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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

Studies to reveal correlation between terrain, energy use, and giraffe locomotion
2016-11-18



More than half of giraffes in captivity in Europe are afflicted by lameness. This high prevalence represents an important welfare issue, similar to other large zoo animals.

According to Dr Chris Basu, a veterinarian at the Royal Veterinary College in the UK, giraffes in captivity are often afflicted by overgrown hooves, laminitis and joint problems. Diagnosis and treatment is limited by our understanding of anatomy and function, more specifically the locomotion of these animals. Although the giraffe is such a well-known and iconic animal, relatively little has been studied about their locomotor behaviour.

Dr Basu recently visited South Africa to do fieldwork on the locomotion of giraffes as part of his PhD studies under the mentorship of world-renowned Professor of Evolutionary Biomechanics, Prof John Hutchinson. This project is a joint venture between Dr Basu and Dr Francois Deacon, researcher in the Department of Animal, Wildlife, and Grassland Sciences at the UFS. Dr Deacon is a specialist in giraffe habitat-related research. 

Together Prof Hutchinson and Drs Deacon and Basu form a research group, working on studies about giraffe locomotion.

Wild giraffe population decrease by 40% in past decade

“Locomotion is one of the most common animal behaviours and comes with a significant daily energetic cost. Studying locomotion of wild animals aids us in making estimates of this energetic cost. Such estimates are useful in understanding how giraffes fit into ecosystems. Future conservation efforts will be influenced by knowledge of the energy demands in giraffes.

“Understanding aspects of giraffe locomotion also helps us to understand the relationships between anatomy, function and evolution. This is relevant to our basic understanding of the natural world, as well as to conservation and veterinary issues,” said Dr Deacon.

Locomotion study brings strategy for specialist foot care

On face value it seems as if foot disease pathologies are more common in zoo giraffes than in wild giraffes. “However, we need a good sample of data from both populations to prove this assumption,” said Dr Basu. 

This phenomenon is not well understood at the moment, but it’s thought that diet, substrate (e.g. concrete, straw, sand and grass) and genetics play a part in foot disease in giraffes. “Understanding how the feet are mechanically loaded during common activities (standing, walking, running) gives our research group ideas of where the highest strains occur, and later how these can be reduced through corrective foot trimming,” said Dr Basu.

Through the studies on giraffe locomotion, the research group plans to devise strategies for corrective foot trimming. At the moment, foot trimming is done with the best evidence available, which is extrapolation from closely related animals such as cattle. “But we know that giraffes’ specialist anatomy will likely demand specialist foot care,” Dr Basu said.

Studying giraffes in smaller versus larger spaces

The research group has begun to study the biomechanics of giraffe walking by looking at the kinematics (the movement) and the kinetics (the forces involved in movement) during walking strides. For this he studied adult giraffes at three zoological parks in the UK. 

However, due to the close proximity of fencing and buildings, it is not practical to study fast speeds in a zoo setting. 

A setting such as the Willem Pretorius Nature Reserve, near Ventersburg in the Free State, Kwaggafontein Nature Reserve, near Colesberg in the Karoo, and the Woodland Hills Wildlife Estate in Bloemfontein are all ideal for studying crucial aspects such as “faster than walking” speeds and gaits to measure key parameters (such as stride length, step frequency and stride duration). These studies are important to understand how giraffe form and function are adapted to their full range of locomotor behaviours. It also helps to comprehend the limits on athletic capacity in giraffes and how these compare to other animals. 

Drones open up unique opportunities for studying giraffes

The increasing availability of unmanned aerial vehicles (UAVs)/drones opens up unique opportunities for studying locomotion in animals like giraffes. Cameras mounted onto remotely controlled UAVs are a straightforward way to obtain high-quality video footage of giraffes while they run at different speeds.

“Using two UAVs, we have collected high definition slow motion video footage of galloping giraffes from three locations in the Free State. We have also collected detailed information about the terrain that the giraffes walked and ran across. From this we have created 3D maps of the ground. These maps will be used to examine the preferred terrain types for giraffes, and to see how different terrains affect their locomotion and energy use,” said Dr Deacon.

“The raw data (videos) will be digitised to obtain the stride parameters and limb angles of the animals. Later this will be combined with anatomical data and an estimation of limb forces to estimate the power output of the limbs and how that changes between different terrains,” said Dr Basu.


Related articles:

23 August 2016: Research on locomotion of giraffes valuable for conservation of this species
9 March 2016:Giraffe research broadcast on National Geographic channel
18 Sept 2015 Researchers reach out across continents in giraffe research
29 May 2015: Researchers international leaders in satellite tracking in the wildlife environment

 

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