SOUTH AFRICAN AIRWAYS BILL, 2006 Select Committee on Labour and Public Enterprises, Cape Town 14 November 2006 Use balance scorecard format and show measurement For DPE strategy analyse measurement – constraints, shifts and focus for remaining period Input in SOE teams to be reflected in scorecards

Table of Contents Background Introduction The Bill Implications of the Bill Conclusion

Background In 2004 the Minister of Public Enterprises approved Transnet’s four-point turn-around strategy to focus on core freight services, namely the provision of rail, ports and pipeline The four-point turn-around strategy entails the disposal of non core businesses, which will help Transnet management focus on turning the company around into a focused freight logistics company South African Airways (Pty) Ltd (“SAA”) is not core to Transnet’s freight businesses

Background (cont.) In addition, due to the volatility of the airline industry and the need to assist SAA to strengthen its balance sheet, it was decided that SAA should be separated from Transnet The intention is that SAA should be a stand-alone State-Owned Enterprise (“SOE”) reporting directly to the Minister of Public Enterprises On 26 July 2006 Cabinet endorsed the separation of SAA

Introduction As a stand-alone SOE, SAA will report directly to Government As a national airline SAA will provide critical tourism and business links that will assist in creating international hubs in South Africa Having a national airline in this role is not unique to South Africa and is the case in countries such as Australia, New Zealand, Malaysia, Singapore, United Arab Emirates and China A national airline that will create hubs in South Africa is part of Government’s new imperative to better leverage its SOE / agencies for the greater benefit of the economy and the country’s citizens

Introduction On 12 June 2006 the Government (represented by the Minister of Public Enterprises) signed an agreement with Transnet to separate SAA from Transnet and for Government to acquire the SAA shareholding from Transnet The salient features of the agreement are the following: All of Transnet’s assets, rights, liabilities and obligations in SAA will be transferred to Government; Ownership, risk and benefit will be passed to Government effective from 31 March 2006; Government will replace Transnet as guarantor in respect of various guarantees issued to third parties lenders and the International Air Services Council; Transnet will provide SAA with a R1 billion facility and Transnet will act as banker of last report providing SAA with access to monies required until the Transaction is finalised and Government has actually replaced Transnet as guarantor; Between signature date and closing date, the Department of Public Enterprises and Transnet will jointly carry oversight responsibilities in respect of SAA to ensure efficient handover of direct control over SAA The agreement is subject to suspensive conditions, which include the enactment of legislative mandate to effect the transfer (i.e. the Bill)

The Bill On 24 October 2006 Cabinet approved the draft SAA Bill, which was certified by the Chief State Law Advisor on 10 November 2006 The purpose of the Bill is to provide for - The transfer of Transnet’s shares, interests and claims in SAA to Government; The (eventaul) conversion of SAA into a public company with share capital; and The listing of SAA as a major public entity in Schedule 2 to the PFMA The Bill records that the main object of SAA is to engage in passenger airline and cargo transport services, air charter services and other related services SAA’s borrowing powers are subject to the PFMA, similar to other public entities Issue: deal flow – sufficient similar type transactions in future for proper transaction programme or will it be ad-hoc transactions To Do: -list no. of 54(2) transactions -detail of exercising reserved shareholder rights (InfraCo, Aerostructures, PBMR) DPE specific transactions (Continental investments)

Implications of the Bill The Bill authorises Government to acquire the shareholding in SAA from Government The eventual conversion of SAA into a public company will enable SAA to access funding from the private sector easily since public companies are generally recognised as the optimal corporate form to access capital markets SAA will continue to run its business as usual SAA will be listed in Schedule 2 to the PFMA similar to other major public entities such as Transnet and Eskom which have operate off their own balance sheets

Conclusion The separation of SAA from Transnet should assist in strengthening the balance sheets of both SAA and Transnet and focus the attention of the management of both companies in turning their companies around With direct reporting to Government, Government should be able to leverage SAA to provide tourism and business links for better economic growth The Bill will effect Government’s acquisition of the shareholding in SAA -Developing guidelines (TOR service providers and outsource development of guidelines) – Governance (Ayanda) to assist Consolidate guidelines