South African economic development is limited by poor and costly national airline which continuously consumes public sector resources which could be better served elsewhere. Through a solid track record of public private partnerships (PPPs) in the country, we evaluate a potential solution that could be applied to the air travel sector, impacting improvement in at least two of the sustainable development goals.

1. A private sector solution for the
South African transport dilemma
By Maciek Szymanski

2. Problem statement
• South Africa is a geographically isolated country, separated by
10,000k+ from major economies (10+ hours of flight time, 1-2 days
by car to neighbouring countries, and days by sea)
• One of the key economic sectors is tourism which employs
0.5million people and accounts for 7% of the South African GDP
• The country is heavily reliant on international airlines that fly into
the country for maintaining its travel and business links with the
rest of the world
• While the domestic private aviation sector is very vibrant and
competitive, it is obstructed by competition from the state airline
which does not have profit motive. As a result 12 airlines went out
of business in South Africa in the past decade illustrating the
difficulties posed by the state being a player in the industry

3. Current situation
• South African Airways (SAA) is a state owned airline that operates
on domestic and international routes
• The airlines is poorly managed and run, with substantial political
interference in management appointments, route selection and
procurement
• On the domestic routes, the airline competes with the private
sector (having even launched its own budget airline Mango), while
on international routes it maintains flights between key strategic
destinations in Africa and elsewhere in the world
• As a result of political interference, SAA continues making
substantial operating losses, required numerous public capital to be
spent to support the battling airline. At least USD 1.5bn of taxpayers
money has been wasted in this manner during the past few years

4. Public private partnerships (PPPs)
• PPSs are arrangements where the public and
private sectors work together to address certain
problems which require joint effort and expertise
• These typically combine private sector skills and
funding, with public sector regulatory framework
that allows the PPP to operate successfully and
provide financial and social returns to all
stakeholders
• South Africa has a successful track record with
PPPs so why not do the same with the national
airline?

5. Transport PPP - Gautrain
• The Gautrain is a high speed train network that
connects the OR Tambo international airport (the main
airport in the country) with the economic and political
hubs of Johannesburg and Pretoria respectively
• The train is operated by a private sector consortium
under a government concession.
• The private sector provided capital expenditure and
operating funding, while the public sector has provided
guarantees that provide compensation to the
consortium should the usage of the Gautrain fall short
of pre-specified targets or revenue benchmarks
• Despite limited track record of PPPs in the transport
sector in South Africa, the project has been a
resounding success, with passenger numbers exceeding
projections. As a result further expansion of the
network is being assessed.

6. Energy PPPs - renewables
• Independent power producers: government
has provided a world class regulatory regime
relating to concessions and pricing of
renewable power.
• Through the bidding process whereby
developers “bid” for tariff rates that would
provide sufficient financial returns, this
programme in 3 years has resulted in an
investment of more than USD 6bn of private
capital (debt and equity), accounting for
6,300 MW of green energy
• During that time, the state utility Eskom has
been only able to develop and operationalise
a single 100MW solar energy plant,
illustrating the power of private sector to
provide developmental solutions

7. Proposed solution
• These 2 case studies of successful public
private partnerships could be used to mobilise
private sector resources and provide effective
solution to the problems of having a national
airline that continues to be ineffective, makes
operating losses and is a drain on the
taxpayers

8. Proposed solution in detail
• Firstly, an independent regulatory body, funded by the fiscus or from an industry levy, should be
established and appointed to oversee and co-ordinate the development of the local aviation sector and
international links with South Africa
• The regulator would engage with other government departments (such as Tourism and Trade) and
private sector stakeholders (eg travel agents, tour operators) in order to identify travel routes that are
being underserviced, which are of strategic importance to the country, and which show the most
potential in medium-term (eg the growing middle class in China which is keen in African safaris and
exotic destinations)
• The regulator then invites private sector operators to bid to operate flights for strategic travel
destinations on the basis of various assumptions. The successful bidders would have preferred access to
such routes, be a “preferred provider” for government employee travel, and other incentives which
could be offered specific to the route.
• The regulator, through an arrangement with the Department of Finance, would fund any short-fall
arising out of operations on these routes below the projected / forecast number.
• This way the private sector would benefit from the economies of scale by expanding its operations and
fleet, while at the same time offering travel service to destinations which may be unprofitable in the
short run
• These tenders would also be open to foreign operators which could source financial support from their
own governments and / or shareholders should they see strategic benefits in operating on such routes

9. Conclusion
• The role of the regulator would be to oversee the service level
agreement with the airlines, ensuring that
– ticket pricing remains competitive vs competitors,
– the required service standards are met and
– the financial returns to the airline are fair in line with the risks that they
are taking
• Such approach would result in
– a more predicable funding require to support the airline sector,
– Efficiency gains for the public of having cost effective and high quality
travel service and
– A stronger airline industry through a more predicable and focused
development of the sector
• the implementation of this solution would reduce poverty (SDG 1) in
South Africa by stimulating tourism, business links with the region and
the rest of the world, as well as supporting decent work opportunities
and stimulating economic growth (SDG 8).