Gordhan and Godongwana fail to clarify the SAA/Takatso deal: DA will lodge a complaint

Issued by Alf Lees MP – DA Member of the Standing Committee on Public Accounts
11 May 2022 in News

The DA will lodge a formal complaint with the Parliamentary Ethics Committee regarding the failure of Pravin Gordhan, the Minister of Public Enterprises, and Enoch Godongwana, the Minister of Finance, to provide SAA information requested by the members of SCOPA during the SCOPA meeting on the 10th of May 2022

The SCOPA meeting regarding the transfer of 51% of the shares in SAA to the Takatso consortium was characterized by both Godongwana and Gordhan being evasive, defensive and cagey about the SAA/Takatso deal. The refusal to provide details of the agreement is far from transparent and is of major concern for the ability of Parliament to fulfill its oversight duties over State Owned Entities.

This refusal to provide information on the basis that it is commercially sensitive just does not fly. How any competitor can be advantaged from knowing the losses that SAA is running at is a mystery. In all probability the SAA competitors probably know in real time what the SAA operating losses that are reputed to be hundreds of millions every month, are.

Enoch Godongwana had initially been open with SCOPA by providing a detailed report on the concerns that National Treasury have with certain of the terms and conditions contained in the SAA/Takatso agreement signed on the 22 February 2022. At the eleventh hour the presentation was withdrawn on the basis that it was an “internal” document but was not replaced with any other presentation. The concerns detailed Godongwana were:

  • Disposal of Mango Airlines: Sale and Purchase Agreement (SPA) states that SAA will sell and transfer all the shares it holds in Mango Airlines (SOC) Ltd to the DPE in line with the MOU agreed to between the DPE (Sale of Mango Airlines as a condition for the conclusion of the transaction).  Lift Airlines would be incorporated into the SAA Group in lieu of Mango. Minister of Finance raised concerns regarding the removal of Mango from the SAA Group given that Mango had received an allocation of R819 million in the Special Appropriation Act no 11 of 2021.  The intention to dispose of Mango had it been disclosed during the decision-making process to allocate funding to Mango, may have had a bearing on the approval of funding provided to Mango.
  • Issue of Preference Shares to DPE: SPA stated that SAA will issue preference shares to the DPE. The terms and conditions of the preference share issue have not been provided, making it difficult for NT to understand the following:
    1. Rationale for the creation of a new class of shares for the Government; and
    2. The consideration that DPE would provide to SAA in exchange for the new class of shares
  • Terms of working capital agreement with the SEP: Terms of the working capital agreement with the SEP are not outlined in the documents provided by DPE to NT. Therefore, it is not clear whether funding from the SEP will be advanced to SAA in the form of debt, equity or a hybrid instrument. This implied that the SEP, may assume very minimal shareholder risk for the acquisition of a majority shareholding at the purchase price of R51.
  • Commitment by DPE to settle all historical liabilities Of SAA: DPE committed to settle all the historical liabilities of SAA prior to the acquisition of the majority shareholding by the SEP. The MOU stipulated that the SEP has a legal right to assess any ongoing liabilities in SAA and determine whether they should be settled by the DPE. This creates a contingent liability for government and may result in the State providing funds in excess of its shareholding as a minority shareholder.
  • SAA government guarantees: As a condition for the sale, the remaining government guarantees are to remain in full force and effect. This is concerning given that SAA has been advised to eliminate its current government guarantee exposure. The conditions attached to the R16.4 billion allocation to SAA specifically stated that no additional funding may be raised utilising government guarantees post the business rescue process. DPE and NT have been working towards eliminating the contingent liability exposure related to SAA’s government guaranteed obligations. The agreement entered into between DPE and the SEP is contrary to government’s efforts to eliminate contingent liability exposure related to SAA.
  • SAA as preferred service provider for all air transport needs: DPE committed to use reasonable endeavours to adopt policies to ensure that SAA is secured as a preferential service provider for all state air transport needs. However, DPE is not the custodian of air transport policy and therefor may not be able to adopt policies ensuring that SAA is secured as a preferential service provider for all state air transportation.
  • Due diligence reports: Due Diligence Reports prepared by Norton Rose Fulbright highlighted some risks related to the Takatso consortium. NT requested DPE to provide the strategies that re in place by DPE to mitigate against these risks.
  • SAA continued reliance on shareholder support: SAA’s dependence on shareholder support may not be eliminated by the sale of a majority stake to the SEP. Failure by SAA to become a profit-making airline, able to produce positive internally-generated cash flows will result in a request from shareholders to provide equity support.

There was also no clarity about the process that will have to be followed in order to deal with the SAA act, Act 5 of 2007. This Act was the vehicle under which SAA was created as an SOE and must be amended in order to enable the Takatso takeover of 51% of the shares in SAA.