98% of South African Airways’ spending didn’t go to white-owned companies

A South African minister’s claim that the national airline spends just 2% on black-owned companies caused a stir. This report presents the facts.

South Africa’s police minister has accused South African Airways (SAA), the country’s national airline, of being guilty of a “despicable crime against black business”.

Calling it “white monopoly existence in full colour”, Fikile Mbalula tweeted that 98% of SAA’s R24 billion procurement goes to white-owned companies while black-owned get 2%”.

Several Africa Check readers asked us to investigate.

Minister responded on Twitter

Appropriately, Africa Check managed to get comment from the minister via Twitter.

Mbalula said the source of his information was an October 2016 news article which said 2% of procurement was to black-owned firms.

The article quoted SAA chairman Duduzile Myeni as saying “we need to find smart ways to ensure that we move from 2% of the procurement spend on historically disadvantaged groups”.

R14.9 billion spent locally

The most recent available information shows that SAA’s 2015/16 operating costs were R30 billion.

SAA’s spokesman, Tlali Tlali, said the airline’s records showed its total spend on local procurement for 2015/16 was R14.9 billion. Local spend is required to meet the requirements of South Africa’s Broad-Based Black Economic Empowerment Act and codes.

The South African government’s policy of broad-based black economic empowerment (B-BBEE) aims to increase participation in the country’s economy. A number of targets have been set to increase the participation of black people in the ownership and management structures of enterprises.

Enterprises doing business with government or an organ of state are required to be compliant and verify their level of transformation.

Claim

“black-owned [companies] get 2%”… “of SAA’s…procurement”

Verdict

mostly-correct

Of the R14.9 billion spent locally, R14.2 billion was spent on B-BBEE compliant companies. “This represented 95% of local spend,” Tlali said.

However, not all B-BBEE compliant companies are “black-owned”, as defined in the B-BBEE Act.

The act’s definition of “black” includes African, Coloured and Indian people. Companies with “over 50% black voting rights are considered to be 100% black.

Tlali told Africa Check that R252 million of SAA’s total local procurement was spent on companies that met the black ownership requirement.

This works out to 1.7% of the company’s total eligible spend of R14.9 billion, close to Mbalula’s figure of 2%. The airline fell short of its target of 8% for the year.

Entry barriers into aviation are high

Barriers to entry in aviation are high, SAA notes in its financial report.

Thus, increasing black-owned procurement may not be an easy exercise, according to Dirk de Vos, chief executive officer of corporate finance and advisory firm QED Solutions.    

“It might be possible for SAA to contract some of its indirect black suppliers directly, [but] this may be difficult logistically or on a supply chain management basis,” said De Vos.

He said that while Mbalula’s claim of black-owned companies getting 2% of local procurement was correct it was misleading.

“If B-BBEE compliance cannot be the measure, then the whole B-BBEE edifice is effectively treated as a non-existent factor,” De Vos said.

He said SAA’s 95% B-BBEE compliance figure was a “significant achievement”.  

Claim

“98% of SAA’s…procurement goes to white-owned companies”

Verdict

incorrect

This part of Mbalula’s claim is incorrect.

“It is wrong to say 98% went to white-owned companies,” Yuneal Padayachy, deputy director of B-BBEE procurement, transformation and verification at the department of trade and industry, told Africa Check.

“A portion of that would have gone to state-owned enterprises.”

Unlike private companies, state-owned enterprises are measured against a specialised B-BBEE scorecard which excludes the assessment of ownership,  Padayachy explained

“They are not white, black or Indian-owned,” said Padayachy, “They are owned by government.”

For example, the Airports Company South Africa would have accounted for “a significant amount” of SAA’s costs, Israel Noko, founder and CEO of  B-BBEE advisory firm NPI Governance Consulting, told Africa Check.

A 2016/17 cash flow projection from SAA shows that it expects to spend R1.5 billion with the Airports Company South Africa. Nearly 75% of the company is owned by the South African government.

R4.1 billion to state-owned enterprises

SAA’s Tlali told Africa Check that in 2015/16 the company spent R4.1 billion on state-owned enterprises.  This would have accounted for 27.5% of their R14.9 billion local procurement.

Africa Check sent questions to Tlali to verify the share but he declined to comment. Questions sent to the airline’s acting chief executive officer, chief financial officer and chairman went unanswered.

So did the remaining balance (70.8%) go to companies that had less than 50% black ownership? We asked SAA but they wouldn’t say.

“It’s not impossible but very difficult to get that level of information,” Padayachy told Africa Check. “The only way to get that information would be to speak to [SAA’s B-BBEE] verification agency or get it from SAA.”

Without this information from SAA, it is impossible to confirm exactly how much of their local procurement went to white-owned companies. However, it is not the 98% Mbalula claimed, as 27.5% was spent on other state-owned enterprises which are not considered white or black-owned.

The nitty-gritty of B-BBEE

As a state-owned company, SAA is subject to Section 217 of the South African Constitution relating to procurement, along with the Public Finance Management Act and the Preferential Procurement Policy Framework Act.

This procurement framework highlights the prequalification requirements that a company needs to meet in order to be considered a compliant tenderer.

These include that the bidder has a minimum B-BBEE status level contribution or that the tenderer sub-contracts a minimum of  30% to various categories of enterprises including Exempted Micro Enterprises (EME) and Qualifying Small Enterprises (QSE).

Exempted Micro Enterprises are those with annual revenues of under R10 million while Qualifying Small Enterprises are those with annual revenues under R50 million.

“So, to be a compliant tenderer to SAA, even if the tenderer is not black-owned, the tenderer will have needed to sub-contract to black-owned suppliers to meet the minimum requirements whether as a B-BBEE compliant supplier or one that has subcontracted 30% to the categories of EME and QSE,” Dirk de Vos, chief executive officer of advisory firm QED Solutions, told Africa Check.

SAA told Africa Check that the airline does, in fact, consider and spend on companies that don’t meet these requirements.

“If a company is not B-BBEE compliant it does not get disqualified, but will lose points when bids are evaluated and can still be awarded the business opportunity after overall assessments have been concluded,” said spokesman Tlali Tlali.

Regardless, the object of BEE regulation is to “encourage a waterfall of BEE compliance down the supply chain”, De Vos told Africa Check.

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