Alexkor & SAA on progress made in addressing governance challenges and financial performance; with Deputy Minister

Meeting report

Alexkor performance: Briefing by Department of Public Enterprises (DPE)

Mr Kgathatso Tlhakudi, Acting Director-General (DG), DPE, said that Alexkor was a state-owned mining company that had a 51% share in an alluvial diamond mining company located on the Northern Cape west coast, the other 49% being owned by the Richtersveld communities. Its current operating activities were fulfilling the obligations of the land and mineral settlement agreement reached between the Alexkor, the government and the Richtersveld community. The Alexkor Richtersveld Mining Company (RMC) Pooling and Sharing Joint Venture (PSJV) jointly produced over 50 000 carats per year - less than a 1% contribution to the national diamond production. The head office operations were located in Woodmead, Johannesburg.

In 2017 and early 2018, the Department had received numerous complaints from the mining contractors, alleging that they had been unfairly excluded from the 2018 marine mining contracting cycle, and claiming victimisation and irregular practices against the Alexkor RMC PSJV board and management. Following an investigation into the allegations, the DPE found that the contractors were, indeed, excluded from the contracting cycle and that the actions of the Alexkor RMC PSJV board and management were discriminatory, and that due process was not followed in making such a decision. This had prompted the Department to commission an investigation into the allegations brought forward.

Gobodo Forensic and Investigative Accounting (Pty) Ltd. were appointed to conduct the investigation. It was projected to be concluded by end of October 2019. The scope included investigation into:

• the validity of the decision taken by Alexkor RMC PSJV to exclude the three marine contractors in the 2018 marine mining services procurement cycle;
• the procurement process followed in the appointment of contractors, particularly the diamond marketing and sales company;
• the process followed in the valuation of diamonds from the mine site to the diamond marketing and sales company offices;
• the prices which diamonds were realising since the appointment of a diamond marketing and sales company;
• the alleged failure to adhere to giving access to the information relating to the sales and marketing of diamonds to the contractors;
• the legality of coffer dam operations which were alleged to have an adverse impact on the environment.

Mr Tlhakudi said that in December 2018, Alexkor RMC PSJV informed the Department that the company would be unable to pay staff salaries for the month of December and that urgent financial assistance of about R5 million was needed. As part of the settlement agreement, the state extended a R200 million non-interest-bearing loan to Alexkor RMC PSJV, through Alexkor, to recapitalise the diamond operations. The recapitalisation was successful and the mine was restored to full operation. The R200 million had since been depleted. The Alexkor RMC PSJV had been able to repay only R10 million since its first drawdown in 2012.

In March 2019, the DPE had met with the community representatives, organised labour and the executive management of Alexkor RMC PSJV to ascertain the extent of the financial challenges. The Department had established that the financial problems at the mine were primarily a product of poor leadership and bad decision making. For instance, organised labour highlighted that there was no mine plan to balance the quality of diamonds produced. The Department also observed that management seemed to have lost the control of the workers and command of the business.

Alexkor RMC PSJV stated that it was pressured to create employment in the area by the then political principals. This had led to the investment in a plant of R60 million, and over 150 permanent jobs had been created. However, due to design challenges, the plant was performing below capacity.

The complex corporate structure between Alexkor and Alexkor-RMC PSJV had made intervention by Alexkor management difficult due to the restrictions of the deed of settlement provisions. The deed was a product of a land restitution award issued to the Richtersveld community in 2007.

However, the deterioration of the joint venture operations had had a knock-on effect on Alexkor because the business was depending on proceeds from the mine to sustain itself. The two entities were currently not a going concern, and the financial future looked dire. It thus became imperative for government to intervene decisively in order to address the state of Alexkor and the Alexkor RMC PSJV. Consequently, the previous Alexkor board had been retired and replaced by an administrator.

Mr Tlhakudi clarified that the administrator was not a business rescue practitioner (as per Section 138 of the Companies Act), but was an incumbent assigned with the duties to restore normality and stability to the operations of Alexkor and Alexkor RMC PSJV, and also to help maximise the prospects of a successful outcome for Alexkor. The Administrator was to assume the duties and responsibilities in place of the Board of Directors and was required to prioritise and expedite the following:

• Undertake an extensive review and analysis of the contract mining and revenue-sharing models between the PSJV and the contractors, providing proposed solutions;
• Review the Alexkor and the Alexkor RMC PSJV cost structure to ensure the procurement of goods and services was warranted and at fair value;
• Remove the duplicate functions at the Alexkor Head Office (Woodmead) and Alexkor RMC PSJV, with particular focus on executive and overhead expenses, as well as identify and implement other remedial cost reduction intervention plans and/or initiatives;
• Terminate the marketing and sales contract with Scarlet Sky Investments (Pty) Ltd (SSI) and propose solutions for the establishment of Alexkor’s own, or a state-owned diamond, trader-related marketing and sales channel;
• Develop a revenue-enhancing plan, with emphasis on contracting for mid and deep water mining operations;
• Propose a right-sizing model for Alexkor and Alexkor RMC PSJV in line with the income streams;
• Manage the eradication of corruption and practices relating to state capture and the implicated individuals at Alexkor and PSJV.

Briefing by Alexkor

Mr Lloyd McPatie, Administrator, Alexkor, said that in his short time at the entity, he had already found that the PSJV was unincorporated and thus conformed to neither the Company Act nor the Public Finance Management Act (PFMA). It was governed by the Deed of Settlement and the unanimous resolution by the PSJV board.

Alexkor was currently maintaining the entire township. The deed of settlement was overdue and the process of transferring the township required a payment of R45 million over the next years to be made to Alexkor.

Mr McPatie said that there had been a disclaimer audit opinion at Alexkor because there was a risk of whether it was a going concern. There was a serious financial liquidity challenge which had led to irregularities of reckless trading which had governance structure implications. At PSJV there had been a retrenchment of 150 staff members, but the entity could not pay the associated costs. The venture also had liquidity challenges and could not meet its statutory payments. It could not pay its electricity bills and suppliers. It was unsustainable, and its current contracts and financial models needed to be extensively reviewed.

Mr McPatie recommended that the mining contracts needed to be reviewed because the split between the contract miner and Alexkor had to be determined to ensure that Alexkor was getting fair value for money. The marketing contracts had to be reviewed to ensure that the mined diamonds were being traded at the correct prices, and the geology of the diamonds needed to be confirmed.

He recommended that the entity should undertake an exploration programme to ascertain the exact resources and compile a mining plan thereafter. The operation model needed to be reviewed with a specific focus on its cost structure, and a decision was needed whether the head office should be located at the PSJV facility. The security of the diamonds needed to evaluated and reinforced. The company’s policies and procedures needed to be aligned with the PFMA and/or the Companies Act, while reviewing the governance structures of both the Alexkor and PSJV. The Richtersveld Communal Property Association (CPA) also needed to be regularised.

Discussion

Ms N Mazzone (DA) said that Alexkor was in a huge amount of trouble. It was unacceptable for the entity’s delegation to come all the way to Parliament to give such an incomprehensive report, lacking sufficient material substance; said that the report was meant to be forthcoming with responses to the pertinent questions that had been asked long before the meeting.

She asked for a progress report on the investigation into the operations at Alexkor which had been requested and instructed by the Minister of Public Enterprises, Mr Pravin Gordhan. She asked for clarity about the connection between the chairperson of Alexkor and Scarlet Skye Investments (SSI) was, asserting that it questionable. She also wanted an update on what the Alexkor Board was going to present before the Zondo Commission, for what were publicly known affiliations with state capture and Gupta-affiliated companies.

Ms Mazzone said she had received emails from various companies that were complaining about the tenders for alluvial diamond procurement not being fairly controlled.  What benchmark was used to determine the prices for the raw diamonds which were auctioned every Thursday? She recounted that the entity had last said that one of the benchmarks was for the diamonds to be sold at 60 points below Bloomberg’s international line. This sacrificed a huge revenue upside. An Alexkor staff member had once proudly told her that they had discovered pink diamonds, and how these diamonds were fast becoming one of the rarest commodities on earth. What were these pink diamonds? Was Alexkor aware of them?

During her visit to the Richtersveld community, she had found the area looking like a concrete wasteland. The land was unusable and the marine life was suffering because of it. She pointed out that the residents could not be blamed for these conditions, and that it was partially Alexkor’s fault, along with the other mining companies that had used the land for many years. What was the status of the rehabilitation of this land? Was any environmental impact study being done to ensure that any further activities in the area did not cause more damage?

Mr K Mileham (DA), a Member of the Portfolio Committee on Mineral Resources and Energy, said that the had DPE rightfully outlined the governance challenges being faced by Alexkor, but had not indicated why these challenges existed and what the entity was doing to address the causes. He recounted that there was talk about the need for an extensive review, conducted by the Council for Geoscience (CGS), on the geology associated with Alexkor’s operations. He asked what the relationship between Alexkor and CGS was. What were the cost implications of this review and what was the status of the process?

He said that the joint venture had generated approximately R3 billion. He asked how much of this revenue had been invested into upgrading its critical operational support assets – the plant, various equipment and the machinery used in the business. Given that the entity was designed to support the Richtersveld community, what was being done to capacitate and empower small-scale marine mining?

Ms J Tshabalala (ANC) said it was important to note that at the beginning of the 6th administration, the Committee had convened to discuss the challenges that existed at Alexkor, and that the current meeting was for the Committee to give the entity some oversight attention. She asked the Deputy Minister what the advantages and the disadvantages of having Alexkor as a public enterprise were.

She noted that the local community owned about 49% of the entity in shares, and asked how the entity’s business model accounted for its overstaffing and the relationship breakdown with the community.

What was Alexkor’s ability to pay salaries, in light of the R5 million that the entity had requested from the Department to pay salaries? Would it be able to meet the demand consistently while sustaining itself? It would be helpful to hear Mr McPatie’s account of the historical background of the issues that had arisen, as well as the entity’s turnaround strategy to address them and recover the business.

She proposed that the Committee should schedule a meeting where it could deliberate and come up with ways to help Alexkor to better interact with the local community in order to make a meaningful contribution. 

She asked the Deputy Minister why Alexkor’s head office was located in Woodmead while the operations were in the Northern Cape. How much in rental fees was being paid for the office space, and was this premium a sustainable expense for the entity?

Ms J Mkwanazi (ANC) asked the DPE to indicate the timeframe within which the Gobodo investigation would be completed. How had the Department responded to finding out that the Alexkor management seemed to have lost the command of the business and control of its workers?

Ms D Dlamini (ANC) asked Alexkor to disclose the countries it sold its diamonds to. What caused the conflict between the members of the community and the entity? Were there any Board members and if not, when they would be nominated?

DPE and Alexkor responses

Mr Phumulo Masualle, Deputy Minister of Public Enterprises, said he resonated with the concerns raised by the Members. If it were up to the DPE and Alexkor, the two parties would have come to Parliament having already put certain plans into effect.

He said the investigating agency that was initially appointed to conduct the investigation had later found that the company was somewhat compromised on matters relating to state capture. This had resulted in the appointment of Gobodo, which had since commenced a new investigation process. The Alexkor board had lapsed and an administrator, Mr McPatie, had consequently been appointed. His role was to advise the entity on how best to proceed under the circumstances. The DPE, in collaboration with Mr McPatie, had worked on prospective interventions whose progress would later be reported to the Committee. He would personally visit Alexkor’s operation facility and the Richtersveld community to ascertain some of the ongoing problems and find ways to make a meaningful contribution.

Mr Tlhakudi said that the Richtersveld was a relatively small community, with about 3 000 beneficiaries of the land claims. The Department was using the land claim initiative to repair damage that had started in the year 1928. The local community had had to be displaced in order to make space for the mine to be set up, and this had really fractured the community. Since 2007, the state had invested about R1 billion into the area, including about R200 million invested into the recapitalisation, and some into the land claim settlements to compensate for both residential and farming operations that had been disturbed. The infighting within the community had caused the structures put in place to protect what belonged to the community, to be in disarray.

The problems that Alexkor was facing with the community were multi-faceted, involving the intervention other agencies and stakeholders, such as the Special Investigating Unit (SIU) and the Department of Cooperative Governance and Traditional Affairs (COGTA). About R300 million from an investment trust had been used to resolve some of the disputes and for the rehabilitation of the area. This had been done only now that there was an administrator who would ensure the proper utilisation of these funds.

Mr Tlhakudi said that the reach of the DPE was limited by the fact that the PSJV was not a state-owned company (SOC), but an unincorporated entity. The management of Alexkor was prohibited from entering some of the community facilities because of the understanding of the deed of settlement, and also because of the animosities that had been created when Alexkor was still in charge of the area.

Once all the ongoing investigations had been concluded, they would be tabled at the Zondo Commission. The leadership would also go to testify if and when summoned. There had been other entities, working under the supervision of the DPE, whose forensic investigations had been submitted to the Commission and their leadership had testified as requested. Those who were implicated also had to go and answer for themselves.

Mr McPatie said that Alexkor would engage the CGS and the bigger companies operating in the area to find out if they had any geological data that could assist Alexkor in developing its mining plan. In the absence of that data, the entity would embark on its own exploration programme. He had found that the previous board did not closely manage the use of the R200 million loan received from the state. He would report back to the Committee once he had ascertained how the funds had been used and when they would be returned.

The entity would review the marketing contract with SSI to evaluate whether its pricing of the diamonds was what it needed to be. The cost structures of the mining contract and of the mine itself would also be reviewed to determine the fairness of the revenue split.

Mr Lemogang Pitsoe, CEO of Alexkor, said that there were no pink diamonds on the company’s diamond register, and the existence of any such diamonds should be deemed fraudulent.

He explained that the legacy rehabilitation and the concurrent rehabilitation programmes were both in progress. Phase one of the legacy rehabilitation had been completed, but phase two had been postponed in order to find cheaper ways of implementing it.

The entity was monitored and held accountable by the National Environmental Management Act (NEMA), the Department of Mineral Resources and Energy (DMRE), as well as the Department of Environmental Affairs (DEA). The entity submits reports to these departments, and so far there had not been any concerns raised about its impact on the environment and marine life. The entity had obtained a right to mine at the Orange River Delta, and through the assistance of the DEA, the entity would find ways to avoid impacting negatively on the environment when mining there.

He said the proclamation process of the handling of the township had been ongoing for the last seven years. The delays were due there being too many stakeholders involved, such as national, provincial and local departments. From now on, the process would also be done in phases. Phase one would be the transfer of public institutions such as hospitals, police stations, schools, etc. These would be transferred by June 2020. The office of the Premier had taken over the process and this had accelerated the entire process. The Premier had promised to be present at the proceedings on 8 October. The signing of the necessary paperwork – such as Memoranda of Understanding (MoUs) and non-disclosure agreements (NDAs) -- would also be finalised on 8 October.

The entity had engaged Barloworld to fund its shallow mining diving programme. However, the fact that the small-scale miners had experience in diving would not necessarily translate into the ability to mine, because it required proper diving equipment. Due to safety reasons, poor weather had also delayed the operation of the programme. However, it would continue because Barloworld was still interested in funding it.

Mr Tlhakudi said that in 2007, the deed of settlement had given the state an option to cut its ties with Alexkor by 2012, but the subsequent challenges had hindered that. Although the mine produced only 1% of the diamonds in the country, if it were to be dissolved, the economy in the community would be drastically affected. Instead, Alexkor needed to engage the community and come up with ways to use the revenue generated to develop sustainable economic activity. One of the initiatives had been to use the available land for agricultural purposes. An agricultural marketing company had been brought on board to plant about 60 hectares of wheat. These initiatives would require the community to unite and end its dysfunctionality.

He said that Alexkor’s inability to right size its operation according to the funds it had would cause the entity to keep having liquidity problems and seek bailouts from government. The entity was selling diamonds and earning interest from its cash holdings, so there was no justifiable reason for it to be struggling financially.

Gobodo had requested a deadline extension to conclude their investigation, and the DPE was expecting a report from them in the coming weeks. The administrator would help in dealing with people who were holding offices they were not qualified for.

He said that 90% of diamonds were cut and polished in India -- no beneficiation was done in SA -- while 10% of the diamonds recovered locally were meant to be sent to the State Diamond Trader, but there were problems with the trader. This was one of many unused job creating opportunities.

Ms Adila Chowan, Chief Financial Officer (CFO): Alexkor, said the entity was paying about R140 000 monthly for the Woodmead office space, inclusive of electricity, water and security. The reason why the head office was located in Johannesburg was because the entity had been solely dependent on PSJV for income at the time. There were initially other pipeline initiatives, including the beneficiation of diamonds and coal.

Ms Shokie Bopape, Head of Legal, Alexkor, said the entity was currently interacting with the State Attorney’s office about the process of transferring the township properties. The entity was also interacting with the Zondo Commission, and was providing it with the requested information.

Mr Pitsoe said that the Agricultural Research Council had declared the Richtersveld area agriculturally disease-free. This made it suitable for agro-processing and agricultural projects, so members of the community just had to put the interests of the community before their own.

Further discussion

Ms Mazzone said that state capture was still continuing because entities like Alexkor were perpetuating it. The most important thing that the new attorneys who had been hired to conduct the forensic investigation should do, was to get an urgent interdict to cancel the contract with SSI - a company that had been proven to have state capture affiliates. She added that the state was losing millions of rands because of state capture, and it should be put to an end immediately.

Mr S Gumede (ANC) told the Alexkor administrator, Mr McPatie, that the Committee was new to office, virtually as much as he was. It was unfortunate that there was no reference document for Alexkor. He proposed that the Committee should reject the report presented by the entity. He said the Committee should be more elaborate and expansive in the narratives it outlined.

Inkosi E Buthelezi (IFP) asked if Gobodo would submit a preliminary report to Alexkor, outlining how it would go about dealing with the matters it was investigating; before submitting the final report.

Ms Mkhwanazi pointed out that one of Ms Tshabalala’s questions had been unanswered -- why was there a need for two offices, including the Woodmead head office? She asked Mr Tlhakudi to frankly describe what he meant by saying that the Alexkor management seemed have lost control of its workers and command of the business. What had the DPE done about this? What was the role of the DPE after receiving the Godobo’s investigation findings? What was expected from the Committee in terms of oversight?

Ms Tshabalala was comforted by the fact that the Administrator was required to expedite the termination of the SSI contract and propose solutions for the establishment of Alexkor’s own, or state-owned, diamond trader-related marketing and sales channel. She acknowledged that the meeting had been productive in diagnosing some of the entity’s challenges, albeit not in great detail. She was concerned that exorbitant funds were being paid for office space and salaries of people who seemingly did not provide value for money. She appreciated the Alexkor executive committee for the work it had done thus far, and sympathised with the Deputy Minister for coming into office during a tumultuous season. She was pleased with Mr Tlhakudi’s tone, but felt it needed to be more convincing -- he had demonstrated a knowledge of Alexkor’s challenges, but they needed to be resolved with urgency.

Deputy Minister Masualle assured the Committee that the DPE would present the steps it would take after receiving Godobo’s findings. The Department was anticipating the final report in a few days’ time, and would appraise the Committee on it. 

The DPE was not in support of Alexkor having more offices than it seemed to need, and was currently engaging the Alexkor board on this matter. He encouraged Alexkor to further detail the presentation before a subsequent meeting with the Committee.

Mr Tlhakudi said that the presence of the administrator at Alexkor was meant to address the management shortfalls that existed within the entity – the loss of control of the workers and command of the business. He wished that the Department could intervene more in the PSJV matter, but corporate governance did not permit. The Administrator was the instrument that mediated the intervention.

South African Airways (SAA): Progress report

Deputy Minister Masualle said that it was common cause that the DPE was involved with numerous challenges that required different sorts of interventions, with the Department predominantly having to recapitalise Alexkor. Some of the loans solicited by Alexkor were due, and the entity thus required capital. The Minister of Finance had announced a recapitalisation of about R5.5 billion, which was meant to assist with repayment of such maturing bonds and the operational costs of the business.

The Department was committed to improve the value of the assets that were under its custodianship. As a result, SAA had to improve its business efficiency while considering the national economic and social objectives, as outlined in its mandate. One of the major activities was the turnaround process of improving the entity’s immediate stability and long-term sustainability. What remained critical in the business cycle of the airline was financial recovery and the enhancing of shareholder value. This had led to the implementation of the entity’s Accelerated Long-Term Turnaround Strategy (ALTTS).

While the SAA situation looked depressed, some of the interventions that had been made already had shown positive signs and inspired hope for the future. One of the achievements since 2018 had been the forging of a relationship with Rolls Royce, which saw the opening of an engine storage facility in SA. This was achieved through collaboration with the National Industrial Participation Programme. This international partner would contribute in servicing the needs of the SA aviation sector.

In 2018/19, the ALTTS had helped the entity reduce its losses on some of the route networks. SAA, in partnership with the International Air Transport Association (IATA), had introduced the first ever Women in Aviation Leadership Development Diploma, which was part of the drive towards achieving gender and racial transformation in the aviation sector.

Ms Zuks Ramasia, Acting CEO: SAA, said the airline had developed its long term turnaround strategy (LTTS) in 2013 after it was validated by various reputable companies like McKinsey & Company, Deloittes and McDonalds, and was subsequently reviewed by Seabury Capital in 2016. The strategy had met with limited success due to various factors such as:

• mismanagement of the business;
• state capture;
• incorrect fleet configuration;
• discontinuity and disruptions at leadership levels;
• erosion of skills;
• several cumbersome approval processes; and
• inability to service its debt - its cost structure was commercially unsustainable.

The financial performance of the entity was impacted by a significantly more challenging operating and competitive environment, with volatile factors like the fuel price and forex market, limited leadership and limited aviation and commercial capabilities.

Ms Ramasia said that SAA had revised the LTTS (to becoming the ALTTS) in late 2017/early 2018 because certain assumptions needed to be updated to take into account the most recent developments, such as the Brent crude oil price being projected at $45/bbl. until 2022. The revised 2018 corporate plan had been built around five key pillars: liquidity and balance sheet restructuring; revenue stimulation and network optimisation; organisational design; supply chain transformation; and SAA Technical’s (SAAT’s) business process transformation.

The Board had approved and submitted the ALTTS to the DPE, and the breakeven position was projected to be realised in 2020/21. The LTTS had been based on an equity injection of R21.7 billion. A R5 billion recapitalisation had been approved in 2018/19, and a further R5.5 billion had been approved for 2019/20, which was to be transferred to SAA by 30 September 2019. The entity currently had a debt of R12.7 billion, which comprised a R9.2 billion legacy debt, and R3.5 billion for the working capital facility. A portion of the 2019/20 funding allocation would be used to repay the R3.5 billion working capital facility, and R2 billion would be used to meet the airline’s working capital requirements.

A Board Implementation Committee (BIC) had been appointed and given the key mandate to facilitate quick decision-making on behalf of the SAA Board. The BIC was a temporary governance structure specifically tasked to realise the accelerated implementation of the LTTS and its outcomes. Some of the initiatives that were implemented during 2019/20 included revenue stimulation and network optimisation that would cost about R1.9 billion over three years. Through the initiative, the entity had managed to conclude an enhanced codeshare deal with Emirates Airlines and to establish new codeshares with the Brazilian GOL airline, Hong Kong Airlines and Ghana’s Africa World Airlines (AWA), to enable an increase in network reach. A new Guangzhou route had been launched to remedy losses on the Hong Kong lease of A350 aircraft, to improve the product and its profitability in New York. Loss making routes in Central Africa had been ceased.

The ALTTS also aimed to facilitate organisational design at a cost of about R200 million. The design had already been developed and implementation was awaiting final approval from the board. The process of reengineering the business process had also been initiated -- a total of 68 cabin crew members had exited the company through voluntary exit options, such as voluntary severance packages (VSPs), early retirements and sabbaticals. 122 excess pilots had been released on flying contracts with other airlines, early retirements and/or natural attrition.

Another part of the strategy was to transform the supply chain processes of SAA. This undertaking was to the value of about R589 million. A new procurement policy had been implemented to ensure tighter control of company expenditure. A full contract review was completed and a contract database was established to highlight expenditure categories. Cross-functional teams were formed to focus on cost reduction and revenue leakages. Total cost savings were achieved through specific procurement interventions in key categories -- energy, maintenance, repair and overhaul (MRO) costs, passenger revenue cost and aircraft leases. The strategy also helped to realise some progressive transformation of the SAAT business process. A new SAAT CEO, Chief Commercial Officer and Chief of Legal and Compliance had been appointed in order to deal with governance challenges and advancing the developmental mandate.

Adv Vusi Pikoli, General Manager: Risk, Legal and Compliance, SAA, said that the board had commissioned various forensic investigations on a number of areas within SAA and SAAT. The recommendations in the forensic reports were being implemented, with some being addressed through the ALTTS. Nine forensic reports issued by forensic audit companies had been handed to the Hawks for criminal investigation, as well as to the National Prosecuting Authority (NPA) for evaluation of the evidence. Consequently, the Hawks had registered five case dockets and four enquiries. As the investigations continued, the four enquiries would in due course also be converted into case dockets. Of the five registered dockets, two were now decision dockets. To fast-track these matters, SAA received regular updates and was working very closely with the Hawks and NPA. A total of 29 employees had been subjected to internal disciplinary hearings, of which nine were dismissed, 15 had received final written warnings, two had resigned and three were pending. Three dismissals had been confirmed by the Commission for Conciliation, Mediation and Arbitration (CCMA), five matters were pending at the CCMA, and two matters were before the Labour Court. The implicated employees who had resigned would still be pursued in the matters.

Adv Pikoli said that apart from the cases reported to the Hawks and the NPA, the SIU had been brought on board, and had immediately identified 84 contracts as high risk. Along with other matters, these contracts had been included in the application for a Presidential proclamation which would empower the SIU to conduct full investigations and take appropriate action.

Mr Deon Fredericks, Interim CFO of SAA, said that the entity had experienced pricing pressures, as customers had suddenly become price sensitive. According to IATA, the average fares from January to May 2018 had reduced by 12%, with passengers increasing by 2%. This had exerted significant pressure on the entity’s revenues. It had since set up initiatives to address this. One of them was to add flights in the domestic and regional market, where there was demand. It had also optimised flights by reducing the ones flying in areas that were not yielding a profit. Fleet extensions were expected to yield around R140 million in 2020. Repatriation from foreign countries was being increased, and the sale of non-core assets was being accelerated. An additional R2 billion for 2019/20 was being negotiated with lenders.

A headcount growth of 0.6% (33) in 2019 was envisaged; however, there would be a headcount reduction of 3.9% (199) over the same period. The decline was caused by factors such as the moratorium on headcount increases, a freeze on filling non-critical vacancies, non-renewal of expiring contracts and natural attrition. There was an over-representation of Indian male and female employees at various occupational levels, while African employees were under-represented. Similarly, white employees were marginally under-represented. There were 34 employees with disabilities, which constituted 0.66% of the total, compared to the set target of 2% by 2022. Greater effort was going to be put into recruiting people with disabilities, as well as encouraging employees to declare their disability in the next three years.

Mr Akhter Moosa, SAA board member, said that the efforts of the board and management, together with the shareholder, were focused on implementing the ALTTS. The company had sustained significant losses in recent years, which had weakened its ability to compete in a highly competitive environment. Despite the current state, there was an investment case for government to continue to support SAA. The shareholder, SAA board and management would continue to engage various stakeholders on the future of the airline.

Discussion

Ms Mazzone said that the ALTTS would be the 14th turnaround strategy at public enterprises that she had become aware of, from the ninth board she had worked with. She hoped that this one would yield results. She appreciated that this was the most extensive and detailed report that she had ever seen from SAA, but stressed that she was yet to see any of the entity’s promises being realised. This caused her still to be sceptical.

She claimed that SAA had some of the world’s best pilots, who stayed with the company through thick and thin. Staff members took pride in working for SAA, but were serving a board that was causing them endless problems and public embarrassment. Despite this, they still continued giving their best efforts in their jobs.

She recounted that one of SAA’s employees had told her that working for SAA had been the saddest experience of their life. This person had told her that there were things that SAA staff members wanted to know, and had asked her to ask some questions in Parliament on their behalf. At the time, Ms Dudu Myeni had been the chairperson of SAA. She had laid charges against Ms Myeni, but could not disclose any case details because they were of a sensitive matter. She had been pronounced as a delinquent chairperson by Parliament and National Treasury. Parliament had issued a summons against her for not appearing before it upon request.

She also recounted that in 2015, Mr Nico Bezuidenhout -- who had been hired by SAA to assist with its turnaround strategy – had gone to Paris to sign a codeshare deal with Emirates Airlines. At the time, this deal would have resulted in a cash injection of over R2 billion. While in Paris, he had received a midnight telephone call instructing him to not sign the deal. This had been because Ms Myeni had called in a favour for former President Jacob Zuma. These were some of the issues that the current SAA board had had to deal with.

She welcomed the new and improved codeshare deal that had since been signed with Emirates and the ones that still existed with Iberia Airlines and American Airlines. She asked if SAA was looking to expand even more in this regard, in order to improve the national economy. She said she was one of the proponents for at least semi-privatising SAA – the benefits would be considerable because of the problems it had caused for the country. She doubted that the airline would be able to turn itself around, even with a state bailout, without a cash injection from a private partner. Despite the merger of SAA with South African Express (SAX) and Mango Airlines, Mango had its own separate board and financial statements. She could not recall Mango reaching a financial crisis, especially to a point of having to request bailout funds from the state.

She said that the A340-600 aircrafts required their modifications (MODs) to be changed when they reached their limit so that the aircraft could continue flying, because of the length of their fuselages. It had been brought to her attention that the MODs for these aircraft had not been and could no longer be purchased. This meant that these aircraft would be removed from service and be replaced by Mango. Such dereliction of duty must be strongly taken into consideration by the current board.

Ms Mkhwanazi asked the Chairperson to do his job of calling Ms Mazzone to order if she went overboard and discussed matters that did not directly relate to the meeting. She appreciated the presentation from SAA and the DPE.

She asked Ms Ramasia to outline SAA’s plans and the timeframes within which the entity would deliver its resolution of becoming self-sufficient. She also said one of the resolutions of the ANC national conference had been that SOEs should be used for economic development, inclusive growth and job creation. How would the entity contribute towards this?

Did the Board have a risk management plan in place to proactively identify and avoid the challenges that had been happening, as this would prevent cost implications? Had any recoveries been made on the cases that had been reported, and how were these recoveries assisting the entity towards becoming self-sufficient?

She asked Mr Moosa why he felt that there was an investment case for government to continue supporting SAA, despite its current state.

Ms Dlamini inquired about SAA’s plan to face its competitors in getting the lowest fuel prices. She also asked about how the entity’s 84 high risk contracts would affect the company.

Ms Tshabalala commended SAA’s effort in its report. She proposed that the entity should periodically send reports to the Committee on relevant matters like recoveries and investigation findings, even when not requested so that the Committee would not have to wait for media reports and for SAA spokesperson Tlali Tlali to communicate status updates publicly. She suggested that the Committee should schedule meetings with the Department of Justice (DoJ), NPA and the Hawks so as to ascertain their capacity and constraints for dealing with the matters that had been referred to them.

She asked how SAA was addressing the human resources matter regarding unskilled workers. She had been taken aback by the work that was being done by the board’s sub-committees -- if they had been efficient enough, SAA would not be in this position. The most disappointing part was that these people were highly qualified and experienced. She appreciated the turnaround strategy, and said the Committee should establish a closer relationship with the Board to help turn around the company.

The Chairperson complimented SAA for the comprehensive report. He asked if the Acting CEO could envision SAA coming out of its current crisis and become efficient, proficient and profitable, in order to contribute to the national economy. How long would it take? How could the Committee be of assistance to help realise this?

DPE and SAA responses

Deputy Minister Masualle said the comments, inputs and the compliments that were given by the Committee would boost the morale of the SAA leadership. Although the current Board had to take full responsibility for the necessary interventions henceforth, some of the wrongs that had been committed before it was appointed would be difficult to account for. Instead, it could only find ways to address the impact that these wrongs had had on the entity. Whatever information was received through informal and illegitimate platforms should be questioned and tested on legitimate ones.

He said that although the DPE and SAA would to come to report to Parliament with transparency, there were also some market-sensitive matters that had to be classified and strategically disclosed in order to for them not to be prematurely exposed to competitor consumption. The arrangement should be designed so as to protect the future possibilities of the company, without undermining public scrutiny and accountability.

Part of addressing the state of affairs would be exploring various avenues, such as proficient networks that were commonly used in practice to improve the viability of the airline through optimising its own network issues. Another would be to consider ways in which expertise could be outsourced. Consolidation of interventions would be a key in making SAA become sustainable. This consolidation would have to take the law into account and respect competition matters.

Ms Ramasia said that the ALTTS had been created in 2013 by the then board, and then been verified by various experts. The entity was facing internal and external challenges in implementing the strategy because of the many problems it had to first address. It had then assigned a board implementation committee, which was supplemented by a joint implementation committee (that consisted of an SAA shareholder – the DPE), to implement the strategy. She said that this had accelerated the process.

She confirmed that the production line of the A346-600 aircraft had been discontinued and its spare parts were thus no longer available. SAA had decommissioned, retained and hibernated two of them and used their parts. The plan was to phase out all four-engined aircraft and retain the two-engined ones because of the rise in fuel prices. In October, the entity would receive two two-engined A359 aircraft which would soon be followed by another two of the same kind. The entity was also refurbishing six two-engined A332 aircrafts in order to keep up with the competition, and had also transferred four aircraft to Mango.

She said SAA was leveraging as much as possible in the codeshare deal with Emirates Airlines. The entity tried to have a partner in each global region.

Mr Pikoli said that an integral part of the state of SAA was the erosion and undermining of institutional capacity of the entire criminal justice system. He welcomed Ms Tshabalala’s suggestion about the Committee having to meet the relevant justice sector bodies to ascertain their capacity. SAA had managed to centralise all of its investigations. In its discussions with the Hawks, it had decided to refer all the matters under investigation to the Directorate for Priority Crime Investigation (DPCI) so as to understand the bigger picture of all the racketeering and the organised crime syndicates that were operating within SAA. The board had just recently adopted a new fraud and corruption policy, which was inclusive of a whistle-blowing policy, for SAA. The entity was also undertaking lifestyle audits of its employees in order to build a culture of ethics within the organisation.

Cases had been identified regarding civil and criminal recoveries, including the actual amounts, and SAA was currently processing them. The forensic investigations that implicated former board members had been referred to the NPA.

Mr Fredericks said that semi-privatisation was a consideration. The company would review the non-core assets and possibly consider selling them. This was part of the plan at a national level, but the final decision lay with the DPE. However, it was important to first stabilise the company.

He confirmed that Mango had never received bailout funds from the state, but the challenging economic environment had impacted the entity too. Other airline companies like FlySafair and Comair had been impacted by the technical environment and had had to lower their prices, but with improved environmental conditions, these companies should be able to become profitable

Ms Ramasia said that the wide-bodied aircraft fleet was inadequate to operate and more expensive to run. SAA would revise its fleet plan to deal with the current constraints. The less the operational and maintenance costs of the fleet, the more revenue the company could generate and retain.

Mr Moosa said that the entity not been solvent since 2016 and had been relying on government guarantees. Its net equity deficit had been above R17 billion. The airline had subsequently been recapitalised with significant sums, and the deficit had decreased to about R13 billion. Despite this, the entity had to remain positive and work on the basis that the ALTTS would help turn the airline around in the long term. The onus on choosing whether to privatise the company was with the DPE.

Mr Pikoli said that the matter of the 84 contracts was being referred to the SUI, because it had the capacity of cancelling contracts and ensuring the recovery of stolen money. Other than these contracts, there were other matters that had already been taken to court.

Mr Fredericks said that SAA was doing well in saving on fuel costs to such an extent that Mango had approached it, asking to buy fuel through the same channel. He added that in 2018/19, SAA had saved about R182 million in fuel costs. The company was working on tenders with some of its partners around the world to minimise the fuel pricing.

Ms Ramasia said the entity was running a programme for Adult Basic Education and Training (ABET) in which employees were allowed to participate. Two of the four unskilled SAA workers were already participating.

Mr Fredericks said turning around the entity would be a challenging journey. For this to be realised, the right people with the necessary skills needed to be on board, and there had to be healthy organisational structures. There was also a need for an acceleration in cost initiatives and reviewing the fleet plan. Maintenance and information technology (IT) systems had to improve. Above all, there was a need for the continuous support of the Committee and the DPE in enabling efficient decision making.

Deputy Minister Masualle thanked the Committee for its contributions, and said he hoped that it would continue working in collaboration with SAA and DPE in order to help successfully implement the ALTTS, while cognisant of the fiscal environment and the fact that the Minister of Finance had clearly stated that there would not be any bailout funds available.

The Chairperson said that although the Members were representing different political parties, they were assembled together for a common objective. He claimed that the major contributing factor to the SOEs’ struggles was corruption, and the Committee should set aside its ideological orientations if it hoped to come up collectively with solutions to eradicate the problem.

Adoption of minutes and third term programme

Mr Gumede moved the adoption of the meeting minutes 4 September 2019, and was seconded by Ms Dlamini. The minutes were adopted.

Mr Gumede moved for the adoption the Committee programme for the third term of 2019, and was seconded by Ms Dlamini. The programme was adopted.

.The meeting was adjourned.