Almost three years ago, when the government said it would partially sell off state-owned South African Airways (SAA), it appeared that the vice-like grip of ANC ideology on state ownership had at last been broken. Last week, however, Pravin Gordhan, Minister of Public Enterprises, said the deal had been scrapped, as his department had not been able to agree on a price with the buyers.
After three years, the buyers, a private equity empowerment consortium, did not agree to a recent R1 billion upward valuation that Gordhan demanded. The reason given by Gordhan for raising the price was that SAA had added value by expanding its network of routes, although the airline’s losses have been growing.
While the price may have been a deal breaker, the signs are that the ruling party got cold feet about selling off the national carrier. It was opposition within the tripartite alliance of the ANC, the Congress of South African Trade Unions (COSATU), and the South African Communist Party (SACP) that (according to last weekend’s Sunday Times) was the real wrecker of the deal.
Brake on reform
COSATU and the SACP are putting a brake on reform at a time when the state desperately needs private sector expertise and finance to turn around failing state enterprises. COSATU fears that privatisation might mean fewer jobs for union members if SAA is run like a business rather than a government department. There is no guarantee, but over the longer term, an expanded airline could mean more jobs without continuing bailouts and the risk of a closure. And within the ANC and the Communist Party, there appears to be a deep reluctance to see the “commanding heights” of the economy in private hands.
With the end of the deal to partially sell SAA, it seems that there will have to be more bailouts by the state to prevent the national carrier going into business rescue yet again. Despite bailouts, SAA was in business rescue from December 2019 to April 2022.
Much has been made by the government of the Treasury’s stated commitment to end bailouts for state-owned corporations, but what will the state do to cover their continuing losses?
Over the six financial years up to 2022/23, SAA received more than R48 billion in bailouts. That is small in comparison to the R241-billion bailout received by Eskom over the past fifteen years, but it amounts to about six percent of this year’s health budget. Despite bailouts, SAA still went into business rescue and required R10.5 billion and a debt write-off of R16.4 billion to emerge from the process.
The Treasury says that the SAA group reported a loss of R761 million, against an expected profit of R92 million, in the first three quarters of its current financial year. In the previous financial year, it lost R122 million.
Murky
Much remains murky about the financial state of SAA. For the past five years, annual reports have been released long after the end of its financial year. Toward the end of last year, SAA tabled a batch of reports for the financial years 2019 to 2022. These delays are a violation of the Companies Act, which requires annual reports to be released within six months after the end of the financial year. All JSE listed companies must release their annual reports within four months of the end of the financial year.
According to Business Day, Gordhan has said that SAA’s 2022/23 report will only be tabled before Parliament in April this year – that is more than a year since the end of its financial year.
Late release of annual reports and the murkiness of the airline’s financial reporting show that governance of the airline is awful. It also shows there is no push for basic accountability to the public.
SAA consistently receives the most severe audit outcomes – a disclaimer from its auditors, which means no evidence was found to back up key figures in the report. Year after year the disclaimer from the Auditor General repeats the phrase, “I was unable to find sufficient audit evidence” on key line items on the balance sheet and income statement. That means the company’s set of accounts lacks credibility and cannot be used in any serious valuation exercise.
The deal to sell SAA to the Takatso consortium, made up of the Harith empowerment private equity fund and, initially airline entrepreneur, Gidon Novick, lacked transparency. It is not clear that Takatso emerged out of competitive bidding. Harith is partially owned by the government’s Public Investment Corporation (PIC), which manages the pension funds of civil servants. Novick withdrew from the deal early on, leaving Harith as the only buyer. Had there been open bidding, we would have had greater assurances of a fair deal.
Injecting
Under the deal, the Takatso Consortium would have taken 51 percent of SAA in return for injecting R3.5 billion over time into the airline. The airline’s balance sheet would be cleared of much debt and Harith would have been required to invest R3.5 billion in SAA in exchange for a 51 percent stake. Under the terms of the agreement, the state would retain a minority stake of 49 percent and have a “golden share” giving it an extra 33 percent of voting rights in addition to that from its shareholding.
With the Takatso consortium chosen by the state and partially owned by the Public Investment Corporation, and with the government’s extra voting rights, this would certainly have not amounted to privatisation. Government would have still had control.
What is so telling about the entire SAA saga is that even this deal, which allowed a continuation of government control, was not able to get through the ruling party’s ideological gatekeepers. Dropping the deal after three years also raises questions about the reliability of the state as a business partner.
Assurances
Despite the ANC’s constant assurances that it is keen to find ways to cooperate with the private sector, the end of the SAA deal shows the party won’t do deals that involve giving up its control of state-owned enterprises.
The latest sign of this is that there has been no recent mention about concessioning off the coal-fired power stations for private contractors to run. The original purpose of the report by the German consortium of power engineering firms was to assess the condition of the stations prior to concessioning them off.
Only in a deep crisis might the government’s hold on failing state enterprises break. Under the immense pressure of power cuts, the ANC ultimately had to allow private solar and wind producers access to the grid.
But in the meantime, the ANC is intent on hanging on to collapsing state enterprises and forcing the economy to pay for their failure.
The views of the writer are not necessarily the views of the Daily Friend or the IRR
If you like what you have just read, support the Daily Friend
Image by ThePixelman from Pixabay
.