/ 27 July 2018

SAA pilotless amid turbulence

A report by auditor general Kimi Makwetu reveals ‘management lapses’ at SAA.
A report by auditor general Kimi Makwetu reveals ‘management lapses’ at SAA. (Gallo Images/Beeld/Lisa Hnatowicz)

SAA employees failed to declare interests in contracts worth more than R600-million in the financial year ending March 2017, an internal draft report by the auditor general says.

The draft report uncovers several weak financial controls that resulted in serious procurement and contract management lapses. Some of these were later confirmed in the airline’s financials that were tabled before Parliament in March this year.

The financials were presented a year late; auditors refused to sign off on them because they had failed solvency and liquidity tests set out in the Companies Act.

The new revelations give an inside picture behind the airline’s R5.6-billion loss, its sixth consecutive loss and a qualified audit finding. A qualification means SAA — which has blown millions in salaries and fees for executives and consultants in chief executive Vuyani Jarana and chief restructuring officer Peter Davies’s offices — gave financial statements that are fairly presented albeit with some misstatements.

Among the revelations in the draft report, dated September 2017, are:

• Thirteen employees were either directors or had close associations with directors of companies that concluded R646-million worth of business with the airline;

• 111 awards, totalling R5.5-billion, were flagged as noncompliant; and

• 52 awards, totalling R1.6-billion, were procured from suppliers without valid tax clearance certificates from the South African Revenue Service.

According to the report, some of the employees occupy senior positions and include two senior captains, a senior first officer, an acting head of flight operations, a chief pilot and the company’s Public Finance Management Act (PFMA) compliance specialist. Unlike civil servants, employees at state-owned entities are not barred from doing business with the state but they, and the companies involved, are required to declare a conflict of interest.

“There was a lack of oversight by the entity’s leadership to prevent noncompliance with the relevant supply chain management laws and regulations,” the report stated. “This resulted in material noncompliance concerning the procurement of services bringing into question the tone set at the top.”

The auditor general also recorded difficulties with compiling the report because SAA’s officials did not maintain a proper record of financial information and assets, including property and aircraft.

According to SAA, R533-million of the R646-million procurement went to a jet fuel supplier, while the balance is shared by 12 other entities.

“We are currently looking at the total supply base and employees of SAA to look at conflicts of interest and this forms part of an exercise that goes beyond what the auditor general was looking at,” SAA spokesperson Tlali Tlali said.

He added that the airline’s commitment to compliance and clean governance dated back to before the audit. “We took steps and appointed a procurement specialist who will lead SAA in addressing the issues we had identified,” he said.

“We conducted forensic investigations that resulted in suspension of a number of employees including senior officials, disciplinary hearings and in some cases, dismissals. We appointed a board ad hoc committee whose mandate is to focus on fraud and corruption and have, among other things, focused on revising our supply-chain management policy to facilitate compliance with the PFMA.”

Of the 52 awards totalling R1.6-billion to companies without valid tax certificates, Tlali said: “There were major commodity [jet fuel] suppliers involved and one of them had a contract value of R1-billion. SAA and the AG [auditor general] had disputes regarding copies of tax clearance certificate or [whether] prescribed process of national treasury regarding tax clearance certificates [were followed].”

The report also showed that SAA’s deficit, at March 2017, had grown by R3.6-billion from the same period in 2016 to R4.9-billion.

As a group, SAA recorded fruitless and wasteful expenditure to the tune of R46.2-million, as well as R113.4-million in irregular expenditure.

In the introductory passages of the draft report, the auditor general noted a “very weak” control environment as a result of vacancies in the executive committee.

At the time, 40% of the airline’s executive positions were occupied by acting personnel.

At the entity’s annual general meeting SAA chairman JB Magwaza was reported to have said that lack of capacity, a shortage of skilled staff and debt were part of key elements weighing the airline down.

Timeline of the turbulence

Last year was tumultuous for SAA and was characterised by a power struggle between former chairperson Dudu Myeni, a compromise chairperson to please former president Jacob Zuma, and her deputy Tryphosa Ramano, part of a new team appointed by then-finance minister Pravin Gordhan.

The board discussed getting a legal opinion on Myeni’s absence from board meetings at a time when lenders were refusing to extend any further grace to SAA, which could not make loan repayments.

The precarious debt situation saw former finance minister Malusi Gigaba extend cash bailouts, using reserves from the National Revenue Fund, totalling R5.2-billion to settle debt with Standard Chartered and Citibank, and announcing a further R10-billion bailout during the mid-term budget adjustment.

Gigaba also announced a rotation of the board, which saw the removal of several board members, including Myeni and Ramano, and announced a new chairperson, JB Magwaza, and other board members, including Martin Kingston, Geoffrey Rothschild and Nolitha Fakude.

The mandate of the new board, which had been joined by chief executive Vuyani Jarana in November, was to implement a long-term turnaround, underpinned by curtailing expenditure and route and fleet optimisation.

  • June 8: The Mail & Guardian reports that SAA, which had reported a loss of R5.6-billion at the end of 2017 and received R15-billion in government bailouts, is splurging millions on hiring new executives and costly consultants.
  • June 27: The airline fires its chief financial officer, Phumeza Nhantsi, and the chief executive of SAA Technical, Musa Zwane, after an independent disciplinary hearing found them guilty of gross financial misconduct, negligence and dishonesty.

The pair had been suspended for recommending to SAA’s board in 2015 that the airline should sign a contract with unknown financier BnP Capital to raise R15-billion to consolidate SAA’s debt, for which the pair would earn a R256-million fee or 1.5% of the debt.

  • July 6: Disclosures made by senior airline executives to unions contain allegations of boardroom lies, corporate subterfuge and purges. The submissions allege that Jarana is behind the suspension and dismissal of executives who differ with him. SAA dismisses the allegations as a smear campaign.
  • July 20: The treasury, SAA’s shareholder, asks the airline to account for an alleged R5.5-million package for interim chief financial officer Robert Head, its expenditure on consultants and for breaking its shareholder compact by dismissing and appointing another chief financial officer.