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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

Prof Jonathan Jansen bids farewell to Kovsies
2016-08-31

 

Dear Kovsie staff and students

This is my final message to you all.

I wish to use this opportunity for some brief reflections, share a word of gratitude, and convey a sense of the future for our beloved university.

Since the announcement of my departure, I have had more than a dozen breakfasts with mainly students, but also staff, to offer an opportunity for the final sharing of thoughts and, of course, goodbyes. The most common questions asked at those breakfast sessions were the following, with my responses. I repeat them here, since these might also be of interest or concern to you.

What are your proudest achievements?
Two things. The increase in the academic standard for the UFS, both in terms of admission standards and pass rates, but also in relation to the requirements for appointment and promotion especially of professors. This is important because in a globally competitive world, a university stands or falls by the quality of its degrees. And for this you need the best students and the best professors.

What would you do differently, given another chance?
Nothing. I believe that leadership is about doing the best you can with the cards you are dealt in the circumstances in which you are placed. There is no point in second-guessing past decisions. I have always been ambitious as a leader, knowing that most of my goals would be met, and that some would not. That is normal in large and complex organisations, and so, I do not sit around pondering regrets, only remembering with gratitude the things we could achieve together.

What did you learn?
A lot. I learnt that our students have tremendous capacity for greatness both in their academic pursuits but also in their ability to live, and learn, and love together. I have learnt never to underestimate the capacity of our youth to excel in whatever they do. Sometimes I felt I was more ambitious for our students and staff, than they were for themselves. But I have constantly been surprised by the capacity of young students to rise above bitterness and division, and to make great our campus, country, and continent.

I learnt, again, that the overwhelming majority of our staff and students are good people, respectful of each other, and determined to work together to heal our broken past and build a more just society. And I learnt that it is much more fulfilling to build up than to break down, to embrace than to exclude, and to love than to hate.

Were you frustrated with the pace of transformation?
Sometimes, yes. But fortunately I studied educational organisations all my life, mainly schools and universities. Universities are called institutions for a reason, and on century-old sites like the historic Bloemfontein Campus of the University of the Free State, there are core beliefs, values, and practices deeply ingrained in the culture of the place.

Anyone, therefore, who believes that transformation is easy, has obviously never tried to change an old university. It is difficult. You will get blowback. You will get bad press. You will, sadly, lose the support of some people. Some believe the university is changing too fast while others will tell you it is not changing fast enough. As you press for change, you find the university going two steps forward and one step back; in these circumstances, the solemn duty of the leader is simply to ensure that the overall momentum is always forward.

For such a time as this –
a commemorative journey:
2009-2016 (PDF book)

Description: Prof Jansen commemorative journey2 Tags: Prof Jansen commemorative journey

I therefore budget for disappointment even as I relish the many changes we have experienced together over the past seven years. If you want to obtain an objective sense of the scale of the changes at the UFS, ask those students and staff who were here in 2009, not those who came recently. They will tell you that we have a very different university, even though we all acknowledge that there is still some distance to travel. Our remarkable story of change is told in the recent Transformation Audit of the UFS, chaired by Prof Barney Pityana; that Audit Report will be released after it is read and studied by the University Council at its November meeting.

At an individual level, I learnt that most campus citizens change quickly and others more slowly, and that one has a duty to constantly push for change, but also to be patient about change. And I learnt that the ideal change retains the best of our past even as we embrace a more just and inclusive future in which all campus citizens feel that the university truly belongs to each and every one of them.

Are you optimistic about the future of our university?

Yes. The UFS is a very well-managed university thanks to the exceptional talent in the management of our finances, human resources and information technology environments. By the end of 2016, we will have record enrolments, from undergraduates to doctoral students, which is good for our future income. We run a tight ship with regard to the university’s finances, and we have greatly improved the academic standard of our qualifications; in this regard, I am very proud of my senior management team, and the talented middle management personnel, and those who make things work at the coalface of our operations.

I am very concerned, however, about future funding of the 26 public universities and the extremely vulnerable situation of at least 10 higher-education institutions. The economy is not growing and the costs of running a modern university are escalating. The delays in government commission reports on tuition fees do not help, and there seems no urgency ‘higher up’ to make the tough decisions.

We have to ensure free education for the poorest students — that is the position of your senior management – but we also need to guarantee the financial sustainability of our universities. The task of the UFS leadership, in this period of uncertainty, is to manage those two expectations as best we can. But this cannot happen without your assistance, and I do ask that you provide the new Rector and his or her team with the same understanding and support which I have enjoyed from you.

In conclusion
I am grateful.

To the many hundreds of students who have passed through my office and our home, and who sat in my many lectures and engaged me in your residences – thank you for enriching my sense of life and leadership. I am grateful that Grace and I could support and mentor many of you over the years and see you graduate. I am a better leader because of you.

To the staff of the three campuses – there is no university Rector, I can assure you, who enjoyed more love and support than what you offered me since the day I arrived here. Students come and go, but you have been my foundation year after year, and I thank you for that.

To parents, friends, and followers off-campus, in South Africa and abroad – thank you for hundreds of letters, emails, phone calls, prayers and ‘packages of support’ (from biltong to books). In the most difficult times, you rallied from everywhere with a word of support, often on social media. Know this: your words kept me calm in the storm.

Thank you, everyone.

Goodbye.

Prof Jonathan Jansen
Vice-Chancellor and Rector
University of the Free State

Description: Prof Jansen saying goodbey Tags: Prof Jansen saying goodbey

Prof Jonathan Jansen steps down as UFS Vice-Chancellor and Rector (16 May 2016)

 

 


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