Turnaround strategies that never worked

August 4, 2017, 10:11am

 

 

Most if not all state-owned enterprises have had several turnaround strategies in the past 10 years yet none of them has managed to make money. The government spent millions funding the turnaround strategies at TransNamib, the Roads Contractor Company and Air Namibia without any returns. In fact, the three state-owned enterprises are notorious for going back to the government to beg for more money.

TRANSNAMIB

In September 2014, TransNamib announced amid pomp and fanfare that they had devised an 180-day turnaround strategy that would cure the company’s illnesses. The government pumped N$450 million for the turnaround strategy. Johan Piek, who was appointed as the turnaround strategy consultant was paid N$7,5 million. The ambitious turnaround strategy spread over three phases for three years sought to improve profitability within six months; refurbish 12 General Electric locomotives; upgrade of the railway line, and restructure human resources.

The refurbishment of the locomotives was expected to cost N$60 million. At the time, the acting chief executive officer, Hippy Tjivikua said they needed N$12 billion to complete the turnaround strategy. About N$3 billion, Tjivikua, who has since been suspended, said was for improving operations, while N$9 billion would be for improving railway infrastructure. Tjivikua boasted at the time that if the N$12 billion is made available, nothing would stop them from realising their dreams. In return, the turnaround strategy was expected to yield more than N$12 million per month.

Although Tjivikua had confidence in the turnaround strategy, he had none in Piek. “Based on my interaction to date with Piek and in the absence of me having any knowledge and ac cess to his profile, I wish to state categorically clear that Piek does not carry the right qualifications, experience and understanding of this exercise at hand,” he later told the board in a letter dated 15 March 2017. When the turnaround ended in March 2015, there was nothing apart from a few locomotives that had been refurbished at Transnet in South Africa. In January 2016, TransNamib announced that it would retrench 1 000 of its 1 600 workers because of financial problems.

By November 2016, it was clear that the turnaround strategy had failed after TransNamib said it did not have money for a 13th cheque. At the time, TransNamib spokesperson Struggle Ihuhua, who has also been suspended, said the financial situation at the state-owned enterprise was not a secret. “We had been engaging all stakeholders including our shareholder of the dire straits in which the company finds itself today,” Ihuhua said. He also said the company informed its shareholder accordingly about its predicament, “but so far we have no substantial confirmation to this effect to date”. Ihuhua said they have developed a comprehensive Integrated Strategic Business Plan to complement the turnaround strategy. “All the initiatives contained in our strategic business plan are aimed at not only transforming the company into a profitable business, but making it a sustainable entity in the railway sector of Namibia and, subsequently, the region,” he said Ihuhua was quick to point out that none of the initiatives was for free and that TransNamib did not have the money to implement the key strategic initiatives.

 Tjivikua would return in March 2017 to say that TransNamib was not in a financially sound condition to carry out a number of functions including the N$200 million needed for the retrenchment. “Equally, we are not in a sound financial position to borrow fundi ng from commercial banks for this purpose without the express support of the shareholder,” Tjivikua told the board in the letter. He also suggested that TransNamib could either secure funding from the government and other parties or sell its non-core properties and use the money for the ret renchments exercise. With both executives suspended, TransNamib turnaround may never be implemented and the money the government out in went to waste.

RCC

Another state-owned enterprise that has had several turnaround strategies is the beleaguered RCC. Today, the company’s survival is hanging by a thin thread after recommendations that it should be shut down. During April 2008, the company opted for a business turnaround strategy designed and planned with a primary objective of restoring the company and transforms it into a profit-making one.

This decision was endorsed by RCC’s shareholder, through Cabinet support as well as key stakeholders such as such as clients, union and suppliers. RCC claimed to have recovered from a loss of N$65 million in 2007-08 to a profit of N$17, 4 million in 201011 due to the turnaround strategy. RCC said its consolidated financial results, which included the financial performance of subsidiaries and joint ventures, showed an improvement from a loss of N$23,5 million in 200708 to a profit of N$28 million in 201011. In order to complement the fruits of the turnaround efforts and ensure continuous sustainability, a new 2012- 2017 strategic plan was launched in September 2012.

Through this strategic plan, RCC identified 14 strategic focuses, which have been transformed into strategic projects spearheaded by respective departmental managers. “RCC can confidently boast that these strategic focus areas are indeed a sign that the turnaround plan has now reached the stage of establishing a sustainable business with mature organisational efficiencies and effectiveness in areas such as cash and cost management, project management, corporate compliance and performance management enforcement,” the company boasted too at the time.

 Fast forward to April 2015, the RCC’s ambitious strategic plan could not deliver and the company failed to pay Vat. The finance ministry then moved in to freeze RCC’s accounts. The then RCC chief executive officer Pieter Oosthuizen confirmed that the company hadn’t paid VAT since 2006. Former works permanent secretary Peter Mwatile said at the time that the RCC needed about N$400 million to function well. At the time, the RCC just like TransNamib had implemented an 180-day turnaround programme. In May this year, finance minister Calle Schlettwein said in May this year that RCC would require about N$1,1 billion to turn it around. Schlettwein who also chairs the treasury committee revealed that he had asked the RCC and the works ministry to devise yet another turnaround strategy.

“We decided that we must receive the plan with business costs and targets to transform the entity into a self-sustaining company. “They have not yet submitted it, and the deadlines have not yet been met. Only after they submit the plan can we make a decision on whether we have that money or not,” Schlettwein told The Namibian in May. It is clear now that the suggested turnaround strategy was never done because both Schlettwein and the public enterprise’s minister Leon Jooste want the RCC to be dissolved. Apart from seeking a billion dollars, the RCC has been struggling to pay its 400 workforce and has asked the government for a N$300 million bailout. Today, RCC faces death instead of prosperity.

AIR NAMIBIA

Between 2003 and 2009, Air Namibia’s turnaround plans gobbled about N$2 billion from the government. In 2011, Air Namibia came up with another five-year turnaround strategy that would cost the taxpayer N$1,6 billion. By August 2013, - halfway through the five-year plan - Air Namibia claimed that it had moved towards breaking even.

In a bid to prove that the turnaround strategies were bearing fruits, Air Namibia hired a London-based firm to compile a report that claimed the airline was coming around. The report titled The Economic Impact of Air Namibia was released in May this year. According to the report, in 2015/16, Air Namibia contributed N$704 million to the economy and sustained more than 4 500 jobs. The report further claimed that the airline spent more than N$1 billion on goods and services locally. “These benefits are not only retained within the aviation or tourism sectors but rather ‘ripple out’ throughout the economy. “Of nine broad sectors in the Namibian economy, five of them enjoy the activity in excess of N$50 million as a result of Air Namibia’s operations,” said the report.

 It estimated that Air Namibia generated about N$316 million in 2015/16, saying further that this was equivalent to 55% of the subsidy the airline had received that year. Responding to the claims made in the report at the time, Schlettwein doubted the report. Schlettwein said Air Namibia depends on state bailouts and subsidies. Air Namibia was allocated N$486 million for the 2017/18 financial year, N$493,9 million in 2018/19, and N$497,7 million in 2019/20. Quick calculations show that the state has given Air Namibia N$10 billion since 1990.

Last month, Air Namibia almost failed to get N$50 million from the government after the works ministry had written to them about the lack of funds. Work permanent secretary Willem Goeiemann told the airline that “due to a very limited ceiling (fund allocation) for July received from the treasury, the ministry is unable to pay for your government subsidy allocation”. “The ministry, therefore, advises Air Namibia to kindly make other financial provisions to pay its leases, maintenance and fuel for July 2017,” Goeiemann wrote. The Villager understands that Air Namibia spends about N$300 million per month. Of this amount, the government tops up with N$50 million per month. Currently, there is a standoff between Air Namibia and the National Airports Company over N$200 million in airport fees.

The Villager has correspondence between the airports’ company board chairperson Rodgers Kauta and Air Namibia’s board chairperson Gerson Tjihenuna dating back to January this year. According to the correspondence, Air Namibia has been promising to pay up and even came up with a payment schedule but failed to adhere to it. Kauta informed Jooste that the airports’ company could be left with no option but to bar Air Namibia from using the airports. One would ask: whatever happened to the turnaround strategies?

POLITICAL INTERFERENCE

Economic analyst Mally Likukela said there is a lot of political interference in SOEs management and operations. Without mentioning names, Likukela said, one will find out that there are certain ministers who interfere with operations. This, he said, is done even after the politicians themselves had agreed to their turnaround. “So, you will find out that management in entities cannot do their work according to how they see it fi t because many times they are stopped in their tracks,” he said. Likukela added that one would also find out that the people who would have put up the turnaround strategy are not the same people that would be there two years after implementation. “We can only remedy the situation by reducing the power of the ministers or the politicians, there is too much power concentrated in their hands,” he said. Another analyst Roman Grynberg said some state-owned enterprises cannot break even. “You have African national flag carriers like Ethiopian Airlines that are making money, but they have a different model. “It’s a model that Air Namibia cannot emulate because they have turned themselves into a global hub,” he said.

According to Grynberg, most of the airlines make it extremely difficult to replicate the experience of airlines like Air Ethiopian or Turkish Airlines, Qatar or Emirates.

“Sometimes you have to take a serious look at whether it’s worth saving a few hundred jobs at the cost of hundreds of millions that may not succeed. “It’s a cruel thing to say. A lot of the state-owned enterprises can make money but they have to be taken out of the management of people who are running them.

“They are not competent or professional. Why didn’t Air Namibia put in place management system years ago?” The Unam lecturer gave the example of the Country Club and Casino, which he said is making money. “Why? Because it is not managed by people who do not know what they are doing. It’s put in the hands of a large South African company, The Legacy Group of Hotels and it makes money,” he said. On the other hand, he said, take the Namibia Wildlife Resorts that is owned by the state and is not making money.

“It is not the ownership that is a problem, it is the management. Grynberg said sometimes even good private management won’t solve the problem because the business model can’t work. “You can make money flying aeroplanes in Namibia. The case for Air Namibia as a carrier of tourists is weakening because you have all these airlines now entering the market. “The argument for keeping Air Namibia as a long haul carrier is making less and less commercial sense,” he said.