Public funding for SAA undermines government credibility and endangers State finances

22nd September 2020 By: Rebecca Campbell - Creamer Media Senior Deputy Editor

The government’s undertaking to reprioritise State funding in order to finance State-owned national flag carrier South African Airways (SAA) and so prevent its liquidation represented a defeat for the National Treasury (NT) and undermined the credibility of the government, Intellidex analyst Peter Attard Montalto argued on Tuesday. The government’s decision has completely contradicted previous assurances by the National Treasury that no more State funds would be allocated to the airline.

While the initially-required R10.4-billion might not seem huge, he argued that more government funding would be needed in the future. The decision to save SAA had set the government on a “slippery slope” and could very well lead to the resignation of Finance Minister Tito Mboweni (colloquially called ‘Tito-xit’). More funding would soon be required for SAA, to recapitalise its subsidiaries (which would cost about R2.3-billion) and to cover losses during the first three years of the business rescue plan (some R14-billion). Even then, there was no guarantee that the relaunched airline would ever make a profit, and therefore would need further funding injections of a few billion rands every five or so years.

“All this still doesn’t ensure [the] success of [the] new-SAA however[,] if it doesn’t get bank bridge funding and a deal with equity partners cannot be found,” wrote Montalto. “The risk that Tito-xit occurs is now very high. More profoundly, this shows how decisions can be taken by the Presidency without appropriate advice or understanding of the consequences[,] in our view.”

Provision of funding for SAA without increasing total government spending would mean that other State departments would face deeper than expected budget cuts. That could reduce the money available for infrastructure projects. Cabinet opposition to this could result in greater government spending and so greater government debt.

Public funding for SAA would also likely undermine the State’s arguments in the Constitutional Court case about public sector wages – the government was arguing that it could jettison contract commitments regarding salaries because of its constitutional mandate to evaluate and chose spending priorities between essential services (such as education, health and infrastructure) on the one hand, and wages on the other. But reducing government spending on infrastructure and programmes in order to fund SAA would completely destroy that argument. 

Should the Constitutional Court rule against the government in this matter, the State would have to find R38-billion for back-pay for this fiscal year, with another R82-billion needed over the next two years to pay for contracted pay increases. Depending on how the court ruled on the time period for the backpay to be provided, this, Montalto warned, could lead to a ‘funding hole’ for the South African government and force an approach to the International Monetary Fund for a support programme.

“The reassurances from NT to the market were highly specific and so are quite clearly broken,” he highlighted. “More generally it goes against NT’s reassurances that there was less fiscal space for [State-owned Entity] bailouts which caused ratings agencies to downgrade implicit sovereign support assumptions.”

He further asserted that SAA, in its currently envisaged structure, would not be a sustainable or economically necessary State-owned company. A State-owned full service airline was not required by South Africa, for both international and domestic routes were well-served by commercial airlines. “This is not to say that SAA cannot have a role as a small State airline to serve market gaps, cargo and crisis support like repatriation flights, with [a] fiscal subsidy for such a role that is transparent. … Overall [funding] SAA seems at odds with a Covid recovery plan.”