BUSINESS MAVERICK OP-ED
Is government part of the solution to SAA’s woes, or is it part of the problem?
SAA’s experience suggests that, far from having the airline’s best interests at heart, the government, as the principal, was, in fact, the one that sabotaged the national carrier’s chances of success.
In an opinion piece in Daily Maverick a week ago, Minister of Public Enterprises Pravin Gordhan wrote about steps taken by his department to reverse the effects of the “ruthless looting and destruction” which has taken place in the country’s state-owned enterprises (SOEs) over the past few years.
He said the Department of Public Enterprises was taking “decisive steps to recover assets, money and intellectual properties stolen from SOEs as part of State Capture”.
In the case of South African Airways (SAA), Gordhan said restructuring — which would include the selection of a strategic equity partner (SEP) — would lead to “the emergence of a competitive, viable and sustainable national airline that is agile, techno-savvy and that will not need any further funding from the fiscus”.
Concluding his article, Gordhan said the government was “determined to root out corruption and all vestiges of State Capture” in order to ensure that SOES “serve the national purpose — equality, jobs and eliminate hunger in our country and [aid in] the development of its people”.
While these are noble intentions that the vast majority of law-abiding South Africans will no doubt welcome, the sad reality is that they are unlikely to result in the stated outcomes. These welcome and well-sounding commitments will amount to little, not least because the government — of which Gordhan is part — is notorious for its inability to implement its own decisions.
Before we go further, though, let us acknowledge the obvious: Gordhan is among the most intrepid fighters against State Capture. He and former deputy finance minister Mcebisi Jonas were at the forefront of the fight against efforts to repurpose the state and its resources and other instruments during the Jacob Zuma presidency, and for that, they paid a high price. As a country, we are deeply indebted to them, and others.
However, there is a real danger that Gordhan thinks State Capture was the only problem confronting the country’s SOEs.
He seems to believe — wrongly, in my view — that all it would take to turn the SOEs around is to end corruption, drive out those suspected of past or current involvement in malfeasance and for the government to be much more closely involved in the running of these enterprises.
He also believes — again wrongly — that, among their responsibilities, SOEs have to create jobs, “eliminate hunger in our country and [aid in] the development of its people”.
By all means, all forms of corruption, by whatever name (by the way, including “cadre deployment”), should be extirpated from the public sector in general and SOEs in particular. Gordhan can count me among the most enthusiastic supporters of those efforts.
However, aggressively fighting corruption is but a start, albeit a necessary and very important one. On its own, eliminating corruption in the SOEs will not turn those institutions around and make them commercially viable or, as our politicians are fond of saying, “fit for purpose”. Turning South Africa’s SOEs around will take much more than that.
Regrettably, judging by the findings of an intensive doctoral study on SAA that I have just completed, even Gordhan is not ready for the tough decisions which need to be taken to ensure that our SOEs are turned around successfully. In fact, evidence revealed that the government was by far the main reason for SAA’s failure, and that Gordhan himself is not without blame.
My study sought to establish what factors facilitate or impede successful implementation of turnaround strategies in SOEs and to develop a framework for the achievement of success in such an endeavour.
Three African airlines — SAA, Kenya Airways and Ethiopian Airlines — were the case studies. Altogether, I interviewed 49 participants in South Africa, Kenya and Ethiopia. Among them were three former Cabinet ministers (Barbara Hogan, Malusi Gigaba and Nhlanhla Nene) who were once responsible for SAA, five former SAA chief executives and nine board members. Vuyani Jarana, who was still SAA CEO at the time, and JB Magwaza, who was the board chairperson, were among the interviewees.
Regrettably, both Gordhan and Tito Mboweni declined to avail themselves for interviews. Over a nine-month period (December 2018 to August 2019), they simply ignored repeated requests for interviews.
Transport consultant Terry Markman said in an interview I had with him for the study: “What worries me more than anything else now is that, with Pravin Gordhan in charge of the Department of Public Enterprises, I think for South Africa that is worse than before. Why do I say that?
“I don’t know him at all. I think he is honest, I think he is honourable, I think he is a decent guy… but he is, in his mind, convinced that the state has to run the airline.
“Now, if you have a person who you know is crooked and he is running the [department], you say ‘oh, well, clearly he doesn’t know what he is talking about’.”
First, SOEs are businesses, even though they happen to be owned by the state. This means that, in order to succeed, they have to be run like businesses and along business lines, and not like special corporations or projects.
The Organisation for Economic Cooperation and Development (OECD) recommends that governments should establish “clear and consistent ownership” policies for SOEs and ensure that they are governed transparently, accountably, professionally and effectively.
According to the OECD’s recommendations, SOEs’ boards should have the necessary authority and comprise qualified people who will be accountable for their actions, with both board members and management teams being appropriately qualified, competent and professional, and being men and women of integrity who are allowed to exercise appropriate authority.
Second, a company undergoing a turnaround is different from one that is performing well, and managing such a company is much more demanding than managing one that is doing well.
By the time a company finds itself in a state where it needs to be turned around, it is already in trouble, and consistent, urgent actions are required.
Turnaround scholar Donald Bibeault calls a turnaround situation “an abnormal period in any company’s history” which requires unique management approaches that are vastly different from those used during a normal period. He argues that during such a period, proven management principles routinely used during moments of stability are no longer valid.
There are at least four primary prerequisites for the successful implementation of a turnaround strategy. Bibeault lists these as:
- New competent management with full authority to make all the required changes, with the CEO being the architect and implementer of the turnaround strategy;
- An economically and competitively viable core operation;
- Bridge capital to finance the turnaround; and
- A positive attitude and motivated people so that initial turnaround momentum is maintained.
Leadership stability is a sine qua non, as is adherence to good corporate governance. Most importantly, the CEO and his/her leadership team should be bold in their efforts to reduce all forms of costs, including labour costs, and to sell off non-core assets.
What was the situation that prevailed at SAA?
The airline was poorly capitalised and could not afford the kind of fuel-efficient aircraft flown by its competitors, and the government dragged its feet when it came to providing the funding on which the long-term turnaround strategy was premised.
SAA found itself shackled by an unfunded, ill-defined dual mandate which required it to fly non-profitable routes, a requirement for it to advance transformation (among other ways, by purchasing through intermediaries which inflated the prices of goods and services, but added no value), and the need to have important decisions approved by the shareholder minister, as is stipulated in the Public Finance Management Act.
The SAA management team even needed to get shareholder approval for something as mundane as having an off-the-record briefing with the media.
The airline was not permitted to effect important cost-saving measures which would have resulted in retrenchments, and the board would not be allowed to place the airline in business rescue until at the eleventh hour, when Solidarity was about to ask the court to order that SAA go into business rescue.
Although shareholder ministers had up to 30 days within which to revert to the SAA board on important decisions which required their approval, ministers such as Gordhan were said to have taken twice as long to do so on some occasions, and on others not to have taken decisions at all. Consequently, agility — which is of absolute necessity in the airline business — was something of which the national carrier could only dream.
The analogy often used by SAA interview participants was that of a boxer thrown into a ring for a world championship fight — but with his hands tied behind his back. Only one outcome is certain in such a situation — he is on a hiding to nothing.
Since shareholder ministers such as Gordhan functioned like the SAA board, some members of that board defaulted to encroaching on operations, thus leaving the CEOs — most of whom were acting — emasculated and frustrated.
There was a time when the situation got so bad that, when he was still on the board, Mzimkulu Malunga described it as follows: “The management… I felt sorry for them because most of them were acting. They were treated badly, even by the board. Nobody really saw them, if you ask me. I felt that the board didn’t think management mattered that much.”
Then SAA CEO Vuyani Jarana said shareholder ministers refrained from making decisions on SAA if those decisions stood to “undermine or affect their political careers”.
SAA chief restructuring officer Peter Davies, an expatriate from Britain, said:
“I don’t think that SAA has a Shareholder who wants to take decisions. At previous government-owned airlines where I worked, the Boards were entrusted with decision making. However, at SAA I have to go through the Board process, which is simply a replication of the Government process, and then having gone through the Board process, we have to do exactly the same through the Government… This elongated decision making has a potentially detrimental effect on SAA. We don’t make these things up. We don’t sit here thinking ‘how can we upset the Board? How can we upset the Shareholder?’ These are fairly obvious facts, and it is frustrating.”
Other challenges which made it impossible for SAA to implement its long-term turnaround strategy successfully were the following:
- lack of coherent government aviation policy;
- frequent changes of shareholder ministers and their different approaches to the airline;
- reluctance by shareholder ministers to make decisions and failure to honour important financial undertakings (other than to allow the airline to submit its annual financial statements and claim to be a going concern);
- unhealthy board dynamics;
- directors’ fears of reckless trading;
- leadership instability;
- lack of management skills and expertise; and
- discordant government voices.
Chairman JB Magwaza struggled for months to have a meeting with Gordhan, to whom he never had an opportunity to present SAA’s revised turnaround strategy. He said it was important for SAA to have a decisive shareholder:
“You need a Shareholder who is prepared, when it comes to decisions, to make major, major decisions, and not run helter-skelter because of the pressure he has from other politicians. If you can’t get a Shareholder who is going to say to the other politicians ‘please give me time, don’t come here and tell me what to do’, you are going to flounder. He must be a strong Shareholder who is able to manage his own politics and not allow that politics to come and affect the organisation.”
Therefore, ultimately, the government was directly responsible for SAA’s failure to be turned around. It was responsible through, among others, the shareholder ministers’ inability to make swift decisions that would facilitate agility; its choice of board members; its insistence that the airline should continue to be subjected to the restrictive Public Finance Management Act; its failure to capitalise the airline properly and tolerance of board members who failed to observe good corporate governance and interfered in operational matters.
With all the aforementioned challenges, there was no way that SAA’s long-term turnaround strategy could be implemented successfully.
The situation was very different at Kenya Airways (although this airline was also unsuccessful in implementing its turnaround strategy, Operation Pride, albeit for different reasons) and Ethiopian Airlines. Some of the key differences among the three airlines are listed in the figure below:
Although SAA’s case is very acute because, unlike most of its South African counterparts, it is in a fiercely competitive environment, there is reason to believe that the situation at the other failing SOEs is not much different. As evidence led before the commission of inquiry into State Capture has revealed, most of the governance challenges which were experienced at SAA also existed at the other SOEs.
As he stated in his article, Gordhan expects the country’s SOEs to “serve the national purpose — equality, jobs and eliminate hunger in our country and [aid in] the development of its people”.
But is that the legitimate role of SOEs?
As one argued earlier, SOEs are businesses, hence they should have very clear business goals. Eskom, for instance, has to generate and distribute electricity as efficiently as possible in order to power our economy while ensuring that it remains sustainable, while the SABC has to be a reliable public broadcaster which, in addition to educating and entertaining the nation, is a credible source of news and analyses in order to ensure that the country is well informed about current affairs.
These SOEs and their counterparts have to be run along business lines and excel at their respective mandates.
Where, then, do goals such as the creation of jobs and the elimination of hunger come in? Does Gordhan imply that SOEs must, as part of their responsibilities, create jobs just for the sake of it, even when they can do with fewer people? And if they do so, how are they to pay these salaries? Is the state planning always to subsidise them so that they create and sustain these jobs in an effort to “eliminate hunger in our country and [aid in] the development of its people”?
It is precisely because the government is not clear about the role of SOEs that most have found themselves in their current challenges.
Just as it seems to labour under the mistaken impression that it can create jobs — when its mandate is to create an environment conducive for the private sector to thrive and create these jobs — the government also sees SOEs as vehicles for job creation. That explains why, when they needed to shed jobs as part of their turnaround strategies, SOEs such as SAA and the SABC have been told in no uncertain terms that they could not do so. For as long as that is the case, no SOE will ever be turned around successfully.
Among the most prominent theories of the firm developed over the years are agency theory, stewardship theory and stakeholder theory. Agency theory concerns itself with the relationship between a CEO and a company’s shareholders and contends that, given information asymmetry which sees the CEO as an agent being privy to more information than shareholders as principals, it is important to introduce controls in the form of a board of directors and financial incentives to align the agent’s interests with those of shareholders.
According to this theory, agents (CEOs) are driven by self-interests and are likely to advance their own interests, rather than those of the principal, hence they need to be monitored by a board and to be incentivised to prioritise shareholders’ interests because achievement of those interests also benefits them.
Stewardship theory, however, concedes that CEOs consider themselves to have a duty to advance the interests of a company, whose success they consider to be their own. Stakeholder theory argues that while shareholders are important, so, too, are other stakeholders such as employees, customers, communities and policymakers, among others.
SAA’s experience suggests that, far from having the airline’s best interests at heart, the government, as the principal, was, in fact, the one that sabotaged the national carrier’s chances of success. I call this the anxious-principal theory, which is the exact opposite of agency theory.
In this case, it was much more the shareholder who posed a risk to the company, and not the agent. BM/DM
A former newspaper editor, Kaizer M. Nyatsumba is a senior business leader, a turnaround strategist and the author of Successfully Implementing Turnaround Strategies in State-Owned Companies.