The implications of the High Court ruling on the PRASA board
15 May 2017
Introduction
PRASA is a public entity wholly-owned by Government and reports to the Minister of Transport (the Minister). Its legal mandate directs PRASA to deliver commuter rail services in the Metropolitan areas of South Africa, long-distance (inter-city) rail and bus services within, to and from the borders of the South Africa. This mandate is implemented in consultation with and under the guidance of the Minister.
On 8 March 2017 the Minister dissolved the Board of Control (the Board) of PRASA. The Board subsequently submitted to the Pretoria High Court that, while the Minister has the power to remove directors, this is a public power which must be exercised in a lawful and rational manner and in accordance with the prescripts of administrative justice.
The Board sought the following from the Court:
1. The notice of removal and the decisions to remove are reviewed; alternatively declared unlawful, and set aside, alternatively suspended and have no practical or legal effect;
2. To the extent necessary, the applicants are reinstated as directors;
3. To the extent necessary, the appointments of any directors, in substitution of the applicants is reviewed; alternatively declared unlawful, and set aside, alternatively, suspended; and
4. Interdicting and preventing the Minister from appointing any directors in substitution of the Board.
Background
The Board was appointed in August 2014 for a fixed period until July 2017. On 31 July 2015 the Auditor General discovered approximately R550million in irregular expenditure for the 2014/15 financial year and approximately R14billion for the 2015/16 year. The directors had thus been appointed when there was already serious maladministration and financial mismanagement at PRASA requiring investigation and oversight.
In accordance with the Public Finance Management Act [1] (PFMA), the directors conducted an internal investigation and had so far uncovered fruitless, wasteful and irregular expenditure of at least approximately R14billion. The directors contended that removing them from the Board interferes with the ongoing investigations and could be regarded as an effort to frustrate a successful outcome. The Minister denied this, contending that the Board’s investigations were selective and concealed some irregular expenditure they themselves authorised. The Minister further stated that the Board had over a period overseen the corruption at PRASA and frustrated the efforts of the Acting Group Chief Executive Officer (CEO), Collins Letsoalo, to turn around the fortunes of PRASA.
The background story to these developments runs as follows: Lucky Montana resigned as Group CEO of PRASA in March 2015 and remained in his position until July 2015 when the Board appointed Nkosina Sena as Acting Group CEO. In February 2016, the Board submitted a list of preferred candidates to the Minister for the Group CEO position. In late June 2016 the Minister seconded the Deputy Director General (Financial) in the Department of Transport, Collins Letsoalo for the position. He was not on the list presented by the Board. The Board reluctantly appointed Letsoalo as Acting Group CEO on 30 June 2016.
The Minister indicated in a letter sent to the chairman of the Board that the all-inclusive human resource costs of Letsoalo would be borne by the Department of Transport and claimed from PRASA on a monthly basis. At the time, Letsoalo’s cost to company was R 1 358 868. In August 2016, Letsoalo applied to Mr. Khumalo, PRASA’s Acting Executive Human Capital Manager, seeking to secure for himself what the previous Group CEO, Montana, had been earning, which was R5,9 million per annum. When Khumalo refused, Letsoalo unilaterally terminated Khumalo’s appointment and appointed Pearl Munthali to the position. Munthali then authorised the increase.
On 24 February 2017 the Board, following legal advice, took a unanimous decision to terminate Letsoalo’s appointment. The salary increase and what the Court dubbed other “teething problems” prompted the Board to take this decision.
Two days later, The Sunday Times’ front page read “MR. FIXIT UPS HIS OWN SALARY BY 350%.” In reaction, on 1 March 2017, the Minister wrote two important letters. The first was to Letsoalo withdrawing his secondment as Acting Group CEO with immediate effect. The second was to the Board giving them five working days to provide the Minister with a report justifying their actions and to furnish her with reasons why she should not intervene. Then on 8 March 2017, a day before the 5 working days given, and before receiving the requested justification, the Minister removed the Board.
Judgment
Administrative vs executive action
The application was brought to the Court under the Promotion of Administrative Justice Act [2] (PAJA). It was thus seen as crucial that the Court establish whether the principles of PAJA apply to the Minister’s decision. If it were an administrative decision then they would. But if it were an executive decision then the principle of legality applies. The principle of legality is an aspect of the rule of law [3] – a foundational value of the Constitution. [4] It requires that a decision taken by a member of the Executive must be rationally connected to the purpose for which it was taken. The decision must not be arbitrary, capricious or taken without or beyond the legal power or authority to do so; it must not unjustifiably limit rights enshrined in the Constitution; and it must be procedurally fair. The Constitutional Court has provided some guidelines for determining whether or not a power is administrative, reviewed on a case by case basis. [5] This includes the source and nature of the power, the subject matter and whether it includes the exercise of a public duty. The Constitutional Court also noted that powers related to policy matters are not administrative, while those related to the implementation of legislation are administrative.
The Court in this case determined that it was in fact an administrative decision because the Minister was not involved in the development of new policy and her power to remove the Board was derived from legislation as opposed to the Constitution. Despite this, the Court further stated that even if it were an executive decision it is still subject to review under the principles of legality, lawfulness, rationality, bad faith and lack of procedural fairness.
Reviewing the Minister’s decision
(i) Procedural fairness
Both PAJA and the principle of legality demand procedural fairness. [6] In terms of administrative law, this comprises two components – a fair hearing and an impartial decision-maker. In this case, the Court noted that the Minister did not give the directors an opportunity to be heard before they were removed. She thus denied them a fair hearing and exercised her power of removal arbitrarily and “in a greatly unreasonable manner” which substantially prejudiced the directors. She had an obligation to disclose any prejudicial information she had against the directors and give them an opportunity to show the information to be false.
(ii) Irrationality
The Court examined the Minister’s decision to support Letsoalo’s version of events and thereby remove the directors from the Board in relation to her subsequent decision to terminate Letsoalo’s appointment herself. The two decisions could not be married, resulting in the Court declaring her conduct “internally inconsistent and irrational”. Her decision to terminate Letsoalo’s secondment days after the Board had done it validated their decision.
The first time the Minster purported to justify her decision was to the media at a press conference on 13 March 2017. In her answering affidavit to the Court the Minster claimed that the trigger for the Board’s removal was their decision to dismiss Letsoalo. That explanation did not however provide sufficient basis for the removal of the Board because the Minister herself removed Letsoalo a few days after the Board had taken that decision.
The Minister also claimed she was forced to remove the Board once Letsoalo was dismissed because then the Board would be unchecked. This suggested the Minister would allow a Board guilty of misconduct to remain as long as it was supposedly supervised by Letsoalo. But the Board was never answerable to Letsoalo and so he could not have prevented misconduct. If the Minister believed there were grounds to remove the Board before 27 February 2017 she was obliged to act then.
(iii) Unreasonableness
Lastly, the Court considered whether the Minister’s decision was reasonable. That is, whether the decision was rational and proportional as components of reasonable administrative action. [7] The Court held that the Minister’s decision was so unreasonable and disproportionate that it was arbitrary and irrational. The Court explained that by seeking legal advice before terminating Letsoalo’s secondment, the Board was acting within its discretion and therefore reasonably. By failing to accept the Board’s decision the Minister acted unreasonably. The Court further explained that the Minister’s decision was disproportionate as she failed to give consideration to the serious and prejudicial impact of her decision to remove the Board on PRASA’s interests.
Concerning the appointment of new Board members, the Court stated that if the removal of the concerned directors was invalid then the decision to appoint new members in their place was equally invalid.
The Court order
The Court closed its judgment with the following order:
1. The Notices of Removal and the decision by the Minister on 8 March 2017 in respect of the Board were reviewed and set aside.
2. The Board was reinstated with effect from 8 March 2017.
3. The appointment of any directors to the Board of Control on or after 8 March 2017 in substitution of the Board was reviewed and set aside, with effect from 13 March 2017.
4. The Minister was ordered to pay the costs of the application.
Conclusion
Despite the far-reaching powers held by Government Ministers to whom State Owned Enterprises (SOEs) answer, these powers are not unfettered. Ministers acting as shareholders of SOEs are unlike shareholders of private enterprises in that Ministers are mandated to represent the interests of the South African public, not their own. As the ruling in the case has shown, no matter whether a decision taken by a Minister concerning an SOE is an executive or administrative decision, it is still subject to review under the principles of legality, lawfulness, rationality, good faith and procedural fairness. This ruling is to be welcomed as an important step in addressing the crisis of governance facing South Africa’s SOEs. This crisis is nowhere better seen than in the Minister’s assumption of a Group CEO supervising a Board. This is Governance in Wonderland.
By Charles Collocott, Researcher, HSF, and Michelle Toxopeus, Legal Researcher, HSF, 15 May 2017
Notes:
[1] 1 of 1999.
[2] 3 of 2000.
[3] Fedsure Life Assurance Ltd v Greater Johannesburg Transitional Metropolitan Council 1999 (1) SA 374 (CC) at paras 56 and 58.
[4] Section 1(c) of the Constitution.
[5] President of the Republic of South Africa and Others v South African Rugby Football Union and Others 2000 (1) SA 1 (CC) (SARFU) at para 143.
[6] Hoexter C Administrative Law in South Africa 2nd ed (Juta Cape Town 2012) 363.
[7] Administrative law above n 6 at 340.
