SAA procured jet fuel at a premium in effort to ‘push for transformation’, commission hears

The commission of inquiry into state capture heard on Tuesday how South African Airways (SAA) took a decision in 2016 to procure jet fuel from small, medium and micro Enterprises (SMMEs) at a premium in an effort to “push for transformation”.

Head of fuel management at SAA Mark Vaughan told the commission, chaired by Deputy Chief Justice Raymond Zondo, that there was “huge pressure from the board” chaired by Dudu Myeni for a “push for transformation”.

Vaughan told the commission that SAA’s BEE scorecard at the time “was really bad” and there was “pressure” for the airline to contract SMMEs for jet fuel procurement in order to improve it.

SAA also engaged in talks with “oil majors” – such as Total, Sasol, Shell, BP, Engen, and Chevron (now named Astron), among others – for them to improve their BEE status in an effort to assist the national carrier’s BEE scorecard, Vaughan said.

“So it made sense for us to do it, for instance, on the transport side, that is where a small-player SMME could operate and very successfully, which a lot of suppliers, I think all of the suppliers have that in place,” Vaughan said.

The January 2016 decision by the board was that 15% of the jet fuel would be procured from SMMEs while the balance would be sourced from the “oil majors”, the witness told the commission.

However, the SMMEs procured the fuel from the “oil majors”, Vaughan said, who would, in turn, sell it to SAA “at a premium”.

Vaughan said it would have been cheaper for SAA to procure 100% of the jet fuel directly from the “oil majors”.

“Because the small companies would be purchasing that fuel from the oil majors and I believe that the prices that SAA gets their fuel from the oil majors, the oil majors wouldn’t be able to give a discount any further to a small owned entity, so they would definitely be, they would have to put a mark-up in order to cover their costs and to make profits,” Vaughan said.

Zondo questioned whether the decision to procure 15% of the fuel from SMMEs would not give those who had “monopolised” the industry “a better arrangement”, to which Vaughan responded in the positive.

Vaughan, however, told the commission that “where the premium” came from was in the handling of the fuel and invoicing of the SMME by the “oil majors”.

Vaughan said it had been envisaged that the duration of the tender would be three years, which was “unusual” because this tender would normally be reviewed on an annual basis.