Non-Tabling of 2018/19 Annual Reports: SAA & Department of Water and Sanitation, with Deputy Ministers

Meeting report

The meeting had been scheduled to start at 9:00am but due to a miscommunication it started shortly before 9:30am.
 
Opening Remarks
The Chairperson accepted apologies from the Minister of Human Settlements, Water and Sanitation Ms Lindiwe Sisulu, Minister of Public Enterprises Mr Pravin Gordhan. It was the view of the committee, he said, that non-submission of annual reports was unacceptable and could not be allowed to become a norm. The practice of using financial solutions to solve non-financial problems had to stop. The issue was to get management and governance right.
 
Deputy Minister of Public Enterprises, Phumulo Masualle and Deputy Minister of Human Settlements, Water and Sanitation, David Mahlobo were present to lead the delegations from SAA and the Department of Water and Sanitation (DWS) respectively. 
 
Briefing by South African Airways
Deputy Minister Masualle stated that the Chairperson of the board had resigned this year. The Acting board chairperson was Ms Thandeka Mgoduso..
 
Ms Mgoduso introduced the delegation from SAA and asked if a few items concerning recent developments (wage demands from labour unions and an impending strike) could be added to the agenda. 
 
The Chairperson said that they could be addressed at the end of the meeting if there was time. The core business of the meeting was the non-tabling of the Annual Report.
 
Mr Martin Kingston, Non-executive Director, SAA, said that a lack of access to liquidity was SAA’s fundamental problem. SAA was technically insolvent, and no assurance could be given that it was a going concern. He acknowledged the support that government had offered but regretfully it was not sufficient. He could not give a date for when SAA would be able to submit its financial statements to the Committee. If SAA prepared financial statements on the basis of being a going concern, there was a risk of receiving a disclaimed audit opinion, which SAA was not prepared to shoulder. The other option was to prepare financial statements on the basis of liquidation, but this would have catastrophic consequences. For example, it would result in over R40bn in obligations needing to be settled immediately and the government would lose all control over the company. SAA could only continue as a going concern if it received a capital injection or a government guarantee to lenders from National Treasury. The Department of Public Enterprises, as shareholder, had confirmed its ongoing support of SAA but no formal confirmation from Treasury had been received. The risks of ceasing to be a going concern included immediate settlement of debts, negative impacts on trade and travel, and the loss of 10 000 direct and over 40 000 indirect jobs. The board had sought legal advice, which had assured it that, given the confirmed support from the shareholder, it was not trading recklessly in violation of Section 22 of the Companies Act. Mr Kingston said that the threat of a strike was pushing SAA toward a precipice. The cost of a strike would be over R50m per day, even without accounting for the effects of the loss of confidence it would cause.
 
Mr Deon Fredericks, Chief Financial Officer, SAA, said that SAA was in discussion with lenders to secure R2bn in working capital. The lenders had agreed in principle, conditional on a government guarantee. The trading environment was very challenging, and SAA was looking for additional revenue whilst aggressively reducing costs and stopping all non-essential expenditure. Looking at SAA’s audit status, 72% of the findings from the 2017/18 audit had been cleared. The draft financial statements for 2018/19 had not been approved by the board because of concerns about its going concern status, and the Auditor-General had agreed to wait until the issue was resolved.
 
Discussion
Mr A Lees (DA) said that the situation seemed very bleak. He asked why the board was not considering business rescue as an alternative to trying to continue as a going concern or liquidation.
 
Mr Kingston replied that the board had discussed business rescue extensively. It could not be done without shareholder consent, however, and according to legal advice the board had received, business rescue would have the same liquidity requirements as trying to continue as a going concern.
 
Mr Lees argued that if the liquidity requirements were the same, business rescue must still surely be an option.
 
Mr Kingston replied that it would be an option only if SAA could get access to the capital it needed. There were also ramifications for some existing agreements such as leases. They had received a legal opinion that it was not an option.
 
Mr Lees asked for a copy of the legal opinion.
 
The Chairperson asked for it to be made available to the Committee by Wednesday, 20 November 2019 at 12:00pm.
 
Mr Lees said that it appeared that the board had been allowing SAA to trade as a non-going concern for at least 18 months.
 
Mr Kingston replied that there was a difference between having an assurance from the Department as shareholder to provide the requisite financial support and actually having the finances and business prospects to qualify as a going concern. SAA had been and was in the first situation, and in the past the requisite support had been provided at the last moment.
 
Mr Lees replied that the board still appeared to be flouting the Public Finance Management Act (PFMA) by not submitting annual financial statements. The assurances of support by the shareholder simply could not override the PFMA. SAA had not been a going concern and had therefore been trading recklessly.
 
Ms Mgoduso disagreed that the PFMA had been flouted. SAA had received unequivocal support from the shareholder and a legal opinion that this was sufficient.
 
Mr Lees insisted that the PFMA made no provision for financial statements to be withheld on the basis of any promise of support. He asked for copies of the support promised by the shareholder and the legal opinion that if was sufficient.
 
The Chairperson asked for these copies to be made available to the Committee by Wednesday, 20 November 2019 at 12:00pm. He said that non-submission of financial statements was non-compliance with the PFMA from the Committee’s perspective, particularly when it became a trend. He reminded the board the shareholder was the South African taxpayer, and the board could not keep demanding money from them.
 
Ms N Tolashe (ANC) was not convinced that SAA had not broken any law by not submitting financial statements and asked Ms Mgoduso to elaborate. She also asked what kind of restructuring was being considered by the board. It needed to get its affairs in order or quit.
 
The Chairperson added that oversight mechanisms were being ignored. Could the board give any assurance that the same thing would not happen next year? Non-submission could not become a norm. The Committee had to be enabled to hold SAA accountable. The board needed to stop relying on circumstances outside of its control.
 
Mr S Somyo (ANC) was very critical of the board’s refusal to shoulder the risk of a disclaimed audit opinion. They were either arrogating the responsibility of the executive authority or of Parliament. The board was essentially only considering itself. It would be reckless for Parliament to continue supporting SAA in the absence of financial reporting.
 
Mr Fredericks began to explain how serious a disclaimed audit opinion was.
 
Mr Somyo interrupted. The board needed to do what it was employed to do, and shoulder the risk.
 
The Chairperson said that the particular phrasing in the presentation was causing the Committee anxiety.
 
Mr Fredericks apologised if the presentation had seemed disrespectful, but the house was on fire. If SAA received a disclaimed audit opinion, no flight would take off the next day.
 
Deputy Minister Masualle called for a holistic view of the situation. He said there had not been any expectation that delays in reporting would go on for so long. The particular situation of SAA would mean that a disclaimed opinion on the basis of not being a going concern would have the knock-on effect of paralysing operations. He called for a meeting of minds to reconcile the realities facing SAA with the duties of Parliament.
 
The Chairperson explained that the Committee’s problem was that it could not perform oversight without the financial statements.
 
Mr Kingston said that financial statements could be prepared on only two bases: going concern or liquidation. It was the board’s responsibility to choose between them. A disclaimed audit opinion would be effectively the same as liquidation.
 
The Chairperson replied that the Committee was not trying to tell the board how to prepare its financial statements; it just wanted a road map for their submission. The Committee appreciated the complexities facing SAA but could not allow it to continue operating without oversight. He supported the Deputy Minister’s call for a meeting of minds to chart a road map for submission.
 
Ms Mgoduso also supported this call.
 
Mr Lees objected to Mr Kingston. He said it was for the facts to decide whether SAA was a going concern or not. In either case, the board was obliged to prepare the financial reports, regardless of the consequences.
 
Mr Somyo said the Committee could not weigh the merits and demerits of the board’s options. The important point was, if the Committee was to approve the funds for SAA, on what basis would it be, given that they had not submitted financial statements?
 
The Chairperson added that compliance could not be cherry-picked. The fundamental point was that compliance was the condition for support from parliament. It was difficult to accept that SAA did not even know when it would be able to submit. It could be in 2024!
 
Mr M Dirks (ANC) said that the problem was that the board was running away from a disclaimed audit opinion. How could the Committee approve funding without seeing the financial statements? He also felt that the particular phrasing in the presentation had made the committee angry.
 
The Chairperson added that there were knock-on effects of complying with SAA’s requests. It would set a precedent for other entities, who would demand the same leniency.
 
Mr B Hadebe (ANC) asked when SAA was going to submit the financial statements. The PFMA did allow for it to give reasons for a delay, but not a simple refusal. What law authorised the board of SAA to not submit financial statements for two years?
 
Ms Mgoduso replied that SAA had not refused. It had consulted with the shareholder and sought a legal opinion.
 
Mr Hadebe disagreed. What gave SAA the right to delay the submission indefinitely?
 
Deputy Minister Masualle suggested that the Department come back with a proposal for a road map for submission.
 
Mr Hadebe asked for details on the restructuring of SAA. The board was saying, indirectly, that it had lost hope of coming up with sustainable turnaround strategies. Was there a turnaround strategy or was SAA expecting to go on relying on bailouts?
 
The Chairperson noted that the main issue of the meeting was the non-submission of the financial statements. He asked for the board to include a restructuring plan in the road map but did not allow the issue to be discussed in the meeting.
 
Ms T Marawu (ATM) felt that the Chairperson was being very lenient towards SAA. The company hadn’t even committed to a date for the road map.
 
The Chairperson announced that there would be a meeting on 27 November 2019 at 6pm. The Department of Public Enterprises, National Treasury, the Auditor-General and SAA would be present. A roadmap for submission and answers to members’ questions would be expected. No request to the house would be submitted before the meeting, as the committee needed to ensure that non-submission of financial statements did not become entrenched as a norm. Everyone was committed to seeing that SAA was functional, effective and efficient, but there were terms and conditions to the government’s support.
 
Ms Avril Halstead, Deputy Director General: Transportation and Defence, Department of Public Enterprises, stressed the dire ramifications for the fiscus of either a disclaimed audit opinion or liquidation.
 
The Chairperson warned that SAA should not try and justify its non-submission at the meeting on the 27th.
 
Ms Mgoduso said that SAA was in the middle of a challenging period but there was a long-term turnaround strategy. There was onerous legislation governing pilots and crew which were being looked at in consultation with the Pilot’s Association. Pilots were entitled to yearly salary increases regardless of whether they were affordable, and unions were demanding the same increase. It was time to start talking about salary sacrifices.
 
Mr Kingston acknowledged the board’s non-compliance. The core issue is the financial viability of SAA, which depended on revenues and costs, and the competition was fierce. He assured the committee that the board was doing everything to avert a strike, but it would not be at the expense of the South African public.
 
Deputy Min Masualle welcomed the guidance of the committee. It was beginning to sink in that state-owned enterprises could not be allowed to continue being a drain on the fiscus. They needed to become agile and fit for purpose.
 
The Chairperson said that the Department of Water and Sanitation had been summoned because it had failed to meet its own deadline for the submission of the Annual Report of the Trans-Caledon Tunnel Authority (TCTA). He criticised the Department for sending the presentation on the day of the meeting.
 
Briefing by the Department of Water and Sanitation
Deputy Minister Mahlobo introduced the delegation and apologised for not sending the presentation earlier. He explained that the Department’s main account had been audited. The delay had been with a separate water trading account linked to TCTA. The outstanding issues at TCTA had been resolved and it had just submitted its annual financial statements.
 
Mr Mbulelo Tshangana, Acting Director-General, Department of Human Settlements, Water and Sanitation, explained that TCTA was the vehicle for all of the Department’s projects in South Africa and abroad, notably phase 2 of the Lesotho Highlands Water Project, which the Minister was launching today. These projects were sometimes very complex and involved numerous agencies working together. Nevertheless TCTA had a track record of good audit results, he said, but the deadline they had set themselves this year had been too ambitious.
 
Mr Percy Sechemane, Chief Executive Officer, TCTA, explained that there had been a difference in interpretation between the Auditor-General and TCTA over the nature of the documents required to substantiate payments made by TCTA to various entities involved in the Lesotho Highlands Water Project (LHWP), which would have resulted in a qualified audit opinion. He discussed the background of the LHWP, noting the complex financial and governance arrangements involving the Kingdom of Lesotho. These complexities required a unique accounting treatment. Since 2012 TCTA had used International Accounting Standard 11 (IAS) 11, but it did not reflect the true nature of the transactions between TCTA and the other entities. The Auditor-General had not been comfortable with changing the standard. Revised financial statements had been submitted on 21 October 2019. The Auditor-General indicated that it would begin its audit on 15 November, with a release planned by 31 December 2019. He said that a qualified audit opinion might have led to TCTA’s outstanding borrowings of R22bn becoming immediately repayable and even de-listing from the Johannesburg Stock Exchange.
 
Discussion
Mr Somyo suggested that a workshop should be held between the entities on either side of the border to ensure a seamless basis for accountability of the LHWP.
 
Mr Somyo was relieved that the financial statements had been submitted to the Auditor-General.
 
Ms Tolashe took comfort from the Acting Director-General’s assurances that the situation would not arise again.
 
Mr Lees said the situation at TCTA was similar to the one at SAA: the board had taken it upon itself to withhold financial statements to avoid an adverse audit finding. While the Minister could inform Parliament of delays, he was not sure that the board had this power, and looked forward to clarity on the matter.
 
Mr Hadebe disagreed that the TCTA situation was similar to SAA. TCTA had given specific reasons for the delay. There had been no deliberate attempt not to submit.
 
Deputy Minister Mahlobo also denied that the situations were equivalent. There was a need for clarity on accounting of transnational agreements, though.
 
The Chairperson accepted the explanation given by the Department. It did raise the question of how monthly and quarterly reporting had been handled. The Committee would also look at the roles, powers and functions of the board. The Committee would hold the Department to its timeline commitments.
 
Committee Matters
The Chairperson informed the Committee that the German Parliament had invited it for a visit and had suggested 14-21 January 2020 as new dates, or in April. The Committee would meet with the Department of Correctional Services on 19 November at 9:30 and with the Passenger Rail Authority of South Africa on 20 November at 9:00. He asked members to submit suggestions for the content of the meeting with SAA on 27 November.
 
The meeting was adjourned.