OR Tambo International Airport in Johannesburg. Picture: ACSA
OR Tambo International Airport in Johannesburg. Picture: ACSA

Airports Company SA (Acsa) recently released its 2019 results.  Acsa is unique among state-owned entities (SOEs) in that it has private-sector minority shareholders and is ostensibly a well-run monopoly, not reliant on government guarantees and bailouts. 

Acsa has also issued bonds on the JSE debt market. This article is an exploration of the Acsa 2019 results by Oppressed Acsa Minority 1 (Pty) Ltd (OAM1), a minority shareholder that has been engaged in a four-year long legal struggle against the department of transport and Acsa, seeking an exit from Acsa at fair value.

Acsa minorities bought shares from the government in 1998 based on a commitment to fully privatise Acsa and list it on a stock exchange. The government changed its mind regarding privatisation and a listing and has, since then, irrationally and without any reasonable grounds fought against a fair exit for oppressed minority shareholders.

Foreign investors to whom President Cyril Ramaphosa has appealed in an attempt to secure $100bn of inward investment and to recapitalise SAA and other ailing SOEs, would see Acsa as an example of what might happen to them if they trust the government with their money.

Like most SOEs, Acsa has had an acting CEO since late 2018 and its last formally appointed CFO resigned in January 2017.

First the good news: Acsa has reduced its gearing levels from more than 60% in 2010 to just 18% in 2019, a level many would argue is way below optimal borrowing levels for regulated infrastructure businesses. 

In addition, Acsa recently received an offer to purchase its 10% stake in Mumbai Airport for R1.75bn, a fair return on the initial R27m it paid in 2007.  This welcomed cash injection will probably be deployed towards Acsa’s capex projects at Cape Town and OR Tambo Airports. However, if Acsa intends to spend the funds on inefficient and uneconomic projects with no feasibility studies, as it did when spending R10bn on the King Shaka Airport, the welcomed funds will go down the drain. 

True to form, the government forced (read “bullied”) Acsa into building King Shaka airport, prematurely and with borrowed funds. As such, the airport will never generate sufficient profits to repay its construction debt. Acsa reported King Shaka’s total assets at R9.6bn in 2011, R8.7bn in 2018 and just R3.9bn in 2019. In the year ended March 2019, King Shaka made a R10m profit, which, after nine years of operations, doesn’t even cover one week’s interest charge on R10bn of construction debt.

In 2010, each rand spent by Acsa on employee costs generated R5.24 of revenue; however, by 2019 this had dropped to R4.35, before any adjustments for inflation over 10 years

Acsa’s 2019 turnover increased 5.5% to R7.1bn over 2018, while net profit after tax dropped 59% to R227m, largely as a result of lower revenue and higher operating costs. While good for customers, Acsa’s regulated tariffs have been mismanaged by the department of transport over many years, resulting in lower revenue and lower profits. Revenue earned by Acsa from the ailing SAA, Acsa’s main customer, was only R857m in 2019, a 15% decrease from 2018. 

After Eskom, Acsa probably boasts the second highest average wage among large corporates/SOEs in the country. In 2019 the average annual wage per Acsa employee was R526,000 and payroll costs increased by 17%. Over the past 10 years, Acsa’s staff numbers have increased by an average of just 3.6% a year while employment costs have increased at 8.3% a year. Acsa provided R121m for staff bonuses in 2019 and some executives received a 21% basic pay hike in 2019. 

In 2010, each rand spent by Acsa on employee costs generated R5.24 of revenue; however, by 2019 this had dropped to R4.35, before any adjustments for inflation over 10 years.

In recent years Acsa has consistently reported “prior period errors” — mistakes made in previous years that are only detected after financial statements are audited.  The most intriguing error in the 2019 financials was described as: “In the prior year, inaccurate data was erroneously migrated into the asset register”, which resulted in a surprising R1.8bn addition to property and equipment in the prior year’s balance sheets.

Squandered funds

In contrast to Mumbai Airport’s positive investment returns, Acsa has squandered R1.1bn since 2012 on an effective 10% shareholding in a 20-year concession to operate Sāo Paulo airport in Brazil, otherwise known as GRU Airport. As at March 2019, GRU’s liabilities exceeded its assets by R4.6bn and, to date, Acsa’s share of GRU’s cumulative losses amounts to R2.3bn. 

Acsa has not impaired this investment and predicts that GRU will start paying dividends by 2025, only seveb years before the 20-year concession ends. Acsa is thus reliant on dividend payouts to recoup its investment over seven years. Assuming no withholding taxes and a generous dividend payout ratio, I estimate that GRU will need to generate annual profits of R2bn to R3bn from 2025 to 2031 for Acsa to recoup its R1bn investment — a tough ask given GRU’s current annual loss of R679m.

In August 2017, Acsa (with the government’s consent) reached a settlement agreement, which was subsequently made an order of court, with OAM1 and another minority shareholder. The court order required an independent valuator to value the minorities’ shares by excluding minority/liquidity discounts and negative consequences of oppressive conduct. The duly appointed valuator valued the shares at R78 each, which also quantifies the opportunity cost to the government by not privatising Acsa and allowing it to be run commercially. 

At R78 a share, Acsa owes the two litigating minorities R701m with the value of the remaining three minorities’ shares exceeding R900m. In addition to this, interest has accrued since August 2017.

The government has now appealed to set aside the court order and Acsa is challenging the R78 valuation. On October 30, the government’s appeal will be heard in court and thereafter Acsa’s valuation challenge will be heard. Both matters are opposed by the minorities. Acsa refused to disclose the court-ordered share buy-back obligations as a liability or even a contingent liability in its 2017 and 2018 financials, but has recently relented and its 2019 financials disclose a heavily disclaimed contingent liability, albeit with no indicative amounts. 

It is submitted that Acsa should have disclosed a liability of R701m plus accrued interest as well as a contingent liability of R900m for the remaining minority shareholders to provide full disclosure to users of its financial statements.

The auditor-general’s audit report on Acsa has become fairly repetitive in the past few years, as noted in these quotes: “Effective and appropriate steps were not taken to prevent irregular expenditure in the amount of R264m” and “to prevent fruitless and wasteful expenditure in the amount of R63m. 

“There has been slow response in implementing the commitments made in the prior year to address the internal control deficiencies in the areas of financial reporting and compliance.

“Lack of implementation of consequence management for transgressions and poor performance.”

At the end of March 2019, Acsa had R983m of cumulative irregular expenditure and R103m of fruitless and wasteful expenditure. We wait to see if the new Acsa board’s “zero tolerance” policy towards irregular and fruitless and wasteful expenditure will result in “consequence management”, particularly regarding the five forensic reports that implicate Acsa’s former CEO in maladministration.

• Frost is a chartered accountant and adviser to Oppressed Acsa Minority 1, which holds 1.4% of Acsa’s shares.