South African Airways Bill: deliberations

PUBLIC ENTERPRISES PORTFOLIO COMMITTEE
31 January 2007
SOUTH AFRICAN AIRWAYS BILL: DELIBERATIONS

Chairperson: Mr Y Carrim (ANC)

Documents handed out
Memo: Distinction between a public company and a private company
Opinion from Mr G Hoon, Principal State Law Adviser
South African Airways Bill [B35-2006]

SUMMARY
The Chairperson outlined the areas where the Committee and the Department had a divergence of views. Members had expressed disquiet at a previous meeting and requested further information about the possible conversion and its requirements. The State Law Adviser had investigated the matter and was of the opinion that it was quite legitimate for parliament either to prescribe the requirements for conversion, or to state in the legislation that no conversion could occur without prior parliamentary approval. The Committee was in favour of specifying conditions. The Department summarised the main distinctions between public and private companies, and also gave a clause by clause analysis of the Bill. Members raised questions on whether other state owned enterprises received guarantees from government, the sale of Transnet shares in SAA, the recommended way of securing capital, and the benefits of an Initial Public Offering. Members agreed that there were policy questions to be debated, but were mindful of time constraints. The Department was requested to convey the Committee’s views to the Minister. Members then deliberated each clause of the Bill. They adopted the definition section of the Bill, Clause 3, Clause 5 and Clause 6(3) only, the remainder of Clause 6 not being adopted. Clauses 2, 4 and 7 and most of Clause 6 were not adopted. A subcommittee would be tasked to process this Bill.

MINUTES
Introductory Remarks by the Chairperson
The Chairperson reminded Members that during previous deliberations it became clear that the Committee was not happy with the current wording in relation to the possibility that SAA could be converted into a public company. A memorandum had now been drafted by Mr G Hoon, Principal State Law Adviser, in relation to Clause 4. That memorandum stated that the clause gave the Minister of Public Enterprises the option to convert SAA into a public company after SAA had been transferred to the State. The Bill, however, did not prescribe any requirements before the conversion could be effected. Mr Hoon had been asked by the Committee to investigate whether the Bill could be amended to either create a framework for the conversion, or to require prior approval by Parliament.

Mr Hoon had stressed that the Minister would exercise executive authority by “preparing and initiating legislation” and by “implementing national legislation”. Parliament, in terms of Section 44 of the Constitution, had the power to pass legislation on any matter. Mr Hoon stated that he could find nothing in any law preventing parliament from creating a framework to indicate under what circumstances conversion should be allowed, nor was there anything to prevent parliament from requiring that the conversion come before Parliament for approval before being implemented.

The Chairperson explained that the Committee could exercise three options. It could leave the Bill as it read currently, could defer the conversion issue, or change the draft wording so as to attach conditions relating to the conversion. He favoured the last option because it would give parliament some form of involvement and would create a broad framework in which the transaction could take place. He was mindful that policy questions needed to be addressed and proposed that the Bill be processed through a sub-committee that would in turn report back to this Committee. He asked the Department of Public Enterprises to address the Committee on the issues.

Comparison between a public company and a private company: Briefing by DPE
Ms Ursula Fikilepi, Chief Director, Legal Counsel, DPE set out the salient distinctions between a public and private company. The salient distinctions were as follows:

A public company must have a minimum of 7 members and was not limited in the number of members it may have. A private company must have a minimum of 1 member and a maximum of 50 members.

A public company could raise capital by the issue of debentures, bonds and preference shares to the public. A private company could not make an offer of shares or debentures to the public.

A public company was not restricted in its transfer of ownership. A private company was restricted in its transfer of ownership.

The voting rights of a public company should be in proportion to the number of shares held by a member. The voting rights in a private company could be self-regulated.

There were other technical and formal consequences that differed, in regard to the articles, number of directors, quorums, voting rights, proxies and so on.

Disclosure and accounting requirements for a public company were greater, and a private company would not generally be obliged to lodge a copy of the annual financial statements. A private company could choose whether to consolidate group financial statements. A public company would have to report according to the International Financial Reporting Standards.

Discussion
Mr C Gololo (ANC) wanted to know whether Telkom was a private or public company.

Ms Fikelepi replied that it was a public company.

Mr P Hendrickse (ANC) stated that SAA was a private company owned by the state. Furthermore, he noted that because it was a state owned enterprise (SOE), it was subjected to the Public Finance Management Act (PMFA) requirements.

The Chairperson queried whether Eskom received guarantees from the government.

Ms Fikelepi confirmed that Eskom did not receive any guarantees.

Mr Vuyo Kahla, Group Executive, Legal Services and Risk, Transnet Limited maintained that government wanted SOEs to rely on the strength of their balance sheet and to avoid seeking guarantees. Lastly, he told Members that the document clearly indicated that a shareholder in a public company did not necessarily have voting rights.

Mr L Human, a transaction analyst, amplified the point that the accounting standards between a public and private company were already great and were set to grow.

Mr Hendrickse asked whether Transnet had shares in SAA.

Ms Fikelepi responded that Transnet had held shares in SAA that were later sold to the government.

Mr Hendrickse sought to establish the amount Transnet received for its shares.

Mr L Human confirmed that the amount of R2 billion was specified in the share selling agreement.

Mr Hendrickse expressed dissatisfaction at the treatment of Transnet. He complained that Transnet gave SAA R8 billion and only received R2billion for its shares.

Ms Fikelepi argued that an independent merchant bank determined the valuation.

Mr Kahla argued that it had been necessary for Transnet to recapitalise SAA.

The Chairperson persisted that Transnet had suffered a loss of R6 billion. Thereafter, he sought clarity on the different forms of debentures.

Mr Human explained that there were two forms of debentures, namely a secured debenture that provided the lender some recourse if a borrower did not pay on a prescribed day, and an unsecured debenture that did not offer such security to the borrower.

The Chairperson asked what was the best form of securing capital for a SOE public company.

Mr Human offered that the most appropriate form of funding could only be determined after analysing the risk and rate of return of the enterprise concerned. He added that secured debentures and Initial Public Offerings (IPOs) were good options. He concluded that tax imperatives needed to be considered when making such a decision.

The Chairperson reiterated his preference for IPOs and wanted to know some of its advantages and disadvantages.

Mr Human proffered that an IPO attracted interest and participation from a broad range of people. However, he mentioned that the company would dilute its equity by giving away shares. Lastly, he stressed those other considerations like strategy and interest should be taken into consideration.

Ms Fikelepi believed that an IPO was favourable because it contributed a large capital base. She supplanted that a SOE public company would attract more investors if had a strong balance sheet.

Mr Denzel Matjila, Manager, Legal Services, DPE opined that an IPO was a better option than a loan because the enterprise shared the risk with others.

Mr Hendrickse asked whether anybody could participate in an IPO.

Ms Fikelepi replied that any investor, whether an ordinary person, institution or company could participate.

The Chairperson enquired whether restrictions could be imposed on who could participate in an IPO.

Mr Kahla answered in the affirmative. He cited the example of Telkom where there was an IPO that catered for black economic empowerment (BEE).

The Chairperson recapitulated the Committee’s main concerns; namely that it specifically wanted to have included in the Bill, either in the preamble or another appropriate place, that SAA was a strategic government asset that must be owned by the government; it wanted to restrict foreign ownership of SAA; and finally it wanted to insert conditions regarding the process and content of the conversion.

Ms Fikilepi admitted that the DPE needed further discussions with the Minister because some of the issues related to policy matters on which she could not pronounce. She suggested that the conversion could be announced by the Minister means of a notice in the Government Gazette.

Mr Kahla warned that the Bill needed to be processed urgently in order satisfy legal requirements. He highlighted that the conversion aspects of the National Ports Act did not create similar concerns.

Mr Hendrickse retorted that the Committee was aware of the time constraints. He added that it was his duty was to ensure that proper processes were followed and not to worry about deadlines

Mr L Marabeni, respresentative of DPE believed that the process of consulting parliament was not unique. He expressed that he was not opposed to this process.

Mr C Golo proposed that DPE seek guidance and direction from the Minister.

Mr Marabeni voiced his concern regarding the legal implication on how the word strategic could be defined if it was included in the Bill.

Mr Hendrickse instructed the Department to properly and strongly convey the Committee’s sentiments to the Minister.

Mr Matjila queried whether parliament should be consulted at the point of the conversion or after.

The Chairperson hoped parliament would be consulted before the Minister went to the Registrar. He wanted to assert the right of the people to express their views on the conversion.

Mr Marabeni commented the Committee that in Australia a hostile attempt to takeover Qantas Airlines could not succeed because parliamentary consent was needed.

South African Airways Bill: Clause by clause deliberation\
The Chairperson asked the Department to go through the Bill clause by clause so that the Committee could adopt certain aspects of it.

Members adopted the definition section of the Bill, Clause 3, Clause 5 and only Clause 6(3), the remainder of Clause 6 not being adopted.

Clauses 2, 4 and 7, and the portions of Clause 6 other than 6(3), were not adopted.

The Chairperson repeated that the Bill would be processed in a sub-committee. He instructed the DPE to respond to the Committee’s concerns at that forum. He revealed that the Committee was not averse to changing or relaxing its positions but that it needed to be convinced by compelling arguments.

The meeting was adjourned.