tag:theconversation.com,2011:/uk/topics/south-african-airways-35599/articlesSouth African Airways – The Conversation2022-10-26T05:10:40Ztag:theconversation.com,2011:article/1925052022-10-26T05:10:40Z2022-10-26T05:10:40ZCrime, COVID and climate change - South African tourism faces many threats, but it’s resilient<figure><img src="https://images.theconversation.com/files/490109/original/file-20221017-18-m33f7e.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">A family of African elephants walk through the Addo Elephant National Park in South Africa's Eastern Cape Province. </span> <span class="attribution"><span class="source">EPA-EFE/Jon Hrusa</span></span></figcaption></figure><p><em>South Africa’s tourism industry has been rocked by <a href="https://www.businessinsider.co.za/numbi-gate-kruger-national-park-closure-after-german-tourist-murder-2022-10">the murder of a German visitor</a> during an attempted robbery. The development resulted in negative media publicity, with a potentially adverse impact on the country’s image as a safe tourist destination. This comes at a time when the sector is recovering from the devastating effects of the COVID pandemic. The Conversation Africa’s political editor Thabo Leshilo asked Kaitano Dube, an expert in ecotourism, about tourism’s place in South Africa’s economy</em>.</p>
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<h2>How important is tourism to South Africa’s economy?</h2>
<p>Tourism is critical to South Africa’s socioeconomic development. It provides numerous benefits, including employment and entrepreneurship opportunities and much-needed foreign currency earnings. It also provides funding for conserving the country’s natural heritage in several protected areas. </p>
<p>In 2018, the <a href="https://www.tourism.gov.za/AboutNDT/Documents/Tourism%20Sector%20Recovery%20Plan.pdf">tourism sector directly contributed</a> 2.9% of South Africa’s gross domestic product (GDP) and 725,000 jobs. Its indirect contribution brought the share to 8.6% of GDP and 1.49 million jobs. Foreign visitors directly spent R82.5 billion, equal to 9.2% of national exports – the second most important export sector. Local tourists spent another R9.49 billion. </p>
<h2>How has the sector grown – before and after COVID?</h2>
<p>South Africa’s tourism industry had been growing <a href="https://www.statssa.gov.za/wp-content/uploads/2021/04/Arrivalsdeparturestravellerstravel2006%E2%80%932020.jpg">steadily</a> over the years before the outbreak of COVID in 2019. But the sector is vulnerable to disease outbreaks, economic downturns and other shocks such as climate threats. This was evident during the devastating <a href="https://doi.org/10.1016/j.jort.2020.100319">2018 “Day Zero” drought</a> in Cape Town.</p>
<p>There was a dip <a href="https://www.statssa.gov.za/wp-content/uploads/2021/04/Arrivalsdeparturestravellerstravel2006%E2%80%932020.jpg">in 2009</a> due to the <a href="https://www.worldbank.org/en/research/publication/decade-after-global-recession">2008 global financial crisis</a>. Before the COVID pandemic, the tourist arrivals stood at about 5.1 million. They plunged to about 2.4 million in 2020 before sliding further to about 930,000 <a href="https://www.tourism.gov.za/AboutNDT/Documents/NDT%20insights%20report%20September%202022_v1.pdf">in 2021</a>.</p>
<p>Disease outbreaks on the continent also adversely affected the tourism sector around <a href="https://doi.org/10.1108/IHR-05-2020-0015">2015 and in other periods</a> due to the <a href="https://wttc.org/Portals/0/Documents/Reports/2018/Impact%20of%20the%20Ebola%20epidemic%20on%20Travel%20and%20Tourism%202018.pdf?ver=2021-02-25-182521-103#:%7E:text=The%20impact%20of%20Ebola%20on%20Travel%20%26%20Tourism%20was%20immediate%20for,50%25%20from%202013%20to%202014">adverse impacts of Ebola</a> in Guinea, Sierra Leone and Liberia.</p>
<p>The <a href="https://doi.org/10.1016/j.jort.2020.100319">2015-2018 drought in Cape Town</a> also slowed tourism growth in the country, because the city is in one of the biggest tourism nodes. </p>
<p>As of the <a href="https://live.southafrica.net/media/298469/sat-performance-report-q2-2022-final-1.pdf?downloadId=412579">second quarter of 2022</a>, the domestic tourism market had recovered by 139% as compared to 2019 base year which translates into 9 million domestic trips. </p>
<h2>What are the main drivers of tourism in South Africa?</h2>
<p>A rich cultural and natural heritage makes the country a must-visit tourist destination. The wildlife in <a href="https://www.sanparks.org/">20 national parks</a> and 10 UNESCO World Heritage <a href="https://whc.unesco.org/en/statesparties/za">sites</a> ensures that tourists are spoiled for choice. </p>
<p>The coastline is another draw card. And South Africa is a gateway to other African tourist destinations. </p>
<p>Most tourists who come to the country travel for holidays (40%). Others visit friends and relatives (36.9%). Business meetings, incentives, conferences and exhibitions account for about 8% of visitors. </p>
<p>Prior to the COVID pandemic, most African tourists came from Zimbabwe (1,1 million), Lesotho (827 000) and Mozambique (681,530). The <a href="https://www.tourism.gov.za/AboutNDT/Documents/NDT%20insights%20report%20September%202022_v1.pdf">most important international markets</a> outside africa were the US (183,134), Germany (149,531) and the UK (220,830). By the 2nd quarter of 2022 the domestic tourism market revenue grew to R24.4 billion representing a growth of 294.4% compared to 2019, while international market tourism spending went down to R11.1 billion marking a 36.4% decline.</p>
<h2>What are the main threats to tourism and how are these being addressed?</h2>
<p>The tourism sector in South Africa faces multiple threats, but nothing the country cannot handle. As noted earlier, <a href="https://theconversation.com/climate-change-has-already-hit-southern-africa-heres-how-we-know-169062">climate change</a> is an existential threat. </p>
<p>The <a href="https://www.worldweatherattribution.org/wp-content/uploads/WWA-KZN-floods-scientific-report.pdf">deadly floods in KwaZulu-Natal</a> province in 2022 also damaged the international airport and holiday homes and prolonged beach closures, with far-reaching implications for tourism recovery in the province and the country.</p>
<p>Diseases and pandemics remain a threat. The aftershocks of COVID can be seen in rising inflation, <a href="https://www.imf.org/en/Blogs/Articles/2022/10/11/interest-rate-increases-volatile-markets-signal-rising-financial-stability-risks">high interest rates</a> and the fear of <a href="https://www.worldbank.org/en/news/press-release/2022/09/15/risk-of-global-recession-in-2023-rises-amid-simultaneous-rate-hikes">global recession</a>. These threaten the sustainability of tourism in South Africa.</p>
<p>The political and social instability in the country, as seen in frequent mass protests and xenophobia, threaten the flow of African tourists. There is a <a href="https://www.tourism.gov.za/AboutNDT/Documents/NDT%20insights%20report%20September%202022_v1.pdf">clear decline in arrivals</a> from countries such as Zimbabwe and Lesotho, which have been the targets of anti-immigrant rhetoric by some politicians.</p>
<p>Such hate campaigns against African countries threaten South Africa’s attraction as a destination for tourists from such places. Other negatives include the instability caused by infighting within the governing African National Congress – which resulted in the deadly <a href="https://www.businesslive.co.za/bd/national/2022-02-07-anc-infighting-a-threat-to-sa-security-panel-finds/">July 2021 riots</a>. This taints the country’s image and brand.</p>
<p>Other critical challengers include the knock-on effects of the Ukraine-Russia war. It has created uncertainties that have harmed the global tourism market, with implications for South African tourism. These can be worsened and compounded by internal challenges such as energy security.</p>
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Read more:
<a href="https://theconversation.com/south-africas-economy-has-taken-some-heavy-body-blows-can-it-recover-183165">South Africa's economy has taken some heavy body blows: can it recover?</a>
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<p>The South African tourism market is quite resilient, but the issue of tourists’ security warrants attention. The country is generally perceived as a risky destination due to <a href="https://www.gov.za/speeches/minister-bheki-cele-quarter-one-crime-statistics-20222023-19-aug-2022-0000#:%7E:text=From%20April%20to%20June%202022,and%20children%20who%20escaped%20death.">high crime levels</a>. </p>
<p>Other concerns pertain to air connectivity after several airlines went under due to <a href="https://doi.org/10.46222/ajhtl.19770720-99">mismanagement and the COVID pandemic</a>. Some local airlines were placed under administration or went insolvent – including <a href="https://businesstech.co.za/news/business/625510/goodbye-sa-express-final-liquidation-order-granted/">SA Express</a> and <a href="https://www.businesslive.co.za/bd/national/2022-06-14-comair-flies-into-liquidation-with-assets-of-r35bn/">Comair</a>. </p>
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Read more:
<a href="https://theconversation.com/airline-tie-up-for-kenya-and-south-africa-possible-rewards-and-risks-174628">Airline tie-up for Kenya and South Africa: possible rewards, and risks</a>
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<p>Mango, a subsidiary of South African Airways, is still battling to return to the skies <a href="https://businesstech.co.za/news/business/625562/as-sa-express-is-grounded-for-good-eyes-turn-to-another-troubled-airline/">after a severe cash burn</a>. </p>
<p>It is not clear what impact new airlines such as <a href="https://www.lift.co.za/?gclid=CjwKCAjw-rOaBhA9EiwAUkLV4oaSNilMKYnxLLSK0IX4N2Ldx5gUDM_i3qiwlrdLTmKiHZIy9MppXhoCFDsQAvD_BwE">Lift</a>, and the expansion of airlines such as <a href="https://www.flyairlink.com/en/za/?gclid=CjwKCAjw-rOaBhA9EiwAUkLV4qhSZ9YbFR671kUiWTj4iNJMU8Y0MNKhighjsEKYPiU9ap9h6h0WyRoCFCAQAvD_BwE">Airlink</a>, <a href="https://www.flysafair.co.za/">FlySAfair</a> and <a href="https://www.flycemair.co.za/?gclid=CjwKCAjw-rOaBhA9EiwAUkLV4tT7e8IMcrBBtwqJIbxCCjgajAYfvLKr3cv5nn5ivoe548MU2eY6xBoCOFUQAvD_BwE">Cemair</a> will have on tourist movements across the country.</p><img src="https://counter.theconversation.com/content/192505/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Kaitano Dube receives funding from the Vaal University of Technology and the National Research Foundation (NRF). </span></em></p>Political and social instability in the country, as seen in frequent mass protests and xenophobia, threaten the flow of African tourists.Kaitano Dube, Ecotourism Management Lecturer, Vaal University of TechnologyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1745572022-01-25T17:11:18Z2022-01-25T17:11:18ZKenya Airways is in financial trouble (again). Why national carriers have a hard time<figure><img src="https://images.theconversation.com/files/440007/original/file-20220110-21-12u2lye.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Nicolas Economou/ NurPhoto via </span> <span class="attribution"><a class="source" href="https://www.gettyimages.com/detail/news-photo/kenya-airways-boeing-787-8-dreamliner-aircraft-as-seen-on-news-photo/1177219448?adppopup=true">Getty Images</a></span></figcaption></figure><p><a href="https://www.kaa.go.ke/airports/our-airports/jomo-kenyatta-international/">Jomo Kenyatta International Airport</a> in Nairobi, Kenya, offers flights to over 56 destinations in 39 countries. This should be a remarkable feat in these waning days of the <a href="https://covid19.who.int/">COVID-19 global pandemic</a>. </p>
<p>Standing out among the brightly coloured aircraft on the field is the black, red, and green tail of the Kenyan flag. This aircraft livery belongs to the national flag carrier of Kenya, <a href="https://www.kenya-airways.com/ke/">Kenya Airways</a>. The airline, proclaimed <em>The Pride of Africa</em> under its name, was founded in 1977 following the <a href="https://www.elibrary.imf.org/view/journals/022/0016/004/article-A010-en.xml">breakup</a> of the East Africa Community and the dissolution of East African Airways, a joint venture between Kenya, Tanzania, and Uganda. </p>
<p>In 2019, Kenya Airways <a href="https://www.kenya-airways.com/uploadedFiles/PRESS_RELEASE%20-%20Kenya_Airways_Full_Year_2019_Results%20.pdf">carried</a> over 5.1 million passengers while its low-cost subsidiary, Jambojet, transported an additional 726,000. These were operational milestones to be celebrated by the airline and the country. But these cheery figures have not changed the airline’s fortunes. </p>
<p>Kenya Airway’s losses <a href="http://www.xinhuanet.com/english/africa/2021-03/23/c_139830277.htm">tripled</a> to $333 million in the 12 months to December 2020 as COVID-19 containment measures cut passenger levels to their lowest level since 1999. </p>
<p>Kenya’s national airline isn’t alone in its struggles. Over the last two decades that I have been <a href="https://link.springer.com/chapter/10.1057%2F9780230100060_6">studying</a> the sector, national carriers have gone to the wall in ever greater numbers. For instance, Delta Air Lines, one of the world’s largest carriers, <a href="https://www.businessinsider.com/delta-calls-2021-year-of-recovery-after-first-loss-in-11-years-2021-1#:%7E:text=Delta%2C%20the%20first%20U.S.%20airline,quarter%2C%20or%20%241.19%20per%20share">posted</a> a 2020 annual loss of $12.4 billion.</p>
<p>While it is helpful to keep both Kenya Airways and Delta Air Lines in mind when it comes to the impact of the COVID-19 crisis on international airlines, it does not answer the larger question of why airlines seem to go from one crisis to another. To understand this issue, it is necessary to look at the nature of the airline industry, the factors that shape it, and the challenges it faces to achieve profitability.</p>
<h2>Tale of two Airlines</h2>
<p>In recent years, Kenya Airways has received a series of government bailouts, and is reported to be <a href="https://www.businessdailyafrica.com/bd/economy/state-plans-sh146bn-kq-bailout-drops-takeover-3662198">seeking further government support</a> due losses linked to COVID-19. It even sought to raise funds by requesting permission to run the profitable Jomo Kenyatta International Airport. This <a href="http://www.parliament.go.ke/sites/default/files/2019-06/Report%20on%20the%20inquiry%20into%20the%20proposed%20KQ%20PIIP%20to%20KAA.pdf">request</a> was blocked by Parliament, citing possible loss of jobs and public revenue.</p>
<p>Previously, the Kenya government’s decision to bring a <a href="https://www.ifc.org/wps/wcm/connect/5b149604-9a0b-4a0d-9ce8-2d19c814c270/PPPStories_Kenya_KenyaAirways.pdf?MOD=AJPERES&CVID=lHIovml">strategic investor</a> on board, in 1995, paid off with short-lived profitability before the airline plunged back to losses.</p>
<p>Meanwhile, US airlines received <a href="https://www.baltimoresun.com/bal-bz.hancock30sep30-column.html">direct bailouts</a> for the 11 September 2001 terrorist attack of $15 billion and COVID-19 <a href="https://www.nytimes.com/2020/04/14/business/coronavirus-airlines-bailout-treasury-department.html">package</a> of $25 billion. In between these bailouts, financial crisis led to the bankruptcy of all of the major US carriers that <a href="https://www.businesswire.com/news/home/20150514006564/en/America%E2%80%99s-Largest-Airlines-Received-Benefits-Worth-US71.48-Billion-New-Study-Shows">benefited</a> from restructuring debt and pension fund bailouts. </p>
<p>In short, the history of airline bailouts across the world is long and costly.</p>
<p>The COVID-19 pandemic is simply the latest major setback for the industry. The International Air Transport Association, the international trade lobby group for airlines, has described the pandemic as the <a href="https://www.voanews.com/a/economy-business_pandemic-threatens-global-airline-industry-financial-losses/6198746.html">worst shock</a> to air travel and the aviation industry since the second world war. In its <a href="https://www.iata.org/contentassets/c81222d96c9a4e0bb4ff6ced0126f0bb/iata-annual-review-2020.pdf">Annual Review 2020</a>, it reported that global revenue per passenger kilometre declined 66% and airline operating revenue went down 60% to a post-tax industry loss exceeding $118 billion. </p>
<p>Without government aid to airlines around the world of <a href="https://www.iata.org/en/iata-repository/publications/economic-reports/airline-industry-economic-performance---november-2020---report/">more than $173 billion</a>, many of these airlines would have failed. </p>
<h2>Vulnerabilities</h2>
<p>The truth is that airlines hold a special place in the heart of people because they often carry the name and the flag of the countries they represent. But this emotional attachment isn’t enough to ensure the financial sustainability of national airlines. Kenya Airways, South African Airways, and Ethiopian Airlines have survived against the odds, but the cost has been high.</p>
<p>When the Wright Brothers first flew in 1903, it was not clear that commercial air travel would one day become a common practice. In fact, most governments had to intervene directly or indirectly with financial support to foster the development of their national airlines. Many governments owned these carriers outright while others used various subsidies to support their operations. </p>
<p>But in 1978 major changes were triggered by the US <a href="https://www.govtrack.us/congress/bills/95/s2493">Airline Deregulation Act</a>. This law liberalised commercial airline industry, ending the US federal government role in setting fares, awarding routes and controlling new market entry. Internationally, the US began to push for changes as well. </p>
<p>As a result, governments around the world began to withdraw from ownership and support roles. The market was now expected to determine the fate of airlines and it has often not been kind to the global airline industry. </p>
<p>Major economic recessions in the early 1980s and 1990s were followed by the attacks of September 11, 2001, and the global financial crisis of 2008. In each case, the global airline industry posted <a href="https://link.springer.com/chapter/10.1057%2F9780230100060_6">record</a> losses. Airlines went bankrupt or merged with other carriers to survive. </p>
<p>Apart from big shock events, airlines are vulnerable for a number of additional reasons.</p>
<p>The first is that the industry is very sensitive to economic cycles. When economic activity slows down, the airline industry is one of the first to feel the impact.</p>
<p>Also, airlines need very expensive assets like airplanes, and highly trained personnel, including pilots, flight attendants and mechanics, to carry out safe and high quality operations. </p>
<p>Third, airlines require a substantial infrastructure to support their activity. These include airports, air traffic systems, and facilities for training and maintenance. </p>
<p>But those that have survived – and the new ones that have taken off – have done so because of rising demand across the world. According to the International Air Transport Association’s <a href="https://www.iata.org/contentassets/c81222d96c9a4e0bb4ff6ced0126f0bb/iata-annual-review-2018.pdf">Annual Review 2019</a>, the global airline industry carried almost four billion passengers and 64 million tonnes of cargo in 2018. The pandemic has <a href="https://www.cnbc.com/2021/01/04/21-years-of-airline-passenger-traffic-growth-erased-in-2020-travel-report.html">returned</a> the airline industry to the levels of 1999.</p>
<h2>Hard to be an airline</h2>
<p>Airlines offer the fastest and safest form of long distance travel, provide direct and indirect employment, and contribute to tourism and economic development.</p>
<p>For these reasons, nations and regions have an interest in the health and welfare of airlines.</p>
<p>But how many airlines is too many or too few? </p>
<p>There is no simple answer to this question. High-income countries with large domestic traffic bases like the US can support a handful of carriers to transport the bulk of their commercial passengers. Countries without a large domestic base of traffic like the UAE must rely on attracting international and connecting traffic. </p>
<p>But lower income countries struggle to support a single carrier. Examples of airline bankruptcy during the Pandemic include Air Mauritus, Avianca (Colombia), LATAM (Chile), and Philippine Airlines.</p>
<p>In Africa, it may take a region to support an airline because the industry needs a large base of potential customers and sizeable investment in assets and infrastructure.</p>
<p>In 1999 African countries signed <a href="https://afcac.org/en/images/Documentation/yd_eng.pdf">Yamoussoukro Decision</a> that commits members to liberalising air services. The Single African Air Transport market and the <a href="https://au.int/sites/default/files/documents/36085-doc-qa_cfta_en_rev15march.pdf">African Continental Free Trade Area</a> expanded the vision. Liberalising air service agreements would allow airlines to draw on a larger base of potential passengers, trained workers, and government resources.</p>
<p><a href="https://www.businessdailyafrica.com/bd/corporate/companies/kenya-airways-saa-now-plan-to-launch-regional-airline-2023-3630180">Talks</a> between Kenya Airways and South African Airways are a tangible expression of the vision of creating a regional carrier structure strong enough to weather the unpredictable winds of the aviation industry. </p>
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Read more:
<a href="https://theconversation.com/airline-tie-up-for-kenya-and-south-africa-possible-rewards-and-risks-174628">Airline tie-up for Kenya and South Africa: possible rewards, and risks</a>
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<p>Hopefully, in the future, African countries can put aside purely national aspirations and rise up to make the goal of a single sky with a few strong, safe airlines a reality</p><img src="https://counter.theconversation.com/content/174557/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Dawna L. Rhoades, does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The aviation industry requires very expensive assets but is sensitive to economic cyclesDawna L. Rhoades,, Professor of Management , Embry-Riddle Aeronautical UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1746282022-01-17T14:55:31Z2022-01-17T14:55:31ZAirline tie-up for Kenya and South Africa: possible rewards, and risks<figure><img src="https://images.theconversation.com/files/440022/original/file-20220110-19-1f5gzxr.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">South African Airlines and Kenya Airways have drawn up plans to set up a joint pan-African airline in 2023.
</span> <span class="attribution"><a class="source" href="https://www.gettyimages.com/detail/news-photo/travellers-queue-at-a-saa-info-counter-at-the-o-r-tambo-news-photo/1182444427?adppopup=true">Michele Spatari / AFP via Getty Images</a></span></figcaption></figure><p>Africa has <a href="https://centreforaviation.com/">357 airlines</a>, the top 10 of which carried more than 60% of traffic. This reflects the fact that many airlines on the continent are very small: some have as few as two aircraft. Between them the airlines carried 95 million passengers in 2019, according to <a href="https://www.routesonline.com/news/38/airlineroute/">Routes</a>, an online source of information on route announcements. </p>
<p>Airlines operating on the continent face particular challenges. </p>
<p>Firstly, the industry has to contend with huge <a href="https://data.worldbank.org/indicator/NY.GDP.PCAP.CD?locations=ZA">disparities</a> in economic and air transport development. There is also an uneven distribution of international air passenger traffic across regions and within countries. The traffic is predominantly centered in a few hubs in North, East and South Africa; and in the large and medium-size cities. </p>
<p>Other challenges include high costs of operation, market protectionism as well as safety and security concerns. </p>
<p>There are very few profitable African airlines. In 2020, only the Ethiopian Airlines made a <a href="https://www.bloomberg.com/news/articles/2020-06-30/ethiopian-airlines-stays-profitable-despite-covid-19-travel-bans">profit</a> in the continent. And with financial woes compounded by COVID-19, it is likely many more airlines will go under. </p>
<p>Two of the continent’s biggest carriers – South African Airways and Kenya Airways – are under financial stress. Both have made significant losses over the past few years and lost market share and destinations to competition. South African Airways came <a href="https://www.aljazeera.com/news/2021/9/23/south-african-airways-resumes-flights-after-bankruptcy">close</a> to being wound up, but for its part Kenyan Airways reported <a href="https://www.reuters.com/article/uk-kenya-airways-results-idUSKBN2BF0LA">losses</a> of $333 million for the 2020 financial year.</p>
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Read more:
<a href="https://theconversation.com/south-africa-in-unfamiliar-terrain-as-national-carrier-goes-into-business-rescue-128868">South Africa in unfamiliar terrain as national carrier goes into business rescue</a>
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<p>In November, the two national airlines signed a <a href="https://airinsight.com/kenya-airways-and-saa-tie-bonds-with-strategic-partnership/">Strategic Partnership Framework</a>, formalising their plan to set up a pan-African airline in 2023. </p>
<p>In my view the partnership will only succeed if certain conditions are met. The two most important ones are that, firstly, there must be strong national and political agreement and will. But, secondly that the tie-up must be driven by the private sector. </p>
<p>My recent <a href="http://eprints.hud.ac.uk/id/eprint/31717/1/Air%20Transport%20Africa.pdf">research</a> on Air Afrique’s failure found that the airline was doomed by conflicting national objectives and some of the 11 participating countries were unhappy with what they called a subordinate role. </p>
<h2>The case for a partnership</h2>
<p>A range of <a href="https://departments.gmu.edu/t-app/paper/app-wp2.htm?gmuw-rd=sm&gmuw-rdm=ht">academic studies</a> show that alliances affect the production costs of participating airlines through economies of scale (by means of joint operations of air and ground services), increased traffic density (through network expansion and additional traffic feed) and scope (through increased reach and efficient connections). </p>
<p>Joint ventures, have been, and will continue to be, the key in the future development of airline business. Air France and KLM are good examples why airlines are better off working together. Both have <a href="https://www.researchgate.net/publication/256033317_Mergers_vs_Alliances_The_Air_France-KLM_Story">experienced</a> significant growth since getting together in 2004.</p>
<p>Some of alliance arrangements may lead to a reduction in costs and increased efficiency. But they do not necessarily lead to a reduction in competition in the market. </p>
<p>Apart from these benefits, an alliance between South African Airways and Kenya Airways would be good for a number of reasons specific to Africa. </p>
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Read more:
<a href="https://theconversation.com/why-a-new-national-carrier-for-nigeria-is-never-likely-to-get-off-the-ground-104779">Why a new national carrier for Nigeria is never likely to get off the ground</a>
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<p>Firstly, it would help them overcome some of the existing market challenges, such as market access restrictions, increased competitions from major non-African airlines such as Turkish Airlines, Emirates and Europeans carriers. </p>
<p>Secondly, the alliance could take advantage of a return to pre-COVID travel levels. The International Air Transport Association <a href="https://www.iata.org/en/pressroom/pr/2020-07-28-02/">anticipates</a> a full return to 2019 air traffic levels in late 2023. </p>
<p>And it’s <a href="https://www.embraercommercialaviation.com/a-single-african-air-transport-market-tapping-a-continent-of-potential/">estimated</a> that air transport will grow on average by 3.2% over the next decades in Africa and by 4.8% if African States implement the Single African Air Transport Market.</p>
<p>Thirdly, it would enable them to create and encourage a market services specialisation among airline operators. Airlines may specialise on feeder services and fly destinations with smaller demand and catchment areas. An example of this type of specialisation include the <a href="https://simpleflying.com/ethiopian-airlink-interlining/">interlining agreement</a> between Ethiopian and Airlink.</p>
<p>In my view, the cooperation deal would also improve the financial viability of the two national airlines. They could pool maintenance services and reduce costs by pooling purchases, sales and financial transactions. It would boost customer volumes if cost savings were passed on to customers by means of lower fares.</p>
<p>Introducing services in the South African market would be a great addition for Kenya Airways and vice versa. With their <a href="https://www.jstor.org/stable/24396273">hub-based model</a>, (a hub is a central airport that flights are routed through), cooperation will help to boost the route networks of both airlines across Africa.</p>
<h2>Why alliances fail</h2>
<p>Many alliances don’t achieve the desired outcome. Examples include <a href="https://corporate.alitalia.com/en/network/Joint-venture-with-AirFrance-KLM/joint-venture-with-air-france-klm.html">KLM - Alitalia</a>, and the <a href="https://dstm.ntou.edu.tw/var/file/71/1071/attach/33/pta_9054_7333084_65739.pdf">European Quality Alliance</a> which brought together Air France, SAS and Swissair.</p>
<p>Alliances fail for various reasons. <a href="https://www.sciencedirect.com/science/article/pii/S0263237309000917?casa_token=P-3XUwwE_zMAAAAA:NpJIQAmn8faXiAeACQqfuqDE6_F_dl4q6OaNnlzs9tGn-vIA8WCx3_jaJt2EjqbAEyCaJ9Q1">Studies</a> show that ineffective governance, insufficient quality of alliance members and internal competition in the alliances are the most common reasons. </p>
<p>Other <a href="https://mro.massey.ac.nz/xmlui/bitstream/handle/10179/5991/02_whole.pdf?sequence=2&isAllowed=y">studies</a> show that more than 50% of strategic alliance fail due cultural differences, mistrust or poor operational integration.</p>
<p>In the case of Africa, the two airlines have to contend with the fact that there isn’t a single African air transport market. Most of the continent’s 54 countries have their own national arrangements or have under-performing state-owned airlines, resulting in protectionist policies.</p>
<p>There is hope that this will change. The <a href="https://www.intervistas.com/a-continental-outlook-of-the-benefits-of-single-african-air-transport-market-saatm/">Single African Air Transport Market</a>, which by November last year had been signed by 35 countries, envisages a share aviation space. This would <a href="https://www.saatmbenefits.org/">enable</a> eligible airlines from one African state to fly into another using only a prior notification procedure. </p>
<p>But there’s a great deal of work that still needs to be done for this to become a reality. </p>
<p>A number of other factors could stymie the proposed alliance.</p>
<p>A big one is the <a href="https://btd.consulting/alliance/governance-structured-not-standardized/">governance</a> structure, which is the oversight required to make and implement decisions essential to the success of an alliance. Elements of governance include legal form, communication structures, cultural differences, trust and commitment. </p>
<p>Yet another factor will be the extent to which the two governments allow efficient decision making to happen. Airline managers should be left to select a course of action – and then to get on with it. This could be difficult given that the state owns <a href="https://www.gov.za/speeches/minister-pravin-gordhan-announces-preferred-strategic-equity-partner-saa-soc-ltd-11-jun">substantial stakes</a> in South African Airways; same case with Kenya Airways where the Kenyan government’s <a href="https://www.reuters.com/article/kenya-airways-restructuring-idUSL8N28819Q">share holding</a> is 48.9%. </p>
<p>Other factors include trust, transparency and communication about what both airlines do together and what they don’t do together. Establishing trust and ensuring that both airlines understand each other’s goals and objectives and that they are the same is key. </p>
<h2>Recipe for success</h2>
<p>A strategic alliance is similar to a marriage. In most cases there is no perfect match. To be successful partnerships must be nurtured and well managed. Mapping out all the stakeholders that are relevant to the story and are going to help the partners achieve the key performance indicators set out in the alliance is paramount. </p>
<p>In my opinion, setting clear performance measures is important, as they will set the partners on a path that is measurable.</p><img src="https://counter.theconversation.com/content/174628/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Eric Tchouamou Njoya does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Alliance between Africa’s two major national airlines may lower costs but competition remains.Eric Tchouamou Njoya, Senior Lecturer in Air Transport, Department of Logistics, Marketing, Hospitality and Analytics, University of HuddersfieldLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1744412022-01-06T08:02:19Z2022-01-06T08:02:19ZState capture report chronicles extent of corruption in South Africa. But will action follow?<figure><img src="https://images.theconversation.com/files/439532/original/file-20220105-13-140qpgm.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Deputy Chief Justice Raymond Zondo has delivered his first report on state capture to South African president Cyril Ramaphosa.</span> <span class="attribution"><span class="source">Photo by Veli Nhlapo/Sowetan/Gallo Images via Getty Images</span></span></figcaption></figure><p>No self-respecting theatre critic would dream of reviewing a three-Act play during the interval at the end of the first Act. But that is what one is compelled to do after South Africa’s State Capture Commission released <a href="https://www.scribd.com/document/550966842/Judicial-Commission-of-Inquiry-Into-State-Capture-Report-Part-1#from_embed">Part 1</a> of its inquiry report. This is more so because those implicated by its findings will be doing all they can to undermine the credibility of its reports. </p>
<p>And in keeping with this dramatic theme, spoiler alert: My view is that deputy chief Justice Raymond Zondo, who chaired the commission, has nailed it.</p>
<p>In response, many will ask the question: has he really? And, even if he has: so what?</p>
<p>In light of the apparent weaknesses in South Africa’s state capacity and institutions, there is understandable scepticism as to whether the government has the technical capability, let alone the political will, to implement the many recommendations that are emerging from the painstaking labour of the deputy chief justice and his small band of support staff and lawyers.</p>
<p>President Cyril Ramaphosa <a href="https://www.thepresidency.gov.za/press-statements/statement-president-cyril-ramaphosa-handover-first-part-state-capture-commission-report">described receiving the report as</a> a “defining moment” in South Africa’s history. It could yet be so. But only if the work of the Commission leads to decisive action and systemic reform.</p>
<p>Without this the Zondo Commission will merely have been an exercise in catharsis – not the first steps to delivering justice and accountability.</p>
<p>The hearings themselves, and the extraordinary range of evidence that was adduced before the Commission, certainly provided catharsis, but also ‘truth’. For those with open eyes, the denuding of democratic state legitimacy was uncovered and the key protagonists – both perpetrators and victims – identified.</p>
<p>The democratic state <em>was</em> captured; key institutions <em>were</em> looted as vast sums of public money were stolen. Former president Jacob Zuma and his motley network of exploited and exploitative allies <em>were</em> responsible.</p>
<p>That much is abundantly clear from just part one of Zondo’s report. Now they must be held fully to account. Justice will need to be done.</p>
<h2>What is in it</h2>
<p>Zondo <a href="https://mg.co.za/article/2018-01-09-deputy-chief-justice-raymond-zondo-to-head-state-capture-commission-of-inquiry/">was appointed</a> to chair the Commission almost four years ago in January 2018. This was after then-President Zuma had tried and failed to prevent it from being established as a part of the remedial action required by then Public Protector Thuli Madonsela in her October 2016 <a href="https://www.scribd.com/document/329756252/State-of-Capture-14-October-2016#from_embed">‘State of Capture’</a> report.</p>
<p>The Commission’s first hearing was six months later. Thereafter it sat for more than 400 more days, interviewing 300 witnesses and yielding 75,000 pages of transcription.</p>
<p>In all, 1,438 individuals and institutions have been implicated, according to the introduction to the document published on <a href="https://www.gov.za/speeches/president-cyril-ramaphos-handover-first-part-state-capture-commission-report-4-jan-2022">4 January</a>. </p>
<p>Given the cost of the inquiry – and the 1.7 million pages of evidence – a further question arises: was it worth the time, effort and expense?</p>
<p>Having read through the 874 pages of this first part, a number of notable features emerge. </p>
<p>First of all, it is lucid and cogent, despite the regrettable absence of an executive summary. The public will have to wait until the publication of Part 3 of the report at the end of February to review the executive report.</p>
<p>Despite this unusual inversion, the executive report will still matter a great deal, and will require skilled wordsmithery if it is to provide the public with a clear story line. This will, in turn, help ensure that the report remains ‘alive’ in the public eye and does not get pushed into the background by other events – as has happened with similar reports in the past, such as the <a href="https://www.sahrc.org.za/home/21/files/Reports/Report%20of%20the%20Ad%20Hoc%20Committee%20of%20chapter%209.%202007.pdf">Asmal report on Chapter Nine institutions</a> as well as the <a href="https://www.sahrc.org.za/home/21/files/marikana-report-1.pdf">Farlam report on Marikana massacre</a>.</p>
<p>To allow the report to gather dust would be a huge waste of the investment in the Zondo Commission. </p>
<p>Despite the absence of an overarching narrative summary, each chapter of part one presents an intricate and fascinating account of how three public entities – South African Airways (SAA), the government’s information arm <a href="https://www.gcis.gov.za/">(GCIS)</a> and the South African Revenue Service (SARS) – were systematically ‘captured’ with criminal intent, and how misinformation, both through the diversion of public funds to a puppet-media organisation, The New Age, and the subversion of GCIS, was used to try and cover up what was going on.</p>
<p>There were notorious key ringmasters, some well known already. These include Zuma, former SAA chair Dudu Myeni and Mzwanele Manyi, Zuma’s current spokesman and the man who was helicoptered in to head GCIS after the incumbent Themba Maseko was summarily dismissed, according to the report, at the behest of the Gupta family. </p>
<p>But, now, a much wider cast of accomplices and useful idiots are exposed.</p>
<p>Private entities, such as the consulting firm Bain, where the evidence of <a href="https://www.dailymaverick.co.za/article/2021-11-28-athol-williams-i-will-continue-whistle-blowing-and-making-the-corrupt-uncomfortable/">whistleblower Athol Williams</a> is applauded by Zondo, were also deeply complicit. </p>
<p>Secondly, it reads like a legal judgment, which is how it should be. The concern was that Zondo might fail to grasp the nettle and either shirk the most difficult issues or fudge its findings – as the Marikana massacre report did, on the core issues such as police culpability in the murder of the miners. He has not. </p>
<p>Assisted by some trusted former judicial colleagues, but under his attentive eye, Zondo has recognised the need to be both specific and precise. As a mountain of evidence was combined and the report constructed, the strategy was to provide a sound basis for prosecutions. The dots have now been joined. </p>
<p>A vast database of evidence can now be placed at the disposal of the <a href="https://www.saps.gov.za/dpci/index.php">Directorate for Priority Crime Investigation</a>, known as the Hawks, and the <a href="https://www.npa.gov.za/">National Prosecuting Authority</a>.</p>
<p>In due course, no doubt, the legal coherence and rationality of the report will be tested in court. There will be numerous judicial review applications that will seek to obscure the picture and delay justice. It may be another four years before the whole process concludes – the completion of the Commission’s work is just the start.</p>
<p>Thirdly, flowing from the findings, part one of the report offers concrete recommendations. Some recommend that certain implicated persons are either investigated or prosecuted. In other instances, the report addresses institutional failings or legal gaps.</p>
<p>So, for example, in chapter 4 of this first part – on public procurement – Zondo recommends that a new institution be created to which whistleblowers can go (a Public Procurement Anti-Corruption Agency), and, furthermore, that the new agency have authority to negotiate a financial incentive for potential whistleblowers.</p>
<p>These are very concrete recommendations. They should be taken seriously, but they are not uncontroversial, and will require further debate. </p>
<p>Nonetheless, what Zondo is doing, in addition to providing the evidential bedrock so that those responsible can be held criminally to account for their abuse of power, is setting out how the governance system needs to be strengthened. By the time part three is published at the end of February, a substantial reform agenda will have been laid out.</p>
<h2>The end game</h2>
<p>Even with two Acts of this play to go, it is reasonable to conclude that Zondo has played his part. Now it will up to the government to deliver, and for the public, civil society and the media to ensure that it does.</p>
<p>But there will be many more twists in the plot. There will be <a href="https://projects.iq.harvard.edu/johncomaroff/john-comaroff-explains-lawfare">lawfare</a>, attempts to subvert the criminal justice system, which is still recovering from state capture. The power struggle within the governing African National Congress in the run up to its five-yearly national elective conference at the end of this year will be even more bloody as a result.</p>
<p>If the late <a href="https://theconversation.com/archbishop-desmond-tutu-father-of-south-africas-rainbow-nation-97619">Archbishop Desmond Tutu</a> was the moral compass of the nation, then Zondo is constructing an ethical map. How South Africa navigates its course in the coming years will define its long-term future.</p><img src="https://counter.theconversation.com/content/174441/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Richard Calland is a founding partner of political risk consultancy, The Paternoster Group, and a member of the advisory council of the Council for the Advancement of the South African Constitution. He gave evidence to the State Capture inquiry commission as an expert witness on issues relating to parliamentary oversight and the legal protection of whistleblowers, not on any matter of substantive fact or allegation. </span></em></p>The inquiry’s findings could be a defining moment for South Africa, but only if the work of the Commission leads to concrete action and systemic change.Richard Calland, Associate Professor in Public Law, University of Cape TownLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1612002021-05-24T15:17:59Z2021-05-24T15:17:59ZSouth African law is failing to make sure that ‘shadow directors’ are held accountable<figure><img src="https://images.theconversation.com/files/402114/original/file-20210521-21-1hyjpvl.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source">Shutterstock</span></span></figcaption></figure><p>South Africa has become notorious for corruption in many of its state-owned entities. In particular there’s been mounting evidence that utilities such as Eskom, which supplies power, and South African Airways were <a href="https://www.theguardian.com/news/2019/jul/11/state-capture-corruption-investigation-that-has-shaken-south-africa">‘captured’</a> when a small group of people influenced the state’s decisions to their own benefit and hijacked state organs to channel public resources their way. </p>
<p>State capture is not unique to South Africa. For example, there have been allegations of state capture in <a href="https://www.eureporter.co/politics/2020/10/08/corruption-and-state-capture-in-bulgaria/">Bulgaria</a>, <a href="https://euobserver.com/beyond-brussels/142279">Hungary</a> and the <a href="https://www.clingendael.org/sites/default/files/2020-10/Policy_Brief_Undermining_EU_enlargement_2020.pdf">Western Balkans</a>.</p>
<p>In South Africa a great deal of evidence has been given to the <a href="https://www.statecapture.org.za/">Zondo Commission of Inquiry</a> into corruption in the country during the Zuma presidency from 2009 to 2018. A major feature of some of the testimony has been about the awarding of contracts by state-owned entities. </p>
<p>Accusations of malfeasance include the awarding of contracts to companies linked to the <a href="https://www.statecapture.org.za/site/information/search/?witness=gupta&search=Search">Gupta</a> family, the influence of third parties in the appointment of directors of state-owned entities, and the mismanagement of key state-owned entities such as <a href="https://www.statecapture.org.za/site/information/search/?witness=eskom&search=Search">the state utility Eskom</a>, <a href="https://www.statecapture.org.za/site/information/search/?witness=SAA&search=Search">South African Airways</a>, <a href="https://www.statecapture.org.za/site/information/search/?witness=Transnet&search=Search">the transport utility Transnet</a> and <a href="https://www.statecapture.org.za/site/information/search/?witness=sabc&search=Search">the South African Broadcasting Corporation</a>. </p>
<p>An intriguing aspect about how decisions were made revolves around the role of their boards, and in particular what influence ‘shadow directors’ had over decisions. It may be arguable that some of those responsible for state capture are shadow directors. </p>
<p>A ‘shadow director’ is someone who secretly influences and controls directors of a company. They lurk in the shadows and hide behind others. Shadow directors don’t take up formal positions on the board. They want to remain anonymous. And avoid being held liable for the company’s actions. </p>
<p>A person may be a shadow director even if they influence and control only some aspects of the company’s business and not the whole business. </p>
<p>In my <a href="http://uir.unisa.ac.za/bitstream/handle/10500/27320/ICCLJ_VOLUME_15_ISSUE_1%20CHAPTER%201.pdf?sequence=1&isAllowed=y">research</a> on shadow directors I have found that the problem in South Africa is that its laws aren’t clear about how they should be managed, and what the accountability structures are around them. They aren’t properly identified as directors, which means that they are able to escape legal responsibility for their influence and control. Due to conflicting authorities and no clear court ruling on this issue, it’s unclear whether shadow directors are governed by the Companies Act. </p>
<p>Holding shadow directors accountable for influencing and controlling directors of a board would deter bad behaviour and improve corporate governance. It would go some way to addressing the issue of corruption and the abuse of state-owned entities for personal gain.</p>
<h2>Directors</h2>
<p>A ‘director’ is defined in South Africa’s Companies Act as a member of the board of a company, and includes anyone who occupies the position of a director. Even if a person is not formally appointed as a director and has another title, such as manager or consultant, under the law they are still considered to be a director. </p>
<p>If someone acts in the role of a director and performs the functions usually performed by a director, they will be subject to the same fiduciary duties as any other director. </p>
<p>These duties include acting in good faith, acting for a proper purpose and acting in the company’s best interests. If a director fails to comply with these duties they will have to account for the losses suffered by the company. </p>
<p>Whether someone is identified as a shadow director depends on the type of decisions they make and how often they are involved in the management of the company. Also relevant is the extent to which their instructions are automatically followed by the board and the scope of their influence. </p>
<p>Shadow directors pose their own set of challenges. The laws of some countries, such as the <a href="https://www.companylawclub.co.uk/shadow-directors">UK</a> and <a href="https://www.accountantsdaily.com.au/business/13117-asic-secures-sentence-against-shadow-director">Australia</a>, ensure that their actions are also open to scrutiny. But South Africa’s Companies Act does not have a definition of a shadow director. This has raised questions about whether or not they are governed by the Act. </p>
<p>Yet another problem is whether professional advisers should be viewed as shadow directors.</p>
<h2>A question of classification</h2>
<p>In my view a shadow director ought to be governed by the Act because the words ‘occupying the position of a director’ should include a person who acts in the position of a director – with or without lawful authority. </p>
<p>A different view is that a shadow director is not a director but is a <a href="https://www.onlinemoi.co.za/Regulation?regulation=38">prescribed officer</a> because of their influence on company decisions. A prescribed officer is not a director but controls and manages the whole or a significant part of the company’s business. </p>
<p>For example, the chief executive officer and chief financial officer are prescribed officers. They have to comply with the same fiduciary duties as directors.</p>
<p>In my view a shadow director should not be classified merely as a prescribed officer for three reasons. </p>
<p>First, to qualify as a prescribed officer, the person must control the whole of the company’s business or a significant part of it. In most cases the influence of a shadow director doesn’t extend this far. This would let them off the hook under the current definition of prescribed officers. </p>
<p>Secondly, a prescribed officer is a person who regularly takes part in the company’s business. This does not accord with the concept of a shadow director.</p>
<p>Thirdly, if shadow directors were prescribed officers, they could escape being declared <a href="https://lnkd.in/dnUxPb3">delinquent</a>. <a href="https://www.researchgate.net/publication/349616907_Notes_Declaring_directors_of_state-owned_entities_delinquent_Organisation_Undoing_Tax_Abuse_v_Myeni/link/608be11392851c490fa7d6ad/download">Delinquency grounds</a> apply to directors, and not to prescribed officers. </p>
<p>Under a delinquency order a person is banned from being a director for at least seven years, or, in very serious cases, for a <a href="http://www.saflii.org/za/cases/ZAGPPHC/2019/957.html">lifetime</a>. </p>
<p>It’s therefore unfair, in my view, to be able to declare ordinary directors – but not shadow directors – delinquent.</p>
<h2>Shadow directors and state capture</h2>
<p>In the context of the inquiry into corruption in South Africa, one potential upshot of holding shadow directors liable for the same duties as ordinary directors is that they would have to account for the losses suffered by a company due to a breach of their duties. </p>
<p>For example, if a shadow director influenced a state-owned entity to award certain contracts to companies associated with them, they could be held responsible for losses suffered by the company due to their breach of the duties to act in good faith, for a proper purpose and in the company’s best interests.</p>
<p>Another upshot is that shadow directors could be held accountable for losses suffered by the company as a result of being a part of fraud committed by the company when the shadow director knew that the act was fraudulent. Where fraud is committed by the company, under the Companies Act a criminal action can be brought against those responsible, resulting in a fine or imprisonment of up to 10 years.</p>
<p>South Africa’s parliament needs to take urgent action to end the uncertainty about whether or not shadow directors are governed by the Companies Act. This will require amending the definition of a ‘director’ in the Companies Act so that it unambiguously recognises shadow directors.</p><img src="https://counter.theconversation.com/content/161200/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Rehana Cassim does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The state capture inquiry shows that South Africa’s parliament needs to urgently end the uncertainty about whether or not shadow directors are governed by the Companies Act.Rehana Cassim, Associate Professor in Company Law, University of South AfricaLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1325442020-02-26T15:08:09Z2020-02-26T15:08:09ZBudget shows treasury is desperately short of ideas to fix South Africa’s economic woes<figure><img src="https://images.theconversation.com/files/317358/original/file-20200226-24690-gcs0dp.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">South Africa's finance minister, Tito Mboweni, ahead of his budget speech.</span> <span class="attribution"><span class="source">EPA/Nic Bothma</span></span></figcaption></figure><p>At the core of this year’s <a href="http://www.treasury.gov.za/documents/National%20Budget/2020/">budget proposals</a> from South Africa’s national treasury is the admission that national debt is no longer expected to stabilise. In previous years, bar one brief exception, budgets and medium-term budgets repeatedly promised that debt would stabilise even as previous years’ promises were broken. </p>
<p>The reasons are, however, not new. There’s the low economic growth rate, 0.9% for the current year. There are shortfalls in tax collection, R63 billion in the current year. Then there is higher-than-planned spending on state-owned enterprises. As a result, the ratio of national debt to the size of the economy is expected to exceed 70% in 2022/23. Five years ago, former finance minister Nhlanhla Nene promised it would not exceed 50%. </p>
<p>Debt service costs are now approximately 15% of government spending and the fastest-growing spending item. This is up from 10% in 2014/15.</p>
<p>Population growth is estimated to be 1.4% a year, meaning that economic output per person is declining. In that sense, South Africans are getting poorer. The most notable state-owned enterprises are Eskom (the power utility) and South African Airways. Eskom has been allocated an enormous R112 billion over the next three fiscal years. The national airline will get a minimum of R16.4 billion. The spending on both entities is R60 billion higher than previously planned.</p>
<p>Treasury proposes to offset the revenue shortfall and expenditure increase through a R160.2 billion reduction of the public sector wage bill. The cuts are intended to run across national and provincial governments as well as public entities. It is acknowledged in the bowels of the treasury’s documents that the cuts in the wage bill “will inevitably have negative consequences for the economy and social services”. Reducing the wage bill will also hit tax revenue collection.</p>
<p>Unlike previous years, no tax increases are proposed. </p>
<p>Meanwhile, at the policy level, the proposals suggest “structural reforms”. These are needed to increase economic growth, without which only more pain will follow in subsequent years. But these aren’t adequately substantiated in relation to South Africa’s current economic situation.</p>
<p>The country’s public finances and economy have avoided the rapid downward spiral that would have resulted had the state capture faction of the majority party taken power in 2018. Nevertheless, the current budget proposals show that the government is hamstrung by the country’s fiscal and economic situation. And that it’s distressingly short of ideas to get out of it.</p>
<h2>Asking public servants to pay</h2>
<p>Reducing wages is preferable to reducing public service employment at a time when unemployment rates are even higher than their usual extremes. In past years, the treasury reduced public service posts by stealth. It capped provincial expenditure baselines, forcing provinces to cut staff numbers. Employee costs are the largest cost item in providing health and education services. Treasury had proposed to reduce the wage bill through an early retirement programme. This always seemed overly optimistic and potentially counterproductive if it led to the best public servants leaving. It has not yielded the desired spending reductions.</p>
<p>But looking at the new budget proposals together, they amount to the treasury wanting public servants to pay for Eskom bailouts directly from their current and future salaries. The proposal of various trade unions <a href="https://mg.co.za/article/2019-12-13-00-cosatu-suggests-an-eskom-solution/">to use worker pensions</a> to relieve Eskom’s debt burden appears to have been disregarded. In the place of that seemingly sincere initiative, the treasury has opted to play a game of brinkmanship. Its proposal on a wage reduction was formally put to unions only the day before it was tabled. The lateness is evident in the fact that the details of the proposal were not even reflected in the detailed expenditure plans across spheres of government.</p>
<p>Not only does this proposal imply immediate pain for workers and the economy, but it also serves to undermine the role of workers and unions in deciding the restructuring and future trajectory of state-owned enterprises. Given the desire to use Eskom’s crisis and the country’s fiscal situation to push various vested and ideological agendas, this seems unlikely to be coincidental.</p>
<p>Nor do the budget documents explain why it’s equitable to get funds for Eskom bailouts only from public sector workers rather than the private sector or general consumers of electricity. The result may be to sabotage any prospect of a much-needed social compact between government, labour and business on Eskom and public finances. That could also end up undermining the credibility of the budget itself.</p>
<h2>The vacuousness of ‘structural reform’</h2>
<p>What stands out from the budget is how little of substance the treasury and the minister of finance have to put on the table in the way of feasible solutions. </p>
<p>Economic growth is rightly cited as the critical issue. Within that, “adequate electricity supply” is a priority. Yet the treasury continues to rest heavily on rhetoric about private sector participation in the generation of electricity without providing even the most basic information. </p>
<p>In particular, what’s missing is an estimate of the impact of increased private sector energy generation on Eskom’s revenue and finances. Since Eskom is the main expenditure pressure and risk, this is a remarkable omission.</p>
<p>The monster in the room remains Eskom’s debt. It is now a matter verging on a national disgrace that a feasible consensus plan has still not been tabled to address it.</p>
<p>But Eskom is not an isolated case. There are other examples of the failure of the government to act decisively and convincingly when necessary. One of the best examples of state failure on policy and public finances is the Road Accident Fund. Its accumulated liabilities have been accelerating dramatically in recent years. It was obvious that a rapid, decisive intervention was required. Yet that still has not happened. In the interim, the fund’s liabilities have risen from R180 billion in 2016/17 to a projected <a href="http://www.treasury.gov.za/documents/National%20Budget/2020/speech/speech.pdf#page=10">R593 billion</a> in 2022/23.</p>
<p>Other than the failure to table a convincing plan for Eskom, the treasury repeatedly refers to “structural reforms”. This is facile, recycled rhetoric, a smokescreen for recycled economic policy proposals.</p>
<p>To the extent that there is any substance to the treasury’s version, it emphasises the regulation of various sectors of the economy. Yet its proposals are outdated and dubious. They are also inadequately substantiated and contradicted <a href="https://theconversation.com/south-africa-is-planning-more-regulators-this-is-a-bad-idea-123572">by the available evidence</a>. </p>
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<a href="https://theconversation.com/south-africa-is-planning-more-regulators-this-is-a-bad-idea-123572">South Africa is planning more regulators: this is a bad idea</a>
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<p>For example, the failed regulatory structure in electricity has contributed, and continues to contribute, to the Eskom crisis. Treasury, however, <a href="https://theconversation.com/south-africa-is-planning-more-regulators-this-is-a-bad-idea-123572">wants to replicate that model in transport and water</a>. This isn’t the “evidence-based policy” and a “learning developmental state” that the minister of finance and various economic advisors continually <a href="https://www.gov.za/speeches/minister-tito-mboweni-2018-medium-term-budget-policy-statement-speech-24-oct-2018-0000">pontificate about</a>. Rather it’s the transplanting of ideas of past eras that are pushed by ideological and vested interests.</p>
<p>It is almost two years since Cyril Ramaphosa took over as president of the country and evidence is mounting that the parts of the state being relied on to steer the country out of a potential fiscal and economic crisis – the national treasury and the presidency – lack the intellectual capacity or political savvy required.</p><img src="https://counter.theconversation.com/content/132544/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Seán Mfundza Muller receives funding from a European Union-funded project, "Putting People back in Parliament", led by the Dullah Omar Institute (University of the Western Cape), in collaboration with the Parliamentary Monitoring Group, Public Service Accountability Monitor (Rhodes) and Heinrich Boell Foundation (South Africa). He is affiliated with the Public and Environmental Economics Research Centre (University of Johannesburg), regularly making inputs to Parliament oversight of the national budget, advising civil society groups on public finance matters and consulting for private sector organisations on an ad hoc basis. He resigned from the South African Parliamentary Budget Office in 2016. The views expressed are his own.</span></em></p>The South African government is hamstrung by the country’s fiscal and economic situation. And short of ideas about how to get out of it.Seán Mfundza Muller, Senior Lecturer in Economics, Research Associate at the Public and Environmental Economics Research Centre (PEERC) and Visiting Fellow at the Johannesburg Institute of Advanced Study (JIAS), University of JohannesburgLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1318602020-02-14T15:23:30Z2020-02-14T15:23:30ZRamaphosa dodges critical decisions, raising the question: is he a lame duck?<figure><img src="https://images.theconversation.com/files/315509/original/file-20200214-10991-kbt9ix.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">South Africa's President Cyril Ramaphosa delivers his state of the nation address. </span> <span class="attribution"><span class="source">GCIS/Sumaya Hisham/Pool</span></span></figcaption></figure><p>Is it possible that South Africa’s Cyril Ramaphosa has become a “lame duck” president? This often happens towards the end of a leader’s term, especially when a successor has already been identified. But Ramaphosa is not even halfway through his first term. </p>
<p>That I even ask the question suggests that I have doubts that Ramaphosa is making the necessary decisions. By that I mean catalytic decisions that will define the legacy of his presidency and the fate of the country.</p>
<p>Ramaphosa has the misfortune of being president at the most challenging time in the life of post-apartheid South Africa. Economic activity is at its lowest, with growth this year estimated at <a href="https://www.moneyweb.co.za/news/south-africa/world-bank-cuts-south-africa-gdp-forecast-on-eskom-fears/">below 1%</a>. </p>
<p>The country’s tax agency will collect <a href="http://www.treasury.gov.za/documents/mtbps/2019/mtbps/Chapter%203.pdf#page=7">R250bn below</a> what was forecast in the 2019 budget over the next three years. And unemployment – <a href="http://www.statssa.gov.za/?page_id=1856&PPN=P0211&SCH=7622">at 29,1% </a> – remains a grave concern, although perhaps not as immediate a danger as dwindling revenues. South Africa has a massive welfare safety net – from free education and health to monetary grants – which has cushioned the country’s poor against the ravages of unemployment. </p>
<p>But because the tax agency is collecting less – the result of companies closing and jobs being lost – the little that goes into public coffers should be spent prudently. Is it being spent prudently? </p>
<p>The answer is a resounding no. Nor does the president’s <a href="http://www.thepresidency.gov.za/speeches/state-nation-address-president-cyril-ramaphosa%2C-parliament%2C-cape-town-0">state of the nation address</a> offer much comfort. It showed that he has a preference for less contentious matters that attract praise. And there were such easy wins in the speech. They included relaxing regulations for independent producers to generate energy, and allowing municipalities to procure renewable energy. Students were promised more accommodation and aspiring business people should expect a state bank that will provide affordable loans to start a business. </p>
<p>These are all commendable measures, unlikely to attract any derision – at least not immediately. But the country’s problems will not be solved through safe decisions. This is a “decisive moment”, as the president himself acknowledged, that requires equally bold moves and vocal support for cabinet ministers carrying out his instructions. </p>
<p>The <a href="http://www.thepresidency.gov.za/speeches/state-nation-address-president-cyril-ramaphosa%2C-parliament%2C-cape-town-0">state of the nation address</a> showed, once again, Ramaphosa’s proclivity to avoid tackling contentious issues. Examples abound, but one of the most telling is his handling of the crisis at the national airline, <a href="https://theconversation.com/south-africa-in-unfamiliar-terrain-as-national-carrier-goes-into-business-rescue-128868">South African Airways</a>.</p>
<h2>Bungling big decisions</h2>
<p>South African Airways has been surviving on government bail-outs. After the previous CEO, Vuyo Jarana, <a href="https://www.fin24.com/Economy/saa-ceo-vuyani-jarana-resigns-20190602">quit in exasperation</a> in June 2019, government eventually conceded that the airline was unsustainable in its current form. Tito Mboweni, the finance minister, thought the airline should <a href="https://www.timeslive.co.za/news/south-africa/2019-11-21-tito-mboweni-on-saa-close-it-down-and-start-another-airline/">simply be shut down</a>, or sold to a private owner. But government figured that it could still be salvaged. Its preferred course of action was to put it through <a href="https://theconversation.com/south-africa-in-unfamiliar-terrain-as-national-carrier-goes-into-business-rescue-128868">business rescue</a>. </p>
<p>The understanding was that the rescue practitioners would do whatever was necessary to turn the national airline around.</p>
<p>But when it came to actually doing what was necessary to rescue the airline, the rescue practitioners soon began to realise that they didn’t have carte blanche. This became clear after they’d announced the cancellation of unprofitable routes, a step taken to reduce operational costs.</p>
<p>Khensani Kubayi-Ngubane, the minister of tourism, disagreed with the decision. Some of the cancelled flights, <a href="https://www.businesslive.co.za/bt/business-and-economy/2020-02-09-saa-route-cuts-irk-minister/">she protested</a>, would harm the tourism industry. The minister’s protestation was understandable – she was protecting her own territory. What was bewildering was Ramaphosa <a href="https://www.fin24.com/Companies/Industrial/ramaphosa-not-happy-with-saa-route-cancellations-report-20200207">agreeing with her</a>. </p>
<p>As the president he ought to have a broader appreciation that cutting costs would ease pressure on the airline’s finances. Moreover, the president should know that decisions like this hardly please everybody. A president, who has to balance various interests against each other, goes with the decision that guarantees the maximum results. </p>
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<p>The president didn’t even provide a viable alternative plan. In his state of the nation address he said only that the “business rescue practitioners are expected to unveil their plans for restructuring the airline in the next few weeks”. It’s not clear from this whether the plan will be formulated entirely by the practitioners. </p>
<p>Government’s discomfort over the reduction of routes suggests that it wants to determine what the plan should be. This shows its reluctance to allow the practitioners to do what is necessary, however unpleasant, to make the airline commercially viable. </p>
<p>But finding funds to bail it out once more looks increasingly unsustainable. The latest injection – <a href="https://www.timeslive.co.za/news/south-africa/2020-01-28-saa-gets-r35bn-lifeline-from-development-bank/">a R3.6bn loan</a> from the Development Bank of Southern Africa – can’t be repeated. And any decision to take additional money out of government coffers will negatively affect other things. </p>
<p>As it is, the minister of finance has the unenviable task of finding money for all the things the president has promised. But Mboweni won’t be able to source money for students and aspirant entrepreneurs without denying others. And he’s likely to have to deal with an even more crippled national power utility as Eskom loses income when consumers – especially companies and municipalities – opt for independent producers of energy. </p>
<p>And assuming Mboweni does find money somewhere, will the president come to his defence when he’s attacked?</p>
<h2>Formidable foes</h2>
<p>It is difficult to sustain a fight against formidable foes all alone without support. Mboweni appears to be showing signs of resilience against severe criticism from the left wing of the party. But <a href="https://www.dailymaverick.co.za/article/2020-01-14-as-battle-for-eskom-goes-nuclear-pravin-gordhan-is-once-again-the-target/">Pravin Gordhan</a>, minister of public enterprises, doesn’t seem to be doing as well. Since taking over this portfolio, Gordhan has exposed widespread maladministration and corruption in state-owned enterprises, and led the call for prosecutions. </p>
<p>Yet, after repeatedly supporting the restructuring of the airline, he also backtracked when business rescuers cut down on routes. This suggests he is taking a lot of strain, and may be capitulating. It’s not surprising as his detractors even include the country’s deputy president, David Mabuza. </p>
<p>Mabuza is unhappy that Gordhan has bypassed the governing party’s deployment committee when making appointments to boards of parastatals. The committee was partly responsible for appointing unscrupulous individuals that looted parastatals and its current head, Mabuza, is <a href="https://www.nytimes.com/2019/05/22/world/africa/south-africa-david-mabuza.html">not known for propriety</a>. But Ramaphosa has not been vocal in his public support for Gordhan. </p>
<p>Ramaphosa appears not to have realised that routine decisions are akin to inaction, no different from being a lame duck. Lack of support will alienate allies, which will leave him vulnerable to detractors. Without ardent supporters Ramaphosa may not even conclude his first term. He has formidable enemies.</p><img src="https://counter.theconversation.com/content/131860/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Mcebisi Ndletyana received funding from the National Institute of Humanities and Social Sciences. He is affiliated with CASAC.</span></em></p>President Ramaphosa’s state of the nation speech showed his preference for less contentious matters that attract praise, rather than catalytic decisions.Mcebisi Ndletyana, Associate Professor of Political Science, University of JohannesburgLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1303932020-01-23T06:39:31Z2020-01-23T06:39:31ZRamaphosa’s famous negotiating skills have failed him. Here’s why<figure><img src="https://images.theconversation.com/files/311387/original/file-20200122-117954-l4jdak.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">South African President Cyril Ramaphoa</span> <span class="attribution"><span class="source">GCIS</span></span></figcaption></figure><p>When Cyril Ramaphosa took over as president of South Africa in <a href="https://www.timeslive.co.za/politics/2018-02-15-cyril-ramaphosa-has-been-elected-president-of-south-africa/">early 2018</a>, there was a great deal of talk about a <a href="https://theconversation.com/south-africas-new-dawn-should-be-built-on-evidence-based-policy-118129">“new dawn”</a>. But his term in office has failed to deliver, raising the question: has the legendary deal-maker lost his touch?</p>
<p>When Ramaphosa replaced former president Jacob Zuma many South Africans believed he would usher in a new era after the <a href="https://www.fin24.com/Economy/South-Africa/ramaphosas-nine-lost-years-speech-impresses-old-mutual-ceo-at-davos-20190124">disastrous reign</a> of his predecessor. The country and the governing African National Congress (ANC) both urgently needed rescuing from the malaise.</p>
<p>Ramaphosa inherited an unenviable hand from Zuma – state institutions had been <a href="https://ewn.co.za/2019/03/01/zuma-to-blame-for-weakened-state-institutions-says-manuel">weakened</a>, the economy was in a <a href="https://theconversation.com/mini-budget-underscores-bad-state-of-south-africas-economy-126137">parlous condition</a>, the ANC was in internal <a href="https://theconversation.com/anc-wont-fix-internal-strife-unless-it-addresses-root-causes-of-discontent-99621">turmoil</a>, and the political elite regularly <a href="https://www.news24.com/SouthAfrica/News/project-moetapele-ace-magashules-dirty-little-gupta-secret-20190407">exposed</a> for fraudulent and corrupt activities, which culminated in <a href="https://cdn.24.co.za/files/Cms/General/d/4666/3f63a8b78d2b495d88f10ed060997f76.pdf">“state capture”</a>.</p>
<p>Ramaphosa promised to rectify the situation through a series of initiatives. These included <a href="https://www.reuters.com/article/us-safrica-election-ramaphosa/south-africas-ramaphosa-targets-reforms-after-election-win-idUSKCN1SH0BL">reforms</a> to state owned enterprises, economic growth and job creation as well as an anti-corruption drive.</p>
<p>Yet, two years on, very little has changed. In fact, things have deteriorated markedly. Even Ramaphosa was forced to admit that any positivity he once stimulated is now <a href="http://www.thepresidency.gov.za/from-the-desk-of-the-president/desk-president%2C-30-september-2019">over</a>. </p>
<p>His legendary negotiating skills have been incapacitated in the face of South Africa’s current predicament. </p>
<h2>Public frustration</h2>
<p>South Africa’s current predicament is well documented. It is characterised by interlocking crises encompassing growing <a href="http://www.statssa.gov.za/?p=12689">unemployment</a>, negative <a href="https://www.cnbc.com/2019/11/26/the-imf-and-sp-sound-urgent-alarms-over-south-africas-economy.html">growth</a> and unsustainable <a href="https://theconversation.com/mini-budget-underscores-bad-state-of-south-africas-economy-126137">national debt</a>. State-owned enterprises such as <a href="https://theconversation.com/south-african-airways-is-in-business-rescue-what-it-means-and-what-next-128409">South African Airways</a> and <a href="https://theconversation.com/south-africas-energy-crisis-has-triggered-lots-of-ideas-why-most-are-wrong-130298">Eskom</a>, the power utility, are failing. And, a <a href="https://theconversation.com/south-africa-is-close-to-junk-status-from-all-three-rating-agencies-what-could-follow-121765">“junk status”</a> rating is looming. </p>
<p>Factor into this scenario a renewed series of <a href="https://qz.com/africa/1708814/what-is-behind-south-africas-xenophobic-attacks-on-foreigners/">xenophobic</a> attacks against foreigners, the <a href="https://www.aljazeera.com/news/2019/09/south-africa-violence-army-deployment-cape-town-extended-190926112751519.html">military deployment</a> in Cape Town to curb gang murders, and a half-hearted response to the <a href="https://citizen.co.za/news/south-africa/society/2174853/aminext-silent-protest-demands-action-from-ramaphosa/">#AmINext</a> movement protesting against gender violence.</p>
<p>Add to these the ongoing conflicts within the ANC, with leading cadres <a href="https://citizen.co.za/news/south-africa/politics/2227115/carl-niehaus-slams-debaucherous-anc-for-literally-being-prostituted/">taking to Twitter</a> to <a href="https://www.timeslive.co.za/politics/2020-01-13-anc-has-liberated-our-people-thats-why-you-are-on-twitter-fikile-mbalula/">express</a> their divergent opinions, and it is abundantly clear why there is growing public frustration with the Ramaphosa administration.</p>
<p>It was not supposed to be like this. Ramaphosa was the president who would save South Africa. Almost <a href="https://www.politico.eu/article/ringside-seat-at-irish-theater-of-war-ira-sinn-fein-irish-politics/">universally revered</a>, expectations were running high that he would make use of his impressive political credentials, not least his
record of past achievements that bore testament to his success as a deal-maker.</p>
<h2>Deal-making skills</h2>
<p>Ramaphosa has a formidable political pedigree that stretches back to his struggle activities in the National Union of Mineworkers <a href="https://www.sahistory.org.za/people/cyril-matamela-ramaphosa">in the 1980s</a>, through to his contribution to the <a href="https://www.sahistory.org.za/article/convention-democratic-south-africa-codesa">constitutional negotiations to end apartheid</a> in the early 1990s. </p>
<p>These different experiences forged his reputation as a wily, tough and pragmatic deal-maker. Over the last 40 years he’s shown time and again his ability to broker major deals. Just look at the wage concessions he extracted for mine workers and how he helped establish the basis for the country’s new <a href="https://www.justice.gov.za/legislation/constitution/SAConstitution-web-eng-07.pdf">Constitution</a>.</p>
<p>Ramaphosa’s negotiating style is based on debate, building trust between participants, manipulating proceedings to his advantage and reaching consensus through rounds of dialogue. Even those on the other side of the negotiating table recognised his skill. Former apartheid-era President FW De Klerk once <a href="https://www.newstatesman.com/world/africa/2017/12/south-africa-s-nearly-man-sets-zuma-confrontation-anc-leadership-win?page=9">described</a> him as “coldly calculating” and silver tongue[d]).</p>
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Read more:
<a href="https://theconversation.com/ramaphosa-fails-to-show-leadership-as-difficult-and-decisive-year-looms-129762">Ramaphosa fails to show leadership as difficult and decisive year looms</a>
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<p>Compromise based on a position of strength is integral to the success of his negotiating strategy. Most notably this came to the fore during the challenging constitutional talks.</p>
<p>Ramaphosa had established a close rapport with reformist MPs from the <a href="https://www.sahistory.org.za/article/national-party-np">National Party</a>, which ruled the country then, such as <a href="https://www.sahistory.org.za/people/roelof-petrus-roelf-meyer">Roelf Meyer</a>. These men were willing to negotiate with the ANC. More importantly, they were willing to make significant compromises to achieve an end to white minority rule.</p>
<p>Talks, debate, and compromise were the foundations for these negotiated outcomes.</p>
<h2>Different times</h2>
<p>Competing economic and social pressures, as well as the <a href="https://theconversation.com/why-the-anc-itself-is-the-chief-impediment-to-ramaphosas-agenda-108781">internal battles within the ANC</a>, don’t allow for Ramaphosa’s preferred style of negotiation or leadership to succeed. In retrospect the belief that he could address the challenges by finding a common position through a debate-led strategy seems naive at best.</p>
<p>A key problem is that Ramaphosa is constrained by his <a href="https://www.timeslive.co.za/politics/2017-12-18-cyril-ramaphosa-wins-anc-presidential-race/">tenuous control over the ANC</a>, while the party elite is locked in a <a href="https://theconversation.com/anc-power-struggle-shows-that-south-africa-is-not-exceptional-after-all-91403">factional conflict</a> for power and influence. The historic “unity” of the party is disintegrating as rivals such as Secretary-General Ace Magashule, threatened by the promised reforms and <a href="https://www.businesslive.co.za/bd/national/2019-08-28-state-capture-inquiry-hears-about-ace-magashule-and-the-asbestos-heist/">anti-corruption initiatives</a>, undermine Rampahosa’s leadership.</p>
<p>There is no room for debate in this febrile atmosphere, and definitely no appetite to seek common ground when disloyalty from within the party is so prevalent. When power and survival are at stake, compromise as a negotiating position goes out the window. </p>
<p>The upcoming <a href="https://www.news24.com/SouthAfrica/News/no-ngc-can-remove-ramaphosa-mantashe-20190510">National General Council</a> of the ANC, scheduled for June, will only threaten Ramaphosa’s position further. The conference is held halfway between the party’s national conferences, to debate the “strategic organisational and political issues” it faces. </p>
<p>Meanwhile, the economic and social challenges require tough and decisive action. Yet, the ANC’s January 8 <a href="https://www.scribd.com/document/442488460/President-Cyril-Ramaphosa-s-ANC-January-8-Statement#from_embed">statement</a> marking its birthday, repeated old adages of unity, growth, employment and transformation. It offered nothing new in terms of <a href="https://theconversation.com/ramaphosa-fails-to-show-leadership-as-difficult-and-decisive-year-looms-129762">vision or solutions </a>.</p>
<p>Ramaphosa’s favoured strategies continue to be through commissions and joint working groups. Yet a consultative approach is time consuming and will simply not succeed when space for debate is marginalised and vested interests are at stake.</p>
<p>Is there a solution?</p>
<h2>Tough choices</h2>
<p>Fundamentally an immediate change to his negotiating strategy and leadership is required. Although decisive action is not in his play book, Ramaphosa can no longer hope to appease everyone through consensus-based leadership. Structural reforms to prevent further economic decline are required quickly. These involve painful decisions and a stronger vision for the future, none of which are evident at the moment.</p>
<p>But, to implement economic reforms and to strengthen anti-corruption initiatives will be immensely unpopular, especially among the ANC hierarchy. Many don’t support Ramaphosa. Others fear the loss of their patronage. </p>
<p>Unless Ramaphosa can exert control over a recalcitrant ANC to make difficult decisions, he’ll stay stuck in a no-win situation, caught between the need to avert economic meltdown or keep the party intact.</p>
<p>The choice ahead for Ramaphosa lies between what is best for South Africa, or for the ANC.</p><img src="https://counter.theconversation.com/content/130393/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Matthew Graham does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Ramaphosa is constrained by his tenuous control over South Africa’s governing party, the ANC.Matthew Graham, Senior Lecturer in History, University of DundeeLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1288682019-12-18T07:28:28Z2019-12-18T07:28:28ZSouth Africa in unfamiliar terrain as national carrier goes into business rescue<figure><img src="https://images.theconversation.com/files/307398/original/file-20191217-58326-131m669.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source">Shutterstock</span></span></figcaption></figure><p>South Africa’s national carrier, South African Airways, has been placed in voluntary business rescue. It’s an historic moment as it’s the first business rescue attempt of a state owned entity. The decision places the country in unfamiliar territory – politically, economically and legally. </p>
<p>What happens next will determine whether the decision was the right one or not. A great deal rides on Les Matuson, the man appointed the business rescue practitioner. The business rescue practitioner is key to the success of the rescue process. His personal qualities of integrity, independence, professional skill, and expertise are vital factors. </p>
<p>The airline’s board of directors appointed Matuson as the business rescue practitioner. This had <a href="https://www.enca.com/news/unions-reject-saa-rescue-plan">trade unions up in arms</a>, as they were not consulted.</p>
<p>Legally, the power to appoint the rescue practitioner depends on how the business rescue came about. In this case, given that the airline went into voluntary business rescue, the board had the sole power to appoint the practitioner. </p>
<p>The process would have been different if it had been as a result of a court order. For example, if a court had ordered the business rescue <a href="https://ewn.co.za/2019/11/21/solidarity-lodges-court-application-to-place-saa-in-business-rescue">at the request of the trade union Solidarity</a> and <a href="https://www.fin24.com/Companies/Industrial/two-fellow-unions-at-saa-back-solidarity-in-business-rescue-application-20191206-3">other unions,</a> then the trade unions would have nominated a business rescue practitioner of their choice and the appointment would have been made by the court. </p>
<p>But will the rescue work, or is it too late. After all, the airline is in dire financial straits, with its liabilities exceeding its assets by about <a href="https://www.dailymaverick.co.za/article/2019-12-02-south-african-airways-lost-over-700-mln-in-past-2-years-documents/">R 13-billion</a>. The Companies Act stipulates that for a business rescue the company must be in financial distress or near insolvency. If it is already insolvent, it is too late. </p>
<p>There are lots of burning issues raised by the business rescue that hasen’t yet been tested in South Africa. Many will no doubt land in the courts where those presiding over cases will also be walking unfamiliar territory. </p>
<p>One possible outcome still remains: that the airline will be shut down. If the practitioner finds that there is no reasonable prospect of a successful rescue, he is duty-bound to have the airline liquidated. </p>
<h2>Where the power lies</h2>
<p>The business rescue practitioner has wide powers over the company. The board of directors continues to manage the company, but is subject to his control. </p>
<p>The practitioner’s fundamental task is to rehabilitate the airline by developing a suitable business rescue plan within 25 business days. This deadline may be extended by the court or the majority creditors. </p>
<p>In drawing up the business rescue plan, the practitioner must consult with management, creditors, trade unions and the government shareholder. But the practitioner cannot be dictated to by any stakeholder. He has a duty to act impartially, independently, and in the interests of South African Airways. In theory, this also means that the government, as the airline’s shareholder, no longer has any legal control over its business.</p>
<p>Once the business rescue plan has been drawn up, it must be voted on by creditors. This gives creditors a decisive say over the future of the airline. </p>
<p>There is a dual voting requirement for the business rescue plan. It must be approved by more than 75% of the creditors and at least 50% of the independent creditors. </p>
<p>The employees of the airline will also have voting rights as creditors, to the extent of any unpaid salaries and wages that were owed <a href="https://www.fin24.com/Companies/saa-confirms-salary-delays-for-november-20191121">before business rescue began.</a> </p>
<p>The interests of shareholders in business rescue are subordinate to those of creditors and employees. As the shareholder, government does not have a right to vote on the business rescue plan, unless its shareholder rights are altered by the plan. This could happen, for example, by introducing a new shareholder as an investment partner. If shareholder rights are affected, the plan must be approved by the shareholder at a separate meeting. </p>
<p>Once approved, the business rescue plan becomes legally binding or <a href="https://juta.co.za/catalogue/contemporary-company-law_23048/">“crammed-down”</a> on all the stakeholders – whether or not they agreed to it. Government as a shareholder is also legally bound. The practitioner must then proceed to implement the plan.</p>
<h2>Role of government as a creditor</h2>
<p>An important and undecided issue is whether the government qualifies to vote on the business rescue plan as a creditor. </p>
<p>Government has recently undertaken to provide a loan of R2-billion to the airline as <a href="https://mobile.twitter.com/DPE_ZA_/status/1202441941226524673">post-commencement financing</a>. This means new financing given to a company in business rescue. Post-commencement financiers get preference on their claims. But the Companies Act is not clear whether they have a right to vote as creditors on the business rescue plan. This will have to be decided by the courts. </p>
<p>Even if the government is a creditor, would it qualify as an “independent” creditor? An independent creditor’s vote on the business rescue plan is weightier than other creditors. Furthermore, only independent creditors may sit on the creditors’ committee. This committee has the power to consult with, though not to instruct, the practitioner on the business rescue plan. </p>
<p>The Companies Act is also unclear on this issue. It will be for the business rescue practitioner to decide. This may ultimately fall to the courts too.</p>
<h2>Rights of trade unions and employees</h2>
<p>From the employees’ perspective, it’s more beneficial to place a company under business rescue than to liquidate. The South African business rescue regime is strongly pro-employee. </p>
<p>Employees continue to be employed during business rescue. Any changes to their employment terms and conditions must be by agreement. </p>
<p>They have preferential rights to be paid all salaries, wages, and other employment-related payments that become due to them during business rescue. Employees rank in the queue before other creditors. They are paid immediately after the business rescue practitioner’s remuneration and expenses. Even if business rescue is superseded by liquidation, employees retain these preferential rights.</p>
<p>Trade unions and employees have the right to be consulted by the practitioner, and to form a committee of employees’ representatives. Any retrenchments are subject to labour legislation, even if they form part of the business rescue plan.</p><img src="https://counter.theconversation.com/content/128868/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Maleka Femida Cassim does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>There are lots of burning issues raised by the business rescue that haven’t yet been tested in South Africa. Many will no doubt land in the courts.Maleka Femida Cassim, Professor of Company Law, University of PretoriaLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1284702019-12-10T07:24:50Z2019-12-10T07:24:50ZSouth African Airways saga puts spotlight on role of directors<figure><img src="https://images.theconversation.com/files/305642/original/file-20191206-90562-152m1go.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source">Shutterstock</span></span></figcaption></figure><p>The board of South Africa’s national airlines recently took a unanimous decision to go into voluntary business rescue. The step removes the threat of the directors being sued by creditors for reckless trading – for now, at least.</p>
<p>The <a href="https://www.timeslive.co.za/news/south-africa/2019-11-22-we-are-unable-to-fulfil-salary-obligations-on-time-saa-to-staff/">airline told its staff two weeks ago</a> that it wouldn’t be able to pay staff salaries. It had become increasingly clear that the airline was in <a href="https://www.moneyweb.co.za/news/south-africa/its-probably-too-late-to-save-saa/">deep financial trouble</a>. From available evidence – including <a href="https://press-admin.voteda.org/wp-content/uploads/2019/12/Annexure-C-%E2%80%93-Roadmap-to-finalise-Annual-Financial-Statements-AFS-241120192.pdf">information passed to the parliament’s standing committee on public accounts</a> – the airline continued to trade even though it was technically insolvent and unable to pay its creditors. </p>
<p>If it is found that the airline continued to trade in insolvent circumstances, South African Airways could be guilty of reckless or fraudulent trading <a href="https://www.justice.gov.za/legislation/acts/2008-071amended.pdf">under the Companies Act</a>. Fraudulent trading is when a company continues to trade and incurs debts when its directors know there is no chance of it ever being able to pay its debts. This is both a criminal offence and a civil matter. </p>
<p>Reckless trading is where the directors do not know, but should reasonably have known, that the company was unable to pay its creditors. Reckless trading is a civil offence. </p>
<p>These laws apply to state owned enterprises too. Even though the government, as the shareholder of the airline, would have had a say over the board, it is the board that is legally accountable for the solvency of the company. </p>
<p>Breaches of company law have potentially serious legal consequences for the board of directors. Trading in insolvent circumstances means that the directors could be personally liable for the losses sustained by the airline. They could also, at worst, find themselves behind bars if they are found by a court to have traded fraudulently. </p>
<p>But there could perhaps be mitigating factors for the South African Airways board. For instance, there was some uncertainty about whether loan guarantees and additional financial <a href="https://businesstech.co.za/new/business/359039/saa-in-limbo-as-government-considers-bailout/">support</a> from government would be made available to the airline. </p>
<p>Nevertheless, the Companies Act stipulates that the ultimate responsibility for ensuring that a company is solvent falls squarely on the directors – regardless of whether it is state-owned. </p>
<p>The South African Airways saga serves as a warning to directors of other state-owned entities, such as the <a href="https://www.fin24.com/Economy/Eskom/eskom-gets-bailout-funding-now-it-needs-a-rescue-plan-20190726">power utility Eskom</a> and the <a href="https://www.businesslive.co.za/bd/national/2019-10-06-how-bailout-gives-sabc-a-chance-to-get-its-act-together/">South African Broadcasting Corporation</a>, to be as mindful as directors of private companies or public companies of their fiduciary responsibilities. </p>
<p>There are four ways in which directors can be held responsible for reckless or fraudulent trading.</p>
<h2>Four ways directors can be held liable</h2>
<p>First, the directors can be held personally liable for any losses or debts sustained by a company as a consequence of their reckless trading. This means that they are at risk of having to compensate the company out of their own pockets. </p>
<p>In <a href="https://juta.co.za/catalogue/new-derivative-action-under-the-companies-act-the_24068/">my book</a> on company law remedies I explained that the directors could be sued for this compensation <a href="https://journals.co.za/content/journal/10520/EJC-c85af6eb0">by trade unions</a>, or by other stakeholders. They could do this by using what is called the derivative action on the company’s behalf. This a powerful weapon for stakeholders. It empowers them to sue the directors on behalf of the company to recover compensation for the company itself. </p>
<p>Stakeholders may, for example, use the derivative action when the directors are not complying with their legal duties to the company. </p>
<p>For example, the <a href="https://www.businesslive.co.za/fm/fm-fox/2016-06-03-lewis-directors-under-fire/">Lewis Group</a>, a large South African furniture retailer, was recently subjected to derivative proceedings brought against it by a shareholder, David Woollam. He sought to bring the derivative action to hold the Lewis directors accountable for lack of corporate governance and various other matters. He was unsuccessful in his efforts, but the case underscored the potential use of the mechanism.</p>
<p>The derivative action is available in a wide range of countries, including the United Kingdom, the United States, Canada, Australia and New Zealand.</p>
<p>The second way in which directors can be held accountable is by having criminal charges laid against them for fraudulent trading under the Companies Act. The act makes provision for directors to be fined or imprisoned for as long as ten years if they are found to have traded fraudulently. </p>
<p>Thirdly, the Companies Act requires the court to declare directors delinquent if they trade recklessly or fraudulently. A delinquency order has severe consequences. It bars a person from being a director for at least seven years, or even for a lifetime. </p>
<p>Fourthly, creditors can hold the board of directors personally responsible for the company’s debts. They could claim the amounts that the company owes to them from the directors personally. </p>
<h2>Business rescue</h2>
<p>The board of South African Airways has gained some valuable breathing space by passing a resolution to put the airline under business rescue. This could serve to protect the directors from being sued for reckless or fraudulent trading. And it will protect the airline from any attempts by creditors to liquidate the company. </p>
<p>But the initiation of business rescue does not necessarily mean that the airline’s board is free of the consequences if it is found to have violated the Companies Act. This will only become clear as the business rescue attempt unfolds.</p>
<p>If the business rescue is successful, the directors are likely to avoid personal responsibility for trading recklessly or fraudulently. But if the attempts at rescuing the business fail, and the airline has to be put into liquidation, there is a risk that the directors would be held personally liable for the airline’s debts. </p>
<p>Likewise, resignation does not free directors from liability for any reckless trading that took place while they were on the board. </p>
<p>This all shows that the boards of all companies – including state-owned entities – must be careful, and must not allow the company to trade in insolvent circumstances.</p><img src="https://counter.theconversation.com/content/128470/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Maleka Femida Cassim does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>There are at least four ways in which directors can be responsible for reckless or fraudulent trading.Maleka Femida Cassim, Professor of Company Law, University of PretoriaLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1284092019-12-05T13:57:21Z2019-12-05T13:57:21ZSouth African Airways is in business rescue: what it means, and what next<figure><img src="https://images.theconversation.com/files/305402/original/file-20191205-38984-196c94f.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source"> Epa/Udo Weitz</span></span></figcaption></figure><p><em>South African President Cyril Ramaphosa has taken the decision to put South African Airways, the cash-strapped national flag carrier, into voluntary business rescue. Caroline Southey from the Conversation Africa asked Professor Marius Pretorius to explain how the process works.</em></p>
<p><strong>What is a business rescue?</strong></p>
<p>It’s what is known in the European Union as a pre-insolvency procedure – that means a process that’s designed to save a company from being shut down. All countries have their own version of the procedures that need to be applied when a business is in distress. One of the best known ones is the <a href="https://www.uscourts.gov/services-forms/bankruptcy/bankruptcy-basics/chapter-11-bankruptcy-basics">US’s Chapter 11</a>. </p>
<p>South Africa’s process is set out in Chapter 6 of the <a href="https://www.gov.za/sites/default/files/gcis_document/201409/321214210.pdf">Companies Act</a>, which came into effect in 2011. It indicates what needs to be applied when a business is in distress. </p>
<p><strong>What’s the aim?</strong></p>
<p>The aim is to address distress in a business, when it’s not performing. Distress is normally identified when a company is no longer profitable, when it’s not a going concern anymore, when it has major problems. Like a sick person. You have to see a doctor when you’re sick.</p>
<p>The aim is to institute a turnaround – to try to prevent the company from having to go into liquidation, or, in other words, shut down.</p>
<p>In South Africa, a company applies for business rescue under Chapter 6 of the Companies Act. It’s basically a last-ditch attempt to save a business. That’s why it’s called a pre-insolvency process.</p>
<p>It’s understandable that the government is trying to avoid liquidation: if SAA went the route of liquidation rather than rescue, the government would be forced to repay creditors. But in a rescue situation, a moratorium is put on relief payments. Creditors don’t have to be paid immediately. It gives a company a bit of a lifeline while the rescue practitioner works out a plan for the business.</p>
<p>SAA has accumulated unsustainable <a href="http://www.sabcnews.com/sabcnews/saa-has-outstanding-debt-of-over-r20-billion-kingston/">levels of debt.</a></p>
<p><strong>When should business rescue be sought?</strong></p>
<p>The act makes a provision for when a business is in financial distress. It’s then obliged to file for business rescue. This would arise, for example, if a company was unable to meet financial commitments due over the next six months. Under these circumstances, the company is obliged to file for voluntary business rescue. <a href="https://pmg.org.za/committee-meeting/21801/">Research</a> shows that company directors take the voluntary route 90% of the time. The reason for this is that if they don’t, they could face being delinquent directors, making them liable for the company’s debt.</p>
<p><strong>How is a company placed in business rescue?</strong></p>
<p>The directors file through a procedure under the <a href="http://www.cipc.co.za/za/">Companies and Intellectual Properties Commission</a>, which then <a href="http://www.sabcnews.com/sabcnews/les-matuson-appointed-saa-business-rescue-practitioner/">confirms the appointment of a rescue practitioner</a> and licences him or her. There is a full process of accreditation and set of requirements set by various professional bodies for practitioners. They are usually lawyers, accountants or business people. And there are conditions specifying how much experience they must have had, depending on whether they are senior or junior. </p>
<p>The process of appointing the rescue practitioner can take up to five days. Once appointed, the person takes full charge of the company. That means they have the power to make all decisions, including running the company’s finances.</p>
<p>The main aim is for the rescue practitioner to investigate the affairs of the company and ultimately prepare a rescue plan. They have 25 days in which to do this. But normally the rescue practitioner would call a creditors meeting to inform them that he or she is applying for an extension to that time. The creditors must agree to this.</p>
<p>The rescue practitioner must also meet with the employees. </p>
<p>When the rescue practitioner has drawn up a plan for the business, it needs to be presented to the creditors for approval. They must vote on it. It can only go through if 75% are in favour of implementation. Alternatively, they can ask for revisions which the rescue practitioner is obliged to follow up. </p>
<p>If there’s no agreement, the business must go into liquidation, and be shut down. </p>
<p>But if the plan is agreed, the next task is implementation. There’s no particular timeline for this – it can take anything from, say, six months to four years.</p>
<p>Once the plan has been implemented, the company must apply to the Companies and Intellectual Properties Commission to have its status reversed to being a going concern.</p>
<p><strong>What happens to the directors during the process?</strong></p>
<p>Most of the time it’s the directors that got the business into trouble in the first place by making bad decisions. </p>
<p>They are obliged to support the rescue practitioner in whatever he or she requires. Their co-operation is very important. For example, they must supply him or her with information. But they no longer have any powers to make decisions. They will still be paid – though, depending on the plan, this is where cuts are usually made immediately. But this will depend on the rescue practitioner and the plan. </p>
<p><strong>And the employees?</strong></p>
<p>Employees are unfortunately very vulnerable during the process. Quite often you’ll find that the good employees leave because they can find other jobs. Nevertheless, they are also protected. If the company does go into liquidation they get preference and are the first of the unsecured creditors to be paid from the available money.</p>
<p><strong>The airline is a state-owned enterprise. Has one of these ever been put through this process before?</strong></p>
<p>Not that I know of. I believe that this is why there was so much hesitancy to do it. </p>
<p>In late November the trade union Solidarity, which represents mainly white, Afrikaans-speaking employees, <a href="http://www.capetalk.co.za/articles/367720/court-will-have-to-rule-if-saa-is-financially-distressed">asked</a> the Johannesburg High Court to place the airline under business rescue. The union argued that this was the only way to save the airline. </p>
<p>I think it’s doubtful that the airline can be saved. The question you have to ask is this: is there a business? </p>
<p>As soon as this process starts, the business takes a body blow. Nobody trusts it anymore. Nobody wants to take the risk and book tickets because there’s a high risk they will lose their money.</p><img src="https://counter.theconversation.com/content/128409/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Marius Pretorius does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Distress is normally identified when a company is no longer profitable, when it’s not a going concern anymore, when it has major problems.Marius Pretorius, Associate professor in strategy, leadership and turnaround, University of PretoriaLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1078112018-11-29T08:00:34Z2018-11-29T08:00:34ZSouth African taxpayers can’t keep bailing out broken airline<figure><img src="https://images.theconversation.com/files/247730/original/file-20181128-32197-jv769a.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">SAA appears to be in a tail spin.</span> <span class="attribution"><span class="source">EPA/Udo Weitz</span></span></figcaption></figure><p><a href="https://www.dailymaverick.co.za/article/2018-11-28-saa-needs-r21-7bn-just-to-stay-in-the-air-until-mid-2109-failure-a-systemic-threat-to-south-africa/">R21 billion</a>: that’s how much South Africa’s beleaguered national carrier, South African Airways (SAA), says it needs to keep running.</p>
<p>SAA has reached this point in its financial crisis through persistent mismanagement and cronyism, with the SA government as main shareholder refusing to take tough decisions about the company. But such decisions can’t be delayed any longer.</p>
<p><a href="http://www.treasury.gov.za/documents/mtbps/2018/speech/speech.pdf">In theory</a>, it’s the South African government that supports SAA and bails it out in times of need. But in practice, it’s the country’s already struggling taxpayers who foot the bill. And they keep doing so, with no clear plan in sight to stem the airline’s financial haemorrhaging. The Free Market Foundation, an economic and policy think tank, estimates that SAA has already cost taxpayers <a href="https://businesstech.co.za/news/government/282900/government-has-plugged-r57-billion-into-saa-and-counting/">close to R60 billion</a> in the past 20 years.</p>
<p>I <a href="https://www.fin24.com/Budget/sell-saa-it-wont-fly-economist-20181031">have argued</a> for some time that SAA is nothing more than a government vanity project and should be sold. In March 2016, when I first said this, it might have been feasible; then, the airline was still financially viable. That moment has passed as the government kept SAA as a vanity project.</p>
<p>President Cyril Ramaphosa <a href="https://www.businesslive.co.za/bd/national/2018-11-07-cyril-ramaphosa-says-shutting-saa-could-destabilise-other-soes/">says</a> that closing SAA would destabilise other state-owned entities and the broader economy. </p>
<p>The country’s recently appointed finance minister Tito Mboweni disagrees. In his recent medium-term budget policy statement, Mboweni warned that failing state-owned entities are “<a href="http://www.treasury.gov.za/documents/mtbps/2018/speech/speech.pdf">no holy cows</a>” and would be expected to pull their financial weight.</p>
<p>South Africa can’t afford any more delays. Strong players in the continent are eating into the airline’s already weakened base. These include Ethiopia and Kenya’s national carriers as well as minnows like Namibia’s airline.</p>
<p>In the meantime, South Africans taxpayers are caught between a rock and a hard place. The country can’t afford SAA anymore – and can’t afford to close it down. What is the next step, then?</p>
<h2>The only option left for SAA</h2>
<p>I believe there is only one option: an independent cost-benefit analysis into SAA’s continued existence and the possible implications of its sale or closure. This should be an independent process; both SAA and the South African government have vested interests in the outcome.</p>
<p>This would be a first, and its successful completion could set a benchmark for judging the continued financial viability of other problematic state-owned entities like Denel and the South African Broadcasting Corporation.</p>
<p>This is urgent. SAA is not just asking for more money to keep itself airborne. Its chief executive, Vuyani Jarana, <a href="https://www.businesslive.co.za/bd/national/2018-11-27-saa-tells-mps-it-needs-nearly-r17bn-by-march/">has told</a> a parliamentary committee that the airline will not be profitable by 2020, as it initially announced. It now says it will be <a href="https://www.thesouthafrican.com/saa-government-bailout-blown-in-one-month/">profitable by 2021</a>. </p>
<p>One of the reasons it has fallen short is that SAA’s management got its oil price forecasts completely wrong. <a href="https://www.thesouthafrican.com/saa-government-bailout-blown-in-one-month/">It planned</a> for an average oil price of US$ 45 per barrel over. The actual average has turned out to be US$ 75 per barrel.</p>
<p>It does not take a lot of management competence to understand that a single oil price cannot be used in profitability forecasts for a company sensitive to oil price fluctuations, as is the case with an airline. </p>
<p>It has also emerged that senior managers at SAA are earning <a href="https://mg.co.za/article/2018-06-08-00-broke-saa-goes-on-spending-spree">enormous monthly salaries</a> (Jarana, for instance, earns R6.7 million a year). This fact, coupled with obviously chronic financial mismanagement – how else to explain that the airline spent its last government bailout of R5 billion in just one month? – is galling to taxpayers.</p>
<p>During its presentation to Parliament, SAA’s managers offered no alternative plans. It’s a government bailout – or bust. But this isn’t sustainable. An independent assessment is critical if SAA is to be saved from itself; and the country’s reeling taxpayers are to be saved from the airline’s excessive demands.</p><img src="https://counter.theconversation.com/content/107811/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Jannie Rossouw is an NRF-rated researcher and previously received funding from the NRF. On occasion, he is a passenger on SA Airways. </span></em></p>South Africa can’t afford its national airline anymore – nor can it afford to close it down. What’s the next step?Jannie Rossouw, Head of School of Economic & Business Sciences, University of the WitwatersrandLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/863732017-10-25T18:27:53Z2017-10-25T18:27:53ZSouth Africa’s finance minister admits situation is grave: but offers no solutions<figure><img src="https://images.theconversation.com/files/191877/original/file-20171025-25502-ldfp48.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">South Africa's Finance Minister Malusi Gigaba has been forthright in recognising the crises facing the country.</span> <span class="attribution"><span class="source">EPA/Stringer</span></span></figcaption></figure><p>The first <a href="http://www.treasury.gov.za/documents/MTBPS/2017/default.aspx">mid-term budget</a> delivered by South Africa’s newish Finance Minister Malusi Gigaba was always likely to be judged largely on three issues: whether he was able to inspire confidence, what the government plans to do with the crises at the various state owned enterprises and whether he would pronounce definitively on its commitment to firming up a nuclear deal with Russia. </p>
<p>Whatever else Gigaba said was likely to be regarded as extra. </p>
<p>On balance, he did reasonably well on the confidence issue. He spoke clearly and with assurance, even with authority. To be sure, he delivered a lot of flannel. He reminded South Africans of the promises of the National Development Plan and the government’s commitment to Vision 2030; he spoke about the iniquities of the maldistribution of wealth and inequality and the government’s commitment to redistribution; he deplored “the challenges” (that overused word) faced by state owned enterprises, the high level of concentration in the private sector and the need to make the economy more globally competitive. And he inevitably he hailed the urgent need for “radical socio-economic transformation”. Words, words, words, one might say. </p>
<p>Against that, Gigaba’s speech was forthright in recognising the immediate crises facing the country. While stressing the importance of economic growth, he indicated that growth was expected to fall to 0.7% per annum, down from a previous somewhat less miserable estimate of 1.3%. </p>
<p>He recognised that the budget deficit was expected to increase from 4.3% from 3.1%. And he conceded that with lower economic activity government revenue was going to fall: indeed, the consolidated government deficit would climb to 60% of GDP by 2022. </p>
<p>Against these grim statistics, he stressed the need for greater tax morality, expenditure cuts, greater efficiency in government’s supply chain management and increased vigour in fighting corruption in state owned enterprises. And he even managed to say all this without smirking. </p>
<p>While it was important that he made it clear that the government recognises the mess the economy is in, he was extraordinarily light on detail about how it intended to clear it up. </p>
<p>The ratings agencies will doubtless be pleased that Gigaba announced no hike in corporation tax. For its part the African National Congress and its alliance partners would have been equally pleased that he announced no rise in Value Added Tax, which would hit the poor hardest. By the same token, he left it unclear – save by vague commitments to cutting costs – how the increasing gap between revenue and expenditure is to be tackled.</p>
<h2>Raiding the piggy bank</h2>
<p>The biggest news in Gigaba’s speech was his announcement that the government intends to sell a portion of its shares in Telkom to enable a recapitalisation of South African Airways and the South African Post Office. Many would say that he was left with little choice. While he thanked the banks for not pulling the plug on the airline by not demanding repayment of their loans, his raiding of Telkom’s piggy bank was an acknowledgement that no-one else was going to risk their money. </p>
<p>He also addressed the crisis in state owned enterprises by highlighting governance issues. This included the appointment of new boards for the airline as well as the state broadcaster and the need for them to recruit efficient managers and to tighten up governance and accountability. </p>
<p>Fine words, but equally, this was no announcement of the government drawing back from its notion of state owned enterprises as key drivers of the “developmental state”. Their current crises had obscured much that they had achieved, he said, such as the development of a pool of competent state managers. </p>
<p>Many would say that it’s a pity that their competence is not more evident.</p>
<p>If Gigaba said just enough to indicate that the government intends to do something to address the problems faced by state owned enterprises, the most glaring gap in his speech was any firm indication of how to tackle the cesspit of corruption that the state power utility Eskom has become. </p>
<p>Far worse than that were his weasel words about any prospective nuclear deal. </p>
<p>Speculation is rife that President Jacob Zuma is determined to sign off a deal to build nuclear power stations with the Russian nuclear agency, Rosatom, as quickly as possible – a deal which many reckon would bankrupt the country. Yet Gigaba chose not to calm the market’s nerves but to remain as vague as possible. Very deliberately, he chose to repeat a previous statement by Zuma that the signing of any nuclear deal would take estimates of the potential supply and demand for energy into full consideration, and would only proceed on the basis of “affordability”. Nobody is likely to believe that.</p>
<h2>No sign of a change in direction</h2>
<p>So, what’s to be made of this first substantive effort by Gigaba? The good news is that he didn’t try and obscure the grim financial situation that the government is facing. </p>
<p>But the bad news is that despite the waffle about the need for “radical socio-economic transformation”, there was nothing in his speech to indicate that the government is considering a significant change in direction. </p>
<p>Yes, there was the commitment to selling Telkom shares, but that was merely akin to selling the family silver to keep the household finances afloat for a little bit longer. Apart from that, there was no real suggestion that the government will start doing things differently. And there was no indication about how it intends to close the steadily increasing deficit.</p><img src="https://counter.theconversation.com/content/86373/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Roger Southall receives funding from the National Research Foundation. </span></em></p>South Africa’s finance minister was honest about the problems facing the country. But he made no real suggestions that the government will start doing things differently.Roger Southall, Professor of Sociology, University of the WitwatersrandLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/838222017-09-11T19:59:17Z2017-09-11T19:59:17ZSouth Africa needs to sober up to save itself from sickly state-owned enterprises<figure><img src="https://images.theconversation.com/files/185465/original/file-20170911-1336-jvnh8u.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">South Africa needs to decide if it will continue to waste public money on its national carrier, or incur the costs of letting SAA go bankrupt.</span> <span class="attribution"><span class="source">Shutterstock</span></span></figcaption></figure><p><em>The South African government is said to be seriously considering selling its stake in telecommunication firm, Telkom, <a href="https://www.businesslive.co.za/bd/companies/transport-and-tourism/2017-08-23-secret-gigaba-plan-to-rescue-bankrupt-saa-exposed/">in order to save the troubled South African Airways (SAA)</a>. This has brought back debates about what is the right thing to do around the country’s state owned enterprises. Sibonelo Radebe asked Seán Muller to weigh up the options.</em></p>
<p><strong>What does financial support to SAA actually involve?</strong></p>
<p>There are two basic forms of assistance government has provided to <a href="https://theconversation.com/south-africa-must-free-itself-from-the-burden-of-owning-a-national-airline-64004">SAA</a>. The first “government guarantees”, in which the Treasury provides a guarantee to support SAA’s borrowing from private lenders. These guarantees mean that if SAA is unable to pay its debt costs or repay the full loan when required, the Treasury must pay. As of February 2017, SAA held <a href="https://www.timeslive.co.za/sunday-times/business/2017-08-07-gigabas-bid-to-stall-repayment-of-r69bn-saa-loans/">R19.1 billion</a> in government guarantees. These pose a risk to public finances, but strictly speaking do not require any funds immediately.</p>
<p>The second type is a “cash injection”, where Treasury directly transfers cash to SAA. This is what is more commonly known as a “bailout”. </p>
<p>In the current case the lines between these two forms of support are blurred. One of Treasury’s reasons for giving SAA cash is apparently to prevent it defaulting on all debt that is called in by SAA’s creditors.</p>
<p><strong>Is selling a Telkom stake and redirecting the money towards saving SAA a good idea?</strong></p>
<p>There are two aspects to this question. First, is injecting more public money into SAA a good idea? Second, is selling government’s stake in Telkom a good idea? </p>
<p>It is hard to see the case for putting further public money in SAA. At various points it may have made sense to do this in order to stabilise SAA as a public enterprise, or prepare it for large scale privatisation. However, this scenario has been repeated so many times that the argument is no longer credible. </p>
<p>Of course, the government has an obligation to prevent the harm that would result from a state-owned enterprise going bankrupt. The direct effects via SAA’s operations, and indirect effects on the economy and investor sentiment in relation to state owned enterprises, could be severe. The <a href="https://theconversation.com/south-africa-must-free-itself-from-the-burden-of-owning-a-national-airline-64004">failure</a> to implement a successful turnaround strategy at SAA, which appears to be linked to the determination to keep <a href="https://citizen.co.za/news/south-africa/1426649/gordhan-to-fire-saa-chair-dudu-myeni-today/">Dudu Myeni</a> as board chair, has placed South Africans in a bind: either the country wastes public money, or it incurs the costs of letting SAA go bankrupt.</p>
<p>With regards to Telkom, it is useful to remember that government previously committed to only bailout state-owned enterprises using funds raised through the <a href="https://www.ujuh.co.za/nene-2015-medium-term-budget-policy-statement/">sale of state assets</a>. There are two advantages of this approach. First, it focuses minds on the consequences of state owned enterprises failure – as is happening in the case of SAA. Second, it means that the main national budget is not affected, so Treasury can still meet its commitments like the planned budget deficit.</p>
<p>But there is no good case for bailing out SAA. At best, it is simply to avoid an even worse scenario in which SAA’s guarantees are called in by creditors. Wherever the money comes from, the social cost is significant and arguably unjustified.</p>
<p>Some have suggested that there are additional costs because Telkom is now a <a href="https://www.businesslive.co.za/bd/companies/telecoms-and-technology/2017-06-05-telkom-rewards-shareholders-as-net-profit-jumps/">profitable</a> enterprise and represents a government success story, but this is <a href="https://mybroadband.co.za/news/business-telecoms/209176-telkoms-adsl-monopoly-crippled-ecommerce-in-south-africa.html">debatable</a>. South Africa’s ICT development has been unsatisfactorily slow and arguably one reason is that government’s stake in Telkom meant that it ended up protecting a firm with monopoly power in fixed line infrastructure. </p>
<p>Contrary to an increasingly popular narrative, the fact that Telkom has become profitable by moving into the mobile space and slashing employment does not make it either a privatisation, or a state ownership, success story. From this perspective, government selling its stake could be a good thing for ICT development in the medium to long run.</p>
<p><strong>What does the consideration say about ANC’s attitude towards privatisation?</strong></p>
<p>There is an obvious tension between the claim that SAA cannot be privatised, while effectively privatising government’s remaining stake in Telkom. Such <a href="http://www.politicsweb.co.za/documents/economic-transformation-anc-discussion-document-20">inconsistencies</a> are characteristic of ANC policy in the last two decades. This is partly due to differences within the alliance and partly the result of policy incoherence, along with a failure to act on advice and implement decisions. </p>
<p><a href="https://www.gov.za/sites/www.gov.za/files/Executive%20Summary-NDP%202030%20-%20Our%20future%20-%20make%20it%20work.pdf">The National Development Plan</a> and the Presidential <a href="https://www.gov.za/documents/report-presidential-review-committee-prc-state-owned-entities-soes">Review</a> Committee on State-Owned Entities both provided fairly clear direction, but many recommendations appear to be inconvenient for the president and those around him – who appear to see state owned enterprises as vehicles for personal enrichment rather than economic development.</p>
<p><strong>Clearly the Telkom model works. Should it be replicated?</strong></p>
<p>It is actually not at all clear that the Telkom model “works” in the sense of advancing economic growth and development in the broader public interest. It was <a href="http://www.sciencedirect.com/science/article/pii/S0308596105000467">arguably the wrong model</a> for the country’s ICT sector. </p>
<p>However, even if it had been the right model for that sector, simply replicating it would be a bad idea. State ownership, privatisation and regulation strategies need to take into account the characteristics of particular sectors. What works for telecoms will be different to what works for energy or for airlines.</p>
<p><strong>And what do you make of the state of Eskom?</strong></p>
<p>The state of <a href="http://www.eskom.co.za/IR2017/Pages/default.aspx">Eskom</a> is of grave concern. Load shedding and price increases, combined with more energy efficiency options for businesses and consumers, have led to much lower electricity demand than originally forecast. </p>
<p>Meanwhile, Eskom is bringing <a href="https://www.dailymaverick.co.za/article/2016-07-07-medupi-kusile-and-the-massive-costtime-overrun/">massive</a> new coal power stations online that have vastly exceeded their original budgets. The result is that Eskom faces a “<a href="http://www.heraldlive.co.za/business/2017/07/17/eskom-denies-facing-funding-crisis/">death spiral</a>” where it needs to increase prices to prop up revenue and bolster its finances, but doing so leads to customers reducing demand (through increased efficiency and implementing alternative options like decentralised solar power). </p>
<p>Eskom holds up to <a href="http://www.treasury.gov.za/documents/national%20budget/2017/">R350 billion in government guarantees</a> and is in an increasingly precarious situation. If one adds the lingering possibility of an unnecessary and ill-advised nuclear deal into the mix, the fear is that Eskom could end up in a similar state to SAA now. </p>
<p>SAA may be a waste of public funds, but the threat it poses can probably be contained. That would not be true of Eskom. The main debate between many analysts now is not whether a crisis is looming but whether there remains any chance of avoiding it, given repeated failures to make and implement critical policy decisions.</p>
<p><strong>And so, what should happen to SAA and Eskom?</strong></p>
<p>In the absence of a clear developmental mandate for SAA, and it being repeatedly bailed out with public money that could be better used elsewhere, the objective must be to minimise the cost of SAA to citizens: if privatisation is the best option then so be it. Eskom is a much more strategically critical enterprise and its problems are more complex, so privatisation would just create a range of different problems. Each state owned enterprises requires tailor-made solutions but one thing they all require is basic good governance, which is not currently in place.</p><img src="https://counter.theconversation.com/content/83822/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Seán Mfundza Muller previously worked for the Parliamentary Budget Office, during which time he conducted analysis of, and provided advice to members of parliament on, the financing of state-owned enterprises.</span></em></p>There is no good case for bailing out South African Airways, it’s simply a matter of avoiding a potentially catastrophic debt default.Seán Mfundza Muller, Senior Lecturer in Economics, University of JohannesburgLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/790632017-06-12T14:49:44Z2017-06-12T14:49:44ZSouth Africa will need a government of national healing after Zuma leaves<figure><img src="https://images.theconversation.com/files/173378/original/file-20170612-10242-185ycjg.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">A government of national unity has served South Africa well before. It should consider forming another after President Jacob Zuma leaves office.</span> <span class="attribution"><span class="source">Shutterstock</span></span></figcaption></figure><p>South Africa’s march into a democracy was greatly helped by a multiparty <a href="http://www.sahistory.org.za/article/south-african-government-national-unity-gnu-1994-1999">government of national unity</a> established after the 1994 elections. </p>
<p>The government of national unity, which governed from 1994 - 1999, has been largely credited with fostering unity of purpose and relative confidence between previously warring parties to build trust in a joint future. It laid the foundation for healing wounds as well as remarkable socioeconomic development. During the period it governed the country enjoyed an economic growth rate of close to <a href="https://www.idc.co.za/reports/IDC%20R&I%20publication%20-%20Overview%20of%20key%20trends%20in%20SA%20economy%20since%201994.pdf">3% per annum</a>.</p>
<p>Given the damage that’s being caused by President Jacob Zuma’s administration since he assumed power in <a href="https://mg.co.za/article/2009-05-09-zuma-takes-the-oath">2009</a>, the country will need elements of a government of national unity when he goes. </p>
<p>The fact that South Africa is in <a href="https://theconversation.com/south-africas-in-a-recession-heres-what-that-means-78953">recession</a> is only the latest in a growing list of Zuma-induced catastrophes. Others include credit rating agencies <a href="https://theconversation.com/what-a-downgrade-means-for-south-africa-and-what-it-can-do-about-it-75704">downgrading</a> South Africa. Their decision was linked to a cabinet reshuffle widely seen as an attempt to <a href="http://www.timeslive.co.za/politics/2017/03/31/Zuma-reshuffle-an-act-of-%E2%80%98complete-state-capture%E2%80%99-%E2%80%93-opposition">capture key state institutions</a>.</p>
<p>The state capture allegations have been corroborated by a number of credible parties including the former <a href="https://mg.co.za/article/2016-11-02-breaking-read-the-full-state-capture-report/">Public Protector</a>, the <a href="http://ewn.co.za/2017/05/18/sacc-disconcerted-by-state-capture-revelations">South African Council of Churches</a> as well as a group of academics who produced a report titled<a href="http://pari.org.za/betrayal-promise-report/"> Betrayal of the promise: How South Africa is stolen</a>. </p>
<p>These reports make it clear that high levels of corruption are at the root of the economic crisis gripping the country. Corruption has driven away investment, and as a result economic growth has suffered. It has also led to an erosion of trust in the government. </p>
<p>It’s therefore necessary to start debating what happens when Zuma goes. South Africa will need a government of national healing, administered by a government of national unity. This is the only way in which its citizens will be able to learn to trust one another again, as they did after 1994. </p>
<h2>Healing will be needed</h2>
<p>Governments of national unity have served some countries, including South Africa, well. Israel had several <a href="http://www.washingtoninstitute.org/policy-analysis/view/israels-national-unity-governments-a-retrospective">governments of national unity</a>, while Kenya had one from <a href="http://www.responsibilitytoprotect.org/index.php/crises/crisis-in-kenya">2008 to 2013</a>. Greece had a government of national unity in <a href="https://www.theguardian.com/world/2011/nov/04/greek-business-community-government-unity">2011</a> to help the country deal with <a href="https://www.theguardian.com/world/2011/nov/06/papandreou-greek-leaders-unity-deal">the aftermath</a> of the international financial crisis.</p>
<p>A South African government of national unity should include representatives of all major political parties in parliament. Its role should be to:</p>
<ul>
<li><p>focus on restoring confidence in government institutions and in the government itself, </p></li>
<li><p>restoring trust among people, and </p></li>
<li><p>eradicating any form of corruption which, in turn, will restore trust in the government.</p></li>
</ul>
<p>National healing requires sacrifices from all citizens to ensure a better future. A government that represented all key players in society, run by leaders appointed for their technical expertise rather than their political party loyalty, would be much better placed to ask people to make these sacrifices.</p>
<p>The question of a wealth tax is a good example. Already on the <a href="http://www.taxcom.org.za/docs/20170425%20Call%20for%20submissions%20on%20wealth%20taxes.pdf">table for debate </a>, a wealth tax could work well if it was presented as a contribution to the interests of the country has a whole. </p>
<p>But people would need an assurance that the money would be put to good use and not wasted. Only a freshly minted government could provide this.</p>
<p>A wealth tax could play an important role in national healing if it was implemented with the necessary circumspection. Given the fragility of the country’s economy, a number of key considerations would need to be taken on board. These would include whether there should be a once-off restitution tax for wealth redistribution, or an annual wealth tax.</p>
<h2>Successes since 1994</h2>
<p>The new government could draw on the considerable successes the South African government has achieved since 1994. This includes the fact that millions more people have <a href="http://www.gov.za/speeches/community-survey-2016-results-1-jul-2016-0000">basic services</a> such as electricity and running water. The percentage of households with electricity has <a href="http://www.enca.com/south-africa/stats-show-that-nearly-90-percent-of-sa-households-have-electricity-says-eskom">increased</a> from 58% to 90% while those with access to running water has more than doubled from 7,2 million in 1995 to <a href="https://www.dailymaverick.co.za/article/2016-07-04-how-do-we-live-annual-survey-reveals-the-improvements-and-hardships-ordinary-south-africans-face/#.WT5kpmiGPIU">15,2 million</a>.</p>
<p>Institutions have been built to safeguard the country’s democracy. South Africa boasts an <a href="http://constitutionallyspeaking.co.za/statement-by-chief-justice-and-heads-of-court-on-rule-of-law/">independent judiciary</a>, despite attempts by the Zuma administration to undermine it. And the country’s <a href="https://www.resbank.co.za/AboutUs/Mandate/Pages/Mandate-Home.aspx">central bank</a> remains independent.</p>
<p>On top of this, there’s the goodwill of millions of South Africans with dreams for a better future for their children.</p>
<h2>Dreams of a post-Zuma era</h2>
<p>The government of national healing would have to create conditions for sustained economic growth, particularly a reduction in the country’s <a href="http://www.timeslive.co.za/local/2017/06/01/SA%E2%80%99s-unemployment-rate-hits-a-13-year-high">high unemployment rate</a>. Strong but caring leadership will be needed to deal with a number of sticky issues that are limiting investment and job creation.</p>
<p>For example, the country needs to make it easy and attractive for entrepreneurs to do business. This will require a relaxation of labour laws, particularly for small business that suffer under the burden of cumbersome regulation. At the same time the removal of red tape for small and medium enterprises would help greatly.</p>
<p>Bold decisions, including privatisation, would also need to be made to deal with the country’s decaying state owned enterprises. Most, such as <a href="http://www.timeslive.co.za/local/2017/05/15/SAA-projects-net-loss-of-R853-million">South African Airways</a> and the national power utility <a href="http://amabhungane.co.za/article/2017-06-09-guptaleaks-how-eskom-was-captured">Eskom</a>, have become an unnecessarily heavy burden on the state.</p>
<p>Addressing the crisis in primary and secondary education would also have to be a priority. And devolving powers to the provinces from the central government would be another. </p>
<p>South Africa has exciting prospects and can look forward to rapid economic growth after the Zuma administration. South Africans need to start dreaming, planning and working towards a government of national healing.</p><img src="https://counter.theconversation.com/content/79063/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Jannie Rossouw is an NRF-rated researcher and receives funding from the NRF. </span></em></p>South Africa needs to start thinking about life after President Jacob Zuma. Given the damage that he’s done, serious thought should be given to forming a government of national unity.Jannie Rossouw, Head of School of Economic & Business Sciences, University of the WitwatersrandLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/724312017-02-06T14:54:18Z2017-02-06T14:54:18ZSouth Africa’s 2017 budget: tough economic times require tough decisions<figure><img src="https://images.theconversation.com/files/155613/original/image-20170206-23500-1nvnvef.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">South Africa's Finance Minister Pravin Gordhan has a tough job of rekindling a weak economy.</span> <span class="attribution"><span class="source">REUTERS/Siphiwe Sibeko</span></span></figcaption></figure><p><em>South Africa’s 2017/18 budget will have to be bold to pull the country out of the prevailing economic crisis. Economic growth has stalled and the threat of a credit rating downgrade still looms large. The Conversation Africa’s business and economy editor Sibonelo Radebe asked Jannie Rossouw to tease out critical issues that must be addressed in the upcoming budget.</em></p>
<p><strong>What should South Africans expect from the 2017 budget speech?</strong></p>
<p>The Minister of Finance made it clear in last year’s <a href="http://www.treasury.gov.za/documents/mtbps/2016/default.aspx">medium term budget</a> that tax increases will be needed to ensure that government revenue rises by R28 billion for the 2017/18 tax year. As South Africa is currently suffering very low economic growth, this additional income can only be raised by higher taxes and through bracket creep as a result of inflation. Bracket creep happens when taxpayers’ income increases as a result of inflation, but concomitant tax relief isn’t granted. This pushes them into higher tax brackets. </p>
<p>South Africans should expect a few things on the tax front. They are unlikely to get tax relief to offset bracket creep, and they are likely to face increases on consumption products such as alcohol, tobacco, soft drinks and fuel. It’s also highly likely that the government will announce some form of sugar tax in this budget. </p>
<p>But all of this won’t be enough to fund the government’s income requirements. This leaves it with one of three options: an increase in Value Added Tax (VAT); an increase in company tax; or an increase in personal income tax. </p>
<p>Increases in company and personal tax seem more likely.</p>
<p><strong>So there will be significant movement on the tax front?</strong></p>
<p>There is <a href="http://www.fin24.com/Opinion/sas-tax-dilemma-hiking-vat-vs-wealth-taxes-20170127">widespread speculation</a> that VAT might go up. But this will place a heavy extra burden on poor people and households. My first choice is for a smaller civil service which will lead to savings in expenditure, eliminating the need for tax increase. </p>
<p>If tax increases are indeed unavoidable, my preference is for higher personal income tax and for higher company tax rather than an increase in VAT. </p>
<p>But I can only support higher personal income tax and higher company tax on condition that corruption is reigned in, wasteful expenditure is pushed back and all possible areas for savings are considered. This would be helped if, for example, President Jacob Zuma’s <a href="https://mybroadband.co.za/news/government/156785-jacob-zumas-new-r4-billion-presidential-jet-back-on-after-old-plane-breaks-down">proposed presidential jet</a> was canned and politicians were forced to drive cheaper cars.</p>
<p><strong>What impact will the prevailing political environment have on the budget speech?</strong></p>
<p>Infighting in the African National Congress (ANC) has raised questions about whether the Minister of Finance Pravin Gordhan’s <a href="http://www.timeslive.co.za/politics/2017/01/21/%E2%80%98Cabinet-reshuffle-imminent%E2%80%99-%E2%80%93-plan-to-get-Gordhan-out-and-replace-him-with-Nkosazana-Zuma%E2%80%9A-COPE-charges">position is in jeopardy</a>. There have been persistent <a href="http://www.timeslive.co.za/sundaytimes/stnews/2017/01/29/From-Saxonwold-shebeen-to-parliament-Molefe-set-for-comeback1">rumours</a> that he may be removed from the portfolio. But he is viewed as a “safe pair of hands” by the international investment community whose capital is necessary for investment in South Africa to stimulate economic growth. He is also viewed as a “safe pair of hands” by the credit rating agencies. </p>
<p>If the minister is removed, South Africa’s credit rating will be downgraded to junk status. This will result in higher interest rates to reflect increased risk which in turn will raise the government’s funding needs and put additional pressure on the fiscus.</p>
<p><strong>The state owned enterprises landscape has become volatile. What should the minister do in this space?</strong></p>
<p>It’s time the government reconsidered its ownership of state-owned enterprises. Many of these place heavy financial burdens on the fiscus and there’s little prospect of turning them to <a href="http://www.gov.za/speeches/government-continues-address-challenges-facing-state-owned-enterprises-26-nov-2015-0000">sustained profitability</a>. South African Airways comes to mind. In my view the government should simply give it away, as it has no net value and <a href="http://www.gov.za/speeches/government-continues-address-challenges-facing-state-owned-enterprises-26-nov-2015-0000">will not fly profitably</a> for many years to come. By giving it away the new owner can rid the company of its <a href="http://www.sabc.co.za/news/a/9a86e9804a9c13379dd7bda65ed2c195/There-are-problems-between-SAA-and-pilots:-Myeni">incompetent management</a> and install managers who can return it to profitability.</p>
<p><strong>Economic growth has almost stagnated. What should the minister do to address that situation?</strong></p>
<p>He should announce initiatives to deregulate the economy in the interests of easier business activity because South Africa suffers “<a href="http://www.scielo.org.za/scielo.php?script=sci_abstract&pid=S0041-47512016000200003">bureaucratic oversupply</a>”. He should also rein in <a href="http://www.scielo.org.za/scielo.php?script=sci_abstract&pid=S0041-47512016000200003">the size of the civil service</a>. It employs too many people, placing a heavy burden on the economy.</p>
<p>These two initiatives will be a good start. But there are many more things that should happen although they are not all under the control of the Minister of Finance. These could include cutting the size of the cabinet and revising new visa regulations – particularly the <a href="http://www.news24.com/SouthAfrica/News/unabridged-birth-certificate-travel-rule-scrapped-20160205">burdensome</a> birth certificates requirement – to boost tourism.</p>
<p><strong>What can we expect from the higher education funding arena?</strong></p>
<p>In a year that the government is really <a href="http://www.fin24.com/Economy/who-will-feel-tax-pain-in-gordhans-budget-2017-20170129">pressurised for revenue</a>, it will be difficult to make provision for substantial increases in expenditure on education. The entire value proposition of education expenditure across the board should be revisited <a href="http://data.worldbank.org/indicator/SE.XPD.TOTL.GD.ZS">given how much</a> – relative to the GDP – the country spends on primary and secondary education.</p>
<p>It might be possible to show savings in expenditure on primary and secondary education without jeopardising standards or delivery. To the contrary, a proper review might result in better quality and delivery with less funding needs. This would release funds for tertiary education.</p><img src="https://counter.theconversation.com/content/72431/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Jannie Rossouw is a C-rated researcher and receives funding from the National Research Foundation. </span></em></p>With stalled economic growth and threats of credit rating downgrade, South Africa’s 2017/18 budget will need to dig deep to foster recovery.Jannie Rossouw, Head of School of Economic & Business Sciences, University of the WitwatersrandLicensed as Creative Commons – attribution, no derivatives.