South African Airways & National Treasury hearing on irregular, fruitless and wasteful expenditure, with Deputy Minister

Meeting report

The Chairperson noted that of late SAA had been in the media for bad reasons. This created anxiety not only for the Committee but the public at large.

The Chairperson voiced concern that the Committee had requested information from Treasury to assist it in conducting its work but there was no timeous response. He deplored the receipt of unrequested documents from SAA. It was likely an attempt to drown the Committee with irrelevant information.

Ms N Mente (EFF) led Members in the questioning. She referred to an SAA annual report made available to the Committee. It indicated that, “SAA remained undercapitalised.” What did the statement mean?

Mr Musa Zwane, Acting CEO, SAA, replied that it meant when SAA was moved from Transnet to become a standalone entity in the early 1990s, not enough equity was injected into the company at its conception.

Ms Mente pointed out that as a State Owned Entity (SOE), SAA was supposed to be generating capital. How was it reasonable for SAA to always complain about underfunding?

Mr Zwane replied that, over the years, SAA was being funded through Treasury guarantees which meant that it had to raise loans to meet capital requirements and repay such guarantees. Hence, SAA had a very huge interest bill that had to be addressed.

The Chairperson interjected and asked if SAA implied that government guarantees were an integral part of its funding mix and not in response to a particular situation.

Ms Phumeza Nhantsi, CFO, SAA, replied that SAA had received R19.1 billion worth of guarantees and had to source funding at the back of those guarantees. However, the service costs for the guarantees were huge. Thus, SAA requested the shareholder (government) to inject capital. When SAA embarked on its turnaround strategy in 2013, it was on the basis of an assumption that the shareholder would inject R8 billion. The injection had not materialised.

The Chairperson asked how SAA could develop a strategy on the basis of an assumption.

Mr Zwane agreed that it was an assumption not an agreement, and it was not realised. The entity currently had R12.2 billion negative equity.

Ms Mente said she found it quite strange that SAA could afford numerous luxuries on the backdrop of its financial challenges. How did it afford perks and frills during flights without money for operations? Why did SAA start a route without proper costing to Abu Dhabi only to cancel it in late 2015 because it was losing R330 million a year? She asked SAA to take the Committee through its cost reduction strategy.

Ms Dudu Myeni, Board Chair, SAA, agreed that the airliner was supposed to be financially conservative. SAA had embarked on a cost compression drive. In an effort to ensure financial viability, it had approached numerous lenders. Part of the requirements by the lenders was for SAA to appoint a Chief Restructuring Officer to spearhead its turnaround strategy. This had been done and it was working towards the full implementation of the turnaround strategy. Also, as a cost-cutting measure, SAA was reviewing free air travel as part of its employee benefit package. The cost of doing business was expensive. More so, certain decisions made a while ago, which appeared to be noble at the time, turned out to be imprudent and expensive. In 2001, as part of the turnaround strategy by the then General Manager Coleman Andrews, SAA sold numerous assets. SAA then had to lease planes, and servicing such contracts using foreign currency was expensive. Mr Andrews went on to be given a golden handshake. In retrospect, decisions made at that time were not the best.

Ms Nhantsi added that various cost cutting measures had been devised. SAA had managed to engage its lessors to reduce and manage lease costs. Non-core assets were being disposed. SAA had identified its top 20 suppliers and was engaging them with the intention to reduce service charges. Also, the five year turnaround plan initiatives were being closely monitored by National Treasury.

Mr Sifiso Buthelezi, Deputy Minister of Finance, said SAA was an airline which does not own airplanes. SAA did not own the bulk of its fleet. It owned only nine of its 60 planes and paid R3.5 billion per annum in leasing costs. This was a legacy problem which kept on adding to its costs. It had to be admitted that bad decisions were made in the past. SAA had a very weak balance sheet.

Ms Mente said it seemed as if SAA could not afford anything. She commented on the consultancy fees appearing on SAA’s books. She emphasised the need to make use of in-house skills.

Mr Zwane replied that in the not so distant past, SAA experienced a brain drain as personnel resigned, thus it lacked skills to get the work done. There was an over-reliance on consultants to provide some skills. It was highlighted as a problem and was then addressed. McKinsey was the consultant this year. SAA had reduced its reliance on consultants.

The Chairperson made reference to the Public Funds Non-compliance YTD 2015/16 spreadsheet, showing that SAA had incurred costs emanating from immigration penalties. How did SAA incur fines worth R6.7 million in the 2015/16 financial year for regulatory breaches such as allowing travellers to fly without the required visa documentation? Who were the individuals involved?

Ms Mente suspected there could be an organised syndicate prejudicing SAA by flouting immigration procedures. She asked if such fruitless and wasteful expenditure could be recovered from individuals. There had to be ongoing interaction with the employees and service providers to recover funds. Individuals needed to be identified for accountability purposes.

Mr Zwane replied that the cases would be followed up. The then General Manager: Commercial, Sylvain Bosc, who was suspended in November 2015 was the head of operations at the time. Cases of non-compliance were subsequently corrected and SAA would work on recouping its funds.

Ms Myeni added that as difficult as it was to admit, the board was misled by the aforesaid managers at the time.

Mr E Kekana (ANC) said compliance with the Public Finance Management Act (PFMA) was mandatory. Why was SAA paying service providers on the back of letters of appointment and not signed contracts? Who was the manager in charge of procurement within SAA? What must the Committee do given SAA management was in breach of the PFMA. He demanded a comprehensive report from the acting CEO.

Mr Zwane replied that inconsistencies in the application of the disciplinary code in 2015 meant that proper measures were not taken in some instances. He could not identify the manager in charge of procurement.

Members were furious that the acting CEO could not even name the commodity manager in charge of the procurement department.

The Chairperson advised against generalisations. Specific names and positions of individuals had to be identified so they can account. He asked if it was standard practise not to enter into contracts with suppliers. How many evergreen contracts was SAA currently a party to?

Ms Nhantsi replied that there was a culture of using letters of awards for contracts with service providers, and SAA was working on it. There was miscommunication between procurement and the business unit. The business unit knew when contracts expired and should be working with the procurement department. Secondly, procurement needed to work with the legal department to ensure there was no overlap. 

Mr Kekana was not convinced by the response. Ms Nhantsi made it sound as if there were various businesses. There was only one SAA and what she had explained was not standard procedure. The legal and finance departments should be in one SAA, so that when it accounts to the Committee, it accounts to everything. It was unacceptable to be told that each unit was meant to do various things. These were the issues that should be discussed in SAA’s management meetings. Entities should not conduct business on the basis of ‘a culture’ but the law.

Mr Zwane replied that SAA held its executive committee meetings twice a month to look at operational and strategic matters. 

Mr Kekana expressed disbelief. He asked Mr Zwane to provide minutes of those meetings so the Committee could see what was being discussed.

Mr Zwane replied that the minutes would be sent to the Committee.

Mr Kekana pointed out that the SAA board took procurement policy decisions without liaising with National Treasury and the Department of Trade and Industry (DTI), and it was discovered after SAA went out for legal opinion that the procurement policy was invalid or against the law. He asked Ms Myeni to explain what would happen to the contracts awarded and who would take responsibility.

Ms Myeni replied that the decision to review procurement was informed by a lack of transformation at SAA. In the past, before the procurement policy decision was made, every contract was renewed or extended and not advertised. Therefore, as the previous SAA board was engaging collectively, it felt the decision would go a long way to ensure participation by previously excluded persons of this country. In view of the current policy of SAA that was not allowing any new entrants, the board felt it could make redresses internally. SAA had engaged with DTI to ensure it was not found wanting. This was done by the procurement department as the board was looking into how SAA could broadly spearhead transformation. It did, partly through the employment of a transformation manager. The board needed to ensure it was legal and in compliance, and as it received feedback and updates, the board thought it had made the right decisions. The decisions made were a team effort.

Mr Kekana was not convinced by Ms Myeni’s response. The need for transformation was well understood but SAA did not follow legislated procedures. As implementers of legislation, the board needed to look at the law. The board could come up with brilliant ideas, but if they are implemented outside the law, it would be wrong. The motivation of the policy was commendable, but unlawful.

Ms Myeni expressed approval and added that the board had relied on information brought before it and initially believed it had followed legal precepts.  

Mr A Lees (DA) made reference to an SAA report and asked how it was possible to conclude that the internal audit was sound, when the internal auditor found the working papers inadequate? Furthermore, R6.8 billion worth of loans were maturing this year. Had Treasury indicated that the funding would be available to repay the loans? Had there been agreements in relation to the refunding of the R2.2 billion June pay out?

Mr Siyakhula Vilakazi, SAA Internal Auditor replied that the report on internal audits required adequate working papers. The internal audit office was quite happy in the last four years. On inadequate working papers, he had responded through an affidavit after a member of the public who was not happy with audit conclusions lodged a complaint to the Institution of Internal Auditors. The latter had ruled in favour of the SAA Audit Office.

Ms Nhantsi replied that SAA had R6.8 billion worth of loans due on 30 September. It did not have a confirmed agreement that loans would be extended, but did not foresee the lenders not extending the loans. SAA had worked with the lenders, who gave it milestones to work with. Instability in management was one of them. However, a permanent CEO had been appointed. Cash flow challenges still persisted and SAA had requested working capital from the shareholder (Treasury).

The Deputy Minister emphasised that SAA was under capitalised. Undercapitalisation was a legacy problem and Treasury was committed to assist as it would not allow the airline to go under. Also, Treasury was suspicious of a number of decisions that were made before by SAA. He added that SAA was not going to be privatised.

Mr T Brauteseth (DA) spoke about a procurement process to supply components to SAA Technical (SAAT). The particular bid was advertised four times. It was worth R1.4 billion. Four persons at SAAT and board, including Mr Zwane, went on to visit AAR Corp in the US. When was the contract awarded to AAR? When did the visit take place? Why was the bid re-advertised four times?

Mr Vilakazi replied that internal audit was looking at the entire procurement process in relation to AAR. Comments were received from all implicated employees and a report was being finalised. Once finalised, SAA would be able to answer the questions. The report must still go to the audit committee and then to the board, and the process was 99% complete. The internal audit team was waiting for the forensic auditors’ final recommendations.

Mr Zwane added that the visit to the US did happen. It occurred two years before the award was granted to AAR. In between, Air France was awarded the same tender for one year.

Mr Brauteseth asked about the owner of JM Aviation. Why did they come in as the B-BBEE partner in the aforementioned tender?

Ms Myeni replied that the matter on the contract was with the courts and part of the reports that would be approved by the board. It was quite a thorny issue that featured Mr Zwane’s name. Mr Zwane was also part of the team that went to the US as he was CEO of SAAT at the time. Therefore, having the acting CEO responding to the question would be seen as an attempt to defend himself. She asked that the question be left in abeyance till SAA brought the said report, which would be finalised at the board meeting on 29 September. She did not know who JM Aviation was as it was part of SAAT's day-to-day activities. 

Deputy Minister Buthelezi said the matter was receiving the attention of the board of SAAT, SAA and Treasury. He asked the Committee to hold on to the issue and allow the report to reach its finality. Even Treasury had an interest in the matter.

Mr Brauteseth felt there was clearly something going on as SAA was getting uncomfortable. He had touched on a raw nerve. He asked the Committee not to suddenly allow SAA to walk away.

Deputy Minister Buthelezi emphasised that there was nothing that could make him comfortable in relation to the matter. He had not seen the report.

Mr Zwane replied that JM Aviation was selected by AAR Corp. AAR Corp brought JM Aviation to bid. He was not really sure on whose recommendation, but they came with AAR Corp.

Mr Brauteseth pointed out that JM Aviation was not part of the original AAR Corp bid. They were brought in later. No one knew the aviation’s owners.

Mr Zwane replied that JM Aviation and its directors were known to SAAT. 

Ms Myeni said SAA would be happy to appear before the Committee after 29 September, the day slated for its next board meeting. SAA would send the comprehensive report to Treasury two days after the board meeting. 

Deputy Minister Buthelezi assured the Committee that the report would be sent a week after Treasury receives it. 

The Chairperson emphasised that the Committee wanted the names of individuals who had stolen money at SAA. The Committee wanted accountability without fear, favour or prejudice. 

Mr Brauteseth said there were major issues at SAA. The question was whether it should be closed down or attempts be made to make it profitable, and profitable to what end. Also, airlines needed support and require some veneer of sophistication in management. Any form of stealing and looting should be stamped out. The Committee will not relent in its call to have those who stepped over the line to face consequences.

Ms N Khunou (ANC) suggested that SAA appear before the Committee more frequently up to a point of stability. More so, if internal auditing was being conducted robustly, most of the current challenges would have been averted. The challenges were escalating, and mismanagement of funds was unacceptable. She was confident that the expected SAA audit by the Auditor-General would identify the real issues and would be much thorough.

Ms T Chiloane (ANC) underscored the need for accountability. Even those individuals no longer in the employ of SAA would need to account for their past wrongdoings.

The Chairperson asked SAA to furnish the Committee with the following: a list of evergreen contracts SAA was a party to; investigation reports for the last three years (complete or still in draft); list of offices and lounges SAA owned or leased outside South Africa including the lease arrangements. Also, where were losses emanating from? He deplored the unending farcical episodes of suspensions and appointments of top management. Stability was important. In conclusion, he stressed that a lack of due diligence was unacceptable, and requisite expertise within the SAA board was needed.

The meeting was adjourned.