13 June 2001
In my Budget Speech on the 1st of June 2001, I indicated I was still awaiting a report from Transnet concerning SAA. I have since received the report from Transnet and have briefed Cabinet which has endorsed a course of action. I am now in a position to respond to the issues with the full authority of Cabinet.
South African Airways is the national flag carrier, with the majority ownership in SAA held by the State, exercised through Transnet. Thus South Africa's citizens and taxpayers have a right to know what has been going on in South African Airways.
The Minister of Public Enterprises represents government's shareholder interest in SOEs. This is a particularly important responsibility that I take very seriously and government prides itself on subscribing to global best practice on corporate governance, especially because many of these SOEs operate globally. Any collapse in corporate governance at enterprise levels have to be raised publicly and decisive action demanded of the responsible Boards.
It has now become clear that since 1998 there has been a systematic erosion of corporate governance at SAA. I will not address the financial status of SAA today as we still await the audited financial statements. Let me focus instead on four issues:
With regard to Mr Andrews' appointment, the Transnet Board on the 8th of May 1988 resolved that 'the process followed to recruit an Executive Official for South African Airways is hereby approved' and thus 'the Chairman, Managing Director, Deputy Managing Director and Mr Cooper are hereby appointed a committee to select and appoint the successful candidate, finalise the salary package and conditions of employment and any other formalities necessary for the appointment . . . .'
At the time of Andrews' appointment, SAA was a division of Transnet and the responsibility for such an appointment resided with Transnet.
On the 27th of May 1998 Mr Coleman Andrews and the former MD of Transnet, Mr Saki Macozoma, entered into a contract for professional services. The conclusion of this agreement was not in accordance with the process outlined in the above resolution as the appointment committee never met, and therefore had no sight of the terms and conditions of appointment of Mr Andrews.
After the incorporation of SAA in April 1999, a second contract, titled "Professional Service and Confidentiality Agreement" was entered into on the 24th of July 1999 between Mr Andrews and Transnet Pty Ltd, represented by the former MD of Transnet. Again, the Transnet remuneration committee and the SAA remuneration committee were not part of this process. These amendments related to Mr Andrews giving up his entitlement of USD 3 million "long term preference fees" and SAA committing to sell to Mr Andrews 18 million shares in SAA at 1 cent per share.
As recently as the 26th of January 2000 a third contract was entered into obliging SAA to provide Mr Andrews within 30 days of 26 January 2000 the same number of shares on identical terms cited in 24 July 1999. This agreement also contemplated the possibility of granting Mr Andrews cash compensation in lieu of shares. Again, the agreement was signed by the former MD of Transnet without the knowledge or participation of either Transnet or SAA's remuneration committees. The Board of Transnet has confirmed that at no point in the exercise was the former MD granted the authority to enter into such contracts.
The implications of the contract only emerged in July 2000 when Mr Andrews claimed that SAA was in default of its obligations regarding the shares, and threatened his resignation. On the 13th of July 2000, the SAA Board resolved to pay Mr Andrews the cash value of the 18 million shares in order to avert his resignation. Concerns were then expressed by both Mr Roy Anderson, the Chairman of the remuneration committee of SAA and Dr Conrad Strauss, the Chairman of the remuneration committee of Transnet about the possible conditions of employment of Mr Andrews, including his remuneration. At this juncture, the conditions of employment of Mr Andrews were not fully known by the above members of the respective boards of SAA and Transnet. It was only at a Transnet remuneration committee meeting on the 21st of July 2000 that the committee reluctantly resolved to ratify the employment agreement with Mr Andrews, noting that they were legally compelled to do so.
After several futile attempts by the Transnet Board to obtain a copy of Mr Andrews' contract, the Chairperson of the Transnet Board approached me as Minister to assist. After a meeting on the 3rd of October 2000, attended by Ministers Omar, Erwin and myself, together with representatives from Transnet, that the former MD of Transnet agreed to provide Mr Andrews' employment contract to the Board of Transnet for the first time, approximately two and a half years after Mr Andrews had been appointed.
The former MD of Transnet has previously stated that the appointment of Mr Andrews and his conditions of engagement were discussed and supported at the "highest level" in Government. Whilst Government is consulted on strategic appointments in SOEs as shareholder, we do not get involved in the discussions of remuneration packages, etc. as this is the task of the remuneration committees of the respective Boards.
Following a meeting in Zurich February 2001 between Transnet and the SAair Group it was resolved that Mr Andre Viljoen should be appointed as Chief Executive Designate to prepare to take over from Mr Andrews, once his contract had come to an end in June 2002. Mr Andrews, once informed of the decision, indicated that he found the proposal of a Chief Executive Designate unworkable, as it could result in confused lines of management responsibility in SAA, and proposed the early termination of his contract, as per the conditions included in his existing contract. These, in summary, are the pertinent facts relating to the appointment and the termination of services of Mr Coleman Andrews.
From the above, it is quite apparent that the former MD of Transnet did not have the authority of the Board of Transnet or subsequently the Board of SAA, to enter into the various contracts with Mr Andrews. Further, it is still unclear to me, even at this juncture, as to why the respective boards did not raise concerns earlier. Whilst they were unsighted of the actual content of the contractual agreement, they must have been aware of the payments made to Mr Andrews much earlier, as this should have been reflected in the financial reports tabled to the SAA Board. I am still awaiting an urgent response to this matter from Transnet and SAA.
For the record, Mr Andrews has earned R232,2 million for the period June 1998 to April 2001, inclusive of his termination package. This amount comprised a salary and bonus totaling R99,8 million, payment in lieu of shares totaling R58,6 million and a termination package totaling R73,8 million. I am not yet in a position to comment whether SAA received value for money from Mr Andrews as we still await SAA's financial results.
Since Mr Andrews' appointment, a large number of consultants assisted Mr Andrews at SAA. For the period from 1998 to the 31st of March 2001, total payments made to consultants was R243,1 million. The largest service provider during this period was Bain & Company who earned R208,9 million. The majority of these appointments did not comply with company tender processes. No performance measures were put in place to assess the performance of these consultants and yet Bain received performance-related fees determined by Mr Andrews, which the internal auditors were unable to audit. It needs to be pointed out that Mr Andrews was a founding member of Bain Capital, a material fact not disclosed to the Board at the time of their initial appointment. SAA's external auditors of SAA, Deloitte & Touche, requested that Mr Andrews' actions in the appointment of consultants be ratified by the former MD of Transnet, before they could signoff on the financial statements for SAA for the 1999 financial year. It is unclear as to why the external auditor sought a signoff from the former MD of Transnet, as his responsibilities at SAA were confined to that of a non-executive director with no additional delegated powers delegated to him by the Board of SAA.
Soon after the appointment of Mr Andrews in June 1998, he also appointed a large number of expatriates to fill key positions of leadership in SAA. In fact, the expatriates formed the core leadership of SAA for the period 1998 to 31 March 2001. Nine expatriates were paid R118 million over this period. The conditions of engagement of these expatriates were determined by Mr Andrews and not by the remuneration committee of SAA. The external auditors in reviewing the financial statements of SAA for 1999 again queried this arrangement and required that the former MD ratify these appointments, including the packages provided, prior to the signoff of the financials of SAA. Further, we have been advised that the expatriates received significant performance related bonuses awarded by Mr Andrews in the absence of any auditable performance measures being put into place. It does appear that this litany of breeches of corporate governance was informed by Mr Andrews belief that he could report directly to the former MD of Transnet, in spite of the existence of the SAA Board. This was confirmed in a letter from Mr Coleman Andrews to the former MD of Transnet in June 1998.
A further problem with corporate governance emerged in early 2000, when Mr Mafika Mkwanazi, the current MD of Transnet, resigned as Chairman of South African Airways. At the time, he had sited work pressure at Transnet. It was subsequently established that the parallel process of decision making in SAA as outlined above had resulted in the neutering of the SAA Board to a point where he had felt it was best to step down. The former MD then proceeded to appoint himself as the Chairman of SAA, without any consultation with the shareholder. This is generally unprecedented in the corporate world. At the very least this would have required a resolution from the Transnet Board. When this matter was brought to my attention as the Minister responsible for Transnet, I advised that I was not in a position to support the resignation of Mr Mkwanazi and advised the Chairperson of Transnet to follow the correct procedure in selecting a new Chairperson for SAA.
Even more bizarre was Mr Phillipe Bruggiser's, the former Chief Executive of SairGroup, letter to President Mbeki requesting that the former MD of Transnet be appointed as the Executive Chairman of SAA. This was presented as a negotiating position on their part regarding their 10% call option in SAA. Following the departure of Mr Bruggiser, I met with the senior leadership of SairGroup in Zurich, who dismissed this as a private view of Mr Bruggiser that had never been discussed at a SairGroup Board level, let alone agreed upon.
Let me refer to Veer.com. On the 30th of October 2000 an application was made to the South African Reserve Bank by legal counsel for SAA seeking approval to establish an offshore company in New York, called Veer.Com. In the submission it was stated that "SAA has obtained the approval of the Minister of Public Enterprises, MrJeff Radebe, in accordance with the provisions of section 54 of the Public Finance Management Act, 1999 and will, in accordance with the provisions of that section, be notifying the Minister of Finance and the Department of Finance of its proposed establishment of Veer and of its intention to undertake the business." I had no knowledge of an entity called Veer, nor was I approached to grant such approval as is required in terms of the PFMA. This effectively amounts to fraudulent misrepresentation.
The first approach to me on this matter was made on the 11th of December 2000, when Mr Bheki Sibiya and Mr Andrews briefed me on the concept of Veer. Even at this briefing, no request was sought from me to approve the establishment of Veer. To this date no formal approach has been made to me seeking the approval for the establishment of Veer. The SAA Board has subsequently terminated the Veer.Com project on the basis of concerns about the business case for Veer. It must be pointed out however that approximately R106 million was spent on this project prior to its termination. I have requested from Transnet a clear indication of how this situation could have arisen and the actions that are proposed to deal with the incurring of this fruitless expenditure.
Since 1994, we have constantly focused on the need to improve governance at SOEs. The corporate governance protocol for SOEs was endorsed by Cabinet.in 1997. Shareholder compacts with the key state owned enterprises, including Transnet, to ensure accountability for actions taken at an enterprise level and a clear delineation of responsibilities and functions between Government as a shareholder, the Boards of state owned enterprises and the executive management of SOEs have been agreed to. In response to these concerns government appointed Mr Don Ncube as the non-executive chairperson of South African Airways, with an explicit mandate to clean up the problems at SAA. Further, I have issued a directive to all state owned enterprises that there should be full disclosure of all benefits including the remuneration, payable to all executive and non- executive board members in there annual financial reports.
Should current investigations at SAA and Transnet reveal that there have been contraventions of the Company's Act and the Public Finance Management Act, appropriate action will be taken against the parties and individuals concerned.
Cabinet this morning expressed its outrage at the situation in SAA and fully endorsed the actions that have been taken to date. Furthermore, a committee of Ministers has been mandated to speed up further investigations on this matter. Cabinet wishes to assure Parliament and South Africa that decisive action will be taken against parties or individuals, whoever they may be, who are found guilty of acting improperly.
In conclusion, let the facts at SAA and government's actions pertaining to SAA speak for themselves. Significant work still needs to be done to improve corporate governance at state owned enterprises, and we are ready for the task that confronts us on this front.
I thank you