SOUTH AFRICAN AIRWAYS CORRUPTION PROBE COULD

C O N F I D E N T I A L SECTION 01 OF 03 PRETORIA 000329

SIPDIS

DEPT FOR EEB/TRA/OTP
DEPT FOR EEB/TRA/AN/TERRI ROBL
ROME FOR ANTHONY GIOVANNIELLO
DAKAR FOR MO KEANNE
FAA FOR NANCY ANGELO AND MEL CINTRON

E.O. 12958: DECL: 02/19/2019
TAGS: ELAB EIND EAIR ECON PREL PGOV PHUM SF
SUBJECT: SOUTH AFRICAN AIRWAYS CORRUPTION PROBE COULD
THREATEN RESTRUCTURING AND EXPANSION PLANS

REF: A. 08 PRETORIA 2612

B. 08 PRETORIA 2754

Classified By: Classified By: A/DCM Perry BAll for reasons
1.5 (b) and (d).


1. This cable is a collaboration between Embassy Pretoria
and Consulate Johannesburg Labor Office.


2. (C) Summary: South African Airways, (SAA) Board of
Directors has launched an investigation into allegations of
high-level mismanagement and corruption. CEO Khaya Ngqula
has been placed on special leave, pending the outcome of the
investigation. Labor leaders endorsed the action as a first
step in reducing corruption and financial mismanagement at
SAA. A senior Department of Transport official believes
Ngqula will not retain his position after the investigation
is completed. Industry and opposition political leaders
criticized the government's support of Ngqula and blamed him
for SAA,s continued financial woes. SAA will have to
address the mismanagement and corruption charges and improve
relations with its union if it hopes to achieve its costly
expansion and fleet modernization plans. End Summary

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CEO ACCUSED OF MISMANAGEMENT AND CORRUPTION
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3. (SBU) SAA,s Board of Directors has appointed a committee
to investigate alleged misconduct by SAA CEO Khaya Ngqula in
relation to an SAA tender. The allegations were leveled by
the South African Transport and Allied Workers Union
(SATAWU),which presented documentation to the Department of
Public Enterprises (DPE) alleging that French-based Servair
had emerged as the preferred bidder to supply 180,000 weekly
in-flight meals on domestic routes due to its ties with
Ngqula and his wife, Mbali Gasi. The contract worth R3.5
billion ($345 million) has not been finalized. The union
pointed out that Servair's Black Economic Empowerment (BEE)
partnership was with a consortium that was co-owned by Gasi.


4. (SBU) Ngqula was placed on special leave (and not
suspended),until the investigation is completed. The SAA
committee appointed the independent forensic audit firm KPMG
to conduct an in-depth investigation on February 10. The
investigation will also address concerns regarding large
retention bonuses and salaries paid to top SAA executives
(including Ngqula),while SAA was receiving generous
government bailouts, restructuring, and shedding jobs.

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UNION WELCOMES BOARD INVESTIGATION
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5. (C) SATAWU endorsed the SAA board's strategy as "a good
first step" towards eliminating what it sees as corruption,
bad corporate governance, ineffective financial
administration, and nepotism at SAA. SATAWU General
Secretary Randall Howard told FSN Labor Specialist on
February 11, that SAA CEO Khaya Ngqula has lost "his passion
and commitment" to South Africa's troubled national carrier.
Howard felt Ngqula's indifference was best shown by the fact
that an "abnormally high" portion of SAA's budget is
allocated to pay senior staff salaries, despite the fact that
most union members had agreed to concessions in hopes of
revitalizing the airline.


6. (C) SATAWU was especially pleased that the investigative
Q6. (C) SATAWU was especially pleased that the investigative
committee had the power to undertake disciplinary action
should it be warranted. Howard said the committee must start
immediately to manage the inevitable negative press. The
union's goals remained for the airline to own up to
legitimate allegations of corruption and quickly clean up its
act so that SAA's reputation (and by definition its
popularity) would be restored. (Note: Two recent cases of
drug trafficking by SAA crew members on international flights
to London is further deteriorating the airline's public
image. See septel for further information on drug busts).


PRETORIA 00000329 002 OF 003



7. (C) Howard believed the next step was for Ngqula to
resign. He questioned why the African National Congress
(ANC) had not ordered the resignation given that the SAG is
SAA's controlling shareholder. Howard said SATAWU had
dismissed the idea of a union strike at SAA because it wanted
the independent investigative board to carry out its mandate
"and take appropriate disciplinary actions." Howard concluded
that SATAWU would revisit the idea of labor unrest if the
board did not "live up to its mandate." (Note: SATAWU
announced a strike on February 20 demanding the extension of
retention premiums to all employees and the end of SAA's use
of labor brokers.)

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NGQULA's FUTURE UNCERTAIN
--------------


8. (C) A senior Department of Transport (DOT) official told
Transport Officer on February 12, that Ngqula would not
likely complete the terms of his contract, which is set to
expire in October 2010. The official noted that questions
had also been raised about other SAA procurement decisions
and Ngqula was losing ANC political support due to the
negative publicity surrounding the current investigation. He
lamented that BEE was being manipulated in government
procurement processes to the point that "securing the right
BEE partner" (i.e., a politically connected or influential
partner) could mean the difference between winning and losing
a tender award. (Note: Post has heard other allegations of
inappropriate/corrupt management behavior at SAA from a
U.S.-based company hoping to procure a separate contract).



9. (C) The DOT official indicated that likely political
changes following the April general elections would further
reduce support for Ngqula. The last two DPE Ministers have
consistently championed SAA restructuring plans and publicly
supported Ngqula's management decisions. The DOT official
speculated that the DPE might be completely disbanded or
reduced in power following the election. He also expected
the in-coming DOT Minister to play a greater role in
decision-making for SAA management and procurement processes,
which would reduce Ngqula's support base within the ANC.

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NGQULA BLAMED FOR CONTINUED FINANCIAL WOES
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10. (SBU) The local aviation industry, opposition Democratic
Alliance Party leaders, and some SAG officials have
criticized both Ngqula's leadership and the DPE's continued
support of the embattled national carrier. To date, the SAG
has provided more than $1.1 billion in subsidies and bailouts
for SAA,s restructuring plan. SAA had approached the SAG
for additional funds worth approximately $280 million to
support fleet modernization and new route expansion plans
(Reftel B). Finance Minister Trevor Manuel rejected the
request, but announced a further R1.6 billion ($158 million)
in subsidies in his 2009 budget speech. The budget
announcement has received criticism from competing domestic
carriers for rewarding SAA mismanagement and distorting
market conditions.


11. (SBU) SAA Chief Financial Officer Kaushik Patel announced
to the Parliament's Public Enterprises Committee that the
Qto the Parliament's Public Enterprises Committee that the
airline,s financial standing would decline further this year
as it was burdened by debt. SAA is expected to post
additional losses for the financial year ending March 2009
because of interest payments on debt and losses from hedging
against the volatility in fuel prices. Patel stated that SAA
would pay R300 million ($30 million) in interest payments in
the year ending March 2009, an amount that exceeded its
operating profit during the same period. Patel also admitted
that SAA had lost money on its decision to hedge forty
percent of its fuel requirements for twelve months, but
refused to mention the exact amount until the exchange rate
for the last day in the period was known.

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PRETORIA 00000329 003 OF 003


COMMENT
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12. (C) SAA will have to address the mismanagement and
corruption charges in a timely and transparent manner to gain
broad union, industry, and government support for its costly
expansion and fleet modernization plans. SATAWU feels
vindicated for the recent actions given that the union has
been calling for an investigation of Ngqula since 2007.
Newly-appointed Acting CEO Chris Smyth will also have to
address the challenges of reducing the airline's dependence
on state handouts and working with the prickly SATAWU. The
union has been accused in the past of protecting jobs at all
costs while tolerating low levels of efficiency.
LA LIME