GOVERNMENT’s commitment to fund the resuscitation of South African Airways (SAA) must clear a number of hurdles and presents a conundrum that cannot be resolved without the support by commercial funders. This is at a time when public finances are strained.
This week, following a successful vote on the SAA Business Rescue Plan, the Department of Public Enterprises welcomed a commitment from Treasury to source funding for a new airline. Government
is required to provide a letter of support for funding the plan “where it results in a viable and sustainable national flag carrier that provides international, regional and domestic services”.
The department said a letter of support that commits the government “to mobilise funding for the short, medium and long term requirements to create a viable and sustainable national airline” was signed by the Ministers of Finance Tito Mboweni and Public Enterprises Pravin Gordhan on Wednesday, the deadline for which the letter had to be provided.
The Business Rescue Plan requires R 10 billion to be provided in the short term and R 26 billion overall to allow the new airline to take off. The R 10 billion is for the payment of restructuring costs, severance package of R 2 billion, which appears to have been DPE’s main goal in the Business Rescue vote, and to pay certain categories of creditors.
In the February budget, Government announced that it has set aside R 16,4 billion to cover SAA guaranteed debts. Its unclear if these guarantees can now be called in to form part of this funding. Even that would seem contentious at a time when other areas are having budget cuts to fund the Covid 19 fight.
On Friday, the Democratic Alliance announced its intention to challenge the funding commitment on the basis that it does not constitute emergency funding and cannot be passed using section 16 of the Public Finance Management Act (PFMA).
“Yet another public bailout of SAA does not meet the definition of an unforeseen emergency. To use this as a pretext to bail out SAA again would be unlawful.” The DA said in a statement.
The party says a legal opinion obtained by Parliament in 2017 in relation to a R3 billion bailout that was advanced by then Finance Minister Malusi Gigaba to SAA stated that the use of Section 16 was “likely illegal.”
Beyond the challenge from the DA, the commitment raises a number of questions. For a start, what portion of the funding is government hoping to come up with and what will it leave to markets.
The R 10 billion required is the riskiest of the funding, it can be thought as pre-feasibility financing. Government can play the role of a development financier and fund that with the hope that a strategic equity partner and other investors can fund the remainder of the R 26 billion.
Strategic Equity Partners tend to take up to 30% stake in entities they invest in, meaning a partner can invest up to R8 billion of the overall requirement, leaving government to source the rest. Government will need to turn to commercial funders and larger airlines and specialised funds for investment. The trouble with airlines is that they are a thin margin business, where a month of Covid disruptions wipes out gains of the preceding three years.
The other question this commitment raises is where funds will be sourced from. Government is unlikely to be able to use the funds borrowed form multilateral institutions like the New Development Bank, or Brics Bank. For a start, the $7 billion (R120 billion) that government is sourcing from these institutions does not even cover the R 300 billion shortfall in revenue that government faces.
The overall debt to GDP ratio is expected to rise to 87% in the next three years with little room to borrow more, unless government is willing to raise the ratio to 100 % of GDP.
Without commercial funder support, government will have to push the bailout through the fiscus over the medium term and hope all ANC MPs vote for its passage even if opposition parties tries to block it using the Money Bills.
(Compiled by Inside Politics staff)