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SAA, fly me to the moon

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

Questions about racial integration in residences answered

2007-07-31

Answers to frequently asked questions about the racial integration of student residences at the UFS

1. Why does the UFS want to change the current situation in the student residences?

There are many reasons why a new approach to placement in the student residences is necessary. However, the main reason is of an educational nature. As a university, the UFS should create an environment in its residences where students can learn to appreciate and respect the rich diversity that is on offer at the university. A university accommodates students from many different backgrounds in terms of race, language, religion, economic status, culture and other aspects. If a student can learn to appreciate the value in this rich diversity at university, he or she will also be able to appreciate the value of this diversity in the workplace and broader society.

The current situation of predominantly white and predominantly black residences has not been able to cultivate such an appreciation for diversity and respect for one another as human beings, and will not equip students with the knowledge and skills required to manage diversity.

Besides this, there are many other areas of life in the residences that need attention. For one, we need to urgently establish a human rights culture in the residences so that the rights of all students can be respected. We need to address the abuse of alcohol, provide disabled students with their rightful place, and last but not least, really entrench a culture of learning in student residences.

Let us make the residences places we can be proud of – places of learning, of diversity, of respect; places of growth and development. This is the ideal we should all strive to achieve.

2. Why does the management want to force us to integrate?

It is a false argument to debate the issue in terms of “force”. Any decision by a University, or any other organisation, regarding matters of policy, rules and regulations implies a restriction on the choice of an individual and an obligation to comply. What we should focus on is whether this decision of the Council is in the best interests of our students.

The management of the university believes that it has a responsibility to give students the best education possible, not only in terms of what you learn in the lecture rooms, but especially in the residences as well. The residences can be very powerful places of learning about matters of great importance, both academic and non-academic.

The parallel-medium language policy separates students into largely white/Afrikaans and black/English classes. Efforts are being made to bridge this divide in the classroom, but we can also try to eliminate it in the residences.

The university is committed to building a new culture for the entire institution that is based on values and principles – such as an academic culture, non-racialism, respect for human rights and diversity – among staff and students.

In the context of student residences, the application of these values and principles still allows substantial room for the voluntary exercising of choice by individuals as well as by Residence Committees, notably with regard to the placement of students (they can still place 50 percent of first-year students), as well as the determination of the future character and traditions of a diverse residence.

Furthermore, students can still choose their residences (subject to availability of places), can choose a roommate, and so forth.

3. What about freedom of association?

The rights we enjoy in a democracy must be balanced against other rights, as well as the laws of the country. This means that the right to freedom of association must be balanced against laws that make it illegal to discriminate against other people on the basis of race, language or religion, for instance.

Freedom of association pertains to the right of individuals to form voluntary organisations such as clubs or private boarding houses, or their right to join or not join existing organisations. You exercise that right when you decide to become a student of the UFS, and again when you choose to live in one of its residences.

However, once you have decided to join an organisation voluntarily, you cannot subsequently demand that that organisation should provide a “club” or residence to your liking where, for instance, you only associate with your choice of co-members. You must accept the policies of that organisation.

In any case, how would that right of yours be balanced against the right of another individual who wishes to associate with a different set of co-members? (For instance – what about the freedom of a student to associate with students NOT from his own background, but indeed from another language, cultural, racial or economic background?)

The constitutional right to freedom of association can, in any case, not be used to exclude or discriminate on the basis of race or religion (Section 18 of the Bill of Rights).

Besides, the new policy guidelines will still make provision for freedom of association. This right can be exercised freely within a diverse residence with regard to friendships, joint academic work, socialising, sport, etc.

4. Will residences not lose their traditions?

The University appreciates that there are many valuable elements of tradition in residences. However, we must bear in mind that the traditions and character of student residences have evolved and changed over time, and they will continue to evolve and to change. In addition, we do not need to accept all aspects of residence life purely on the basis of tradition, including the unacceptably high level of alcohol abuse and unsavoury, humiliating and discriminatory orientation practices. The new approach to integrated residences provides the opportunity to retain the positive aspects of the current traditions and character, but also to develop new traditions and give residences a new character.

We can now establish a tradition and a character for each residence that are reconcilable with the values of the University as a place of scholarship and are aligned with the human rights approach of our country’s Constitution, the laws of our country and the strengths and diversity of the students in a particular residence.

5. Have students been involved in this process? Is there a role for them to play after the decision has been taken by the Council of the UFS?

In the first semester of 2007, during two rounds of consultations, the primes, SRC and student organisations were consulted about the proposed new placement policy to increase diversity in residences. Some residences also made written submissions on the matter (such as Madelief, Soetdoring, Wag-'n-bietjie, Vergeet-my-nie, Emily Hobhouse). Other residences requested and were granted more time, but did not make any submissions in the end (such as Reitz and Armentum).

Management also had several meetings with the above-mentioned structures to hear first-hand from students their concerns and solutions regarding possible challenges presented by integration in residences.

During these interactions, several excellent ideas and proposals were put forward by students. These views had a definite impact on the eventual proposal that was taken to the University Council, in particular regarding the minimum level of diversity (30%) in junior residences and the fact that residences still want to have a say in the placement of students, rather than the placement decision being left in the hands of Management alone (hence the 50% placement portion of residences). Management values the effort that was put into the process by the primes and residence committees, and thanks them for their contributions.

However, it should be stressed that consultation should not be understood as a process of negotiation, nor does it imply that consensus must be reached. What it means is that Management must take a considered decision after hearing the views of stakeholders.

Management would like students to continue to provide input and ideas regarding the implementation details of the policy guidelines. Task teams have been established and students will be informed about how they can interact with the task teams on an ongoing basis.

6. But integration in the residences was tried in the past (in the late 1990s), and then it failed. Why will it work now?

Yes, the University of the Free State did integrate its residences as far back as 1993, and for a few years it worked. The UFS did it at that time and is now doing so again, because it is the right thing to do. Yet it is important to understand why the previous attempt at racial integration in residences was not successful.

Firstly, both black and white students were much polarised because of the apartheid past. Secondly, there was insufficient management support for students in the residences, the student leaders generally as well as residence heads, in terms of dealing with diversity and related issues. Thirdly, the institutional culture of the UFS and the residences in particular was not addressed as part of broader transformation and integration in residences, whereas it is now being addressed.

In addition, the current decision to integrate residences has the benefit of being implemented after several more years of integration in schooling, sport, workplaces and other aspects of life.

This decision is also based on Management’s commitment to give all the possible support it can to this process.

This is a very important initiative that the UFS is undertaking. Management, in co-operation with students, must ensure that it succeeds. Integrated residences that produce high-quality graduates equipped to deal with the challenges of the workplace and our society is a worthwhile ideal we should all strive to achieve.

If you would like to make a proposal regarding the implementation and practical aspects of the new policy, please send it to the following email address: rector@ufs.ac.za

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