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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

Position statement: Recent reporting in newspapers
2014-10-03

 

You may have read reports in two Afrikaans newspapers, regarding recent events at the University of the Free State (UFS). Sadly, those reports are inaccurate, one-sided, exaggerated and based not on facts, but on rumour, gossip and unusually personal attacks on members of the university management.

Anyone who spends 10 minutes on our Bloemfontein Campus would wonder what the so-called ‘crisis’ is about.

We are left with no choice other than to consider legal action, as well as the intervention of the South African Press Ombudsman, among other steps, to protect the good name of the institution and the reputation of its staff. No journalist has the right to launch personal and damaging attacks on a university and its personnel, whatever his or her motives, without being fair and factual. In this respect, the newspapers have a case to answer.

But here are the facts in relation to the reports:

  1. No staff member, whether junior or senior, is ever suspended without hard evidence in hand. Such actions are rare, and when done, are preceded by careful reviews of our Human Resource Policies, labour legislation and both internal and external legal advice. Then, and only then, is a suspension affected. A suspension, moreover, does not mean you are guilty and is a precautionary action to allow for the disciplinary investigation and process to be conducted, especially where there is a serious case to answer.
  2. At no stage was the Registrar instructed to leave the university; this is patently false and yet reported as fact. We specifically responded to the media that the Registrar does outstanding work for the university and that it is our intention for him to remain as our Registrar through the end of his contract in 2016.
  3. The Rector does not make decisions by himself. Senior persons, from the position of Dean, upwards, are appointed by statutory and other senior committees of the university and finally approved by Council. No rector can override the decision of a senior committee, and this has not happened at the UFS even in cases where the Rector serves as Chair of that committee. The impression of heavy-handed management at the top insults all our committee structures, including the Institutional Forum – the widest and most inclusive of stakeholder bodies at a university – which reports directly to Council on fairness and compliance of selection processes.
  4. In the case of senior appointments, Council makes the final decision. Council fully supports the actions taken on senior appointments, including a recent senior suspension. The fact that one Council member resigns just before the end of his term, whatever the real reason for this action, does not deter from the fact that the full Council in its last sitting approved the major staffing decisions brought before it. The image therefore that the two newspapers try to create of great turmoil and distress at the university, is completely unfounded.

Even if we wanted to, the university obviously cannot provide details about staffing decisions, especially disciplinary actions in process, since the rights of individuals should be protected in terms of the Human Resource Policies and procedures of the UFS. But that does not give any newspaper the right to speculate or state as fact that which is based on rumour or gossip, or to slander senior personnel of the university. For these reasons, we have been forced to seek legal remedy and correction as a matter of urgency.

Make no mistake, underlying much of the criticism of the university has been a distress about transformation at the UFS; in particular, the perception is created that white colleagues are losing their jobs. The evidence points in the opposite direction. Our progress with equity has been slow and we lag far behind most of the former white universities; that is a fact. More than 90% of our professors are white; most of our senior appointments at professorial level and as heads of department are still overwhelmingly white. Reasonable South Africans would agree that our transformation still has a long way to go and only the mean-spirited would contend otherwise. But based on the two Afrikaans newspaper reports, an impression is left of the aggressive rooting out of white colleagues.

In the past few years the academic standard of the university has significantly improved. We now have the highest academic pass rates in years, in part because we raised the academic standards for admission four years ago. We now have the highest rate of research publications, and among the highest national publication rate of scholarly books, in the history of the UFS. We have one of the most stable financial situations of any university in South Africa, with a strong balance sheet and growing financial reserves way beyond what we had before. We now attract top professors from around the country and other parts of the world, and we have the highest number of rated researchers, through the National Research Foundation, than ever before. And after the constant turmoil of a number of years ago, we now have one of the most stable campuses in South Africa. Those are the facts.

The UFS is also regarded around the world as a university that has become a model of transformation and reconciliation in the student body. The elections of our Student Representative Council are only the most visible example of how far we have come in our leadership diversity. Not a week goes by in which other universities, nationally and abroad, do not come to Kovsies to consult with us on how they can learn from us and deepen their own transformations, especially among students.

Rather than focus on what more than one senior journalist, in reference to the article in Rapport of 21 September 2014, rightly called ‘a hatchet job’ on persons and the university, here are the objective findings of a recent survey of UFS stakeholders: 92% endorse our values; 77% agree with our transformation; 78% believe we are inclusive; and 78% applaud our overall reputation index.  Those are very different numbers from a few years ago when the institution was in crisis.

This is our commitment to all our stakeholders: we will continue our model of inclusive transformation which provides opportunities for study and for employment for all South Africans, including international students and colleagues. We remain committed to our parallel-medium instruction in which Afrikaans remains a language of instruction; we are in fact the only medical school in the country that offers dual education and training in both Afrikaans and English for our students - not only English. We provide bursaries and overseas study opportunities to all our students, irrespective of race. And our ‘future professors’ programme is richly diverse as we seek the academic stars of the future.

We are not perfect as a university management or community. Where we make mistakes, we acknowledge them and try to do better the next time round. But we remain steadfast in our goal of making the UFS a top world university in its academic ambitions and its human commitments.

END

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