Transfer to SAA subsidiaries & conditions attached: DPE briefing; Appropriation Bill & Special Appropriation Bill: Committee Reports; with Deputy Minister

NCOP Appropriations

09 June 2021
Chairperson: Ms D Mahlangu (ANC, Mpumalanga); Mr T Matibe (ANC, Limpopo)
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Meeting Summary

Video: Joint Meeting: Select Committee on Appropriations and Select Committee on Public Enterprises

Audio

Tabled Committee Reports

At a virtual meeting, the Committees were briefed by the Department of Public Enterprises on the proposed transfer of R2.7bn to South African Airways subsidiaries. The Committee was also updated on the expenditure of R7.8bn transferred to South African Airways in the 2020/21 financial year, which included the terms and conditions of the Special Appropriation Act 15 of 2018, linked to the approved R10.8bn transferred.

Regarding the proposed transfer of funds to South African Airways subsidiaries, the Department said South African Airways went into business rescue on 5 December 2019 due to continuous losses over an extended period. South African Airways exited the business rescue process on 30 April 2021, and its subsidiaries were not put into business rescue.

The funding for South African Airways subsidiaries was approved by government. A total of R2.7bn was part of the request, and the R3.5bn needed over three years, needs to be approved. Urgent funding of R10.5bn was allocated up to 31 January 2021. The total funding amounts to R14bn.

The Committees welcomed the briefing but said there should be meaningful value for the money Parliament appropriates to departmental entities, and there should be strict adherence to the stipulated conditions under which appropriations are made. Assistance must be needs driven and not done randomly and irresponsibly. Members noted the importance of accountability for the appropriated public money and adherence to the conditions under which it was appropriated. Members were pleased to hear South African Airways is ready to fly in the same name again.

Members asked if the funding is adequate to ensure salaries are paid out as a matter of urgency, and asked about the job security of the employees at South African Airways.

Members asked if the funding allocated is going to be sufficient to get South African Airways off the ground and self-sustainable, without constant cash injections from government.

Regarding the liability of unflown tickets, Members asked if all outstanding liabilities were paid or if there will be more payments for future-dated tickets bought by people with the intention to fly to destinations.

Members asked for further details on the employees who opted for voluntary settlement agreements.

Members asked how the grounding of the flights of South African Airways impact the entity’s future; and asked what the discussions between the Department of Public Enterprises and the Department of Transport regarding international flights and routes are.

Members further asked what the cost of the business rescue proceedings are, and how much practitioners were paid. The presentation provided no clear breakdown on the growth plan for South African Airways, and no mention was made of Voyager club members holding flyer miles, and how its concerns would be addressed.

Members asked for clarity on the privatisation of state-owned entities, and said public-private owners and partnerships should be encouraged; and asked if this entity was worth saving; and if it will become self-sustainable to the extent it can provide a quality service to its end users and be commercially viable.

Meeting report

Co-Chairperson Mahlangu convened the virtual meeting and welcomed Members from the Select Committee on Appropriations, the Select Committee on Public Enterprises and Communications, and the delegations from the Department of Public Enterprises and National Treasury.

The purpose of the meeting was for the Department of Public Enterprises to brief the Committee on the proposed transfer of R2.7bn to South African Airways (SAA) subsidiaries, and to update the Committee on the expenditure of R7.8bn transferred to South African Airways in the 2020/21 financial year. This amount included the terms and conditions of the Special Appropriation Act 15 of 2018, linked to the approved R10.8bn transferred. The second item on the agenda was for the Committees to consider its draft reports on the Appropriation Bill [B4B — 2021], and the Special Appropriation Bill [B5 — 2021]. The last item on the agenda was for the Select Committee on Appropriations to consider its draft minutes of 2 June 2021.

The delegation from the Department of Public Enterprises (DPE) consisted of Mr Phumulo Masualle, Deputy Minister of Public Enterprises; Ms Nonny Mashika, Acting Deputy Director-General: Aviation, DPE; Ms Jacqueline Molisane, Deputy Director-General: Strategic Partnerships, DPE; and Mr Edwin Besa, Chief Director: Financial Analyst, DPE.

The delegation from National Treasury consisted of Mr Ravesh Rajlal, Chief Director: State-Owned Entities (SOEs), National Treasury (NT); Ms Ntsakisi Ramunasi, Communication Officer, NT; Ms Ntandokazi Makaula; Ms Julia de Bruyn, Chief Director: Public Finance, NT; Mr Isaac Kurasha, Director: Trade and Industry, NT; and Ms Empie van Schoor, Chief Director: Legislation, NT.

Co-Chairperson Mahlangu said it is prudent for the Committees to understand how the monies transferred to South African Airways will be spent by its subsidiaries.

Co-Chairperson Matibe appreciated the chance of a joint meeting between the Committees. It is an exemplary act of efficiency geared towards strengthening Parliament’s oversight function, to ensure monies appropriated are used efficiently and in compliance with the law.

Mr D Ryder (DA, Gauteng) asked for clarity on the discussion the Select Committee on Appropriations had in the previous meeting. It was said the goal is to make sure monies were being used in the correct manner. Questions were raised regarding the monies for the business rescue of South African Airways, and the fact funds were appropriated. The Committees need to ensure funds are properly utilised and well accounted for, considering the salaries outstanding and yet to be paid.

Briefing on the proposed transfer of funds to South African Airways subsidiaries

The first item on the agenda was for the Committees to be briefed by the Department of Public Enterprises on the proposed transfer of R2.7bn to South African Airways subsidiaries, and on the expenditure of R7.8bn transferred to South African Airways in the 2020/21 financial year. This includes the terms and conditions of the Special Appropriation Act 15 of 2018, linked to the approved R10.8bn which was transferred. Ms Nonny Mashika, the Acting Deputy Director-General: Aviation, DPE, presented the briefing.

Business rescue plans and funding for South African Airways subsidiaries

South African Airways went into business rescue on 5 December 2019 due to continuous losses over an extended period. South African Airways exited the business rescue process on 30 April 2021, and its subsidiaries were not put into business rescue. The impact of South African Airways being in business rescue exacerbated financial challenges of the subsidiaries. The business rescue plan recognised the deteriorating financial situation of South African Airways. Clause 14.6 of the business rescue plan recognised the relationship between South African Airways and its subsidiaries, and the requirement for intra-group transactions. The success of business rescue plan is dependent on financial viability of subsidiaries.

The funding for South African Airways subsidiaries was approved by government. A total of R2.7bn was part of the request. The R3.5bn which is needed over three years needs to be approved. Urgent funding of R10.5bn was allocated up until 31 January 2021. It consists of R2.8bn allocated for employee-related payments, R800 million for creditors after the business rescue process, R2bn for working capital, and interim flying, R2.7bn for the recapitalisation of subsidiary companies, and R2.2bn for the honouring of ‘unflown’ liability. Regarding the remainder of the three years, R1.2bn was allocated for ‘unflown’ liability and R2.3bn for dividend concurrent creditors. The total funding amounts to R14bn

The funding requirements for the subsidiaries of South African Airways were outlined to the Committees:

-For South African Airways Technical, the operational issues included the inability to procure spares in advance, and had a ripple effect on the maintenance of Mango flights and its retrenchments. This meant the right size business was required. Regarding the financial issues, it was reported the declining revenue is not sufficient to cover fixed monthly costs, and only the partial payment of salaries will be possible. It was recommended the restructuring of South African Airways Technical is required, and the amount allocated for the business restructuring is R1.66bn.

-Regarding Mango Flights, the operational issues included that its market share had decreased since February 2020 because of the COVID-19 pandemic. Operational inefficiencies are prevalent mainly because of the grounding of the aircrafts. Inadequate support from South African Airways Technical remains an issue in this regard. Regarding the financial issues, it was reported the cash inflow is less than the cash outflow, meaning payments are deferred so the subsidiary can meet its critical payments. If critical vendors are not paid, it could result in the grounding of Mango Flights. Funding is required to pay mainly for accumulated debt, instead of positioning for future. It was recommended the funding initially allocated for subsidiaries needs to be reassessed based on changed market circumstances, the future of South African Airways, and the subsidiary’s available funding. The amount allocated in this regard is R 819 million.

-Regarding Airchefs, it was reported the operational issues included the inability to provide any services. This was because of the following factors: most of the Airchefs’ business comes from South African Airways, the COVID-19 restrictions on serving in-flight meals, the liquidity challenges resulting in operational inefficiencies, and the loss of new customers due to the inability to provide services, because of pending liquidity challenges. The financial issues pertained to the continued losses as Airchefs’ revenue is insufficient to cover its costs. It was recommended an urgent review of Airchefs is conducted, and a restructuring plan is approved by the Board of Directors. In this regard, the amount allocated is R218 million.

An update regarding the R7.8bn expenditure allocated for business rescue:

A total of R7.8bn was transferred to South African Airways for restructuring the business. It was reported this funding was used for voluntary settlement packages, the payment of employee liabilities, amounting to R2bn, the payment of post-commencement finance creditors, amounting to R632  million, and the payment of unflown ticket liability, amounting to R800 million. The balance of R4.4bn transferred has not yet been spent. It was reported these monies will be used for working capital when operations commence, amounting to R2bn, the payment of the balance of unflown ticket liability, amounting to R1.4bn. An amount of R800 million has been ring-fenced for the payment of outstanding salaries, depending on the outcome of legal proceedings. There has been a saving of R200 million for post-commencement financial creditors.

Compliance with the conditions for appropriation:

For the revised budget allocations of the 2021 Medium-Term Expenditure Framework period (MTEF), the allocation for the 2021/22 amounted to R4.3bn, and amounted to R1.8bn for the 2022/23 financial year. The allocated conditions included the following: the funding is to be utilised only for settlement of guaranteed debt and interest, unutilised guarantees will be reduced and no additional raising of guaranteed debt after the business rescue processes, the Department of Public Enterprises regularly report to the Cabinet on the benefits to the South African economy of continued government ownership of airlines. In addition, it was required South African Airways provide biweekly updates on the implementation of the business rescue plan, updates on the profess of securing a Strategic Equity Partner, the utilisation of business rescue funds, and regular updates be provided on employee-related matters. For the period after the business rescue processes is completed, South African Airways should provide monthly updates.

The Committees were provided with the extent to which these appropriation conditions were complied with. First, South African Airways will utilise funds only for settling guaranteed debt and interest as soon as the funds are disbursed. The unutilised guarantees will be reduced and no additional guaranteed funding is to be raised post the business rescue process. The Department of Public Enterprises was waiting for South African Airways to come out of business rescue, as well as conclusion of the strategic equity partnership negotiations. This is to take place before a comprehensive report is submitted to Cabinet. The business rescue practitioners were providing reports to affected parties in line with the Companies Act 71 of 2008.

A close-out report was submitted at the end of the business rescue process as follows: the utilisation of funds, a breakdown of the number of employees who were paid three months remuneration under a settlement agreement, and a hand-over report which included update on employee matters. It was reported a forecast of cash flows, revenue generation, and profit and loss statement were not done, as this is dependent on the negotiations with the Strategic Equity Partner, who will develop the business plan at the end of the negotiations to commence the new airline. As South African Airways exited the business rescue process, monthly meetings between National Treasury, the Department of Public Enterprises, and South African Airways will be revived to discuss the performance of the airline.

Discussion

Mr D Ryder (DA, Gauteng) thanked the delegation for the briefing made to the Committees. South African Airways is one of the most pressing matters for the Committees in attendance. It is good news there is still a balance of R4.4bn in the account of South African Airways, because it means the money is still available to be spent when necessary. He noted the amount of R800 million ring-fenced for the payment of outstanding salaries. There is an impression from media reports, the salaries of the cabin crew members are also outstanding, in addition to those of the pilots. He asked if the funding is adequate to ensure these salaries are paid out as a matter of urgency.

He asked when this matter will be finalised; and said it is concerning when employees of the government are left without incomes. He asked how quickly the matter can be resolved; and asked for clarity on the future, and on job security of the employees at South African Airways.

He wanted to know if the funding allocated is going to be sufficient to get South African Airways off the ground. There are a lot of licensing issues on airplane pilots, and equipment. The goal is to get South African Airways to become self-sustainable, without constant cash injections from the government.

Regarding the liability of unflown tickets, he asked if all outstanding liabilities were paid or if there will be more payments for future-dated tickets bought by people with the intention to fly to destinations. He said he appreciated the work done by the Department of Public Enterprises, and regarding the National Treasury, he asked if South African Airways was compliant with the conditions set, and the need for cutting out unnecessary and wasteful expenses.

Mr M Moletsane (EFF, Free State) acknowledged the presentation made to Members. He asked for further details on the employees who opted for voluntary settlement agreements.

Ms L Bebee (ANC, KwaZulu-Natal) asked if the Department of Public Enterprises has been able to attract private equity investors to partner with running South African Airways, to avoid too much reliance on the fiscus. She asked if the business rescue processes were successful in dealing and settling all the liabilities of South African Airways; asked how the grounding of the flights of South African Airways impact the entity’s future; and asked what the discussions between the Department of Public Enterprises and the Department of Transport regarding international flights and routes are.

Ms W Ngwenya (ANC, Gauteng) welcomed the presentation made to Members. She asked if the funding allocated to Mango Flights would be sufficient to ensure the funding initially allocated for subsidiaries is reassessed, as recommended by the Department of Public Enterprises. She asked what the cost of the business rescue proceedings are, and how much practitioners were paid. It is important the Committees be furnished with a line-by-line breakdown of the costs for the services of the business rescue practitioners. The presentation provides no clear breakdown on the growth plan for South African Airways, and no mention was made of Voyager club members holding flyer miles, and how its concerns would be addressed.

Mr S du Toit (FF+, North-West) asked for a breakdown of the non-guaranteed debt of South African Airways, and asked for clarity on the measures put in place to ensure these creditors are paid as well. He asked what the progress on the business rescue plan is, and what challenges are experienced.

Mr A Arnolds (EFF, Western Cape) said the Committees noted the allocations as outlined in the briefing regarding the funding allocated to each subsidiary, namely, South African Airways Technical, Mango Flights, and Airchefs. The current state of these subsidiaries needs urgent attention before it collapses. He asked what measures are in place to ensure the monies allocated are not wasted.

Regarding South African Airways, he asked for clarity on the sustainability of the entity, and how the Turnaround Plan is being implemented.

He asked what impact the COVID-19 pandemic has on the long-term sustainability of South African Airways. It is crucial the Committee be provided with the breakdown of the costs for the services of the business rescue practitioners, as well as the costs spent on lawyers and consultants during the process. This will enable the Committees to ensure all the funding allocated is accounted for, and well-spent.

Mr S Aucamp (DA, Northern Cape) noted there are significant dangers for using pilots who have not flown recently. There are problems with the Civil Aviation Authority, which had to waiver 13 of the requirements for a flight to ensure pilots who have not recently flown can do so. He asked what is being done regarding the pilots who are on a strike. Having pilots who have not flown recently brings about serious safety concerns for the public. He asked what training programmes these pilots will be subjected to, or what measures are put in place to ensure these pilots are up to standard to be able to fly airplanes. He asked for clarity regarding the option to privatise South African Airways, by getting a strategic partner involved.

Mr M Nhanha (DA, Eastern Cape) asked for details on the performance of the business rescue practitioners. He asked for a breakdown of the non-guaranteed debt of South African Airways, and for clarity on the debts outstanding regarding the maintenance of aircrafts and fuel.

Ms T Modise (ANC, North-West) asked if the funding allocated to South African Airways will enable the airline to start its operations free from any other financial burdens, liabilities, or outstanding debts.

Mr Y Carrim (ANC, KwaZulu-Natal) asked for clarity on the privatisation of state-owned entities. He said public-private owners and partnerships should be encouraged. South African Airways will have to compete with all other airlines, as there is no monopoly on aviation in the country. This debate should not be polarised.

Mr Ryder said South African Airways Technical was experiencing difficulties with its ability to service the needs of its customers. He asked if this entity was worth saving; and asked if this entity will ever become self-sustainable, to the extent it can provide a quality service to its end users to become commercially viable.

Co-Chairperson Matibe expressed his appreciation for the meeting and noted the importance of accountability for the appropriated public money, and adherence to the conditions under which it was appropriated. The briefing is encouraging, especially the fact it is ready to fly again, in the same name.

Co-Chairperson Mahlangu told the Department of Public Enterprises there should be meaningful value for the money Parliament appropriates to departmental entities, and there should be strict adherence to the stipulated conditions under which appropriations are made. Assistance must be needs driven and not done randomly and irresponsibly. There have been countless bailout interventions which went into bottomless containers. There must be value for money spent by the government. It is the duty of the Committees to hold the Executive accountable to show the monies appropriated to South African Airways has a return. Regarding the questions on privatisation, she noted her opposition to the proposal of privatising South African Airways.

Responses from the Department of Public Enterprises:

The Deputy Minister of Public Enterprises told the Committees the implementation of the business rescue plan has ensured South African Airways is ready to resume operations, with preparations at an advanced stage. He committed to ensuring the Committees receive a breakdown of the costs for the services of the business rescue practitioners, as well as the costs spent on lawyers and consultants during the process.

He noted these costs have been exorbitant. The Committees will also be provided with a breakdown of the employees who opted for voluntary settlement agreements. The briefing is encouraging, especially the fact South African Airways is ready to fly again, in the same name, given the advanced preparations put in place to ensure the turnaround of the entity.

Regarding the pilots and readiness to fly because of safety issues, he said the passengers are important to South African Airways, and measures will be put into place. He also assured Members the Department of Public Enterprises will reappear before the Committees to make a presentation on the details around mobilisation of the strategic equity partners for a financial injection. It will also present on South African Airways’ employees.

Regarding privatisation, he assured Members South African Airways will fly under its national banner, and there has not been any intention to fly under any other name.

Adv Melanchton Makobe, the Acting Director-General of the Department of Public Enterprises, told the Committees the business rescue plan, which exited the business rescue process 30 April 2021, has recognised the deteriorating financial situation. On the R7.bn, he said it was transferred to South African Airways for restructuring, and was used for voluntary settlement packages, employee liabilities, post commencement finance creditors, and unflown ticket liability. A balance of R4.4bn remains from the amount, which is still to be spent for the purpose it was requested. The balance of R4.4bn will be used as working capital when operations commence, as well as to pay the balance of the unflown ticket liability, the outstanding salaries pending the court case, and for post-commencement creditors. Regarding the amount which was reinvested for salaries, he confirmed the funding would be sufficient to cover the outstanding salaries of employees of South African Airways, who have not been paid. It is also sufficient for the voluntary severance packages for the pilots and the cabin crews. Pilots are also challenging the validity of the lockouts, through legal proceedings, to claim pilots need to be paid for the months South African Airways has locked pilots out. The pilots also want to be compensated for the termination of the regulating agreement. Once there is a meeting of the minds on these two issues, then a settlement agreement can be signed, and the relevant payments made to the affected pilots. The government has already contributed to the payments of the outstanding liabilities, so the South African Airways must contribute to the cost of restarting the newly born entity. On the question of when South African Airways will be able to fly again, he said preparations are in place for the resumption of operations. One of the issues which must be looked at is the regulatory compliance with Civil Aviation Regulations, to ensure the safety and security requirements are adhered to. South African Airways has always been known as a safe airline, and this reputation must be maintained. There is a market re-entry strategy in place, but as part of the restructuring of the subsidiaries, there is a need to make sure it is aligned to restarting the entity.

A receivership was set up for the next three years to pay the outstanding liabilities, and to clean up the entity in line with the business rescue plan. Two receivers were appointed, and are undertaking the process of paying for the outstanding liabilities for the next three years. The Department of Public Enterprises will exercise its shareholder rights to ensure the money is spent well, and South African Airways can be held accountable for how the money is spent.

Ms Nonny Mashika, Acting Deputy Director-General: Aviation, referred to the voluntary service packages, and said there is a total of 3 250 employees who took the packages, 269 of those persons, being managerial staff members. She said the Voyager programme will remain in place within the airline, especially to ensure miles earned by such members are not lost. The Civil Aviation Technical Standards and the Civil Aviation Regulations are in place to ensure pilots are ready to fly. South African Airways and the relevant aviation authorities will continue to operate at local and international destinations. It is critical the public is reassured regarding South African Airways being safe.

Mr Edwin Besa, Chief Director: Financial Analysis, said there are various tickets which need to be refunded, but now with the reduced staff of the South African Airways, the process of repayment has become delayed. It is also a very time-consuming process to ensure there is no duplication of refunds. The total guaranteed debt of South African Airways amounts to R6.4bn, which still needs to be paid. He said a total of R 4.3bn will be paid to settle debts and liabilities in the current financial year.

Co-Chairperson Mahlangu thanked the delegation from the Department of Public Enterprises and the National Treasury for the briefings, and for the contributions given to the Committees’ inputs. She asked for the remainder of questions to be responded to in writing, and to be submitted to the Committees.

Consideration of Committees’ Reports
Report of the Select Committee on Appropriations on the Appropriation Bill [B4b– 2021] [National Assembly (Section 77)]

The DA and the FF+ reserved its positions. The report was subsequently duly adopted by the Select Committee on Appropriations.

Report of the Select Committee on Appropriations on the Special Appropriation Bill [B5-2021] (National Assembly – Section 77)

The DA and the FF+ reserved its positions, and the report was duly adopted.

Consideration of the outstanding minutes for the Select Committee on Appropriations

The last item on the agenda was for the Select Committee on Appropriations to consider its draft minutes of 2 June 2021. The minutes of the previous meeting was duly adopted.

The meeting was adjourned.

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