Gordhan, Mboweni commit in letter to obtain funding for SAA

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Minister of Public Enterprises Pravin Gordhan and Finance Minister Tito Mboweni have committed to obtain funding for the state-owned airline’s short, medium and long-term requirements in a letter in a letter sent to the business rescue practitioners of South African Airways late on Wednesday evening.

The letter, which does not mention any particular amounts, was requested by the business rescue practitioners. It does not say where the funding will come from.

The department of public enterprises has repeatedly said in the past its aim is to create a viable and sustainable new South African national airline.

In terms of a business rescue plan accepted by the creditors of the flag carrier on Tuesday, a letter of commitment of funding had to be provided to the rescue practitioners by Wednesday in order for the plan to proceed.

The rescue plan requires about R10.3 billion in new funding for, among other things, restarting operations (R2.8 billion for July and August) and severance packages for employees (about R2 billion).

Plans for a new airline

The department said in a statement on Thursday that it welcomes the commitment by National Treasury that the government will support and source funding for the plan which will result in “the emergence of a new viable, sustainable, competitive national airline”.

According to the DPE, the funding commitment gives effect to Cabinet’s previous endorsement of SAA’s business rescue plan.

Cabinet’s position is that “it supports the proposal for a new airline and the concerted effort to mobilise funding from various sources, including from potential equity partners for the uptake of the new airline”.

The department did not, however, say whether any equity partners have indeed been obtained.

“In the rescue plan, the practitioners project that an amount of R13.1 billion will be required to fund the restructuring of SAA over the short to medium term. Different tranches of money will be required as different aspects of the restructuring takes effect,” states the DPE. The restructuring include severance packages to about 2 700 SAA employees.

“The DPE is cognisant that airlines across the world are in turmoil due to the Covid-19 pandemic. There are possibilities for airline partnerships to improve the scale and scope of the aviation industry and ensure continuity of value creation to the South African economy.

“While maintaining a certain level of presence in the ownership of the new carrier, the DPE welcomes the attraction of a mix of local and international investor groups to provide the new airline with technical, financial, and operational expertise to ensure significant South African ownership whilst diversifying the investor base.”

The rescue practitioners said they have no comment at this stage.

Reaction

The National Transport Movement thanked Treasury and public enterprises “for having fulfilled their respective commitments” to fund a restructured SAA.

“The real work begins, and the sooner SAA touches the skies the better. As NTM, we have already prepared for a leaner SAA and will be able to cooperate with the soon to be appointed interim board. We want ensure that the tax payers will get value for money when SAA restarts,” commented NTM President, Mashudu Raphetha.

Capt. Grant Back, chairperson of the SAA Pilots’ Association, commented that the investment of taxpayer funds in this particularly difficult economic environment is not a sacrifice take lightly.

“It is, and has always been, SAAPA’s priority to save jobs, to reduce reliance on the fiscus and ultimately, to save the airline,” said Back. “To justify the public investment in SAA, a new fit for purpose management team must prioritise sustainability, profitability, good governance, transparency and accountability.”

In the meantime, the Democratic Alliance has sent a letter to Mboweni cautioning against the use of any more public funding for SAA, specifically not in terms of section 16 of the Public Finance Management Act. Section 16 is a mechanism for “emergency situations” and, in the view of the DA, it would be “unlawful” to use it to fund the flag carrier.

“There is no emergency. SAA’s financial decline has taken place over several years,” states the DA letter. “The public interest favours accountability and transparency.”

In the view of Peter Attard Montalto, head of capital markets research at Intellidex, the joint letter from Mboweni and Gordhan will be enough to move the business rescue process forward. But he notes it actually provides no commitment to funding.

“Instead, it is a commitment ‘to mobilise funding’ and National Treasury and the DPE think this means very different things. Money is needed very quickly for voluntary severance packages as well as recapitalisation of subsidiaries and then more through the coming quarter,” said Montalto.

“The DPE will keep pressure on Treasury to provide this from the fiscus, but it won’t and instead apply pressure on the Development Bank of SA and similar institutions. However, there is a very strong probability there is no money and this all falls apart if Treasury holds its ground.”

For aviation expert Guy Leitch the announcement that government has met its promise to fund the relaunch of SAA is to be welcomed, But he said the projected amount of R10.1 billion needed was insufficient.

“It does not consider the restructuring costs of around R4 billion. Also, government’s stated commitment to burdening the restructured airline with a ‘developmental agenda’ is worrying as it will strongly limit the likelihood of a suitable strategic equity partner being found,” said Leitch.

For Dr Morne Mostert, director of the Institute for Futures Research at Stellenbosch University, a very negative signal is being sent to the international community.

“The government has missed a significant opportunity to demonstrate serious intent for an alternative fiscal future. As anticipated, the symbolic value of a national airline has dominated the commercial viability assessment,” says Mostert.

“This perpetuates a pattern of short-term, political decision making, while what we desperately need is a long-term course correction.”