After the Bell: Gordhan’s blunders on the runway to the failed SAA privatisation deal

Following the announcement by Public Enterprises Minister Pravin Gordhan that the Takatso transaction had been cancelled, several pertinent questions arise: Who is to blame? What does it mean for SAA? What does it mean for future privatisations? 

Oh, one thing. Did I write “privatisation”? My bad. That’s not what I meant. We don’t use such an ugly word in public any more. What I meant was a “public-private partnership”. This is not the process of the state admitting failure and dumping its badly run hot potatoes into the private sector’s lap. God forbid. 

Anyway, assigning blame is usually pretty difficult, but in this case, it’s easy: the blame falls squarely on Gordhan. At each stage of the process, Gordhan had crucial decisions to make and he consistently made the wrong ones. That’s easy to say in retrospect; success in governing is often a marginal affair. 

Let’s go through those decisions. Right at the start of the process, the government decided that the political cost of pumping billions into SAA was (at last) not sustainable, so the idea was to pass that responsibility on to the private sector. Sorry. I mean, enter into a public-private partnership. 

Rand Merchant Bank (RMB) was appointed to identify possible buyers, which it duly did. It’s a safe guess that the demands of the potential partners were steep. At the very least, they would want more than 50% of the equity; nobody is going to take over a state asset in such deep doo-doo without control. It’s inconceivable that RMB would not have told Gordhan that. 

At this point, in my opinion, Gordhan should have folded. One of the first rules of Texas hold ’em poker is that if your hole cards are not of high value, run away, because the chances are someone else at the table is holding better cards. But Gordhan was of the view that the government could and should retain a majority stake. So, all the work RMB did was for nought and a new solution had to be found. 

At this point, members of what was to become the Takatso consortium expressed an interest in Mango. It appears that through some back-manoeuvring, Gordhan convinced the consortium to go for the mother ship rather than the offspring that it wanted. We don’t know this for sure; it’s just a rumour. 

The reason we don’t know this is that Gordhan was at this point bending a whole bunch of rules to make the deal happen. The reason he was bending the rules was desperation. The process was taking so long that SAA was nose-diving, helped by the dire situation for airlines around the world caused by the Covid-19 pandemic. 

In what must have been something of a panic, Gordhan signed an agreement with Takatso, selling SAA for the princely sum of R51 and the promise of an “agterskot” of R3-billion which would be paid if the consortium could get the airline back on its feet. This was kept secret for almost a year, but clearly the Treasury was increasingly uncomfortable about the deal. Opposition was also building among politicians in Parliament whom Gordhan was trying to prevent from revealing the details of the deal.

But by this time SAA, now solidly bankrupt, was in the hands of a business rescue consortium, which did what should have happened years earlier: it fired most of the staff. Hard decision, but if you don’t do it, you risk the entire enterprise.

The irony here is that when the company did emerge from business rescue, just in time for a turnaround in the global tourism market, it was in much better shape than it had been for years, because that crippling staff bill had been substantially reduced and the government had paid off around R15-billion in debt. Ironically, but not surprisingly, that made the deal with Takatso more appealing from the buyer’s point of view. The consortium was now buying not a huge problem that it would have to fix, but an asset with some value where most of the heavy lifting had been done. If managed correctly, SAA could bounce back. 

Much to the credit of SAA’s new management, the airline’s financial position, while precarious, might be sustainable. In December, John Lamola (ridiculously, still the interim CEO after being in the job for a year) said that SAA was “in a healthier financial position than it has been in several years”. 

The audited financial results of the year 2022/23 showed that the airline had the strongest balance sheet since its last profit declaration in 2011. 

“Since last year, the airline has been running on financial resources generated from its own operations and management innovations,” Lamola said. Turns out he was a trifle optimistic and the airline reported a loss for the 2023 financial year when the results were finally — only recently — announced.

In the interim, the problem with this announcement was that it made the deal that Gordhan cut with Takatso at the lowest point in the airline’s history look very favourable. And that made Gordhan even keener to keep the details secret. Unfortunately, his director-general, Kgathatso Tlhakudi, was starting to question the deal. So Gordhan fired him. Mistake.

Tlhakudi then became, I suspect, an informant for the Portfolio Committee on Public Enterprises. I assume this is the case because, in the committee’s triumphant announcement cheering the termination of the Takatso deal, it cited Tlhakudi’s objections and endorsed his call for Gordhan to be investigated. Honestly, that really would be a horrible outcome; for all his missteps, Gordhan’s intentions were, I suspect, good all along, even if the decisions were, in my opinion, wrong.

I also have some sympathy with Gordhan’s position on Tlhakudi. The former DG’s notion that SAA was in better condition than many people thought was probably right. But his idea that the government was selling assets worth R7-billion to R10-billion for R51 is direct from Mars. I find this often with government representatives: they just aren’t living in the real world. Anyway, Tlhakudi was pushing on an open door; the Portfolio Committee on Public Enterprises didn’t want to accept that SAA’s position was precarious — a hard truth the government has been unable to accept for years. 

At this point, Gordhan once again did the wrong thing: he tried to get the Portfolio Committee on Public Enterprises back onside by reformulating the deal and increasing the sale price. Takatso tried to gently point out that it had signed a legally binding deal. The consortium must have been having second thoughts, as you would if the vendor suddenly increased the price after the deal was signed. 

Takatso had another problem because the Competition Commission, in its unbounded and infinite wisdom, had forbidden the involvement of people who actually know something about airlines — Global Aviation, the operator of low-cost airline Lift — from participating in the consortium.

I assume Takatso at this point walked away and the deal collapsed.

So what is the outcome of this extremely unfortunate turn of events? Well, for the government, it’s really bad. The whole theory of the government-business partnership rests on a foundation of understanding and trust. Changing the price of a deal after you have signed a contract, in whatever circumstances, is — how should we put this? — not good. 

All of the government’s future attempts at dumping its hot potatoes in private sector laps will rely on the government keeping its word, being able to execute sensibly and quickly, and politicians trusting and understanding what the department is doing and why. Not one of these things happened in this case. 

As for SAA, I suspect this might be good news, because either the government is going to have to pump more money into the business just before an election, which it is probably not going to do, or it is going to have to get an international airline to buy SAA pronto. Effectively, the potential partners that RMB suggested right at the start of the process could have a second bite at the cherry. The question is whether the government has the will and the skill to get this done fast. 

Here’s hoping. DM