Lessons from the Kalahari: Government support is key

The past two years have been identified as the beginning of the golden age of business rescue in South Africa. The Covid-19 Pandemic accelerated the distress that many companies found themselves in; and while many companies are beginning to address the challenges that they are facing, the outlook for the profession is that there will be many more companies seeking the assistance of BRPs and turnaround professionals going forward. This trend was highlighted in the 2022 Deloitte Restructuring Survey.

They Survey also pointed out that there is a growing crisis of trust (which Turnaround Talk has discussed at length) and that there is a need for legislative development to take place in order to improve the profession.

This is not an isolated case. Earlier in the year, the Turnaround Management Association of Southern Africa (TMA-SA) opened a branch in neighboring Namibia which has a vibrant business rescue and restructuring profession. Recent reports have pointed to the fact that there is a similar need for legislative development in Namibia in order to address loopholes within the profession.

Across the Kalahari

As envisaged in the Harambee Prosperity Plan II (HPPII), a Business Rescue Task Force (BRTF) was appointed by Dr Hage Geingob (President of Namibia) on 1 July 2021, to review global and domestic business laws, policies, and frameworks with a view to recommend amendments to the applicable laws, determinations, regulations, and policies to cement Business Rescue (BR) as the preferred path for businesses in financial distress.

In addition, the task force was also asked to propose alternate funding solutions to prevent, as far as practicably possible, viable businesses from closing and limit job losses.

Through comprehensive research and the wide consultations held locally and internationally, the Task Force was enabled to make recommendations that are unique to the Namibian economic landscape. These were discussed in a recently released report.

Speaking to a few prominent South African BRPs about the report, they pointed out that the funding recommendation and the ethics issues discussed in the report are interesting. We will look at the funding issue in this editorial.

Recommendations related to funding
As discussed in previous articles on Turnaround Talk, the funding for business rescue is an issue. This was highlighted on numerous occasions during the South African Airways Business Rescue as well as the Edgars business rescue. Post commencement financing, and the ranking of creditors, is also an issue that was discussed by Turnaround Talk Contributor – Moses Singo.

Again, this is not an isolated case as we can see the challenges that are faced in Namibia. The task force established by the Namibian Government identified the challenges and made some key recommendations. These are outlined below.

Issue	Priority Solution	Benefits/Impact	Timeline
Lack of funding options available for businesses in distress.	Establish a Business Rescue Fund- with a blended funding structure from Government, International Investors and the Private Sector.	Providing much needed Post-Commencement Funding to recapitalize (and restructure) distressed businesses.	Short term: < 12 months
Difficulty of accessing funding by SMEs.	Improved Access to Finance by creating a Collateral Registry and introducing subsidized interest rates.	Afford SMEs with no fixed assets as collateral, the opportunity to offer movable assets as collateral and to access funding at reduced or subsidized rates.	Short term: < 12 months.
Lack of funding available to Government to inject capital into the Business Rescue Fund	Acceleration of PPPs/ JVs – monetisation of commercial state assets, delay capital projects, allocate a certain percentage of income to the Business Rescue Fund	Accelerate the establishment and launching of the Business Rescue Fund	Medium Term: 12 – 24 months
Shortage of skills and capacity to facilitate Business Rescue	Allow work permits to bring in qualifying business rescue candidates from other countries to transfer skills to Namibians	Bridging the gap between enacting of new legislation and sufficient skills and experience being developed	Up to 5 years
Government competing with Private Sector (in some sectors) putting them out of business	Government to focus on creating a probusiness environment and developing (non competitive) new markets	Allow Private Sector entities to continue doing business without fear of competition from public enterprises	Always

The report adds that the success of Business Rescue will largely depend on the availability of flexible and well-structured Post-Commencement Finance (PCF) instruments. It is therefore critical to come up with innovative financial solutions for Companies, Close Corporations, Sole Proprietors, Partnerships, Trusts and Public Enterprises.

It is proposed that a cascading range of measures and solutions be considered that can be used in isolation or in combination to bridge the financing gap that arises because of the current economic down-turn and make sure that potentially productive capacity is maintained, and an entrepreneurial spirit is encouraged to support the recovery of the economy at large.

The cascading range of interventions includes:

• Government intervention;
• private sector intervention;
• revisit the role of the Development Bank of Namibia;
• fund raising; and
• capacity building.

Government intervention
The report points out that Government intervention in Namibia will typically be required because of a prolonged economic/financial down-turn similar to what is being witnessed in the current environment, impacting the entire economy, specific sectors or industries, or large employers of people.

The report adds that it is recognised that the Namibian Government has limited resources to address all national demands and may therefore not be able to avail financial resources to directly address BR. The following are proposals to support Government in raising much-needed capital to support the economy:

• The current ownership structure of Commercial Public Enterprises unfortunately does not lend itself to generate positive cash inflow for Government. Cognisance is taken of the good progress made with the Public Enterprise Ownership Policy which is in an advanced stage. The relevant Ministry is encouraged to enhance implementation of the new Policy, thereby ensuring that Public Private Partnership, Joint Ownership or Private Sector Investment in selected Commercial Public Enterprises, can be realized as soon as possible. It is well known that a number of these Public Enterprises are a huge financial burden on Government (The Shareholder) with no Commercial Return on its Investment. By “privatising” a percentage ownership to Private Sector investors, the Shareholder will not only unleash large sums of capital which can be put to great use for priority job creating projects, but also turn the negative outflow of cash towards these Enterprises around to a positive cash inflow, and thereby achieve a positive return on its investment; and
• In addition, Government is encouraged to create a Property Holdings Entity under the Ministry of Finance and consolidate all fixed properties owned by Government under this Entity. This will result in the establishment of the true economic value of the properties and gear the assets professionally to generate a new source of income for Government. Under the newly established Public Enterprise Ownership Policy, Government should not enter into competition with the Private Sector (i.e. Namcor) or go into ventures that private sector should be doing, unless it will significantly “grow the cake” and grow the economy to the extent that it creates sustainable long-term employment and Private Sector growth and development.

The report points out that the Namibian Government also has a useful tool at its disposal, which is policy/legislative interventions. Through policy/legislation, Government can create a pro-business environment which will in turn attract to Namibia investors with sufficient “risk capital” for Business Recovery. Non-finalisation of key legislation such as the Namibia Investment Promotion Act and the New Equitable Economic Empowerment Bill (NEEEB), does not support a pro-business environment.

It is well known that investor capital will flow to countries where it is treated well and rewarded adequately and a lot of work is required to make Namibia more investor friendly by introducing efficient and streamlined policies, easing the way of doing business in Namibia.

Further work is still required in terms of sustainable solutions in this space.

Private sector intervention
The report points out that without Post Commencement Funding, Business Rescue cannot exist, and it is critical in such difficult times to explore innovative financial solutions with respect to debt and equity recapitalization and keeping capital markets open.

It is important to develop a framework that provides fair protection as well as comfort to both the entity as well as creditors (secured and unsecured) and financiers of Post Commencement Funding.

The report adds that, to provide incentives to unsecured creditors, it is proposed to consider different classes of creditors enabling a cross-class voting and clampdown process. Lenders generally require a fair amount of certainty that they will be considered fairly, what their ranking in the process will be and assurance that they will have a fair vote when it comes to approval of a restructuring plan. It is recommended that four categories of funding be considered in isolation or in combination namely debt funding, equity finance, bonds, and grants/donations.

The role of the Development Bank
The report points out that the role of the Development Bank of Namibia should be reconsidered in line with global best practice. Whilst banks are typically measured on financial returns, Development Banks should also be measured on social returns (i.e., be less commercially attractive with a higher multiplier effect as far as job creation, poverty alleviation and the creation and development of new industries are concerned, and therefore expecting lower returns).

The DBN should play a bigger role as a bi-lateral partner to Government in raising and managing development funds globally in the form of policy loans, cheap loans or free grants/donations to fund debt/equity conversions at very low returns and/or to subsidize interest accumulated during national distressed situations in very exceptional circumstances.

The report adds that the Development Bank of Namibia may not necessarily have the expertise to manage and administer funds like these, and this function might have to be outsourced to a professional fund manager in the Private Sector.

Fund Raising
The report points out that the success of Business Rescue will largely depend on the availability of flexible and well-structured Post-Commencement Finance (PCF) instruments. It is therefore critical to come up with innovative financial solutions with respect to debt and equity recapitalization.

Key lessons
In martial arts, there is a philosophy that states: the master becomes the student, and the student becomes the master. While we are not suggesting that the South African business rescue profession is superior to the Namibian profession, it is undeniable that the South African system will be more advanced than our neighbors by virtue of our position as the third biggest economy on the continent.

It is clear that the Namibian business rescue profession has learned a lot of lessons from South Africa. It is also equally clear that the Namibian Government has recognized the value that the profession can play in building strong economically successful institutions. Therefore, Namibian BRPs can expect a lot of support from the Namibian Government in terms of funding and legislative development.  Perhaps South African can now take a few of the recommendations mentioned in this report and apply them to our profession.

The ball is in your court Mr President and Minister Patel.