported for the 2005/2006 financial year. What was the reason for this deficit? Had it just been the result of very significant capital expenditure over the course of that period?

Mr Maseko explained that ACSA’s focus for that financial year had been the payment of a once-off special dividend to shareholders. This had been part of the capital restructuring process to bring down the effective cost of capital and borrowing. It had been quite a significant dividend payout to the shareholders, which included the state. As a result, in that particular year there was a deficit, but he explained that overall the company was financially sound.

The Chair asked for clarity. Had ACSA deliberately increased their dividends to increase their borrowing capacity?

Mr Maseko explained that this was not the case. The dividend was paid in order to bring down the average cost of capital to ensure better value for shareholders. He said that as the full dividend was paid out in one year it resulted in a deficit. He gave an example that, if a company made a profit of R500 in one financial year, and in that same year had paid out R600 in dividends, even though they had build up this R600 over 10 years, there would be a deficit for that particular year.

The Chair requested clarity on who ACSA’s shareholders were.

Ms Hlahle said that the South African Government owned 74% of ACSA and the Public Investment Commission 20%. Strategic business partners and staff held the rest of the shares. Ms Hlahle explained that historically ACSA had always borrowed money at low interest of about six or seven percent. This effectively meant that ACSA had always used shareholder funds to invest in the company. They had not borrowed at a level that a company like ACSA should be borrowing. She said that in the long term borrowing would reduce costs, not only to the passengers and the airlines, but also to the shareholders because ACSA would not continually be relying on them for capital injections. ACSA could afford to increase its borrowing to a target of about thirty percent. This would mean ACSA could begin to make costs much more affordable. An opportunity had been created to give a portion of the proceeds back to the shareholders. She commented that this was an ideological debate.

The Chair felt it was not just an ideological debate. It was about money. Given the fact that the Government owned 74% of ACSA, it was a political and strategic decision as to whether the Government wanted dividends or increased capital expenditure.

Mr Farrow asked for clarity about ACSA’s R2.7 million debt. Who was the primary debtor and what had caused the debt? In previous years, ACSA’s strategic plan had included the aim of enlarging the company’s shareholder base. Had ACSA’s strategic thinking on this changed and if so, why?

Mr Maseko explained that as the presentation highlighted, ACSA had actually recovered R2.7 million in bad debt this past financial year. Such debt was usually owed by failed airlines like Sun Air. It could take up to five years to recover such debts.

Mr Farrow expressed concern about the focus on infrastructure creation for the 2010 Soccer World Cup. Obviously this was needed to some degree, but in many respects the tournament was a "two week wonder" and he was concerned that ACSA would end up with infrastructure that would have no value after 2010. He wanted to know whether using existing infrastructure had really been investigated thoroughly.

Ms Hlahle assured the Committee that, because ACSA’s capital expenditure plans were five-year rolling plans, all they had done was to recast them as ten-year plans and made a decision on bringing forward certain infrastructure development. ACSA was not building specifically for the World Cup – it simply accommodated the World Cup in their building programme.

Mr Farrow asked about disparities in salaries between ACSA employees and other airport employees. He also wondered about performance bonuses. He had noted that in a number of State owned enterprises such bonuses sometimes exceeded the salary of the President threefold. Was this the case with ACSA?

Ms Hlahle agreed that ACSA’s contractual relationships were critical. The vast majority of people working at airports were not directly employed by ACSA. A major challenge had been trying to develop a common culture toward all employees. She said that all contractors had their own independent human resource policies. She noted that irrespective of who their employers were, workers always demonstrated at the airports. There were issues in regard to contractors, but ACSA would attempt brokering service level agreements with the various operators. She explained that to a certain extent running an airport was like running a local authority with many involved institutions. A balance had to be found between governance and interference.

Ms Hlahle said company transparency was vital. The salaries and bonuses of all ACSA top executives were public knowledge and were contained in the annual report. ACSA’s bonuses were the lowest of all parastatal organisations. She added that the maximum bonus she could receive was 40% of her salary. In some other companies in the private and public sectors, bonuses could be up to 200% of salaries.

The Chair commented that he had the impression that some of the companies operating in the aviation sector lacked good labour relations. There was no way that workers at Johannesburg International Airport were going to go and demonstrate at a head office in an obscure place. Workers were well aware that the best means of drawing attention to their plight was to demonstrate at the airports. He added that ACSA had to be careful about the equity performance of some of its contracted suppliers. The vehicle hire industry was one industry where serious labour issues existed.

Ms Hlahle said that service delivery partners were encouraged to adopt a worker-friendly culture.

Mr Farrow commented that there was an increasing need for expansion of bus services directly to and from airports. He asked for reassurance that this was being addressed. What plans did ACSA have in this regard?

Ms Hlahle explained that the Department of Transport now had a director employed specifically to look into the integration of the transport system. The key transport hubs like airport linkage to public transport was being investigated. The Department was looking for the first time at creating a master transport plan. This had been welcomed by the transport industry. She said that similarly ACSA was planning thirty to forty years ahead for this.

The Chair asked if a contractual relationship existed between ACSA and Gautrain.

Ms Hlahle explained that ACSA had deployed their best planners to lend expertise to the Gautrain project, simply because of the kind of congestion that could be seen at ACSA’s airports. There was also a growing need for additional parking infrastructure. ACSA had influenced the standards and approach towards aspects of the Gautrain project. At this stage there were no agreements, but ACSA foresaw the possibility of an agreement with the Gautrain operator.

Mr L Mashile (ANC) asked what ACSA’s plans were for dealing with the security issues highlighted by the recent theft from Johannesburg Airport.

Ms Hlahle explained that due to an ongoing police investigation she was unable to deal with the recent incident in any detail. A big weakness in the system was potential collusion between criminals and airport employees. She expressed her belief that the Johannesburg incident was a case of high-level collusion by people who had detailed knowledge of the airport’s security systems. She stressed that aviation security was an issue of national security. She explained that a national aviation security plan existed. ACSA had an Aviation Committee and a chief security officer. Security plans existed for all the airports. The challenge ACSA faced was dealing with the people factor.

The Chair commented that he appreciated that ACSA had not tried to apportion blame. He said that there should be a strong message sent out that those guilty would be caught.

Mr O Mogale (ANC) expressed his belief that the security issue was aggravated by a lack of closed-circuit television (CCTV) cameras.

An ACSA representative said that it was factually incorrect to say there were not enough CCTV cameras because Johannesburg International Airport had more than 1500 of these cameras.

Mr Mashile questioned the RSR’s strategy to popularise the entity, to build up awareness and recruit potential employees.

Mr Moja explained that research had been done into popularising the entity. The challenge was trying to make sure the RSR delivered on its mandate while being mindful of budget constraints. The RSR had developed a communication strategy and plan, which included public awareness programmes. When this had been costed it was found that the programme would have consumed the bulk of their budget. He explained that when choosing between prioritising a public awareness programme and conducting an equipment investigation, the regulator would rather direct resources to the equipment investigation as this was their priority.

Mr Masilo requested comment on the death of Business Report journalist Lynda Loxton who had died after being dragged by a train along a platform at Lakeside station.

Mr Moja apologised saying he could not comment as he was unaware of the particular case.

Mr Farrow noted that in October 2005 the RSR had indicated that they intended creating fifty-nine new staff positions. Was this still the case?

Mr Moja explained that the staff issue related to budget constraints. The structure had been finalised when there was already a budget allocation for the financial year. The issue was about prioritising positions. There had to be identification of which positions were critical for carrying out the RSR’s mandate. He gave the example of the inspectorate as one of these areas.

Mr Khoza explained that their Governing Act included provision for charging fees for the issue of safety permits. The RSR was currently developing regulations to charge the fees. The regulator had established that there was no international example that could be applied directly to South Africa. Using the New Zealand model for example would mean charging Metrorail a fee of R2 million. They were currently developing an equitable fee model. Currently, no fees were being charged for permits but this should change next year.

The Chair expressed the view that safety systems were more important than fees. The key task of the regulator was to ensure compliance with safety requirements and not to make money from the process.

The Chair said that the Committee felt the regulator should eventually become self-sustaining, but for now the priority should be regulation. How Government would contribute to the funding was a secondary matter. He said that speaking for the ANC Members of the Committee, they would support greater Government funding. This was an area for further discussion.

Mr Moja explained that the major challenge for the RSR had been to deliver a clear business plan to the National Treasury. Now that the regulator was properly functioning, they could give a clear indication of their intended actions. They could also now clearly demonstrate their achievements. He said that looking at the RSR budget allocation for the previous year it was clear that the resources had been insufficiently aligned to the function and mandate of the RSR. They had been allocated R20 million but had already spent R24 million. They had communicated this to Treasury and believed they had a strong case to receive the requested R50 million.

Mr Schneeman noted the absence of disabled persons on the RSR Board. He asked if attempts were being made to rectify this shortcoming. He commented that there had been a lot of attention in the media on the growing phenomena of "train surfing" where youngsters on trains attempted to hang out or jump from the train. A number had died. Was the RSR doing anything about this? He also asked whether the regulator was involved in improving access for disabled persons to trains and stations.

Mr Moja explained that the RSR had regular interaction with the operators to deal with all on-going safety issues. Although the RSR was unable to deal directly with these issues, it was their responsibility to force the operators to address these issues.
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Mr Farrow enquired where the railway safety inspectors were based.

Mr Moja said all inspectors were based in Johannesburg for a centralised approach. When safety incidents happened they were dispatched to the scene as quickly as possible even if this meant by chartered aircraft.
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The Chair commented that South Africa now had a proper railway safety regulator. He explained that the Committee would certainly indicate to the Department of Transport that the RSR needed an increase in their baseline allocation.

The meeting was adjourned.