Africa: Report shows how South African Airways has been overpaying Air France for Logistics work amidst other Shady deals.
The beleaguered SAA, already bleeding and surviving on government bailouts, has paid R4.5bn to overseas contractors in terms of long-term contracts.
Two forensic reports, in the possession of City Press, reveal how SAA Technical (SAAT), which maintains and services the fleets of the national airline as well as several other carriers, flouted procurement regulations and extended contracts several times without going to tender.
There are also indications that inside information was given to at least one of the foreign companies to help it hold on to its “evergreen” contract.
Both reports were submitted in May and will be processed by the new SAA board.
The revelations come just two weeks after the cash-strapped airline received a R2.3bn bailout to settle a Standard Chartered Bank loan.
The reports were drawn up by Open Water Advanced Risk Solutions, which provides forensic accounting, fraud prevention and litigation support services.
Open Water was commissioned by Advocate Nontsasa Memela, the head of SAAT’s supply chain.
Memela, who assumed office in 2013, directed the investigators to probe how and why, in 1999, SAA had entered into a tender with Bridgestone Aircraft Tire Europe SA (BAE) which had no end date.
BAE supplied SAA Technical with Boeing and Airbus aircraft tyres.
A senior SAA executive told City Press that “it was a strange contract, crafted in a manner that makes it continue into perpetuity”.
“It basically said the contract will stand as long as SAA has Boeing aircraft in its fleet,” the executive said.
Fifteen years of plenty
The first forensic report that looked into long-term contracts at SAAT revealed that SAA and its technical division extended a tyre contract several times, over 15 years, without a public tender.
The Public Finance Management Act forbids the extension of contracts without a public tender process.
It shows that:
– BAE was paid upwards of R2 billion for the contract, which was signed in 1999 and is still running.
– In September 2013, SAAT advertised a tender for the supply of Boeing and Aircraft tyres. It was won by BAE in November 2014.
– Inexplicably, no contract was signed, with the two parties opting to work through a memorandum of understanding.
– In December 2015, SAAT and BAE cancelled the memorandum, retracted the tender and agreed to revive the evergreen contract, which had ended in November 2014.
– In February last year, SAAT issued a new tender. In May 2016, the SAAT board approved the appointment of Michelin for the supply of Airbus tyres. It opted to split the tyre tender and open another tender process for the supply of Boeing tyres.
– While negotiating the contract with SAAT, Michelin supplied tyres through a different memorandum of understanding. But Michelin reneged on a mandatory local supplier development, prompting SAAT to cancel the negotiations.
– SAAT awarded the same tender back to BAE in October last year. However, no contract was signed and the board agreed to procurement via a memorandum of understanding, which was signed in January. It expired at the end of June.
Boeing did not respond to requests for comment.
The Air France bonanza
The second report shows that a five-year components and logistics contract with Air France, worth R240m a year, was summarily extended on a quarter-to-quarter basis in 2013 by the SAAT board without going to tender.
By 2016, the French company had scored R2.5bn from SAA.
In the meantime, SAAT had advertised for a new R1.3bn, five-year components and logistics tender.
The Bid Adjudication Committee recommended that it be awarded to Air France for the Airbus components and Israel Aerospace Industries for the Boeing fleet.
The report says that the committee’s recommendation “did not include any amounts and was presented in a manner that deems Air France to be the service provider providing the lowest cost to SAAT, notwithstanding the fact that they were approximately R200m more expensive than Lufthansa”.
Furthermore, the report noted several incidents where tenders were open and companies competed only to have the Air France contract extended on a quarterly basis over time, as SAAT either delayed in approving the adjudication committee’s recommendations or withdrew its tender and started afresh.
For example, in April 2015, the adjudication committee recommended that the tender be awarded to Air France for the Boeing components and Pegasus Universal Aerospace for the Airbus parts.
However, in June 2015, the tender was withdrawn again, which resulted in another six-month extension.
In December 2015, SAAT advertised a five-year tender for the supply of components for its Boeing and Airbus fleet.
The adjudication committee recommended that Air France be awarded the contract.
However, in May last year, the SAAT board overturned the decision and awarded the contract to a joint venture between US aviation company AAR Corporation and JM Aviation.
Open Water investigators found that JM Aviation, which was registered in 2015 and was supposed to be a Black Economic Empowerment partner of AAR Corporation, had neither expertise nor experience in the aviation sector.
The company’s premises were also found to be a residential area in Sandton.
Air France did not respond to requests for comment.
AAR Corporation spokesperson Shawn Taylor said the company had always conducted itself according to South African and US laws.
“Any allegations to the contrary are completely false. AAR stands behind our business practices, and we reject any notion of impropriety.”
JM Aviation, he said, was a certified, Broad-based Black Economic Empowerment (BBBEE) enterprise and its partnership with AAR was aligned with the legal regulations and intent behind BBBEE – namely, to build the capabilities, performance and skill sets of South Africa’s black-owned businesses and its workforce.
Another senior executive said the AAR/JM Aviation joint venture would save SAAT R800 million over five years.
Another internal SAAT report, obtained by City Press, reveals that all the extensions and cancellations of the two tenders were meant to “give SAAT an opportunity for management to consider various options, including negotiating discounted rates for individual contracts”.
It also shows that SAAT was looking at “joint purchasing models”.
An airline source said Memela had also probed the Air France components contract because SAAT was allegedly paying the French airline more than what was agreed to in the 2008 components contract.
An internal SAAT email obtained by City Press shows that, over and above the agreed annual R240m payment, SAAT paid Air France R70m more every year between 2008 and 2016.
Another email, written by former SAAT board chairperson Yakhe Kwinana in July last year, reveals that Air France should have been disqualified from getting tenders at SAAT because of misconduct identified by Open Water during its initial investigation phase.
The letter, which Kwinana had addressed to Dudu Myeni, the chairperson of SAA, reads: “Open Water went as far as discovering that Air France was being assisted to tender by an inside source.
“There is evidence that can prove that Air France should have been disqualified from participating from all tenders at SAAT because of their misconduct and non-adherence to tender rules and conditions.”
SAA spokesperson Tlali Tlali said it was important to understand the status that these reports enjoyed within SAA and the processes the company had embarked upon before conclusions were made on any aspect of the reports.
“Notwithstanding this, the board would like to assure the public that it does not condone, nor will it cover up, allegations of criminality at SAA.
However, any action the board must take against anyone accused of impropriety must be factual and be legally sustainable.”
Investigations, he said, were previously commissioned by SAA to look into financial losses incurred by the company.
“The board has looked into those reports and determined that, as things stand, they are incomplete.”
He said further work was being done on the reports before being given to the board for consideration.