South African state-owned enterprises (SOEs) are coming under tremendous pressure to do something to extricate themselves from their financial woes. Any kind of bankruptcy event cannot be the answer: because of the obvious cross-default impact such a declaration will have on various debt and other instruments in the capital markets. It will also be catastrophic to the Government’s standing and rating in the financial markets. Rival ratings agencies agree on one thing, and that is President Cyril Ramaphosa’s ability to turn the South African economy around and with that the financial woes of the SOEs.
So how does Government intend to restore SOEs? President Ramaphosa spoke about the appointment of a chief restructuring officer (CRO) to Eskom, the beleaguered power utility, in June. He said that the CRO will be “expected to re-position Eskom financially with careful attention to the mix between revenue, debt and cost structure of the company: Freeman Nomvalo was appointed as the CRO at Eskom. Such appointments were then mooted for South African Airways (SAA), Denel, South African Broadcasting Corporation and other SOEs. An advert appeared recently in the Financial Mail for the role of a CRO of SAA. This role envisages, inter alia, the restructuring of SAA (and its subsidiaries) “for optimal performance and profitability”; implementation of initiatives aimed at the “recovery” of SAA; reporting to the board who, in turn, will manage the relationship with Government and other stakeholders; leading and managing “cost optimization”; creating stability in the entire restructuring process.
What does the role of a CRO entail, given the environment in which the SOEs navigate in the political situation in South Africa?This requires an understanding of the role of a CRO, why are they required and what they can and cannot do. How does a CRO go about delivering the end result of a successful turnaround?
The state of the SOEs is particularly complex, sensitive and special. Government is unlikely to easily get rid of them. It is also, of recent, holding out on constant bailouts of SOEs. Its concern is that constant bailouts will fuel inflation. So any CRO will need to be experienced, individually or as a team; with strong leadership qualities. This is a key ingredient for financial stakeholders to engage in confidence with the CRO. To achieve the role and objectives foreshadowed in the SAA advert, the CRO must explore financial and strategic options, and come out with financial and operational plan. The CRO must deliver a robust operational and financial turnaround plan. The turnaround plan will require debt and capital restructuring solutions. This cannot be achieved by one person – it is the outcome of many heads aligned to, in the words of the SAA advert, the optimal performance and profitability of a financially distressed entity.
Many causes can be attributed to the failure of the SOEs: poor management and direction from the board of directors; high levels of corruption; high costs of operations; corporate inertia and lack of policy; failure to spot and deal with changes in the market. The recognition and appointment of a CRO to the SOEs is attributed to the recent history where none other than management can be blamed for their plight. The SOEs have lost all credibility and trust with outside stakeholders (other than the Government shareholder). So, first and paramount, the CRO must bring about a level of credibility and trust with the outside stakeholders. Without that hurdle being overcome, the appointment will fail and the SOEs will collapse. My advice to SAA, for instance, is that when seeking the appointment of a CRO it must ensure that the candidate it has in mind has the ability to bring about credibility and trust with the relevant stakeholders. For this reason, and critical at that, the CRO cannot be a “political animal”, unable to avoid politically driven roadblocks in the turnaround exercise. Take the following scenario: if the turnaround plan requires job reductions, the CRO should be allowed to implement and pilot the job restructure without political pressure and influence. Naturally, it will be for the board to adopt a job restructure if it is in the best interests of the future “optimal performance and profitability” of the entity. Without such difficult decisions, the CRO will be nothing more than a figurehead.
The CRO must possess skills if the CRO, with relevant stakeholders, wish to inject the right medication into the troubled entity – the option of a ban-aid plaster, self-serving and not dealing with the key problems, will be doomed to fail. The CRO must possess a wide skill-set with financial and operational know-how. The CRO must be able to set objectives aligned to a successful turnaround; measure them and put forward a timeline for the achievement of the objectives; manage the liquidity position during the turnaround regime; identify barriers and how the barriers will be overcome within the set timeline; conduct management meetings; negotiate on the strength of the credibility build in the process with various stakeholders on disposal, for instance, of non-core assets and the reduction of jobs; define future management of the enterprise.
Without consensus, driven from the foundation of credibility and trust, as political as the position of a CRO of a SOE holds, the complexities and intricacies of a restructuring plan will not be achieved. What if the banks hold out or trade unions refuse to accept job reductions (as they have intimated in relation to any job cuts following from Eskom’s break-up)? For that reason the CRO should be granted executive powers (being part of the management board). That will lend credibility to the process and put the CRO on the same level, or playing field, as the rest of the board. On the flip side, the CRO will be weary of personal liability arising from insolvent trading. That argument can be put to rest, and levelled out, by the fact that Government will always stand behind the SOEs for all financial liabilities and risk. Banks and stakeholders can be asked upfront to waive all claims based on insolvent trading against the CRO when it comes to the CRO investigating and implementing a turnaround plan. They should be inclined to do so if they support the person appointed by the board.
Finance Minister Tito Mboweni has made it clear that Government cannot be expected to write blank cheques. He wants to see turnaround plans – plans that will see SOEs achieving “optimal performance and profitability”. This will require some hard decisions to be made, amongst them job reductions. That should not be a reason for battle lines to be drawn between the distressed SOE and the trade unions. A more pragmatic approach will be to consider the financial position of the distressed entity, the reasons for its lack of performance, viability and profitability. The options available in the short-term and longer-term and how best to maximize the turnaround now and avoid bankruptcy.
So with the right level of support and power invested in a CRO, with dedicated and professional resources provided to the CRO, the chances of a successful and accelerated turnaround increase. The mandate of a CRO can be as wide as one wishes or can think of, but in the end the successors will depend on how much integrity and credibility the CRO, and the wider team, enjoys both internally with management and externally with stakeholders. SOEs can ill afford a band aid solution at this critical juncture in our country.