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01 September 2020 | Story Dr Cecile Duvenhage

Opinion article by Dr Cecile Duvenhage, Lecturer in the Department of Economics and Finance, University of the Free State

Awards and bailouts

The World Travel Awards recognised the state-owned enterprise (SOE), South African Airways (SAA), as Africa’s leading airline – every year from 1994 to 2015. However, behind the scenes, the flag carrier has repeatedly been given lifelines thanks to government guarantees. The last year that the SAA made a profit was in 2011.

Over the past decade, more than R16,5 billion in taxpayers' money was spent on bailouts for the airline. In the February 2020 budget, the government set aside R16,4 billion, of which R11,2 billion was for SAA’s debt-servicing costs. 

The SAA has been fighting for its survival since it entered into voluntary business rescue in December 2019 and is facing liquidation after specialists were appointed at the end of April 2020 to try to save the airline.  

How did SAA end up in this mess?

After the government deregulated the domestic airline industry in 1991, SAA lost its national market share (of 95%), especially to Comair and FlySafair. The airline was also hit on its African routes, where Ethiopian Airlines started to erode its competitive position. Theoretically speaking, deregulation breaks the market power of a monopoly, and inefficiency will put you out of business in a competitive environment. 

Add the component of poor management and suspect tenders (pertaining to the former SAA chairperson Dudu Myeni’s plan to buy several Airbus planes, sell them to a local company, and then lease the planes back), and debt starts to snowball. Additional poor management decisions include the desperate saving measures on essential expenditure, which led to the buying of ‘fake parts’. Unnecessary sponsorships (ATP tennis), given a tight budget, reflect poor management decisions by SAA. 

Surely, the weak rand played a role in the profitability of SAA, but also for the competitors who managed to survive due to efficient management. 

So, what are the cards on the table? 

The cards include liquidation, foreign direct investment (FDI), and a rescue package under Section 16 of the Public Finance Management Act (PFMA).

The liquidation of the airline will reduce future ongoing operational losses but will require the payment of creditors who rely on the so-called ‘implicit guarantee’ of ongoing funding by the state. Thus, debt claims cannot be avoided, as would be the case with conventional companies. Besides, there is no consensus regarding the liquidation cost – ranging from R2 billion to R60 billion.

Another card is the ‘restart’ of a new SAA, with a smaller international network. This airline needs to be financed by new investors, which might include large international airlines. In this case, the SA government will hold a minority stake, which requires a change of legislation to allow larger GDI into SA airlines. In attracting FDI, the SAA could be revived as a smaller international franchisee airline in cooperation with a larger international airline.

A further card is the option of using citizens’ pension as a business rescue package for the SAA under Section 16 of the Public Finance Management Act (PFMA). 

Section 16 of the Public Finance Management Act

The purpose of the PFMA is “(t)o regulate financial management in the national government and provincial governments; to ensure that all revenue, expenditure, assets and liabilities of those governments are managed efficiently and effectively; to provide for the responsibilities of persons entrusted with financial management in those governments; and to provide for matters connected therewith.”

In terms of Section 16 of the PFMA, the Minister can authorise the use of funds, including the National Revenue Fund (NRF), to finance expenditure of an ‘exceptional nature’ which is currently not provided for and which cannot, without serious prejudice to the ‘public interest’, be postponed to a future Parliamentary appropriation of funds.  

Thus, Section 16 allows the Minister of Finance to sidestep normal budgetary appropriation processes in an emergency to make money available for items of an ‘exceptional nature’ or unforeseen circumstances.

Exceptional and short-term orientated

Exceptional is synonymous with abnormal, atypical, and extraordinary. However, the improvement of the financial position of SAA through recapitalisation has been constantly on the government’s agenda since the February 2017 budget. Four months later (1 July 2017), the National Treasury published a media statement titled Government transfers funds from National Revenue Fund to South African Airways. The argument was that the SAA needed to be recapitalised to allow the airline to pay back its commitment to Standard Chartered Bank, thereby sidestepping a default.  

How exceptional is inefficiency and poor management over a period of ten years, and how biased would such a transfer decision be towards public interest (that favours transparency and accountability), can be asked?

According to the July 2017 media statement, “default by the airline would have prompted a call on the guarantee, leading to an outflow” (take note: not will lead to an outflow) from the NRF and possibly resulting in higher awareness of risk related to the rest of the SAA's guaranteed debt.

The statement also adds that several options have been explored and given the nature of the problems at the SAA, Section 16 of the PFMA “had to be used as the last resort”. According to Minister Mboweni, the government is currently also considering several options, including that the government retains a percentage of the issued share capital in the new airline, finding private equity or strategic partners to take up shareholding in the new SAA, or approaching international or local funding institutions. Of course, local funding institutions include the National Revenue Fund.


Thus, the government may – and possibly already has – partly fund the recapitalisation of the airline using the NRF. Accusations from the Democratic Alliance (DA), an opposition party, state that the former Finance Minister, Malusi Gigaba, used R3 billion of emergency provisions to recapitalise the SAA in 2017.

The DA recently requested confirmation whether the SA Minister of Finance, Tito Mboweni, had again made ‘unlawful’ use of Section 16 in committing to provide and disburse public money for the SAA’s restructuring. The DA also asked the court to interdict SAA and its rescue practitioners (Siviwe Dongwana and Les Matuson) from using the money by any means. The application for the interdict has in the meantime been withdrawn, given the government’s commitment not to use Section 16.

Minister Tito Mboweni’s cards

Although Mboweni indicated that he would protect the efforts of those “who work day and night to make a success of this country”, he is up against a loaded team of government, SAA, and rescue practitioners. The minister expressed a preference for closing the SAA down, but Cabinet has given its backing to a business rescue plan.

The minister recently said that he did not authorise the ‘use’ of funds from the NRF for emergency funding, although he did not exclude the possibility of approaching ‘institutions’ to invest pension funds for this purpose. 

The impact and implication of using NRF

What is in a name, a rose by any other name would smell as sweet? What is in a name, ‘using’, ‘investing’, or ‘mobilising’ pension funds? Do you smell a rose or a rat? Either way, it still boils down to the possibility of ‘getting access’ to the pension funds of hard-working SA citizens to bail out a straggling, poor-managed SOE.

Looking at the poor track record of the SAA and the bleak future of aviation in general (due to the global recession and impact of COVID-19), would an individual, conservative investor opt to invest in SAA? Only political allies making a political decision in their best interest, or aggressive investors being promised high returns on their investment, will take the bait. 

My next concern – will the new, restructured SAA be able to generate profit to remunerate the invested ‘institutions’, given that it currently has only five planes to fly? 
For a start, was the R3 billion emergency allocation (dated back to 2017) retrieved and paid back to the NRF? Hill-Lewis, representing the DA, argued that if the SAA had spent the funds (of 2020), the country and the public purse will be irreparably harmed. Thus, the money may not be retrieved, which will lead to anarchism in the country.

Most parties agree that the SAA remains a strategic asset to South Africa and to its role as the flag carrier, where it assists as an economic enabler with benefits across a wide range of economic activity. However, the parties do not agree on the finance model regarding the bailout of the SAA.

The new SAA needs to generate high profits in a competitive environment to be efficient and cost-effective in its management. Thus, the money need not be forthcoming from a future stream of ‘already recruited’ pension contributions of so-called ‘institutions’. If the latter is indeed the case regarding the generation of income, it reminds me of the activities associated with a pyramid scheme.

SAA, please do not fly us to doom.

News Archive

Teachers should deal with diversity in education - Prof. Francis
2010-10-08

At the occasion were, from the left: Prof. Jonathan Jansen, Rector and Vice-Chancellor of the University of the Free State (UFS); Prof. Francis; and Prof. Driekie Hay, Vice-Rector: Teaching and Learning at the UFS.
Photo: Jaco van der Merwe

Prof. Dennis Francis, the Dean of the Faculty of Education at the University of the Free State (UFS), recently delivered his inaugural lecture on Troubling Diversity in South African Education on the Main Campus in Bloemfontein.

He urged teachers to be open to what “diversity” might mean in a particular context and how diversity relates to either inclusion or exclusion.

“An approach that promotes the inclusion of all must be based on an understanding of how exclusion operates in ways that may have typical patterns of oppression, but differ in the specific ways that exclusion is expressed and becomes normalised in that context,” he said.

“The good teacher thus seeks to understand how these forms of exclusion may develop in the school’s context and respond through taking thoughtful action to challenge them. It may require creating a climate that enables the silent to speak and recognising that not all groups communicate in exactly the same ways.”

He said teachers also had to affirm the experiential base of learners and students. He said there was an assumption that students would be more effective practitioners if their own experience were validated and explored.

“It is crucial that the students’ own history is treated as valuable and is a critical part of the data that are reflected,” he said. “Equally important is that such stories and similar activities are intentionally processed to enable students to make the connections between personal experience and relevant theory.”

He also urged them to challenge the ways in which knowledge had been framed through oppression.

“Schools are often characterised by messages that draw on one or another form of oppression. Thus, expectations are subtly or in some cases unsubtly communicated, e.g. that girls are not good at physics, or that, while white learners are strong in abstract thought, African learners have untapped creativity, and so on,” he continued.

“For someone to integrate into their role as educators a commitment against oppression means confronting obstacles that one may previously have shied away from, such as challenging authority, naming privilege, emphasising the power relations that exist between social groups, listening to people one has previously ignored, and risking being seen as deviant, troublesome or unpopular.”

Furthermore, Prof. Francis said dealing with diversity in education was always affectively loaded for both students and teachers. He said in South Africa one injunction from educators was to be “sensitive” and thus avoid risking engagement with the contentious issues around imbalances of power.

“If both students and teachers are to confront issues of oppression and power in any meaningful way, we need to design more purposely for the difficulties they will encounter, for example, creating a classroom environment that promotes safety and trust so that all students are able to confront and deal with prejudice and discrimination. Classroom environments will need to balance the affective and cognitive in addressing issues of diversity and social justice,” he added.

He also said that teachers should recognise the need to complement changing attitudes with attempts to change the structural aspects of oppressions.

“To prevent superficial commitments to change, it is important for students to explore barriers that prevent them from confronting oppressive attitudes and behaviours. In this way students are able to learn and see the structural aspects of oppression,” he said.

“Equally important, however, is to get students to examine the benefits associated with challenging oppression. A fair amount of time must therefore be spent on developing strategies with students which they will be able to use practically in challenging oppression.”

He also advised educators to affirm the capacity of staff and learners to act and learn in ways that do not replicate patterns of oppression.

“Many South African schools have survived both the harsh repression of apartheid and the continuing legacy of oppression of various kinds. Despite that, we are often as educators made aware of the ways in which young people in particular affirm themselves and each other in creative and confident ways,” he concluded.

Media Release
Issued by: Lacea Loader
Director: Strategic Communication (acg)
Tel: 051 401 2584
Cell: 083 645 2454
E-mail: loaderl@ufs.ac.za  
7 October 2010
 

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