The business rescue of SAA has been a prolonged and tortuous process over the past six months. That is largely due to the government wanting to ensure that a state airline in some form comes out of the mess.
Rather than an actual bailout, the government has decided on something that is open to wide interpretation and leaves the door open to official funding later. In the letter to the business practitioners, the government has said it will help “mobilise” R10bn. This amount will help to cover R2.5bn in retrenchment costs and the start-up costs of a new airline. This is in addition to the R16.4bn that government has already made available over the next three years to repay government guaranteed debt. Nothing can be done to get out of repaying debt that is guaranteed.
The letter to the practitioners says the Ministers of Public Enterprise and Finance will help, “mobilise funding for the short, medium and long-term requirements of a new SA national airline.”
The word “mobilise” covers a wide range of possible actions. It could mean a direct payment from the Treasury, or it could mean a commitment to make an introduction to possible equity partners or lenders. So this is hardly an abrupt public reversal of a commitment to a big state-owned sector, and indeed the glamour project of a national airline.
It is conceivable that “mobilise” implies that the government might extend a guarantee for any debt that is raised by the new venture. Government guarantees are not a free commodity. Ultimately, a guarantee adds to the state’s debt burden and is a subsidy. Given the wide interpretation of “mobilise”, and the absence of a time-frame given for this in the letter, there is also an inherent risk from this wording that far more than the R10bn might be “mobilised”.
The benign view of “mobilising” might be that it is a path to stealth privatisation. Anything other than equity raising to create a new SAA that can be stealthily privatised and perhaps listed would be out of bounds if the real aim is to reduce spending and guarantees of debt.
The SAA saga presents a dangerous precedent as a sign to the unions that if the government can “mobilise” finance to resurrect SAA, it can also “mobilise” resources to meet their pay demands. Bailouts and indeed, “mobilising” finance, have to be a slap in the face to the increasing number of unemployed and hungry, who derive no benefit from a subsidised glamour project.
The undefined scope of “mobilising” has to be a sign that the government is unable to come up with a categorical “No” to additional spending. To stabilise the public debt to GDP ratio by 2023/24 at 87.4 percent, which is still over the top for South Africa, real cuts in spending amounting to more than ten percent of 2019 GDP may be required over the next two budget cycles, amounting to about 40 percent of the budget tabled in February.
The three major credit rating agencies all downgraded South Africa on the view that the country has shown an inability to cut spending. Moody’s noted in its commentary on the Supplementary Budget that, “given South Africa’s weak track record of fiscal consolidation in recent years and the weak medium-term economic outlook, debt stabilisation by 2023 will be very difficult to achieve.”
Support for the state-owned enterprises, budgeted at R67bn or 1.3 percent of GDP, in the February budget and public sector salaries is where cuts will have to come from if the government is serious about containing debt. Social grants, health, education, and debt service costs, which make up more than 50 percent of public spending are untouchable. The true test of the ability of the government to cut spending will come in October when the Medium-Term Budget Policy Statement is delivered. Failure to substantially cut the lifeline to state enterprises will make it impossible to make deep cuts, and the refusal to liquidate SAA represents a bad start to this process.
In an interview with a TV news channel, eNCA, over the weekend, Public Enterprises Minister Pravin Gordhan came up with his list of reasons for a state airline. The state, he said, required the “national capacity” of an airline in case of emergencies. This is simply not the case. There are many firms in a vast global plane rental market that are in the business of providing appropriate planes to clients at the right time and place. The other argument he used was that SAA has to be state-owned as it is crucial for transformation. This again is not the case, as the private sector can also train and employ black pilots.
There is an argument that South Africa needs a state airline, as tourism is important to the country and we are an “end of hemisphere destination”. This does not amount to a case for a state airline. The fact that Air New Zealand is 52 percent state-owned does not make the case for state ownership. Key to the potential profitability of any route and airline interest is whether sufficient seats can be sold to obtain an above break-even load factor.
Gordhan says that his department might be open to a model along the lines of Telkom, in which the government is a minority partner. However, there is not a case to be made for such a venture, as the government still has to come up with capital or debt guarantees.
One of Gordhan’s premises is that the poor management and corruption that have bedevilled state enterprises will be avoided with a clean slate of professionals. The problem is that even in the two and a half years of the Ramaphosa presidency there has been little evident progress in turning around state enterprises. Over and over again the state has demonstrated that it is simply unable to run entities on a profitable and sustainable basis. Why try again in the hope of success?
And why start an airline now? The global airline industry has suffered an almost total wipe-out with the Covid-19 pandemic, and any recovery is likely to be very gradual over an extended period.
Even this attempt at a “mobilisation” for funding shows that the ANC is simply unable to accept that under its watch, state-owned enterprises have been a mammoth failure. Over and over again it has demonstrated the poor outcomes of giving bailouts to support previous investment failures, and revealed the inefficiency of the large state. Finance theory dictates that investors should look afresh at opportunities and not take into account what has been invested previously in capital and ideology.
The commitment to “mobilise” finance for the new SAA may give the state wiggle-room, but it still faces the much larger sunk cost of Eskom, which cannot be liquidated and which the government has so far refused to privatise.
The views of the writer are not necessarily the views of the Daily Friend or the IRR
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