Development bank's loan to SAA not justifiable, say experts

South African Airways' business rescue process may be on "sounder footing" after the airline secured much-needed funding, but some experts argue the Development Bank of Southern Africa has poured billions of rands that could have gone to improving people’s lives into financing that will probably take a while to pay back.

On Tuesday, SAA’s BRPs Les Matuson and Siviwe Dongwana announced R3.5bn had been secured from DBSA after Treasury struggled to raise the remainder of the R4bn the national airline needs to cover its short-term liquidity requirements before its business rescue plan is adopted. Local commercial banks chipped in to provide R2bn of the required amount, but government struggled to raise the R2bn it had promised to contribute, which it planned to borrow from banks.

DBSA is one of few profitable state-owned entities. In the financial ended 31 March 2019, it posted R3.1bn in net profit.

That government had to approach DBSA to finance a transaction that’s not in line with its mandate showed that it had run out of alternatives to fund SAA’s rescue plan, because other potential funders had realised all they’d be doing is plugging losses and it could take months without the prospect of repayments trickling in, believes Econometrix director and chief economist, Azar Jammine.

“What concerns me is; they’ve already seen a dramatic fall in the demand for flights and they’ve had to cancel a lot. It’s going to take many, many months of continued operations and proof of reliability before people want to use SAA again. That means for a long while, there’s likely to be a substantial loss and all this R3.5bn will do is simply plug holes," said Jammine.

Despite government’s insistence that SAA is a national strategic asset, Jammine also said it should still be questioned if there was a justification for DBSA's decision.  

"It did rise in my mind whether this was the kind of project that a development bank should be funding. It’s quite right that we should question that. Is it really a development loan? It’s not new project or anything," said Jammine.

Development mandate

The DBSA’s mandate is to develop and finance infrastructure projects ranging from roads and bridges to energy and ICT. It also funds social infrastructure, like the building of clinics and hospitals, schools and water and sanitation projects, although a smaller portion of its total disbursements go towards these.

Even though it does gets involved in mass transportation projects by funding public transport networks, its mandate states that its role is limited to "development" projects.

Wayne Duvenage, CEO of the Organisation Undoing Tax Abuse, said asking DBSA to fund SAA’s appeared to be a ploy to avoid putting the airline into liquidation because without the funds required to keep it going in the short-term, the business rescue process would have been cut short.

"Where’s the developmental aspect in [assisting] a state-owned entity who’s on the way out as opposed to being developed? It’s already in business rescue. It’s throwing more good money after bad. No shareholder in their right mind would probably approve that," said Duvenage.

In response to media queries, DBSA issued a statement saying it granted the facility in line with its economic mandate and the objectives set out in the DSBA Act.

It added that the matter was scrutinised under its governance, credit evaluation and approval processes and its board chairman, the ruling African National Congress' Enoch Godongwana - who is also the party's head of economic transformation - did not participate in the board’s decision.

"The granting of the facility has not impacted the ability of the DBSA to execute on its development objectives and mandate. The DBSA continues to manage its balance sheet within its policy framework," read the bank’s statement.

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