South African Airways Bill [B35-2006]: Department briefing

LABOUR AND PUBLIC ENTERPRISES SELECT COMMITTEE
15 November 2006
SOUTH AFRICAN AIRWAYS BILL [B35-2006]: DEPARTMENT BRIEFING

Chairperson: Ms P Themba (ANC, Mpumalanga)

Documents handed out:
South African Airways Bill [B35-2006]
South African Airways Bill, 2006 presentation

SUMMARY
The Department of Public Enterprises summarised the background and implications of the South African Airways Bill. This Bill was the consequence of the decision by Transnet to dispose of certain non-core assets, which included South African Airways. The Bill provided for the restructure of the airline to a state owned enterprise, the transfer of Transnet’s shares, rights, liabilities and obligations in SAA to Government; the eventual conversion of the airline into a public company with share capital; and the listing of it as a major public entity in the Public Finance Management Act. The implications of the Bill were set out and explained, and it was noted that the separation of the airline from Transnet would strengthen the balance sheets of both, focus attention on turnaround, and that there would be more room for government leverage on tourism and business links of benefit to the economy. Questions were raised about the R1 billion facility Transnet was providing to SAA, the listing of SAA, the implications of the transfer in terms of reporting, the implications of the Mango operation, specifically in terms of competition and monopolies, and the suspensive conditions.  It was noted that the Portfolio Committee had also raised concerns about the closure of routes, customer service, quality of service and the possibility of other airlines running certain routes. 

MINUTES
Mr Litha Mcwabeni, Deputy Director General: Department of Public Enterprises (DPE) stated that the briefing would summarise the purpose and nature of the South African Airways Bill, 2006.

Ms Gaynor Kast, Ministerial Spokesperson, DPE, stated that in 2004 the Minister approved Transnet’s intention to focus on the core freight services of rail, ports and pipeline. The four-point turn around strategy meant that non-core businesses would have to be sold, to enable management to focus on building a freight logistics company. South African Airways (SAA) was one of the non-core businesses, and therefore the decision was taken to separate it. The intention was that SAA should be a stand alone State-Owned Enterprise (SOE) reporting directly to the Minister of Public Enterprises. Cabinet endorsed the separation in July 2006. SAA would report directly to Government, and would provide tourism and business links assisting in creating international hubs in South Africa. A national airline was not unique to South Africa, and was part of Government’s new imperative to use its state owned enterprises to benefit the economy.

On 12 June 2006 the Minister of Public Enterprises signed an agreement with Transnet to separate SAA and for Government to acquire the SAA shareholding.  The salient features of the agreement were outlined in the presentation. The agreement was subject to suspensive conditions, including the enactment of legislation to effect the transfer. In October 2006 Cabinet approved the draft SAA Bill, and the Chief State Law Advisor certified it on 10 November 2006.

The purpose of the Bill was to provide for the transfer of Transnet’s shares, interests and claims in SAA to Government; the eventual conversion of SAA into a public company with share capital; and the listing of SAA as a major public entity in Schedule 2 of the Public Finance Management Act (PFMA). The Bill stated that the main object of SAA was to engage in passenger airline and cargo transport services, air charter and other related services. Its borrowing powers were subject to the PFMA. The eventual conversion of SAA into a public company would enable it to access funding from the private sector more easily. SAA would continue to run its business as usual. The separation of SAA from Transnet should assist in strengthening the balance sheets of both SAA and Transnet, and would focus the attention of the management of both companies in turning their companies around. Government should be able to leverage SAA to provide tourism and business links for better economic growth.

Discussion
Mr N Hendricks (UIF Western Cape) asked for clarification on the R1 billion facility Transnet was providing to SAA. He asked whether this facility would have to be paid back once the Bill was finalised and the whole transfer enacted.

Mr Mcwabeni responded to the issue of the R1 billion. The implications were exactly as stated in the presentation. Transnet would provide SAA with a R1 billion facility and Transnet would act as banker, providing SAA with access to monies required until Government had replaced Transnet as guarantor for various guarantees to third parties and the International Air Services Council. The terms meant the State would have more control over SAA. In terms of the PFMA, SAA would be expected to submit a corporate plan in February to the Minister of Public Enterprise and the Minister of Finance, which the Department would have to approve. It also meant that significant activities that had a threshold in terms of finance would have to be approved.

Mr N Hendricks asked when SAA would be listed.

Mr Mcwabeni clarified that the view of the Department was that it was not strategic to immediately privatise SAA. Firstly, in terms of the FIFA programme for the 2010 World Cup, Government had committed itself to deliver transport, which included aviation, and SAA would play a critical role. Government’s commitment would translate into strengthening the national carrier. Secondly, there could not be increased trade without movement within the continent. There was a difference between wholesale privatisation of an airline and partial listing of an airline. In some instances the State had disposed of enterprises at low prices, and it would be poor economics to dispose of a national airline with large debts at the moment. It would be preferable to wait until the airline and its capacity to deliver key service were strengthened. Listing could take place for a number of reasons, including generating more resources if the State did not wish to dispose of SAA.

Ms Ursula Fikelepi, Chief Director, DPE, added that in respect of the R1 billion facility, Transnet would be a bank of last resort. Transnet would simply make the facility available to SAA, in effect as working capital, to use should SAA not be able to get funding from other external sources. SAA would be required to repay only the amount actually used.  This facility was not dealt with in the Bill but in the agreement that Government signed with Transnet.

Mr Mcwabeni further clarified that banks were prepared to provide funding to SAA and the general impression created in the media that the State might be putting a lot of money into SAA was unfounded. The fact that SAA became an SOE meant that if anything went wrong with the funding structure, Government would guarantee it. Banks were more inclined to provide funding to SAA because of the changes it was currently undergoing.

Mr D Mkono (ANC Eastern Cape) understood that this meeting was scheduled for the previous day. He stated that he would have expected an apology and reasons why the meeting was postponed from SAA. He was most concerned that it was postponed because one person was not available and said that surely other people in the Department could deliver the presentation.

 Mr Mcwabeni apologised on behalf of the Director General, who was out of the country. He himself had a crisis due to his mother’s ill-health. He took the point that one person’s inability to attend could not be an excuse, and apologised to members for the inconvenience caused.

Mr Mkono queried what the statement that all Transnet’s assets, rights, liabilities and obligations in SAA would be transferred meant. He asked what implications there would be in terms of reporting.

Mr Mcwabeni responded that SAA would account to Parliament in the normal way that other SOEs accounted, so that the SAA Board would have to account to the Portfolio Committee on Public Enterprises on an annual basis for performance and strategy. Parliament would then report about their findings.
 
Ms J Terblanche (DA North West) asked whether there was any possibility that in future the tax payable would be released from SAA and that it could be privatised.

Ms Terblanche asked what effect the Mango operation, which was also operated by SAA, would have on SAA, and what implications it would have for this specific Bill when it was enacted.

Mr Mcwabeni clarified why SAA was allowed to get into the low cost arena. There had been significant changes in the aviation industry in the country and SAA had not responded adequately and timeously to the entrance of low cost carriers like Kulula and One time. SAA felt that it had to enter the terrain of low cost airlines in order for it to increase its market share; and respond to those changes not only in South Africa, but also in other countries. He did not think there were implications for shrinking the market share of the other airlines. The entrance of Mango to this market should not result in less competition in the country but instead the country would have a variety of low cost airlines. Those people who had never previously had access to flying, particularly those from disadvantaged communities, would have greater access to different centres.
The historical formulation of SAA had not taken into account the requirements of the larger population within the country.

In terms of its operations SAA would have nothing to do with Mango. It would belong to the overall group of SAA, but would have separate management and a separate Board. The structural relationship between SAA and Mango would not breach the competition laws of the country. Government was not protecting SAA and could not do so without going against these laws.

Ms Fikelepi added that there were no direct implications of the Mango transactions on the Bill. The Bill would only affect Mango insofar as it was part of the SAA group. Mango would just be one of the assets of SAA and Government would not have a direct relationship with it, merely acquiring shares in SAA and eventually converting SAA into a public company. .

Mr Mcwabeni stated that questions had arisen on monopolistic behaviour. If SAA breached the Competition Commission rules they could be fined and expected to pay damages. This would still remain; but Parliament, and no longer SAA management, would now have direct oversight over their behaviour.

Ms Fikelepi added that the Competition Act imposed various sanctions where an entity was found to have engaged in anti competitive behaviour. SAA had already been fined in a number of cases. The Department and SAA were aware that other players in the airline industry were watching SAA with a very keen eye and if there was any form of anti competitive conduct they would be very quick to file complaints against SAA. For these reasons, the Department had asked the Competition Commission for an advisory opinion as to how to structure and establish Mango.

Ms Fikelepi added that there were some further suspensive conditions. One related to the passing of the Transnet Pension Fund Amendment Bill, which covered the rights of SAA employees, who were already members of the Transnet retirement schemes, to continue to participate.  The Department had briefed the Committee on that amendment bill in the previous month. Other suspensive conditions included Government replacing Transnet as guarantor, and amending the various licences to reflect Government as the direct shareholder. The Department was working together with Transnet and SAA to ensure that the suspensive conditions were fulfilled.

Mr Mcwabeni added that the Portfolio Committee had raised certain issues that were brought to the attention of the airline. One of the concerns was around the issue of route closure, including the Port Elizabeth to Cape Town route.  Route closure had arisen mainly from financial considerations. There could be implications if the national carrier closed particular routes that were regional routes. The main triangle was Johannesburg-Durban-Cape Town. However, the national carrier could also possibly deal with routes going to small towns.

Other issues were raised around the customer services provided in the various airports where SAA operated, some of which could have competition implications, which the Department would bring to the attention of the airline. Other issues related the quality of services provided and SAA was asked to come back to the Portfolio Committee with their customer services plan.

Mr Mokona articulated that the Minister of Public Enterprises had hinted that Airlink might be considered as an express airline between Johannesburg and Mthatha. Any changes must not affect the constituency because there were serious problems between Johannesburg and Mthatha.

The Chairperson wished Members and the Department the best during the festive season.

The meeting was adjourned.