BUSINESS MAVERICK

Tito Mboweni and Pravin Gordhan defend R10.5-billion bailout for SAA

By Ray Mahlaka 29 October 2020

Public Enterprises Minister Pravin Gordhan (right). (Photo: Gallo Images/Sunday Times/Esa Alexander) / Finance Minister Tito Mboweni. (Photo: GCIS)

Despite protestations by the Finance Minister that the R10.5-billion allocation to SAA is not a ‘bailout’, it has the hallmarks of undeserved financial assistance. The cash for SAA – or the ‘bailout’ – will come from deteriorating taxpayer funds.

Finance Minister Tito Mboweni has defended his decision to throw SAA a R10.5-billion lifeline – a controversial move that will see budgets of crucial service delivery programmes cut to shift taxpayer funds to the bankrupt airline. 

Mboweni has insisted that the R10.5-billion allocated to SAA in the Medium-Term Budget Policy Statement (MTBPS) on Wednesday, 28 October is “not a bailout” because the funds will bankroll the airline’s business rescue process. 

“A bailout would have made a huge [cash] injection into SAA. This is not what the budget has done. This is an allocation for the business rescue process,” Mboweni told a joint meeting of Parliament’s standing committee on public accounts on Thursday, 29 October, a day after tabling the MTBPS.

Mboweni contends that unlike previous bailouts to SAA – amounting to roughly R57-billion since 1994 – the latest will set the airline on a path of recovery under a business rescue process. Previous government bailouts have directly funded SAA, helping it to pay debt to lenders and grease corruption networks, while the airline’s financial situation deteriorated further because it last turned a profit in 2011. 

The business rescue process, Mboweni said, will wean SAA off from the fiscus for survival because the airline’s financial requirements will be backed by unnamed private investors. He said the government wants SAA to emulate the ownership model of Telkom, which is partially owned by the government. In future, this means that SAA won’t be wholly owned by the government, paving the way for private investors to be introduced. So far, the only potential SAA backer to officially come forward has been Ethiopian Airlines, the national carrier of Ethiopia, which is interested in playing an operational role of providing SAA with pilots, planes and aircraft maintenance services, rather than injecting cash.

Despite Mboweni’s protestations about others calling the R10.5-billion for SAA a “bailout”, it does have the hallmarks of it. The funds for SAA or the bailout will come from deteriorating taxpayer funds.  And, controversially, budgets of about 30 government departments, which roll out crucial service delivery and social programmes, will be cut and reallocated to the airline. 

For example, the budget for the South African Police Service was effectively cut by nearly R1.2-billion, higher education and training will lose R1.13-billion, transport will have to do with R681-million less, and the health department will pencil in cuts of R694-million (see table below for further budget cuts). Budget cuts to the health department will inflict more pain at a time when SA is facing the Covid-19 outbreak, which demands the health system to respond effectively to the pandemic. 

Source: The MTBPS. The total column reflects the total budget cuts of government departments and agencies, reflecting cuts of R10.5-billion, which will be channelled to SAA. 

The newly allocated R10.5-billion will fund the implementation of SAA’s business rescue plan, which proposes paying unsecured creditors nearly R2 billion over three years, retrenchment packages worth R2.2 billion to 2,000 workers, and funding the restart of the airline’s flights in January 2021.

Without financial support from the government, SAA would be in danger of liquidation, which entails the permanent closure of the airline’s operations and a fire sale of its assets to pay the outstanding debt.

Gordhan weighs in

Public Enterprises Minister Pravin Gordhan, who oversees the financial affairs of state-owned enterprises, welcomed the SAA bailout on Thursday, adding that he is “shocked and disappointed” by criticism against the bailout. 

He accused critics of lacking “financial literacy” because an SAA liquidation scenario would cost the government more than R18-billion – more than the R10.5-billion bailout – because it would have to immediately pay lenders their outstanding debt and retrenchment packages that are capped at R32,000 per worker. The next steps after the latest bailout will include the appointment of an interim SAA board, CEO and CFO, Gordhan said in a statement.

But SAA’s fortunes won’t change anytime soon. Aviation experts, including the International Air Transport Association, expect air travel across sub-Saharan Africa and outside the continent to recover from the Covid-19 pandemic in the next three years. 

Over the next five years, the business rescue practitioners of SAA, Siviwe Dongwana and Les Matuson, expect SAA to still have a negative cash-flow position. The airline is expected to have a cumulative loss of R59.7-billion between the financial years 2021 and 2025. DM/BM

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  • So it’s about R67-billion and counting, in bailouts, plus another R59.7-billion of losses in the next 4-5 years (and I’ll bet my house that number will prove conservative), and yet these apparently ‘learned gentlemen’ believe it’s worth it? I cannot help but wonder who is it who is “financially illiterate”!

  • A totally insane decision. Saving an airline which adds no value at the expense of education and crime fighting is such a daft idea, it boggles the mind.

  • I dont wish to defend the seemingly endless cycle of SOE bailouts however it does make financial and political sense to keep SAA going under the current climate.
    Assuming that Gordhan did not conjure that 18billion rand figure out of thin air (and I’m afraid I can see the validity of the amount mentioned) one has to consider the knock-on effects of liquidating SAA. Not only it would increase the already insanely high levels of unemployment (and many of these people would be unemployable because there is simply no other airline that could soak them up), would lower the already low taxpayer base, increase the financial burden on UIF and SASSA. The financial call is to look at this business vehicle with the potential of generating cashflow and feed 5000-6000 families and under business rescue and private investors it may even turn profit in a year or two. Once-off 11billion versus an estimated 25billion burden over the next year (during the time we can least afford it). Its a business decision and not a political one even though it does seem the other way around. Unlike ESKOM a working, cashflow generating business entity such as SAA can be sold later for considerable sums (assuming decent management of course).
    From a logistical standpoint: without a national airline South Africa would be abused by international airlines as there were no alternative to their pricing which they could and would hike. SAA was never cheap but served as a yardstick other airlines aimed to beat.

    I know its not such a scandalous theory as the political spin of it DA prefers to communicate but Mboweni, Gordhan are technocrats first and politicans second.

  • As @Helen Lachenicht said, the majority of our people rely on trains. The DM has catalogued the Metrorail disaster in Gauteng which needs the SAA billions to rebuild. The trains that are now running are headed by diesel locos not suited to pulling electric sets. Stations are vandalised, track uplifted, overhead catenary power lines stolen, and the list goes on. The DM report was truly shocking, I had not realized the extent of the theft of rail infrastructure, yet we bail out SAA and the President wants high speed rail between cities!

  • I don’t even want to read this article because the argument is crap. The BAILOUT will be borne by the TAXPAYER – there is no other way of spinning it. Now is the time for Outa to start a crowdfunding exercise to challenge this destructive decision in court on behalf of the taxpayers of this country. Those who are sick of paying and being lied to.
    I’m in, just let me know the bank details.

  • Public Enterprises problem is Gordhan – he like his colleagues must go and enjoy his/their grandchildren or do some gardening and leave management of business to businessmen! and not retort with arrogance like his colleagues that “his critics lack financial intelligence”. It is time that Cyril & Co understand that government don’t own anything – the taxpayer does the owing – they must manage! “Management is the effective and efficient use of ANOTHER PERSONS property and resources for the purpose to produce an expected added value”

  • Indeed Helen, why doesn’t the government fix what was a very efficient railway service? This is untenable really and all South Africans should come out and speak against it.

  • @Steve Smith, @Nigel Segers – I totally agree. @Szivos David – how many millions are staying unemployed and not being fed because the ANC are protecting interests and keeping a non-core asset from liquidation – for a little while longer.

  • Gordhan accuses critics of the bailout of lacking financial literacy. The arrogance !! He represents the ANC whose total lack of integrity, financial literacy, management skills has led to all our SOE’s being financially bankrupt. The ANC could not manage a simple spaza shop and this is glaringly evident.
    All this happened on the ANC’s watch Mr. Gordhan. Your comment is simply dishonest

  • Ray, that is some serious typo / misreading of the projected income statement of the BRP. The cumulative annual projected loss over the next 5 years will maximize at about R6.7bn in 2023 after which the projections indicate operating profits in 2024 & 2025. It would appear you aggregated the last row in the cash flow statement, but that is already “cumulative cash flow”. Ie that row indicate the cumulative projected cash position at that time (similar took a bank overdraft or loan facility), i.e. SAA will require R14.4bn in cash over the next 3 years before the projected operating profits start to shrink the size of the “overdraft” from R14.4bn in 2023 to R12.6bn in 2025.

  • Good money after Bad! The state has funded wholesale theft of public funds by paying SAA 57 billion since 1994. Unless the whole operational model of SAA is pruned the question is, will the 10 billion be the last bailout or are we delaying the inevitable collapse. Maybe, the 18 billion repayment of debts is the less expensive route.

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