Finance Minister Pravin Gordhan announced on Wednesday that government would explore a possible merger of the financially distressed South African Airways (SAA) with SA Express (SAX) and that it was also open to “engaging with a potential minority equity partner”.

However, the programme would only be pursued under the direction of a new board at SAA, which Gordhan described as an essential ingredient to ensuring the appointment of permanent executives, who could drive a “financially credible” turnaround strategy.

There was no intention to privatise the national carrier, or any of the other major State-owned companies (SoCs), but government could seek to rationalise the number of State-owned entities (SoEs) currently in existence across the government system, particularly those currently operating at a provincial level.

There had been an attitudinal shift, though, with SoCs no longer viewed as “sacrosanct”. In addition, government was increasingly open to pursuing partnerships with the private sector, including co-investing in projects and enabling private entities to take minority positions in certain entities.

The asset base of SoEs stood at over R1-trillion, equivalent to about 27% of gross domestic product (GDP) and government had provided support, in the form of guarantees, which now totalled R467-billion, or 11.5% of GDP.

“The balance sheets of several entities with extensive infrastructure investment responsibilities are now stretched to their limits . . . Yet we need to accelerate infrastructure investment in the period ahead. So we must broaden the range and scope of our co-funding partnerships with private sector investors. This requires an appropriate framework to govern concession agreements and associated debt and equity instruments, and appropriate regulation of the market structure.”

Future restructuring would be guided by the recently released report of the Presidential Review Commission on State-Owned Enterprises, which indicated that the mandates of some entities overlapped, while others were in perpetual financial difficulties.

“So we must take decisive steps to ensure that they are effectively governed and that they contribute appropriately to the attainment of the National Development Plan,” Gordhan said.

NEW SAA BOARD

Specifically, on the possible consolidation of SAA and SAX, the Minister said it seemed clear “that we do not need to be invested in four airline businesses”.

“Minister [Lynne] Brown and I have agreed to explore the possible merger of SAA and SA Express, under a strengthened board, with a view to engaging with a potential minority equity partner, and to create a bigger and more operationally efficient airline,” he said.

SAA currently fell under the shareholder control of the National Treasury, while SAX fell under the Department of Public Enterprises.

A proposed merger between SAA and SAX had been mooted on a number of previous occasions, but had thus far failed to materialise. However, the latest proposal came amid serious solvency concerns at SAA, which had already benefited from several bail-outs and was currently drawing heavily on government guarantees.

Gordhan said he wanted the word bail-out removed from the vocabulary associated with South African SoCs, many of which also needed to prove their efficiency before turning to consumers for higher tariffs.

The SAA-SAX announcement also followed on from a showdown in 2015 between previous Finance Minister Nhlanhla Nene and controversial SAA board chairperson Dudu Myeni over a ‘swap transaction’ agreed with Airbus earlier in the year.

Under the arrangement, the national carrier would lease five A330s from the manufacturer instead of buying ten A320s.

The National Treasury approved the deal in September and, in December, Nene rejected an eleventh-hour amendment to the deal, proposed in November by Myeni, that SAA purchase the A330 aircraft and enter into a rand-denominated sale and leaseback of the aircraft with a local lessor.

Nene was subsequently removed from his portfolio by President Jacob Zuma, leading to four days of market and social turmoil after Zuma named the little-known David ‘Des’ van Rooyen as Nene’s replacement. Partial calm was restored only four days later, when Gordhan was reappointed Finance Minister.

However, the situation at SAA remained precarious, with Gordhan having now sought two extensions from the Speaker of Parliament for the tabling of the national carrier’s 2014/15 annual report. The new deadline had been set as March 15.

Without making any reference to Myeni, Gordhan indicated that the National Treasury was prioritising the constitution of a new board.

“There are proposals that have been made in respect of a new board for SAA and we hope that, in the next few weeks, we will conclude deliberations on that, take it to Cabinet and the new board will be in place, because having a new board is absolutely essential for the rest for the processes to kick in.

“The rest of the processes mean a full-time, effective and credible management team and a process, that might take two or three or more years, to actually ensure that we have a financially credible plan for SAA.”

ESKOM COAL PROBE?

Meanwhile, Gordhan used the occasion of his 2016 Budget address to reject reports that the National Treasury was targeting power utility Eskom’s coal contracts for specific investigation.

In a statement released along with the Budget documents, the National Treasury described the reports as “malicious and mischievous” and stressed that, since June 2015, the Office of the Chief Procurement Officer had been reviewing all contracts above R10-million across government and the SoCs to ensure value for money and to reduce wastage and procurement irregularities.

“The coal contracts of Eskom happen to fall within the category of contracts that are above R10-million. Eskom has been cooperating with the review.”