Turnaround market watch South Africa

Read about the:

The private sector turnaround market in South Africa.
The public sector turnaround market in South Africa.
The global turnaround market.

Turnaround in the private sector

The turnaround industry is expected to pick up in 2009 as a result of deteriorating economic conditions, and even more so in 2010 as new business rescue legislation is introduced.

South Africa is in a recession

The South African private sector turnaround market has been relatively quiet after the busy days of the late nineties. However, with South Africa having entered into a recession, signs are pointing to more work for the turnaround industry in 2009, but moderated by two factors:

Lack of credit and funding for turnarounds, exacerbated by more restrictive loan covenants, greater conditions to be met, and a lower ratio of loan to cash flow/profitability.
Due to the recessionary conditions, causes of distress of most troubled companies are external and out of control of management. This leads to internal cost cutting and retrenchment by troubled companies rather than calling in turnaround practitioners.

From a robust to a contracting economy

After experiencing unprecedented growth until 2007, South Africa now experiences a recession as a result of the international credit crunch and economic slowdown.

The economy contracted 1,8% in the fourth quarter last year, 6.4% in the first quarter this year, and 3% in the second quarter, putting South Africa in a recession for the first time in 17 years.

With sound banks and sober state spending, South Africa weathered the first months of the financial crisis, until reduced global demand finally took a toll on its mining and manufacturing exports - the two biggest sectors of the economy.

France, Germany and Japan have all exited recession, and the UK is expected to follow soon. The SA economy is expected to continue to stabilise during the rest of the year, but a recovery would only begin in the second half of 2010.

Business confidence has declined from its highs 2004 - 2007, as evidenced by trends in both the SACOB Business Confidence Index and the RMB/BER Business Confidence Index (see graphs below).

Business confidence dropping

Click on the thumbnail for the enlarged SACCI Business Confidence Index graph.

Since the recession started, the SACCI Business Confidence Index reached its lowest point in March 2009. It has increased slightly thereafter to August 2009, but not pointing to a meaningful recovery yet.

Click on the thumbnail for the enlarged graph of the SACCI Business Confidence Index relative to last year.

Click on the thumbnail for the enlarged graph of the RMB/BER Business Confidence Index.

The RMB/BER Business Confidence Index declined by one index point during the third quarter to a level of 23 from 26 during the second quarter. It is the lowest level in 10 years.

Interest rates

High interest rates are an important factor causing liquidations and a barrier to successful turnaround.

Interest rates reached its lowest point in 24 years before increasing by 5 percentage points from June 2006 to June 2008 in an attempt to curb inflation. After December 2008 it dropped rapidly by 5 percentage points by August 2009 in an effort to stimulate the economy.

Click on the thumbnail below for the enlarged graph of the trend in the prime overdraft rate since 2000.

Liquidations - on the increase

Monthly company liquidations per annum leveled off in 2008, but has risen sharply in 2009.

Liquidations are expected to continue the upward trend since 2004 as a result of tougher business conditions emanating from the global recession and credit meltdown and in spite of the interest rate decreases since December 2008. Especially exporting commodity companies are hit the hardest by the recession experienced by the industrialised companies overseas.

Click on the thumbnail for the enlarged view of the most recent monthly company liquidation statistics (July 2009).

Read more about liquidations trends at liquidation statistics.

New business rescue legislation

New business rescue legislation as contained in Chapter 6 of the Companies Act No. 71 of 2008 was signed by the President on 8 April 2009.

Enacting this legislation will provide the turnaround industry with a substantial boost as it has in overseas countries where modern business rescue legislation has been introduced. It is, however, not expected to become operational before the middle of 2010.

Turnaround in the public sector

In contrast to the private sector, turnaround in the public sector is buoyant.

Turnaround and transformation programmes are driven by government striving for increased service delivery and increased financial performance.

The turnaround at the South African Post Office by Maanda Manyetse, who has since left for MTN (and who has moved on again), seems to have run its course, and very successfully so.

Extremely successful turnaround and transformation programmes have been executed at the South African Revenue Services (ex-Pravin Gordham).

Parastatals undergoing turnaround action are Transnet (ex-Maria Ramos, now under acting Group CEO Chris Wells), South African Airways (ex-Khaya Ngqula, now under acting CE Chris Smyth) Denel (ex-Shaun Liebenberg, now under CEO Ismail Dockrat), SABC and the Land Bank.

It is understood that the turnarounds at Denel and SABC are not going well, with allegations of financial mismanagement and irregularities being addressed at SABC and the Land Bank (now under CEO Phakamani Hadebe).

Small Enterprise Development Agency (Seda) is sorting out its finances and has put in place a turnaround plan to have the agency's books checked by auditors each month. The strategy is driven by recently appointed chief executive Hlonela Lupuwana.

The 2004 Babani turnaround programme at SAA has failed, and was replaced by a second turnaround programme devised by US-based airline management and consultancy firm Seabury Airline Planning Group. But CEO Khaya Ngqula has just been dismissed, and SABC are facing charges of price fixing.

At the Department of Home Affairs, a second turnaround programme has been announced in April 2007, with Mvuso Msimang, who accomplished the SITA turnaround, that moved over as Director General of the department.

Initiatives are under way at local government level to place municipalities on a sound financial footing and improve their service delivery. Sponsored by National Treasury, a programme for municipal management has been launched at Wits Business School.

The public sector prefer the international management consultancies or local BEE consultancies to help improve results. With the exception of some parastatals, the approach is often more that of business transformation rather than conventional turnaround.

Accordingly, there is little demand for the services of the established turnaround practitioners from the private sector.

Government itself facilitates labour consultation based turnarounds through Productivity SA by subsidising the fees of private sector consultants who bring in projects and follow the NPI's turnaround and labour consultation methodology.

Government's rescue plan for SA vehicle sector

The entire automotive industry has been severely affected by the global downturn.

A task team led by the Department of Trade and Industry is considering a three-pronged plan to rescue the automotive industry, including tax adjustments to stimulate demand for cars. The team, which includes industry and labour representatives, was set up as part of a South African response to the global economic crisis, thrashed out in the National Economic Development and Labour Council (Nedlac). The framework envisaged a dedicated response to help ailing industries, including the automotive sector. Industry players were not prepared to discuss the details of the plan, which is expected to be finalised by month-end, but it is understood that the rescue package will stand on three legs:

Bridging finance to help cash-strapped car manufacturers’ balance sheets provided by the Industrial Development Corporation (IDC). An industry source stressed that the finance would not be a bail-out, but loans that have to be repaid;
Tapping into Department of Labour and Manufacturing, Engineering and Related Services Sector Education and Training Authority funds for on-the-job training to minimise retrenchments, while additional funds from the Unemployment Insurance Fund could be allocated to help workers already retrenched. The loss of skills from inevitable downsizing has been identified as one of the biggest threats to the industry; and
Incentives to stimulate demand, akin to programmes that have been rolled out in Germany and the UK. These could take the form of scrapping allowances, tax incentives or temporary rebates for trade-ins to stimulate demand.

Government will not bail out stricken companies

ANC treasurer-general Mathews Phosa in April 2009 dismissed calls for bailouts for stricken companies, saying it would send the wrong message to business. "We will be creating a precedent because if you did wrong things you get help from government. It is an immoral approach to business - we (would be) punishing those who did well in business," he told the Cape Town Press Club. Phosa said the incoming administration's top priority would be protecting the vulnerable and fighting poverty, but that he doubted that bailouts were part of a sustainable job creation strategy.

Bridging the private and private sector

The Turnaround Management Association - Southern Africa (TMA-SA) is intent on engaging with government bodies to promote closer cooperation between government and the private sector.

During November 2006 it had fruitful discussions with dti and National Treasury on a wide range of topics including turnaround industry driving forces and constraints, and how government can help.

Also, in 2007 and 2008 it made a submissions to the dti on draft business rescue legislation as now contained in Chapter 6 of the Companies Act, 2008, and participated in workshops in this regard.

Presently, it is launching the Certified Turnaround Professional programme in South Africa under license from TMA, its parent body, and in partnership with Services SETA.

In August 2009 it applied to be designated the regulator of business rescue practitioners, and provided dti with points of view on various regulatory matters.

The global turnaround market

Please refer to the Turnaround Management Association.

The global credit boom has come to an end.

The turnaround industry in South Africa

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The Corporate Renewal Solutions Blog has news about and comments on the corporate renewal, business transformation, turnaround and business rescue industries in South Africa.