COMMENT ON: GOVERNMENT BAIL OUTS

There has been much said on the matter of Fisher & Paykel Appliances’ profit downturn and the possibility of government bail out of New Zealand companies affected by the global credit crunch.
Some commentators have rightfully pointed out that care needs to be exercised in making taxpayer-funded grants to struggling companies, to avoid the creation of dangerous precedent. In addition, caution also needs to be exercised to avoid long line of entrepreneurs simply looking for government hand-out which would be inappropriate in their particular circumstances.
In this current economic cycle, it is likely that very significant number of businesses in New Zealand will be struggling. What is interesting in the case of F&P Appliances is that while it has not made as much this year as in prior years, it is still making profit. This raises the argument whether it really is case for bail out. If it is deemed appropriate to extend government funding, where does the line get drawn at who qualifies?
The Prime Minister has been asked to disclose the criteria to be applied in cases of bail out. While it is difficult to argue with the principle of government assisting deserving New Zealand business to stay in business, the powers that be will not only need to define the criteria for assistance very carefully but will have to be very cautious in how those criteria are measured and applied before the cheque book is opened.
Statistically, most businesses that fail and end up in receivership or liquidation do so through inappropriate management decisions or even inept management. If the business is in difficulty, was that difficulty caused by factors beyond the control of the management, in which case bail out may well be appropriate, or was the present predicament caused simply by poor management decisions? If the latter is the case then it is arguable that any handout will probably result in another application for more money six months later.
If the root cause for the adverse predicament is not identified and rectified, then government bail out is likely to result in more good money being thrown after bad.
If any government-funded bail-out scheme is to succeed and to avoid simply dishing out money to badly run businesses that have hit hard times, thorough screening and evaluation process will need to be put in place.
That will inevitably add layer of cost as it will necessitate an independent, professional appraisal of the causes of the problem and plan being identified to rectify those causes before money is handed out.
New Zealand has come off the back of what is arguably its longest period of sustained economic wellbeing since the end of the Second World War. We have generation within the workforce which has never known bad times. Consequently many managers of businesses do not know how to manage the economic challenges their enterprises are presently facing and simply giving them cash hand-out will not solve the problem.
What will be essential to avoid the bail-out fund becoming bottomless pit is that each applicant for funding will need to be subjected to business health check, with suitably experienced and qualified independent professional assessing the need for assistance, identifying the root causes of the problem, recommending remedial action and making sure that such recommendations are implemented.
Thought needs to be given to whether it will be appropriate for an applicant for government assistance to be placed under the temporary care of such professional, for instance through the Voluntary Administration Regime, (similar to the USA’s Chapter 11).
While there has been some criticism levelled at this relatively newly introduced regime, it can be very effective when applied to valid candidate. It can be argued that many of the companies which have thus far opted for the Voluntary Administration Regime and for whom it did not work, were really not capable of rescue anyway.
If company has been the victim of the global economic downturn, is not overburdened with debt and has good core sustainable business, then it is submitted that there is valid case for government assistance provided there is strong management structure in place with adequate controls to ensure that any money granted will be well spent in ensuring the survival of the business.
The key to the success of any such programme will be to ensure that only deserving applicants with valid case in favour of assistance get such aid and that it well spent in preserving the business for the benefit of all of its stakeholders.
One cannot argue against the principle of helping business to survive when it is not the architect of its own misfortune, as staff, suppliers and the business owners themselves will avoid losses but the controllers of the cheque book need to be sure that their money is going only to deserving recipients and is not propping up businesses which would have failed, regardless of the global economic crisis.