South African Airways Bill: deliberations

PUBLIC ENTERPRISES PORTFOLIO COMMITTEE
30 January 2007
SOUTH AFRICAN AIRWAYS BILL: DELIBERATIONS

Chairperson: Mr Y Carrim (ANC)

Documents handed out
South African Airways Bill [B35-2006]
Document of the Department of Public Enterprises (DPE)

SUMMARY
The Minister and Department summarised that the Bill essentially provided for SAA to be a stand-alone government owned entity, but also made provisions for it to become a public listed company in the future. Listing of SAA would be likely to attract investment. It was possible that a minority stake could be disposed of in future by an initial public offering. The State expected SAA to operate profitably and not expect to rely on state guarantees. The Department took the Committee clause by clause through the Bill. Members’ questions related to the practice of hedging, the status as a national carrier, what was expected of SAA, whether government could rescue SAA in the event of failure to perform, consultation with the unions, possible job losses, and government recapitalisation. Clarity was requested on some of the definitions in Clause 2. Several members expressed concerns about possible conversion, which they accepted was a policy issue. They felt strongly that parliamentary approval must be obtained before conversion, and that there must be specific reference to this in the legislation. They were also firm on the need to formulate a preamble that asserted the State’s strategic role in SAA. The Department was requested to respond to Members’ concerns at the next meeting.
 
MINUTES
Introductory remarks by the Minister
Members of the NCOP Standing Committee on Public Enterprises were present for the briefing by the Minister of Public Enterprises, The Hon. Alec Erwin. He stated that the Bill made South African Airways (SAA) a stand-alone government owned entity and also made provisions for it to become a public listed company in the future. The Minister told the Committee that government would maintain strategic control of the airline because it would promote critical tourism and business links. He opined that the listing of SAA would make it easier to attract investment. He favoured the disposal of a minority stake by means of an Initial Public Offering (IPO) but only expected this to take place in several years. Mr Erwin was adamant that the state would not bail out SAA or any other state-owned enterprise (SOE). He wanted these enterprises to operate on the strength of their balance sheet and to eliminate their reliance on state guarantees. The Minister recognized SAA’s efforts to turnaround its financial and management shortcomings, and expressed hoped that SAA would strengthen.

Discussion
Mr J Stephens (DA) reminded the Committee that SAA had a history of hedging. He wanted assurances from the Minister that SAA would avoid this practice in the future. He warned that the fiscus would be put under tremendous pressure if SAA continued with speculative hedging. Also, he hoped that SAA would apply better management practices and processes.

The Minister dismissed the notion that hedging was evil. He argued that it was a necessity that needed to be implemented in a simplified and restricted manner. Furthermore, he expressed satisfaction with the Departmento of Public Enterprise’s (DPE’s) established policy on risk management and hedging. Lastly, he pointed out that the management practices at SAA had improved because there were two sources of oversight, namely the Department and Treasury.

Mr Stephens expressed concern about the possible future conversion of SAA into a public company.

Mr P Hendrickse (ANC) said that he had no problem with the separation aspect of the Bill. However, he echoed the concerns of the previous speaker regarding the possible future conversion of SAA into a public company.

The Minister confirmed that the Department wanted SOEs to operate on the strength of their balance sheet and to eliminate their reliance on state guarantees. He said that it was important for government to maintain a strategic control over SAA but did not rule out the possibility of raising capital from the market in the future. He pointed out that the government did not wish to replicate its experience with Telkom where it no longer had control. He supported the principle of using IPO as part of a turnaround strategy but this had to be balanced with government’s interest. He appealed to the Committee to accept the Department’s approach on the matter and did not wish to engage in a debate at this stage whether there should be an IPO or not.

Mr Hendrickse enquired whether SAA was a national carrier.

The Minister emphasized that SAA was a modern national carrier but this did not mean that government would bail it out at any time. He asserted that the SAA Board and management were informed that they needed to exercise proper management and that compelling reasons were needed for recapitalization.

Mr Hendrickse asked what SAA’s bottom line would be.

The Minister replied that SAA would have to recover its costs and operate in a sustainable manner.

Mr Hendrickse queried whether there was any restriction on foreign ownership.

The Minister responded that there was no absolute restriction on foreign ownership.

Mr Hendrickse bemoaned the fact that while government owned 38% of Telkom, it had lost control and impact there.

The Minister acknowledged this point. He was confident that lessons had been learned well, and that this would not be replicated.

Mr L Gololo (ANC) wished SAA well. He asked the Minister what plans were in place to rescue SAA if it failed to perform properly.

The Minister highlighted that there had already been improvements and that SAA did well in its first year. He re-iterated his confidence in the Board and management of SAA. Lastly, he admitted that SAA had no option but to reduce its cost base across the board in order to improve its rate of return.

Mr Z Kotwal (ANC) asked if the Department would consider a form of subsidy for air passengers.

The Minister replied that most airlines received some sort of subsidy. He clarified that this did not take the form of a subsidy for each passenger because it would be economically unsound and untenable on the fiscus.

Mr Hendrickse enquired whether the unions or business fraternity had been consulted on the Bill.

The Minister said that the unions were consulted. He believed that there was no reason to consult with the business fraternity because it was a matter of government’s own interest.

The Chairperson sought clarity whether the position to retain SAA in government’s hand was clearly reflected in the Bill. He suggested that the conversion aspect of the Bill be postponed. He argued that the Department must consult parliament and seek its agreement at the time of the future conversion.

The Minister answered that he was confident that the Bill was sufficient and did not want to make it too complicated.

The Chairperson voiced his concern regarding the future loss of jobs.

The Minister remarked that job losses were an unfortunate reality. He promised that negotiations would take place with the unions in order to soften the blow.

The Chairperson asked whether SAA would be recapitalised by the government after its separation from Transnet.

The Minister answered in the affirmative. He stated that the Department would seek support from the Treasury for essential recapitalisation in the next year. He concluded that any recapitalisation would have to be properly motivated.

South African Airways Bill: Committee deliberations
The Chairperson asked Ms Ursula Fikelepi, Chief Director: Legal Counsel, DPE to guide the Committee through the Bill. Members were asked to interrogate the DPE if they needed any clarification.

The Chairperson asked whether it was possible to have a public company without a share capital.

Mr Lawrence Human, a transaction analyst, answered in the affirmative. He added that the wording of Clause 2(b) of the Bill, which referred to “the conversion of SAA (Pty) Ltd into a public company with share capital’-was consistent with the formulation in the Companies Act.

Mr Stephens repeated his concerns about the possible conversion. He felt uncomfortable endorsing legislation without knowing the details, terms and conditions of a future event.

Ms Portia Molefe, Director General, DPE, retorted that the Department was following the Treasury’s instruction to include this aspect in legislation.

Mr Vuyo Kahla, Group Executive, Legal Servies and Risk, Transnet Limited, mentioned that there was nothing in law preventing a private company from converting into a public company.

Mr Stephens observed that conversion was a policy issue. He asserted that even though the Department did not need legislation to convert, this Committee had an obligation to examine it because the issue was now in front of the Committee.

The Chairperson made the point that there should be some provision in the Bill that specified that SAA would remain in the state’s hands. He favoured IPO’s and private/public partnerships as better alternatives to privatisation.

Mr Stephens persisted that parliament should have an input during the conversion process.

The Chairperson sought clarity on the word “interests” in Clause 2(a) of the Bill.

Ms Molefe answered that it referred to the assets, liabilities, claims and risks.

Mr C Wang (ANC) asked what the word “member” in Clause 3(a) meant.

Ms Fikelepi replied that it referred to a member of the Board of SAA.

Mr Stephens argued that word “shareholder” should be preceded by the word “sole” in Clause 3(a) of the Bill and that the word “member” was not necessary.

Mr L Human advised against inserting the word “sole” because SAA was in the process of finalising a share scheme with employees and that this insertion could create technical problems.

Mr V Kahla explained that it was possible to be a shareholder, specifically a preference shareholder, without being a member.

The Chairperson accepted this explanation and proposed that the word “member” should be retained.

Mr C Wang proposed the words “main” or “majority” instead of sole.

Mr Stephens reiterated his suggestion that the Bill must provide that parliament be consulted and its consent be sought before conversion.

The Chairperson summarised that there was unanimity concerning the separation of SAA. He noted that the Committee needed to be convinced on the conversion aspect of the Bill, which was a difficult matter that involved policy questions. He asked the Department to respond to Members’ concerns at the next meeting.

The meeting was adjourned.