SAA, Eskom and Transnet COVID-19 impact: update by Minister & CEOs

Meeting report

South African Airways (SAA): Minister of Public Enterprises update
Minister Pravin Gordhan noted that we are living under exceptional circumstances where this kind of electronic digital medium is available for us to communicate. But it also means that once we have reached a new normality, it might be an idea and have the parliamentary committees leave the officials in Pretoria and you can have the same kind of interaction with them.

SAA into two categories - a good performing airline but also an airline with a history of poor management that has led to its decline. This has affected SAA the airline and SAA Technical. Since South Africa is an “end of hemisphere destination” there are structural difficulties that arise. Due to the low margins that airlines work with, there is a large amount of volatility that arises. Thus, any change in jet fuel prices or geo-political events will greatly affect the industry. Events such as the SARS virus, 9-11 and now COVID-19 will affect the airline industry. Therefore, with the global pandemic affecting the entire industry and the current situation SAA is in with lacklustre management, the airline is not in good stead.

There are many raising why a national airline is needed although a national airline does not need to be wholly owned by the state. This has been answered in part as the planes are currently used by the state for South African citizen repatriation from Wuhan and other places, due to the pandemic, as well as cargo. The repatriations are still ongoing at the moment.

Borders across the world are either totally closed or mostly closed, including South Africa. It will be a while before air travel resumes. The cost of air travel will rise and the profitability of airlines. When it does resume, domestic travel will open first, then regional and lastly, international.

In the midst of the global crisis, maintaining social distancing protocols in terms of the business model, may be challenging for airlines. Airlines would have to cap airplane capacity at 30%, ensure that masks are worn and take other precautions. The cost of flying would be higher and thus impact upon profitability. It is estimated by IATA and WHO that it will be 18 to 36 months to fully recover again on an international level.

The Minister said that many airlines who had ordered airplane will not be taking delivery of these. These manufactured planes that had not been delivered will remain on the factory floor and in turn affect manufacturing in the airline industry. If one had the means to purchase, then now would be the time to make a deal to purchase these planes.

He discussed countries that have bailed out their airline industries such as the England, Norwegian and Australian governments. SAA has either of two paths - liquidation or business rescue. If there is no hope for the business, liquidation would be the route to take. However, if the business is able to be rescued, a new type of airline must emerge and should be restructured in the effort of business rescue. He stated that there should be no dependence on the fiscus and strategic equity partners should be found to support any new initiative that gets off the ground.

He stated that the business rescue practitioners are still in control of SAA, although the SAA board is in place, the BRPs manage the day-to-day decisions. The role of business rescue practitioners (BRPs) are to “rescue” a business so that it can operate normally. R5.5 billion was made available in December for post-commencement finance. The Department of Public Enterprises (DPE) has been questioning the fact that R5.5 billion had been spent in the last five months at the sole discretion of the BRPs. Thus, matters of accountability have been called into question as the PFMA is applicable to them to.

The BRPs announced all repatriation flights are planned to stop on 8 May; however, DPE had an interaction with the BRO and there is now some flexibility in this if there are savings available from the R5.5bn. In DPE’s view, if the wind down process continues as the business rescue propose, it will not follow the objectives set in terms of the business rescue process.

The Minister is engaging with the BRPs on important issues. Firstly, on access to information. An American aviation consultancy firm was brought in on the recommendation of the lenders of the initial R2 billion to be the aviation advisors. The firm’s fees resulted in R30-35 million but DPE has not seen the product of what they have done. In other words, we cannot see value for money. DPE wants full access to that information to analyse if there was value for money. DPE has called upon the BRPs themselves as well as other consultancies, such as accounting firms, to reduce their fees up to 40% so that they will be contributing to the process as the staff is contributing to a proper outcome of this process. It is the trade unions have come with magnanimous gestures.

The BRPs were supposed to produce management accounts were supposed to be presented to the Standing Committee on Public Accounts and have not been produced to date. In the next 48 hours, the Minister plans on meeting with the practitioners to examine finances to see how much money can be found beyond the 8 May to push for continuity beyond this date. There should not be a fire sale of important SAA assets nor should there be movement towards liquidation, when there are many other options available. Government expects SAA as the national plaque carrier to take responsibility by being paid for the repatriations and to earn income on the cargo side.

The second issue is a legal one on when a fully fledged business rescue plan will be presented. At best, what DPE has currently is an outline, mainly on history and not much about solutions. It was important to understand from the BRPs what a new airline should look like and the migration route between where are now and where we want to get. What we must be absolutely clear about is that the SAA that exists now, will not exist later as it was not competitive or viable in the economy plus the environment of the airline industry has changed very significantly since the pandemic. Nobody can anticipate what air travel will look like anytime soon

There is the Section 189 process of the Labour Relations Act that the BRPs have initiated with some of the unions while some unions have refused to be part of that. In terms of the Companies Act business rescue process, there must be adequate consultation with the shareholder. It is the view of DPE, that this has not taken place. This and an alternative transition proposals will be put to the BRPs in a bilateral session in the next 48 hours.

The purpose of a business rescue plan is to get business to a viable future which must be voted on by certain classes of creditors. The shareholder has a narrow prerogative as though not as broad as the other creditors. The main creditors are South African banks that have lent SAA R R9.2 billion plus interest over time. This has been catered for by what the Minister had discussed before in the MTBPS.

Over the last three weeks, DPE has consulted with eight labour unions involved with SAA and has built an interesting level of trust and consensus, in terms of what a new airline would look like. There is an understanding that the old airline will not return. And that there will be a slow, gradual take off due to current global situation. Whether it is a brand new airline or existing airline, there will not be a return to issues of the past. The Minister discussed the digital workshop with the trade unions held the day before in the design process on routes, types of aircrafts and other aspects pertinent to the success of a new airline.

DPE would like to discuss with the BRPs and the unions about a more consensual approach to Section 189 on the understanding that not all employees will be rehired. A social plan needs to be put together to look after the welfare of labour as well as change the way in which business is done to accommodate as many workers as possible. The furlough system or work sharing system that operates in other countries needs to be applied so that as many families as possible will have income. It is the duty of a public official to ensure this takes place either by using the COVID-19 funding or UIF funding and discuss this with trade union movement. The Minister hopes that the constructive spirit that has been seen amongst the trade unions will be seen with constructive discussions with the BRPs. The Labour Court will hear an application on 7 May by the National Union of Metalworkers of South Africa (NUMSA) and the South African Cabin Crew Association (SACCA) challenging the Section 189 process at SAA as the BRPs have failed to deliver a business rescue plan. They want to know the logical sequencing and how many employees will be retained or retrenched.

The process of developing a new model is happening in two tracks, potentially three. The first, is the engagement of unions, as discussed. The second, is the consultancy has worked with SAA before which has done some design work in terms of the global situation and benchmarks available. And the third, is the consultancy that was brought on, whose reports remain unavailable to DPE at the moment.

The Minister discussed the key issue of transition, how do you get from the old to the new, especially if even with the new, you are not starting at an optimal level. All airlines will start on a small scale and depending on market situation will grow in terms of whatever they have to offer.

On the finance side, R5.5 billion has been spent. DPE is questioning this as it is believed that more could have been done in terms of cost savings. The 8 May deadline must be reviewed. The future of SAA Technical needs to be investigated as it is considered to have a large amount of potential to become a Southern African player. The future of low cost airlines and air share should be looked into in terms of their future as well as Air Chefs. Mango has voluntarily taken a 50% cut in salary. SAA workers have also taken a salary cut with the amount depending on salary level.

In summary, SAA is still in business rescue and has the potential to be restructured into something new, which is what government wants. There are various strategic equity partners that are under consideration. These will be evaluated by a team of experts, not ourselves. DPE is looking for an answer from the BRPs to how the work the SAA is doing can be extended and a constructive resolution needs to be developed to transition from old to new. Most of this is work to be completed. The Minister said that he cannot say if he is optimistic or not but every effort will be made to head into the right direction. He asked the Mr de Ruyter to discuss ESKOM.

Eskom CEO briefing on COVID-19 impact and developments
Prof Malegapuru Makgoba, Eskom board interim chair, noted his presence in the meeting.

Mr Andre de Ruyter, Eskom CEO, said that the first major impact on Eskom was the major decline in demand. The demand reduced by an average of 7500 MW (peaking at 9000MW). The pattern of consumption has changed as the morning peak has disappeared and the evening peak and night dip has become more pronounced. This has been a challenge to manage but the Generation Unit has managed fairly well. Eleven units have been taken out of service to use the opportunity to carry out maintenance.

There has been a reduction in use with mining and industries shutting down and thus reduction in sales. For April, the net loss in cash is estimated at R2.5 bn. However, the full financial impact of COVID-19 restrictions is still being fully assessed.

The extended lockdown period has enabled Eskom to carry out maintenance which significantly reduces the likelihood of load shedding during the coming winter months. Some 'philosophy maintenance' was moved out due to the restrictions on people and spares while some short term maintenance was done, particularly to reduce partial load loss. It has been anticipated that partial load losses (PLLs) will be reduced by 2000MW.

• Some outages have been moved out to take account of spares and contractors availability:
Koeberg 2, Matla 2, Majuba 5, Drakensberg 2
• Kusile 1, Majuba 4 and Medupi 6 brought forward to take advantage of the low demand
• 6 776 MW capacity being maintained in addition to pre-lockdown plan by short term maintenance intervention
• Partial load losses (PLLs) to be reduced from 7 858 MW to 4 434 MW, an improvement of 3 424 MW in available capacity – for the year 2020/21
• Commitments signed by power station managers, cluster mangers and GE: Gx
• Most likely scenario (P80) after lockdown maintenance is the improvement from 31 days of Stage 1 load-shedding for the next quarter to 3 days, assuming PLLs reduced by 2 000MW.
• Demand post lockdown being remodeled.

Mr de Ruyter said that after lockdown the anticipated 31 days of stage 1 load shedding for the next quarter may be being reduced to only three days. This is based on partial load losses being reduced by 2,000MW. Eskom is taking advantage of the very unfortunate circumstances associated with this global pandemic. Two further scenarios have been developed that are more severe since the Eskom system is unreliable and unpredictable.

A Reliability Maintenance Recovery Steering Committee has been put together. A sum of 11 power stations have been approved for relevant maintenance to improve reliability of the system. Eskom will be making use of short term projects and external help to improve project execution capabilities. 60 retired Eskom engineers have volunteered to help manage operations. Most have offered as a form of national service, but will be reimbursed for costs. They will be streamlined and placed at power stations. The intention is to kick off on 1 June. This will be done to improve reliability maintenance.

Steps have been taken to improve the supply of electricity by managing the demand. This includes the use of the traffic light system, liberating 100MW of capacity. The public has played a role in switching off energy hungry appliances during peak times. Eskom will procure an additional 900MW before the end of the year such as the Renewable Energy Independent Power Producer Programme (REIPPP) to boost generation capacity thus building in sufficient buffer capacity.
Mr de Ruyter referred to the Eskom road map diagram in the presentation. Hard work is underway to stabilise the business. For optimisation, Eskom is divisionalising Transmission, Distribution and Generation under Eskom Holdings and this is anticipated to bring greater focus to the business and result in a lean and efficient business. There is a longer term vision of a lower carbon energy mix, with greater opportunities in Generation by private capital. Part of the objective of divisionalisation is the creation of investor confidence.

Good progress has been made in divisionalisation in the road map to unbundling. Board and director appointments have been made at no cost. Steps are being taken to manage the income statement in an active and positive way. Eskom is on track to enable the divisions in accordance with the roadmap set out by DPE. Relinking has been made with good progress in deployment of staff back into work place. An income statement is in the midst of being developed in accordance with the divisions.

Transnet CEO briefing on COVID-19 impact and developments
Ms Portia Derby, Transnet Group CEO, said Transnet began planning their response to COVID-19 very early on in the pandemic and partnered with the Port Authority in Singapore. They work quite actively with DPE and private sector.  Since essential cargo could be offloaded, non essential cargo became a challenge. Transnet was able to establish a good relationship with the port community, SARS and freight owners and they were then able to move non essential cargo out of the port and rail it into warehouses. Nerves are rising as warehouses become more full with cargo and the economy not opening, which could create a bottleneck in storage.

At the moment, 50% of staff are operational to protect against infection. As well as that if a section of Transnet had to be quarantined, there would be staff at home available to take over. Mines were closed for part of the lockdown thus causing concern about the effect on revenue. However, lines were open and able to transfer iron ore and manganese to the port of Saldanha. There are lower levels of allocation. In re-prioritizing maintenance related capital, the preliminary outcome of the Capital Optimisation process is an R2.4bn reduction in 2020/21 planned CAPEX. Further optimisation is expected to yield limited results as most 20/21 projects are committed and in execution. Covid-19 impact modelling has focused on three broad, evolving scenarios for simplicity. These scenarios take into account customer based supplier materials constraints, customer production constraints, global and local economic factors (unemployment, sales demand), legislative factors and forecast volumes by Transnet in performance metrics to arrive at current forecast revenue impact for 2020/21. These are Scenario 1 (Optimistic) – Quick bounce back with a revenue reduction of R8.96bn; Scenario 2 (Realistic) – Extended soft-lockdown with a revenue reduction of R12.25bn; Scenario 3 (Pessimistic) – Recurring waves of infections and associated lockdown: impact currently being quantified.

Transnet wants to ensure maintenance continues even with lower levels of revenue and movement. This gives an opportunity to fast track maintenance operations. This is on condition that needed supplies and equipment reach South Africa in time.

Transnet has established the following operations at a limited capacity during the extended lockdown period:
• The integrated container logistics system mainly around the Port of Durban and the link to the economic hub in Gauteng –ensuring that the complex system remains efficient and secure to enable the movement of priority and essential containerized goods; this includes the movement of non-essential cargo to City Deep, only for storage in order to decongest the Port of Durban;
• Additional security measures in conjunction with NATJOC have been put in place along the NATCOR hotspots as well as City Deep;
• The heavy haul rail and ports export system from the Northern Cape to Port of Saldanha;
• Chrome, Magnetite and Manganese exports coming on stream; and
• Domestic and export coal and other General Freight Business cargo through Richards Bay port.
This increases revenues. With 50% of staff operational, Transnet as been able to make 60% of their forecasted revenue for Quarter 1.

Transnet usually gets their equipment in kit form and assembles this in South Africa. With the lockdown, there is a worry that there are not enough crews to assemble which might delay ability to deploy equipment.

Durban congestion has been resolved; there are no problems at the moment. This period has implemented the truck booking system, which allows only trucks that have been booked into the port. Work needs to be done to protect workers from infection and is a priority. Transnet is in the process of appointing a programme director to coordinate that all decongestion projects are implemented in time.

Freight has managed to achieve 60% of its planned volume for April 2020 with a reasonable performance in the export of coal. There has been a successful reduction in Temporary Speed Restrictions (TSRs) which are imposed as a result of poor track condition. The reduction in TSRs was achieved through focused maintenance and network renewal interventions. General freight needs to be improved to aid government’s initiative to shift from road to rail. The total infrastructure investment required for all Transnet Freight Rail General Freight Business (TFR GFB) lines over nine years is about R39 billion. For 2020/21, about 74% of the approved R4.2 billion Infrastructure Maintenance Investment will be allocated to GFB lines

Challenges include procurement of major material contracts as a major constraint to executing the network renewal programme and security and vandalism. Vandalism and fuel theft is growing. This is imperative to solve due to the leakage cost and environmental cost.

Transnet is in the process of corporatising Transnet National Ports Authority (TNPA), especially with COVID-19, this has revenue impacts in some of the conditions for Transnet’s covenants. So caution needs to be taken when restructuring the balance sheet. A virtual balance sheet already exists for TNPA. Transnet has made a commitment that by the end of the next financial year it will be corporatised as a subsidiary, but under the ownership of Transnet.

Ms Derby put forward the question that with the prediction of a deep slump in the global economy, will this have a negative impact in the transportation of cargo. The manganese market is oversupplied and under-consumed throughout 2019 and early 2020. This is underpinned by the indicative high stockpiles at major Chinese ports. In January to February 2020, manganese ore imports were down 16% in China. The global coal demand is projected to fall by about 8% in 2020, the largest drop since World War II, with coal use declining in virtually every sector of every region in the world. Iron ore supply could reduce in the seaborne market by around 18 million tonnes in 2020. Transnet Freight Rail and Ports will be significantly impacted in volumes handled or transported due to the global slow growth. However, Transnet should continue with its CAPEX drive to improve its ailing infrastructure to be ready to support and take advantage of global economic recovery.

Discussion
Mr A Cloete (FF+) understood that a new SAA business model is not available as of yet. However, launching a new airline is costly and he questioned from where the money will come. Are private companies interested in buying SAA? What about SA Express? He asked Eskom how the lights were suddenly kept on and if load shedding will be more prominent during the softer stages of the lockdown.

Ms L Bebee (ANC) complained about the document not being made available earlier before the meeting to interrogate it. She asked if DPE had considered downgrading from Schedule 3 to 2 of the Public Finance Management Act to avoid being indebted. This will limit borrowing powers to Treasury approval.

Ms V Malinga (ANC) asked if Eskom can keep the lights on with mining being reintroduced in Level 4.

Ms M Omphile (EFF) stated her disappointment in the Minister of Public Enterprise. Firstly, the corruption of the Eskom COO was not addressed. Secondly, the BRP report was not made available. Thirdly, she claimed that the Minister is unaccountable and “untouchable”. She asked if SAA would be privatised and if the donors to the CR-17 campaign will be buying SAA. She asked that the Minister make the reports available in the interests of accountability. She asked if DPE intends to give the deal of Ghana's railway line restoration to the Gibela Rail Transport Consortium. The Minister had briefed the Committees on three state owned entities (SOEs), leaving only 30 minutes to ask questions. Each SOE should be allocated its own meeting in future. There must be a follow up meeting next week.

Ms W Ngwenya (ANC) complained that the presentation document was only received at the meeting. She asked what happened to the Presidential Review Committee (PRC) Report on SOEs to achieve the developmental objective, which was approved by Cabinet. She asked if DPE and other relevant structures implemented the recommendations of the PRC Report. If yes, to what extent and if no, why not?

Mr M Nhanha (DA) asked if the current SAA Act established in 2007 will be repealed and a new act implemented, or will the current act be applicable. He noted that Denel Metal employees at the Wellington branch have been served with retrenchment letters. He asked for the financial situation of this SOE. He asked Transnet what the plan is to take freight off our roads and onto rail.

Ms J Tshabalala (ANC) moved a motion to have a joint meeting the following week to discuss the presentations and this motion was seconded by Mr Cachalia.

Ms M Mokause (EFF) asked for the Minister’s take on SAA employees receiving handouts from the community. She asked if the number of senior SAA members should be reduced as some are not serving a purpose at the moment. She asked who appointed the consultants at SAA and how they are remunerated. She asked what Transnet is doing to assist the South African economy and upcoming businesses.

Mr G Cachalia (DA) asked why there are still no SAA financial statements and management reports provided. The plans for the new airline have not been presented by the business rescue practitioners, thus failing to adhere to the Companies Act. He requested more information about Comair. He asked about the involvement of the trade unions and what is at stake for them.

Mr Cachalia referred to the ports congestion caused by the demarcation between essential and non-essential goods and asked Transnet who will pay for the costs incurred. He asked what maintenance Transnet has undertaken during lockdown. What provision has been made for the impact of lower commodity prices? He asked why Eskom believes it will be able to keep up with demand after lockdown and what tangible support will be given by organised labour. All of Eskom scenarios relied on the downfall of diesel and he asked what monetary provision has been made for this.

Ms H Komane (EFF) asked how the new SAA business model will be financed. She asked the Minister to take the Committee into confidence on who was responsible for the corruption at SAA and the consequence. SA Express employees were not paid during the last few months. What is the Minister’s role in resolving this? She also asked Eskom what will happen when electricity demand increases again.

Minister's response
Minister Gordhan noted the Committee email requesting the meeting was signed off on 30 April, and was seen the following Monday, leaving three working days to present. DPE and the respective institutions did due diligence in preparing remotely and he asked that Members take this into account. In terms of ministerial accountability, he stated that they have never been shy of that and he is prepared to continue the meeting until midnight with the colleagues from the SOEs. He said that Members should respect one another and leave political battles outside the meetings regarding SOEs.

The Minister replied that there is nothing that can be presented on the SAA new business model and funding as this is still being worked through. Further, some information is commercially sensitive at this time. Once DPE is ready and certain on the plan of action it will be offered to the Committee. He emphasised that there is no business rescue plan as yet. In the next 48 hours, DPE will confer with the business rescue practitioners to find the right way forward. He went on to state what aviation consultants look at when developing a new model and noted the points in the presentation on post Covid-19 measures such as social distancing on planes and the effect it will have. Thereafter, the financial model will need to be considered which linked to all the questions about from where the money is going to come. He stated that an interesting business opportunity arises from the airplanes left on the factory floor.

On downgrading the PFMA schedule of SOEs, he replied that any borrowing requires Treasury approval. He look into whether it will make a significant difference.

He replied that mining in Level 4 is still not on a full scale and health measures will have to be in place.

He replied that the matter of the Eskom COO has been resolved.

He reaffirmed that there will be no privatisation of SAA in accordance with the President’s statements.

Many recommendations of the Presidential Review Committee on SOEs Report were implemented but he will look into this. The BRPs appointed the consultants. The idea of reducing senior managers is in discussion and he had appealed to the BRPs to do so. However, this has not been done by the practitioners. He replied that everyone on the SAA side is being paid, not including the salary cuts due to the lockdown. DPE has encouraged SA Express to make an application to the UIF. He agreed that there needs to be action against those who had been involved in corruption.

He will enquire into the state of Denel, however, he replied briefly that it is somewhat stable.

The Minister replied that the question on SAA legislation was not clear as his digital connection was unstable at the time of the question. He suggested that this question be addressed later.

The Minister explained again that the practitioners have not put enough effort into making the reports and financial statements available. Legal and financial processes need to be met to establish a plan for the future. In terms of trade unions, there was a willingness to take salary cuts to fund SAA for a while longer. There is no intention of foreign ownership at the moment.

Eskom response
Mr de Ruyter replied that Eskom will attempt, as stated previously, to avoid load shedding due to the short term maintenance initiatives. Through demand management interventions it has added more than 10% of the average daily consumption in terms of ability to buffer. He believes that the forecast of load shedding in the winter months is significantly lower than expected. The development of demand depends on the approach to soften the lockdown. This could allow for a gradual demand ramp up. Short term maintenance has been carried out. However, longer term maintenance could not be carried out due to the health risks of large numbers of people congregating. Eskom has given support to their organised labour and enjoys an open, robust relationship with them in which issues are raised and dealt with. Annual diesel consumption is budgeted for and Eskom is becoming stricter about consumption.

Transnet response
Ms Derby replied that on 5 December 2019, SA signed a five year agreement for the revitalisation of the Ghana Western Railway Line, with the Ghana Rail Development Agency and Ghana Rail Corporation. There is no intention to add any private partner to revitalise this line.

She stated the importance of moving from road to rail. The branch line strategy has a few lines operating in the Eastern Cape. There are concessions being concluded in parts of the country. This allows for small players to enter the industry.

Ms Derby replied that Transnet is helping with COVID-19 testing in KZN and Eastern Cape and providing quarantining facilities, as well as providing assistance to small businesses.

Ms Derby replied that Transnet will not be held liable for the costs of congestion due to force majeure. She replied that as much maintenance as possible was being done, considering the limited amount of resources due to lockdown restrictions. On the impact of the lower commodity prices, the take-or-pay contracts prevent any immediate worry. However, there is concern of a further sudden fall off in demand.

[At this point there was an outcry regarding Committee Members being muted].

Chairperson Magaxa stated that a special request was made to parliamentary leadership to convene a meeting and this was the only time available. This short notice must be taken into account when considering the delayed presentation document. The organisational aspect of the meeting was compromised. He asked for order on the meeting platform. He stated that politics should not play a role in this oversight meeting.

Ms Mokause raised a point of order stating that the Minister is here to account and the Chairperson is taking up time.

Chairperson Magaxa stated that Members must behave in the manner they would within the House of Parliament and not take advantage of the virtual platform. The Chairperson closed the meeting.

Ms Tshabalala stated that Ms Mokause and Ms Omphile are out of order.

Ms Mokause and Ms Omphile demanded that the meeting continue as their questions were not answered.

Ms Tshabalala asked that the meeting be postponed. Ms Mokause and Ms Omphile disagreed as their questions to the Minister were not answered.

Ms Omphile stated that she must not be muted by the parliamentary staff.

Ms Mokause demanded that the meeting continue regardless of whether it is live or not.

Ms Omphile stated that the two chairpersons must be removed as they collapsed the meeting in the interest of protecting corruption.

The meeting ended.