No Covid Business Bailouts
With governments around the world ramping up public spending to levels not seen since wartime along with the mandated shutting down of whole swathes of the economy, how can society ensure that government supports of business are not simply bailouts but are ‘bail ins’?
The Current Situation
With Covid putting a freeze on economic and social activity around the world here are a few stats that demonstrate the challenge that governments and societies face.
- Oil Prices — Oil prices have fallen far and fast, with some types of oil selling for below $5.00 a barrel. The massive drop in oil demand is one sign of how large an economic crisis we are facing. The Canadian energy industry in particular will struggle until prices increase.
- Air Traffic — It is expected that the airline industry will see revenues fall by nearly 50% from 2019 to 2020. Quickly falling demand has already resulted in large scale lay-offs and government support.
- Unemployment — Some see unemployment hitting levels nearly tripling, with Canada’s forecast to rise from 5.6% in February to 15%, levels not seen since the Great Depression.
- Stock Market — Major global stock market indices are dropped nearly 35%, wiping out the pensions and savings of people around the world.
These are some sobering statistics suggesting that the global economy is set to experience a massive recession and reduction in GDP.
Government Responses So Far
Governments around the world have responded to shield businesses from the economic shocks of the Covid crisis in different ways. However, they have tended to fall into a few broad buckets.
- Wage Supports — Governments have been creating programs to provide wage subsidies for companies that have to lay-off or temporarily furlough employees. This has enabled businesses to retain employees and pay wages for employees in self-isolation, temporarily laid-off, or unable to work.
- Low Interest Credit — Providing access to low interest funding through support provided to private banks and/or government agencies. The aim of this being to provide businesses with liquidity to pay bills and wages at a time when they may be generating little to no positive cash-flow.
- Grants — Direct grants to business needing quick access to cash have also been offered. These have tended to be geared towards smaller businesses who may struggle to access credit.
Due to the speed that the Covid crisis is developing, the quickly changing medical situation, and the complexity of identifying what business needs are and how to provide support to those in need governments are constantly tweaking programs and creating new ones.
What we have not yet seen is detailed thinking around if / how many of these supports will be recouped by governments. For instance, Canada’s GDP is forecast to drop by 25% in Q2 2020 and the federal deficit jump by more than 400%, leaving Canadians with a massive increase in debt.
Governments should learn lessons from the Financial Crisis of 2007–2008 and ensure that they don’t socialise the losses of business while letting them keep any gains. In layman’s speak, make sure businesses and shareholders don’t get a massive bailout paid for by the taxes of citizens.
I am not an economist, public policy expert, or corporate financier, but here are a few ideas that governments should be considering when it comes developing these programs and recouping some of the business supports provided during this crisis.
- Equal Treatment — There should be little to no differential treatment between businesses or sectors of the economy. Funds should only go to businesses domiciled in the nation providing the support, but would include funding to local subsidiaries of multi-nationals. The government should not be picking winners and losers.
- Efficient Delivery — The process for accessing support and providing it should be quick and simple (e.g. revenue drops of X% from the same period in 2019, X% of staff at risk from redundancy). For instance, where pre-approvals for support can be conducted using tax records this should be done. Once a decision has been made existing payment channels should be used.
- Apply — Businesses should have to apply, using a simple and quick approach, for funding. The decision criteria should be free of political bias with the aim of getting money, quickly to the businesses that express a need for it.
- Controls — Restrictions on what government support can be used for should be applied consistently across all business recipients of government Covid support. These could include restrictions on dividend payments, transfer of funds within larger corporate groups, executive compensation, wage increases, share buy-backs for instance.
- Public Ownership — Where a business is the recipient of a material amount of financial support versus their historical enterprise value, revenue, and/or profit the government should be able to gain an equity stake in the company using a transparent and formulaic approach so that shareholders have their equity stakes diluted in return for a large amount of government support.
I don’t think most people would argue against the first four points, however, the fifth, public ownership, likely warrants some debate.
Governments taking an ownership stake in businesses they support seems to be a lot like socialism — but it also has a strong dose of free market capitalism. The socialist part is the government taking ownership of private businesses. The free market aspect is having shareholders suffer some of the pain (diluted ownership), meaning they now own less of the business after receiving government support. This would turn what looks like a bailout to a ‘bail in’ — governments becoming shareholders of the businesses they support.
With this bail in approach all of society benefits. When a business returns to profitability the value of the equity stake increases and dividends gets shared with government.
So how do we stop government from meddling in these businesses, directing them in a manner that benefits politicians but not shareholders, thereby reducing future profits and the value of equity? Governments, like Canada or Norway could transfer all ownership stakes to their arms-length public pension funds, like Canada’s Canada Pension Plan Investment Board. This would insulate businesses who received Covid support from political meddling, ensure that taxpayers who will receive a public pension share in any upside, and place shareholdings under competent and independent management.
That is not to say that this model does not have its complications. How would the value of equity stakes in private (not on stock exchanges) be valued? Would there be a business size threshold where this model would not be viable (small business)? At what threshold of government support would governments be able to take an equity stake? What provisions could there be for shareholders to buy-back the equity stakes taken by government? What process and timeline would there be for governments’ selling their stakes? These are all problems that can be solved — they should not stop governments ensuring that citizens benefit from any upside following the Covid crisis and that shareholders don’t get ‘free’ money from a bailout.
Write to your politicians, share this article, and write your own case for governments ‘bailing in business’ and not bailing them out.