Excessive penalties ‘chased up costs of SAAT contract with AAR Corp’

The contract for the supply of components for a period of five years which South African Airways Technical (SAAT) entered into with American based AAR Corporation and locally-based JM Aviation, at the current rate, is expected to increase from around R1.3 billion to R1.8 billion.

This is according to the acting head of department (HOD) of supply chain management at SAAT, Schalk Hendrik Human, who on Thursday took the witness stand at the commission of inquiry into state capture chaired by Deputy Chief Justice Raymond Zondo.

The contract was awarded in May 2016 at a value of R1,253,636,151.81.

At the commencement of the contract, SAAT paid a deposit, via wire transfer, of US $4.32 million, which at the time was just over R60 million, to AAR as opposed to giving the company a letter of credit as per common practice, the commission heard.

Human said in the documents he perused he was unable to determine a logical argument for the payment, which possibly unnecessarily put a strain on SAAT’s cash flow.

“Making [the] cash payment [did] not really make a lot of sense,” Human said, concurring with Zondo that had AAR failed to perform, SAAT would have been prejudiced considering that a deposit had been transferred to the company.

Human said in 2018 the contract was reviewed to assess AAR’s performance and address matters that were found not to be beneficial to SAAT.

Issues found included that there was a long turnaround time for the repair of components, with some repairs outstanding for 600 days – just under two years, which is “virtually unheard of”, Human said.

He said 930 items were found to be outstanding for an excessive time of six months or longer and that there had been an issue with incorrect invoicing.

Another issue was that AAR charged SAAT excessive penalties amounting to R69 million, the commission heard.

However, Human said AAR was not charged penalties for delays on their part, which was “strange” and made the contract one-sided.

AAR had failed to implement the national industrial participation programme (NIPP), which was a critical criterion for a bidder to meet in order to score the contract, the commission heard.

ALSO READ: Zondo commission hears of ‘irregularities’ in SAAT contract

Human said SAAT has so far spent just over R1 billion on the contract and that at the current rate this would total R1.8 billion at the conclusion of the contract.

Incorrect pricing and the harsh penalties imposed by AAR on SAAT have contributed to the increase of the value of the contract, Human added.

The commission also heard testimony on how a company, Swissport, was in 2012 awarded a tender by SAA for ground handling services and that this company continued to provide these services, though a contract was not signed.

In an affidavit, the company said since 2012 it had struggled to get a signed contract until one was signed in March 2016 for a five-year period till 2021. The latter contract, the company says in the affidavit, is rooted in the 2012 tender.

“That’s very strange, isn’t it?” Zondo commented, noting that Swissport could benefit double the value of the contract which is R1.2 billion.

The commission also heard testimony on how SAAT sold newly acquired ground powering units (GPUs), which it had acquired at R9,193,981.20, to JM Aviation at R248,000 per unit, totalling R3,392,640, when the book value of the GPUs was at the time R7,968,117.

Swissport then purchased these units from JM Aviation at R9.4 million and SAAT subsequently leased these from the former company, the commission heard.

To date, SAAT has paid R8.4 million for leasing the GPUs, Human said.

He added that SAAT’s sale of the GPUs has amounted to a capital loss of just over R6 million.

“Tjo,” Zondo said, “I take it there will be evidence of who are the people who were responsible for all these decisions.”

“It was an irrational decision,” Human said, explaining that SAAT still needs the GPUs.

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