SOEs will fail if chief restructuring officers lack power
Government must enable CROs to do the jobs they are meant to do, and protect them from pitfalls of the job
SA’s state-owned enterprises (SOEs) are coming under tremendous pressure 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 debt and other instruments in the capital markets. It will also be catastrophic for the government’s standing and credit rating.
Rival ratings agencies agree on one thing: President Cyril Ramaphosa has the ability to turn the SA economy around, and with that the financial woes of the SOEs. So how does the government intend to restore the SOEs to health?
Ramaphosa spoke about the appointment of a chief restructuring officer (CRO) at Eskom, the beleaguered power utility, in June. He said the CRO will be “expected to reposition Eskom financially with careful attention to the mix between revenue, debt and cost structure of the company”. Freeman Nomvalo was duly appointed as the CRO at Eskom.
Such appointments were then mooted for SAA, Denel, the SABC and other SOEs. An advert appeared recently in the Financial Mail for a CRO of SAA. This role envisages 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 which, in turn, will manage the relationship with the government and other stakeholders; leading and managing “cost optimisation”; and creating stability in the entire restructuring process.
But what does the role of a CRO entail given the political environment the SOEs must navigate in SA? This requires an understanding of the role of CROs, why are they required and what they can and cannot do. How does a CRO go about delivering a successful turnaround?
The state of the SOEs is particularly complex and sensitive. The government is unlikely to easily get rid of them but is being forced into constant bailouts. Its concern is that this will fuel inflation. So any CRO will need to be experienced, individually or as part of a team, with strong leadership qualities. This is a key ingredient for financial stakeholders to be able to engage with the CRO in confidence.
To achieve the role and objectives foreshadowed in the SAA advert, the CRO must explore financial and strategic options and come up with a financial and operational plan. The CRO must deliver a robust operational and financial turnaround plan, which 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; and failure to spot and deal with changes in the market. The recognition and appointment of a CRO to the SOEs is attributed to their 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 as shareholder). So first and paramount the CRO must bring about a level of credibility and trust on the part of the outside stakeholders. Without that hurdle being overcome the appointment will fail and the SOEs will collapse.
My advice to SAA is that when seeking the appointment of a CRO it must ensure the candidate has the ability to bring about credibility and trust with relevant stakeholders. For this critical reason, the CRO cannot be a “political animal” who is unable to avoid politically erected 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 the new restructure if it is in the best interests of the future “optimal performance and profitability” of the entity. If they are not able to make such difficult decisions, CROs will be nothing more than figureheads.
The CROs must possess skills if they wish to administer the right medication to troubled entities. Solutions that do not deal 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 they will be overcome within the set timeline; conduct management meetings; negotiate on the strength of the credibility built in the process with various stakeholders on the disposal, for instance, of noncore assets and the reduction of jobs; and define the future management of the enterprise.
Without consensus driven from a foundation of credibility and trust, 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 job cuts following from Eskom’s break-up)? 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 playing field as the rest of the board.
On the flip side, the CRO will be wary of personal liability arising from insolvent trading. That argument can be put to rest by the government always standing behind the SOEs for all financial liabilities and risk. Banks and stakeholders can be asked upfront to waive all claims based on insolvent trading 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 the 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 hard decisions, among 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 implement the turnaround and avoid bankruptcy.
With the right level of support and power invested in a CRO who is given dedicated and professional resources, the chances of a successful and accelerated turnaround increase. The mandate of a CRO can be as wide as one wishes, but in the end success will depend on how much integrity and credibility the CRO enjoys with management and with stakeholders. SA cannot afford Band-Aid solutions at this critical juncture in our country’s development.
• Laher, a partner in Fasken Johannesburg, acted as independent chair of the committee of creditors established in the business rescue proceedings of Group Five Construction.