An elegant exit strategy for Covid-19 state aid

Never let a serious crisis go to waste.
Image: Bloomberg

Governments are helping businesses survive the debilitating effects of the coronavirus by allocating state funds to various rescue packages to keep companies alive and preserve as many jobs as possible. With unprecedented amounts of economic stimulus planned to combat an unparalleled situation, it’s essential that the authorities spare at least some attention to what a post-pandemic exit strategy might look like.

Once the virus is subdued and the lockdowns end, governments should convert a chunk of the aid they’ve distributed into equity stakes in the recipients, with the ensuing portfolio of holdings assembled into sovereign wealth funds.

Norway currently has the world’s biggest sovereign wealth fund, overseeing about $945 billion and funded by the nation’s oil revenue. Singapore has had a wealth fund for more than four decades. Egypt, Senegal and Turkey have all set up wealth funds in recent years to manage their state-owned companies, with South Africa saying earlier this year that it plans a similar move.

Read: Soon-to-be launched sovereign wealth fund targets R30bn in capital

Countries in Europe have toyed with the idea in the past. In August, a draft proposal for a “European Future Fund” suggested an initial 100 billion-euro ($110 billion) pot could be set aside to invest in strategic industries in the European Union. But as my colleague Ferdinando Giugliano argued at the time, the EU is not a sovereign state, and such a fund would just divert existing budget resources rather than tapping a pool of wealth.

In the UK, the May 2017 Conservative Party manifesto proposed what it called Future Britain funds, which would “hold in trust the investments of the British people, backing British infrastructure and the British economy.” The pitch said the money would come from “shale gas extraction, dormant assets and the receipts of sale of some public assets.” Almost three years later, there’s still no sign of those plans being enacted. (That’s probably just as well given their paltry financial underpinning; as myself and my colleague Marcus Ashworth wrote at the time, those sources would have provided a minuscule capital base, even before fracking was banned in Britain.)

But the current crisis provides an opportunity for individual countries to make good on those vague promises by setting up wealth funds that are big enough to count as full-blown assets to society, given the scale of financial assistance that’s likely to be required to get through these dark days.

They could start by assigning existing state investments to wealth funds. The UK government, for example, still owns about 60% of Royal Bank of Scotland Group, more than a decade after bailing out the ailing lender to the tune of more than 45 billion pounds ($56 billion) as part of a wider rescue of the domestic banking industry. The German government has a stake of almost 16% in Commerzbank, while Belgium and France have control of Dexia SA, split 53% to 47%.

The global financial crisis made many banks wards of their states. Formalising those stakes in wealth funds would be a way to start building state-owned asset portfolios. During normal times, governments could be sleeping equity partners. But in times of crisis — like now — governments would have a more direct pathway to influence lenders to help borrowers weather any economic storm.

For the UK, creating a wealth fund would solve the issue of preserving vital domestic infrastructure without handing free money to foreign conglomerates. The owners of Heathrow Airport, for example, include Qatar Holding, the government of Singapore’s GIC, and the China Investment Corporation. By making aid conditional on receipt of equity, Britain would be getting a stake at current distressed values in return for bailout funds.

Today’s situation demands aid packages for a swathe of industries feeling the pain, including automakers and travel companies. If having such a broad range of stakes feels too interventionist, wealth-fund holdings could be restricted to infrastructure that’s vital to the economic functioning of a country. Though that could prove to be a tough distinction; given initial lockdown experiences, an argument could be made that suppliers of internet broadband and food delivery should qualify.

For those who still insist the state should stay out of private enterprises, note that governments are already effectively telling companies how to run their affairs in return for aid. Earlier this week, Germany asked companies seeking help to suspend their dividends, with France also asking the same from firms that defer tax liabilities. German Economy Minister Peter Altmaier also wants senior executives to “contribute in emergencies, especially with respect to bonus payments,” according to an interview with the Frankfurter Allgemeine Zeitung at the weekend.

One of the new realities of the post-virus economy will be increased state involvement in business. Companies are likely to come under pressure to shorten their supply chains and bring more manufacturing back home, wherever home may be. The lines of production will become shorter, as regional ties replace at least some of the worldwide outsourcing that has been a keystone of the globalised economy. That will be easier to enforce if governments’ holdings give them seats on corporate boards.

Shareholdings would give governments additional clout to influence better corporate behaviour as more nations embrace their responsibilities to the future of the planet. Until now, asset managers have long been leading the drive to force firms to give greater emphasis to environmental, social and governance issues.

A decade ago, a key complaint about the rescue of the global financial system was that public money was used to compensate for private risk taking gone awry. While this crisis is undoubtedly different, there’s still a danger that as governments pledge billions of dollars, euros and pounds to businesses, public support will wane as the scale of the financial challenge becomes apparent. Building equity stakes that belong to the nation will help offset voter mistrust about the wisdom of such largess, allowing everyone to participate in the economic recovery that the disbursements are designed to facilitate.

As the saying goes, never let a serious crisis go to waste.

© 2020 Bloomberg

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Government has already assisted their major economic worry, the taxi-industry, so everyone will just have to wait.

The premise of demanding an equity stake in businesses because of state aid given to them is laughable ; since government caused undue harm to the operation of the business by enforcing the lockdown.

It was government that failed to track and trace adequately. South Korea avoided a shutdown by doing this correctly –

It would be immoral for a government to benefit in some fashion from a mess that they were part of creating.

So; no, government should support the businesses as they try to keep people employed while abiding to the lockdown….

It could be a time to invest more in green technologies as proposed by Tim Jackson in his book Prosperity without Growth: Foundations for the Economy of Tomorrow. There is a summary on Ted Talk, but I recommend reading the book if one has the time during one’s stay-at-home period.

Mmmm I hope this fund does not morph into a collection of even more inept state owed entities that only survive with government aid. I would rather this crisis was used to liquidate a lot of old stale companies. People and assets will still be there and new owners will step up with new better ideas on how to profit from them.

The South African SOE experiment serves as an example of the destructive effect of government intervention. The financial aspect, in the form of corruption, inefficiency and debt, is the least of the costs to society. Government intervention and control of industry and enterprise leads to a far greater cost, namely a detrimental shift in the mindset of citizens.

The first positive attitude to disappear is accountability, and the first negative mindset to appear is the victim attitude or the slave mentality, that motivates the exploitation of the shared resources. Government intervention and control enables, incentivises and rewards the most destructive behaviour patterns because it destroys accountability and it rewards incompetence and greed. Once this mindset becomes the norm in the wider society, it becomes impossible to turn it around. These morally bankrupt citizens will eventually target the ultimate bastion of accountability, the Reserve Bank, and plunder the purchasing power of the currency. We have seen this in Zimbabwe and Venezuela.

“Freedom to order our own conduct in the sphere where material circumstances force a choice upon us, and responsibility for the arrangement of our own life according to our own conscience, is the air in which alone moral sense grows and in which moral values are daily recreated in the free decision of the individual. Responsibility, not to a superior, but to one’s own conscience, the awareness of a duty not exacted by compulsion, the necessity to decide which of the things one values are to be sacrificed to others, and to bear the consequences of one’s own decision, are the very essence of any morals which deserve the name.”
― Friedrich August von Hayek, The Road to Serfdom

Other than the Reserve Bank Governor Mr E L Kganyago and Mr Tito Mboweni, the ANC including current president with see this “sovereign fund” as a “slush fund” for the ANC personal expenses, holidays and non-refundable loans”

Here is a novel idea for an SA wealth fund:

All the BEE shares should be placed in this wealth fund – from where it can be fairly distributed for the benefit of all the people in the country, instead of the benefit of a few ANC aligned fat cats.

Are you smoking your socks? Wake up! Oh I see, Bloomberg. That explains it.

End of comments.





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