South African Airways Annual Report for year ended March 2018

Meeting report

The Chairperson welcomed Members and the delegation from the Department of Public Enterprises (DPE) and the South African Airways (SAA) to the meeting.

Ms Jacky Molisane, Acting Director-General, DPE, said SAA would lead the presentation and the Department would assist them with questions from Members.

Briefing on SAA Annual report and Financial Statements for 2018
Mr John Lamola, Executive Chairperson and Chief Executive Officer, SAA, said the matter to be considered was firmly within the purview of the Board of SAA which the Chief Financial Officer would represent. His appearance at the meeting was to give a personal apology to the Committee as SAA was summoned by the International Air Services Licensing Council (IASLC) to a meeting that would be in an hour and a half, which was a physical meeting to be led by himself. He requested to be excused during the meeting with the Committee so he could attend the meeting with the IASLC.

Mr Fikile Mhlontlo, CFO, SAA, presented SAA’s March 2018 financial results. The annual report was regarding business operations that took place under the previous management and the previous Board. The financial statements were prepared by the previous management under the oversight of the previous Board and finalised by the new interim management and interim board.

The annual report was only finalised after SAA exited Business Rescue in April 2021. A substantial part of the audit of the 2017/18 annual financial statements was performed in 2018.  SAA was, however, unable to satisfy the going concern assumption at the time and consequently, the audit could not be finalised.
The debt remained high at R8.4 billion as did the cost of financing debt at R1.4 billion. This was after the Shareholder provided R10 billion during the year under review as capital injection comprising R7.4 billion to repay lenders and R2.6 billion for working capital.

The financial position remained weak with equity and reserves remaining negative to the value of R13.3 billion as total liabilities of R26.7 billion exceeded total assets of R13.4 billion, hence the going concern issue highlighted before. The net cash position remained positive at R819 million, and the Group turnover for the year was R29.4 billion, with operating costs of R32 billion.

The business continued to be unable to meet various key performance targets set by the shareholder as detailed in the directors’ report. The auditors continued to have findings on various matters such as fixed assets, irregular expenditure, fruitless and wasteful expenditure, and various general ledger accounts.

Various interventions were implemented by SAA management, including key appointments made to plug the critical skills gap, the adoption of the revised long-term turnaround strategy, and the commencement of the restructuring programme. However, the interventions were implemented at a time when there were weak governance structures at SAA, coupled with the consequences of State Capture that were laid bare by the Zondo Commission Report.

Discussion
The Chairperson said he had noticed that the attendance of meetings by some of the core members of the Committee was becoming poor, which was frustrating to see. He hoped the Whips of all the parties would do their work to ensure that Members prioritised the Committee.

The Committee needed to deal with such problems to execute its oversight responsibilities effectively. This would not be possible if most of the Committee Members missed important meetings and missed out on important information, especially coming from entities that the Committee exercised its oversight responsibilities on. He hoped Members would not continue the culture of only attending meetings as they pleased or when they had interests in specific issues being discussed.

Mr N Dlamini (ANC) said it was not something to take lightly that there were no financial reports from the previous years because they would have helped. He said the portfolio’s work was in crisis and they needed to find a way to get out of the crisis. He hoped that the IASLC meeting Mr Lamola was attending would result in SAA accessing international routes.

Mr F Essack (DA) said the presentation remained a tick-box exercise because it was four-and-a-half years old, and so much had happened in the interim. The issues that the Committee should have interrogated were the operating losses incurred since SAA resumed its operations and whether SAA was compliant with all statutory obligations such as Value Added Tax (VAT), Pay As You Earn (PAYE), Unemployment Insurance Fund (UIF), other employee fund contributions, etc. There were other issues that the Committee needed to understand so it could be able to interrogate and make qualitative and quantitative recommendations. These included the source and amount of working capital currently used by SAA to keep operations going, as well as the status of the legal action of the Airlink claim for payment of Airlink ticket sales revenue collected by SAA and not paid to Airlink. He also asked what the status of a buyer for Mango Airlines was. Why did SAA employees get special treatment with massive severance packages while SA Express and Mango Airlines employees did not receive the same treatment? A lot had happened at SAA in the previous five years and some issues were still unfolding, such as the Takatso issue. It had been announced about 15 months before that that they would take a shareholding of 51% in SAA. The Committee needed to get a copy of the agreement and a report on what had been done since the announcement and why it was taking so long to conclude.

Ms J Mkhwanazi (ANC) felt it would be appropriate to know about the current issues at SAA because there were a lot of developments that the Committee needed to be informed of. She asked the DPE to speak on the timelines of the finalisation of the strategic equity partner (SEP) and its details, as well as the necessary regulatory approvals that needed to be received.

Ms V Malinga (ANC) asked if government was still the major stakeholder at SAA and what measures were in place for the audit findings of the 2021/22 financial year. She asked if the strategic equity partner was on board and what their stance was on the internal audit of the entity. Given that SAA did not submit the financial statements from 2017 until 2021, she wanted to know when the outstanding financial reports would be presented. It was not right to oversee an entity that failed to submit its financial reports. On 23 June 2022, it was reported in the media that Toto Investment Holdings filed documents in the Cape Town High Court against government’s sale of SAA. The company claimed that the process lacked transparency and was unfairly excluded from the deal. Given this litigation against the strategic equity partner, she asked how this would affect the deal going forward. National Treasury also withdrew its approval of the sale of the 51% of the SAA shares to the strategic equity partner, stating that the sale still represented a contingent liability to the fiscus. She wanted to know how this would affect the finalisation of the deal.

Mr S Gumede (ANC) pleaded with DPE to at least have one airline operating in South African skies because Mango and SA Express were no longer operational, and uncertainties surrounded SAA. He said when the Committee considered the input from Mango Airlines, there was a comment that, at times, there were some politics at play. He recalled when SAA proposed an amendment that Mango Airlines could not operate because the strategic equity partner was not on board. As a result, the consideration was deferred and that did not happen. When looking at the current situation at SAA, it seemed like the strategic equity partner was not on board, which pointed back to the politics at play. He said all the efforts should be focused on saving SAA. He asked if there was any cut-off point or date for the submission of financial statements. If there was one, what was the value of the statement presented to the Committee in the current meeting? He was unsure whether it was presented for noting or if it would form part of the records. He asked if SAA had an alternative plan because Treasury said it would no longer fund the entity, it was not happy with the process, and Toto Investment Holdings was taking SAA to court. He was concerned about Treasury being unwilling to assist the entity and unwilling to support the process of the strategic equity partner and was worried about what would happen to the entity if it failed to secure the strategic equity partner. Considering that the strategic equity partner would hold 51% of SAA shares and government would own 49%, he was worried about the expertise that may have been lost. He asked if SAA had kept some expertise in case the airline became fully operational again. He asked DPE to be honest with the Committee so that it could assist the entity.

Ms J Tshabalala (ANC) agreed with the Chairperson that the attendance issue from Members of the Committee needed to be addressed. She suggested the Committee should consider having physical meetings or hybrid sessions in Parliament. The presentation was an account of the outstanding financial statements of SAA. The airline was unable to submit the statements as they were not a going concern at the time. Submitting the financial statements during the period would have meant the airline's liquidation. The company underwent a business rescue process that saw the airline's restructuring. Due to the fact that there were continuous financial losses and liquidity challenges, government decided that SAA would be put into business rescue and the majority stake in the airline would be sold, hence the 51% and the Takatso issue. SAA was placed in care and maintenance by the Business Rescue Practitioners (BRPs) by 13 April 2021, which led to the appointment of an interim Board. She said the BRPs were given over R10 billion to do their work, but she did not understand how the money was used. She asked the Department and SAA to explain.

There were a lot of changes in SAA as in June 2021, the Minister of Public Enterprises announced that Takatso Consortium, comprised of Harith General Partners, a leading investor in African infrastructure and airports and an airline management firm, and Global Airways was selected as a strategic equity partner for SAA. After the conclusion of the due diligence process, the parties agreement was signed by all parties on 22 February 2022, and the transaction would be concluded subject to the satisfaction of all conditions of the sale and when regulatory approvals had been met. An amount of R10.5 billion was allocated to SAA by National Treasury in the 2021 financial year to implement the business rescue plan, and the entity was able to submit its backdated outstanding annual financial statements. She asked how much was left of the R10.5 billion and what it was being used for. She asked when the process of the BRPs was going to be finalised to ensure that Takatso Consortium would keep the end of their bargain and transfer the money for the 51% shares of SAA. What would the implications be for Takatso Consortium if they ended up not keeping their end of the bargain? Would SAA be able to survive without Takatso Consortium? How much would SAA need from Treasury to survive in the case that the deal with Takatso Consortium failed to materialise? SAA was not meant to be handed over to the private sector just for the sake of it. SAA represented the pride of the nation and there were lots of markets and demand for it. There was no way government was going to fold its arms and allow the private sector to take over. The Committee had asked the DPE executive why it had not advertised the opportunity of getting SAA into the market for interested parties to invest while keeping government as the majority shareholder. The bidding process where Takatso Consortium ended up having a deal with government over the sale of the shares was never transparent and still needed to be explained by the DPE. She did not understand how there would not be any other progressive business people who would be interested in investing in a government shareholder type model of an airline.

[Referring to the table on performance against the Shareholder’s Compact], she said the targeted SAA operating cash flow for the 2017/18 financial year was [negative] R955 million and the actual was [negative] R2 545 million. Why was the Key Performance Indicator (KPI) not achieved? The targeted Earnings Before Interest and Taxes (EBIT) for 2017/18 was [a loss of] R1 221 million and the actual was [a loss of] R3 990 million, which meant the KPI was also not achieved. She asked why that was the case. The targeted net profit was [a loss of] R2 778 million but the actual ended up being [a loss of] R5 424 million. She asked why this KPI was not achieved.




The achievement of consistent, efficient, effective operations, including asset utilisation, hours per day, white body daily utilisation, safety records, etc., were not achieved, including the percentage of procurement spent locally. SAA had a target of >85%, and only 64% was achieved. She wanted to know the reasons for the underachievement. On the performance against the shareholder’s compact, SAA had 37% achievement, meaning they achieved 6 out of 16 targets. On another issue, they had achieved 44.4%, meaning they achieved 8 out of 18 targets, hence the audit opinion was qualified.

One of the issues that the auditors highlighted was the restatement of corresponding figures. The corresponding figures for 31 March 2017 were restated because of errors in the consolidated and separate financial statements of the SAA group at the year ended on 31 March 2018, and the material impairment and material losses of R313 million were incurred as a result of the impairment of the cash neutrality advance to the South African Express Airways, SOC (Ltd) [pages 36 and 80]. She said the DPE must address issues pertaining to internal controls, leadership instability, inadequate policies and procedures, lack of decisive action taken to mitigate emerging risks, no proper record keeping, as well as inadequate oversight regarding compliance and related internal controls by the accounting authority and management.

Although the report submitted was the annual financial statements as a going concern, the auditor raised a concern about entity’s going concern status [page 8]. This concern was raised by the fact that the entity required the SEP to provide it with R3 billion [page 87] over a 3-year period to keep it financially sustainable, but the SEP deal was not finalised, which raised serious concern about the future sustainability of the entity. Given this concern, she felt that the Committee should get timelines from the Department on when the SEP would be finalised, and if the answer could not be provided, the Department should tell the Committee when it would take the entity back to complete government ownership. 

The Chairperson thanked Ms Tshabalala for the background she provided to the Members. He said he was worried about Members going into meetings, having forgotten about the previous meetings. The idea of having weekly Committee meetings was to help Members remember and understand the processes periodically so they could link the information they received with the information they received in past meetings.

The financial statements presented by SAA were part of the financial statements that were still outstanding and should have been appreciated when they were presented to the Committee because complying was not a useless exercise, but a legal process that made people account. As the 6th Administration, government had inherited problems, including financial challenges facing most of the State-Owned Entities (SOEs), including liquidity challenges. Central to the liquidity challenges, SAA was among the entities that were failing due to the financial situation that required them to present their financial statements. State Capture and all the corruption that happened in the past had damaged the SOEs. At the start of the 6th Administration, the Minister played a leading role in fixing the problems, including putting proper governance structures to remove those that failed to operate properly and appointing new executives in the SOEs. He said it was important for members to appreciate the presentation because even though it may have been outdated, the information was still needed.  

He said the process of handing over SAA to the majority shareholder should not take years to happen because the delay would feed to the rumours that were circulating in the media that Takatso Consortium did not have money to run SAA. The Committee needed the process to be fast-tracked to focus on its public interest duty. If the Competition Commission did not fast-track the process, it would provoke the Committee to an extreme level. “The Department cannot babysit Takatso Consortium forever”, he said.

Response by DPE
Ms Molisane said she understood the level of frustration about the finalisation of the handing over of SAA to the SEP, but the challenge was not with Takatso Consortium. The challenge was that Takatso Consortium could only take over the 51% SAA shares once all the regulatory processes were completed. That included the current work that the Competition Commission was doing. After that, there would be a Competition Tribunal process, which was expected to be concluded between mid-October and November. DPE informed the Competition Commission that it would want to conclude the work sooner rather than later because it did not want more delays.

The other regulatory issue that needed to be addressed involved the Air Services Council. That process would also take a few months to complete. The timeframe for the completion of the handover would be the end of March 2023 at the latest, when all the regulatory approvals would have been secured. Takatso could not begin its work until it received a green light from the regulatory authorities. Until all those conditions were met, SAA would remain under the full ownership of the state.

On the legal case opened by Toto Investment Holdings, she said Toto Holdings was one of the entities that expressed interest and were given an opportunity to present their proposal. The DPE also had a one-on-one engagement with them to ascertain their business proposition, and they did not meet the criteria. The criteria were clear in terms of what government was looking for, including strategic fit, operational capability, and the ability to raise funding. The case was in court and would be ventilated to the public later that month. The Department also made its own submissions and was awaiting the outcomes of the case, which would be revealed at the end of September.

When the Department undertook the handing over process, there were clear options that it was seized with. Either the Department followed the business rescue process, or it would have to go through the liquidation process. Having done a cost-benefit analysis, the Department concluded that going through the business rescue process would be prudent. For that to be implemented, the Department needed R14 billion. Treasury managed to provide R10.5 billion to the Department, but the remaining R3.5 billion was still needed to deal with the unfilled ticket liabilities and the concurrent creditors. All the entities had indicated that they would not pay any historical liabilities, which was the prudent manner that the DPE sought. She was unaware of Treasury pulling out of the transaction between SAA and Takatso Consortium. She said this was a government process and the R3.5 billion was the balance that was required. The Department had performed a due diligence check on Takatso Consortium to ascertain whether the entity had the financial ability to fund SAA. The Department found that the company did have the funds and wanted to conclude the handing over process sooner rather than later. The allegations that the company did not have the funds were untrue.

She said the Department was implementing the recommendations of the Zondo Commission report to fix the internal challenges experienced in SAA due to State Capture and all previous corruption that took place in the past, as was made public in the Zondo report. The Department was also keen to ensure that the damage done and the people responsible were held responsible and possibly sent to jail because they cost the state a lot of money. There were also SAA aeroplanes that were operational in South African Airports.

Adv Melanchton Makobe, Deputy Director-General: State-Owned Companies Governance Assurance and Performance, DPE, said when SAA went through financial difficulties, there were two options to solve the issue: it was either through the restructuring that would be done by the Board or through a business rescue process. A decision was made to go through the business rescue process. This was because there was a form of protection that entities received when they were under business rescue. Litigation could not be initiated, and SAA could negotiate with its creditors on what was owed. When in business rescue, an entity must provide post-commencement finance to ensure that the restructuring of the entity was done within the confines and the protection of the business rescue process. The business rescue process was expensive, and the fees of the BRPs needed to be looked at to ensure that they were in line with the regulations. Once SAA got into the business rescue process, government said the fiscus was constrained in terms of funding SAA going forward. Because Treasury was unable to put in the working capital, the Department looked for a SEP that would provide the necessary capital injection into SAA so that the taxpayer’s money was not lost, and the company would not go into liquidation where a few assets would be sold on a fire sale and the money would be given to the creditors. Government could not afford to run SAA on its own because the fiscus was constrained and would not be able to provide the working capital.

Takatso Consortium was not given the shares for free; it committed to providing the R3.5 billion to SAA and capital to the entity going forward. The agreement was signed subject to a condition precedent, so up until the conditions stipulated by the Acting DG were met, the deal would not be concluded. The Department was waiting for the Competition Commission and the aviation authorities to provide the necessary approvals. Once that was done, Takatso Consortium would take over 51% of the shares. Government would still own the remaining 49%, but some minority rights were negotiated by government in the agreement. Those included that the entity would remain South African Airways and remain based in South Africa, and the developmental objectives of government would still be realised through SAA going forward.  

Toto Investment Holdings launched an application to review the process followed by government in appointing Takatso Consortium. The Department also filed its defence in Court and believed its prospects of success in Court were good because it had followed the legal processes it needed to follow when it appointed Takatso Consortium. Toto Holdings also launched an interdict against the implementation of the transaction, and the Department was also defending against that interdict that would be heard at the Cape Town High Court the following week. 

Response by SAA
Mr Mhlontlo said it was correct that the financial statements for the past four years were outstanding. The context that Ms Tshabalala provided was correct. SAA went through a business rescue process for 18 months, and the audit for 2017/18 had to be paused and was only continued towards the end of 2021. This referenced the reason for the delay in the submission of financial statements for the four years. The remaining outstanding financial statements have since been drafted. They were under review by the Auditor-General through the audit process, and that would be concluded in the last quarter of the current financial year.

SAA was currently only flying domestic routes such as Durban, and Cape Town, as well as six additional routes within the region, including Kinshasa, Accra, Lagos, Lusaka, Mauritius, and Harare. The airline was looking to expand its routes towards the end of the year and had a programme targeting international routes sometime in the 2023/24 financial year. This also depended on the fleet, as the airline only operated six aircraft, with the seventh being the backup. The airline needed to acquire additional fleet, working capital, and further modernisation, and all those matters required funding.

SAA was compliant with VAT, PAYE, UIF, and the workmen’s compensation. The working capital utilised by SAA was part funding provided by the fiscus during the business rescue and part from the cash generated from running operations. They would deal with the more current financial statements when the financial statements of the past financial years were concluded.

The Airlink claim matter went to court on two occasions, where SAA won. Then it was referred to court again, so it was sub-judice and SAA would not be able to reveal the merits of the case until it was concluded. The interest in the acquisition of Mango Airlines would only be clarified once SAA received a Public Finance Management Act (PFMA) application from the business rescue practitioners. The process would be taken from there and would require approvals from DPE and National Treasury.

He did not have the details on the basis for the question on severance packages, but any settlements that were reached with employees, were reached by the business rescue practitioners, having negotiated with the trade unions representing the employees. The SEP had not expressed any view on the status of the SAA internal audit as it was not on board yet.

The audit findings fell into an awkward period where two auditors had to pull out because going concern requirements could not be met and there were serious issues of liquidity and solvency at the time. The reports that were generated were in the process of being followed up on.

SAA required capital expenditure, re-fleeting, modernisation, and additional funding going forward, and the shareholders must investigate those issues after the acquisition. If the acquisition transaction with Takatso Consortium fell through, funding would be the biggest challenge faced by SAA and liquidation would be the inevitable outcome.

He said SAA was currently operating a smaller fleet and the expertise was available to fit the current fleet, but when the business expanded, the entity would embark on a process to acquire the required expertise and to attract the needed skills. Most of the expertise from SAA, Mango, SA Express, and Comair was still available, so the country was not short on relevant expertise, and SAA would tap those going forward.

R3 billion of the R10.5 billion was used to fund voluntary severance packages, retrenchments, and settling issues of unpaid salaries in the system. Post-commencement creditors amounted to R600 000, and unflown ticket liabilities amounting to R2.2 billion. There was also R2 billion that was left for working capital, and an additional R2.7 billion was paid to subsidiaries. All these amounts accounted for the R10.5 billion total.

The issues pertaining to internal controls, leadership instability, inadequate policies and procedures, lack of decisive action taken to mitigate emerging risks, no proper record keeping, as well as inadequate oversight regarding compliance and related internal controls by the accounting authority and management, related to a difficult time in the history of SAA. This included the underperformance on the KPIs. The best way to explain it was that the business failed, which was why it went into business rescue.

Follow-up discussion
Ms Malinga asked DPE for timelines on when the SEP would be finalised and takeover SAA.

Ms Tshabalala said Takatso Consortium had not injected any money into SAA and their agreement was already breached because they were supposed to take over during the current timeframe. The fact that SAA was still under the complete control of government meant that it could survive under government. She asked if SAA would be able to survive if the deal with Takatso Consortium fell through. She said the Committee should consider inviting the Competition Commission to explain to the Committee why their process was taking so long to conclude. 

Mr Essack asked if the investigation on the near disaster fuel contamination on the flight from West Africa was completed and whether the Committee would receive a report on it.

Response by DPE
Ms Molisane said they were expecting the Competition Commission to finalise the determination by mid-October, which would go to the Competition Tribunal. She said the Department kept open communication with the Competition Commission, but their work was an independent process. They needed to satisfy themselves by fulfilling their own mandate. If the deal with Takatso Consortium fell through, and if government could not put any further injections of funds into SAA, liquidation would be inevitable. 

Adv Makobe said an addendum to the agreement was signed so the agreement was active and was not breached, and this was not because Takatso Consortium was not able to raise funds, but the delay was caused by the Competition Commission process. The Department gave all the necessary information to the Competition Commission, but they considered the transaction a large measure that normally took a long time to investigate. The Commission was also an independent authority, so the Department could not push them beyond their timelines.

Ms Tshabalala wanted to know if the addendum was signed to correct the breach of agreement made by Takatso Consortium.

Adv Makobe said they were correcting the issue so that it would not result in a breach of agreement as they needed more time, as it was envisaged that they must do so in law.

Ms Molisane said even if Takatso Consortium had put money into SAA, it would not have been allowed to flow until the agreement was concluded and the Competition Commission process was complete and all the regulatory approvals were made. The exchange of money would only happen when the exchange of ownership agreement was sealed.

Adv Makobe said the agreement was subject to a confidentiality regime in law, so they would have to consult with Takatso Consortium to get the necessary consent for them to be able to disclose the agreement. There was also a confidentiality clause in the agreement so they would take legal advice and revert to the Committee on the matter.

The Chairperson agreed that the Department should get legal advice and revert to the Committee on whether they would be able to share the information. He thanked the DPE and the SAA for their responses to the questions asked by Members and noted that the Committee did not ask questions out of spite, but out of genuine concern for the entity and the people of South Africa. He released them from the meeting as the Committee would continue with its internal matters.

He said the Committee would not consider the minutes as planned because the Committee Secretary was still on leave and hoped the Committee would be able to adopt the minutes next week.

Ms Tshabalala reminded the Chairperson of the joint meeting with the Portfolio Committee on Mineral Resources and Energy (PCMRE) on the oversight the Committees undertook at the Koeberg Power Plant a few weeks previously, where Eskom had promised to submit responses to questions that were raised in Koeberg in writing. She said the Committee needed to adopt the report so it could be tabled to Parliament. There was a proposal to have another joint meeting on Tuesday of the following week so that the report could be adopted.

She also proposed that the Committee consider visiting the Head Offices of Eskom during the parliamentary recess and have a whole day session with Eskom to deal with its issues, including load shedding and other issues. Lastly, she proposed that the Committee try to squeeze a study tour into its programme. The study tour would help them investigate SOEs in other countries where SOEs were run correctly and ascertain how they managed to sustain them. The study tour would also investigate energy matters where the countries were able to run energy sufficiently. This would assist the Committee in enriching its understanding and its ability to give recommendations to SOEs and on other matters that Executives should be able to deal with on the issues of energy.

Mr Dlamini seconded the suggestions.

The Chairperson agreed to have the joint meeting with the PCMRE on Tuesday of the following week and would ask the Committee Support Staff to ascertain the availability of the PCMRE. He said the suggestion of a study tour was presented earlier in the year and the Committee was waiting on Parliament’s response. He said it was necessary for the Committee to visit some of the power stations because they needed some answers from the executive.

The meeting was adjourned.