Parliament

Dudu Myeni’s ghost and SAA’s financial turmoil emerge at Scopa

By Marianne Merten 25 April 2018
Caption
Photo: South African Airways CEO, Vuyani Jarana, appeared before the Standing Committee on Public Accounts (Scopa) in Parliament on Tuesday 24 April to discuss the airlines annual report, financial statements, irregular, fruitless and wasteful expenditure for the 2016/17 financial year. Tuesday 24 April 2018. Photo by Leila Dougan

The ghost of Dudu Myeni’s tenure at the helm of the board of SAA continues to hang over the national airline. And a litany of lack of internal audit capacity, haphazard contract management, gaps in procurement policy, dubious governance controls and financial mismanagement emerged when SAA’s new executives and board appeared on Tuesday before Parliament’s watchdog on public spending, the Standing Committee on Public Accounts (Scopa). SAA got a qualified audit for the financial year ending 31 March 2017 – a verdict of what can happen when politics trump governance within easy reach of the national purse.

SAA is one of those State-owned Entities (SoEs) like Eskom that has been haemorrhaging cash amid governance and administrative turbulence under a series of board and executive appointments that read more like a who’s who of political connectivity. Like the power utility, the national airline has received billions of rands from government. While Eskom has been described as a significant “risk” to South Africa’s economy due to the R350-billion of government guarantees, the financial turmoil at SAA last year cost taxpayers R10-billion from the national coffers.

That controversial bailout was urgently required as SAA could not meet its loan obligations, and it became public record that banks put up resistance in extending loans if Dudu Myeni, also the executive chairperson of the Jacob Zuma Foundation, remained as SAA board chairperson.

Against this background, efforts to relieve Myeni of her tenure as SAA board finally came through in mid-October 2017. Insiders say it had been an epic battle, with word being Myeni’s removal was blocked at the highest level at least once. Then finance minister Malusi Gigaba appointed a largely new board – and, finally after several months’ delay after the initial announcement, a firm starting date for new SAA Chief Executive Officer Vuyani Jarana from November 2017.

Unlike the parliamentary Eskom State Capture inquiry, which unearthed governance manipulations to benefit a few politically-connected at a cost of tens of millions of rands, the state of SAA has remained largely shrouded.

Until Tuesday. Then Scopa MPs heard of a litany of governance failures: the internal audit committee wasn’t quite up and running and neither were appropriate internal financial control systems, there were gaps in supply chain management policy, while legal services that is meant to assist in managing contracts was effectively a two-person unit, and the information technology management structures were also inadequate.

The finances are a mess, and SAA needed R5-billion “now”, according to Jarana, as working capital to keep going. That’s about as frank as it got amid the predilection for business and financial jargon, talking of “R9.2-billion negative equity” and a “very weak balance sheet”. The blunt reality is simply this: SAA is billions of rands in the red, and faces the real possibility of not meeting its loan repayment obligations that fall due in early 2019.

MPs were told that even though planes may be full, operating costs effectively meant flights ran at a loss. “Domestic routes, all without fail, registered losses,” said Jarana, citing costs for aircraft and crew alongside fuel, landing and other fees. The airline could no longer be all things to all people and “tactical” decisions needed to be taken, including cutting the frequency of flights from, say, every 30 minutes to an hour or two, even if that left customers dissatisfied.

Is SAA a going concern, the lingo for being able to pay bills in the next 12 months? Last year’s R10-billion government bailout was crucial to keep planes in the air because a national airline is just one of those prestige projects, tied with ideology, notions of sovereignty and patriotism, government does not want to let go of.

The directors’ report in the SAA integrated report says the national airline is a going concern, despite challenges. “Going concern… has been satisfied. The post balance sheet successful conclusion of a process of engaging debt providers on the relaxation of payment terms, coupled with a capital injection of R10-billion from the shareholder (government), has enabled SAA to satisfy the going concern assumption…”

The Auditor-General is more circumspect. Under the headline “material uncertainty related to going concern”, it emerges the SAA group – this includes AirChefs and SAA Technical – incurred a R5.569-billion net loss for the financial year ending 31 March 2017, up from R1.478-billion the previous year. And liabilities exceeded assets by R17.8-billion. “The history of losses, lack of capital and volatility in foreign exchange rates, along with maturing loans and working capital deficiencies, indicate that a material uncertainty exists that may cast significant doubt on the company’s ability to continue as a going concern.”

According to the integrated report, SAA incurred fruitless and wasteful expenditure of R40.4-million in the financial year ending 31 March 2017, significantly up from the R15.7-million incurred in the previous year. And SAA’s irregular expenditure of R125.9-million also increased by some R3-million over the same period.

The majority of the irregular spend incurred to date was due to the expired contracts or no contracts in place,” according to the Auditor-General’s notes in the SAA Integrated Report.

Scopa raised questions about steps taken to stem the financial haemorrhaging, and investigations into dodgy tenders and contracts. The answers were somewhat unspecific, hinting also at a “double challenge of people and systems”. It may not necessarily be surprising given the scale of the problem now on the new management executives’ and board directors’ plate, but it left MPs frustrated with the lack of detailed reports on challenges, issues and possible solutions.

The response we are getting is like you are building an entity from new,” said Scopa chairperson Temba Godi. And the SAA team was bluntly told, this is Scopa and its members read, read, read as this was a “different” committee. “We do want granular (details). We read this side and we want information.”

South African Airways CEO, Vuyani Jarana and South African Airways board chairperson Johannes “JB” Magwaza appeared before the Standing Committee on Public Accounts (Scopa) in Parliament on Tuesday 24 April to discuss the airlines annual report, financial statements, irregular, fruitless and wasteful expenditure for the 2016/17 financial year. Tuesday 24 April 2018. Photo by Leila Dougan

The SAA team, including its members perhaps more used to behind-closed-door private sector corporate culture, got the message. There are implications for other committees, including that lack of detailed scrutiny by MPs effectively allows officials to pull the wool over their eyes with fluffy good news power point presentations, but that’s another matter.

There are plans to streamline policy to ensure compliant asset valuation, procurement practices and the like. There are new recruits to boost management accountability even though, Jarana told MPs: “SAA as a brand does not sell to top skills (given what happened in the past). No-one wants to leave a good job and come to SAA.” There are time frames, including in getting the internal audit committee up to capacity within the next three months.

But as EFF MP Veronica Menthe pointed out: “We all sit here blaming Dudu Myeni for sinking the ship, but she did not work alone. She issued unlawful instructions to executives, some of whom are sitting here (with Jarana).”

It will be an uphill battle to successfully execute the umpteenth SAA turn-around plan to balance the books by 2021. Asked whether he regretted taking the job, Jarana told Daily Maverick: “I don’t. It was always going to be difficult. The airline is fixable”. DM

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