The current business and economic environments globally necessitates that companies constantly review their positioning, strategic direction and competences. As a result, companies tend to restructure and reposition their businesses in order to adequately navigate today’s world and respond appropriately to the prevailing business challenges. Corporate restructuring is a concept that is widely used both in the developing and developed markets. The research within the field of restructuring suggests that companies go through a restructuring process in order to increase their levels of profitability, reduce their debt levels and create operational efficiencies in times when their prevailing business strategies have become dysfunctional and obsolete.
Whilst the country is reeling at what appears to be the biggest failure of a State Owned Company (SOC), that is Eskom, its debt woes, operational and financial challenges are mounting to a point where even President Ramaphosa has called for Eskom’s business to be broken into three separate businesses that is, generation, transmission and distribution. However, one can’t help it but ask, what is the problem we are trying to solve here? Are we calling for Eskom to be restructured because we have failed to manage the asset or lack ability to deal with its liquidity, escalating debt and governance challenges? The message from the proponents of this restructuring is clear, however, none has bothered to tell the nation as to what must happen to the massive debt in Eskom’s balance sheet that is estimated to be around R500 billion.
The financial restructuring of Eskom’s capital structure would have been the ideal form of restructuring as it would include amongst other things, debt for equity swaps and changes to the equity structure to include private shareholders/ investors. Typically, when the value of the firm falls due to the escalating debt levels, management ought to look at the allocation of capital and restructure the debt position as a response to short-term financial distressed position. In addition, a highly leveraged position in any company must trigger some operational actions such as efficient revenue collection systems and robust controls around operating costs. Evidently, Eskom’s revenue has been on an upward slope over the years but this was not due to increased sales but attributed to fee hikes. Same for the cost base, its been growing unabated and sadly through unscrupulous ways. Where was the board of directors and an active and vigilant shareholder in all of this to ask the pertinent questions and hold those in management to account?
A financial restructuring process would deal amongst other things with the allocation of cash flows or credit exposure in line with the strategic rules of the shareholders. It will help outline the acceptable of debt ratio, movements in the revenue line and governance mechanism through an efficient board of directors. All this will lead to a more focused, improved governance and well managed debt management ratios. Even though these measures are internally focused however, they seek to strengthen the role of the board of directors by ensuring that its focused on what really matters, the operational and financial wellbeing of the business more especially its liquidity and debt ratios.
The dominant thinking on the looming restructuring of Eskom is that of organisational restructuring by essentially breaking down the company into three separate legal entities. The significance of this restructuring form is that the whole organisational structure of Eskom will change, its span of control too. In addition, this form of restructuring also calls for revising the remuneration structure, company processes, redesigning governance structures and reducing the headcount. Having said that, changes to any organisational structure and downsizing tend to have a negative impact on staff moral with flow through impact on the company’s overall performance.
Given how constrained Eskom is both operationally and financially, a complete restructuring will be ideal with the objective of achieving the following if properly executed:
i. Improve efficiencies are likely to be realised due to discipline by management, the ability to reduce the cost of doing business, improved business focus and effective capital allocation
ii. Reduce the information asymmetries as all stakeholders will have visibility on how the separate business units are performing, along with access to their operational information and decisions. Information asymmetries affect the decision making process as shareholders, investors or debt providers have less visibility of the key business information. The availability of information in how the three separate spun-off entities are performing will reduce the agency problem that currently exists between management and the shareholder represented by the Minister of Public Enterprises.
All of the above does not address the issue of the massive debt that Eskom’s balance sheet is currently mired with. Perhaps now is the time to learn from the Korean government, which created a restructuring vehicle when its economy was suffering from a dreadful economic crisis towards the end of 1997. This entity will be used to take on the debt that’s tainting Eskom’s balance sheet and allow it a fresh start given that the company is too big to fail. Another option to be explored, is setting up a corporate restructuring fund, that will operate like an investment fund and fund ailing SOC’s through issuing equity and security investment. The main objective of this fund will purely be to invest in securities of financially distressed SOC’s thus supporting them in realising the desired levels of shareholders’ returns.
Now is the time that we all explore our minds broadly in addressing the issues that are facing Eskom and provide solutions than rehashing what has gone wrong. The problems that Eskom is faced with have the ability of creating an economic and social unrest in the long term. Furthermore, the decline of Eskom’s financial fortunes is a mirror of the fundamental problems that South Africa has been faced with over the past ten years. The lack of visionary leadership has eroded Eskom’s competitiveness and the company is now in dire need of a masterplan that will readjust its business focus and adapt to the prevailing economic and business challenges. By not addressing the leadership challenges at Eskom with much urgency, we might be running a risk of rendering President Ramaphosa’s Thuma Mina campaign a mirage.
Thabile Wonci is an Executive Director, Board Member and former Investment Bank Professional.