Government could end up part-owning dozens or even hundreds of big businesses

Wednesday, 1 April 2020

ANALYSIS A total of 2189 New Zealand businesses have annual revenues in excess of $80 million, Statistics NZ has calculated for Stuff.

That is the cut-off for 'tailor-made' assistance that Finance Minister Grant Robertson has promised to provide on a case-by-case basis to larger firms that are suffering from the coronavirus pandemic.

The price for such assistance for some firms may be that they accept the risk that they may end up partly in state ownership.

The workings of the Beehive have suddenly become much more important to 2189 firms that have annual revenues over $80m a year.

Tailored assistance for larger firms is the third main leg in the Government's plan to help businesses through the crisis.

Separately, all companies that can show a 30 per cent monthly drop in revenues, attributable to the coronavirus pandemic, are entitled to claim wage subsidies from the Ministry of Social Development.

Small and medium-sized firms with an annual turnover between $250,000 and $80m are also potentially eligible for government-backed loans of up to $500,000 to help tide them over the crisis.

Talks are understood to have started with a number of firms after Finance Minister Grant Robertson said last week that the Government, Reserve Bank and the Treasury were continuing to work on further tailor-made support for larger, more complex businesses.

* Coronavirus: Businesses welcome removal of $150k wage subsidy cap

* Coronavirus: Air New Zealand shares drop more than 40 per cent after trading halt lifted**

In theory, at least, the Government has secured a decent amount of headroom for bail-outs of bigger businesses.

Parliament last week passed a bill allowing the Government to spend up to $52 billion on the response to the coronavirus pandemic without going back to MPs for further approvals.

It is understood about half of that sum – just over $25b – has been committed to the myriad of initiatives announced to date.

Tailored help for big businesses may come in the shape of a bitter pill, if the assistance provided to Air New Zealand is anything to go by.

However, there is currently only one solid clue as to what the scale of assistance to large firms might be, or in what ways it may be provided.

Negotiations are understood to be taking place with a number of companies that have sought help.

But to date, the only bespoke assistance that has been confirmed is for Air New Zealand, in the form of a $900m government loan that has some quite hard-nosed terms.

The interest payable on that loan has been set on a sliding scale between 7 and 10 per cent, depending on how much of the facility is drawn down and when the money is paid back.

The loan also required the airline to shelve its planned 11 cent-per-share dividend to shareholders, and all future dividends while the facility is in place.

The loan is only for two years.

And if Air NZ can't pay back the money, the Government will be able to either force it to raise the necessary capital from its shareholders or – perhaps more realistically – allow the Government to directly convert the debt into equity.

The latter outcome could massively dilute the stake held in the airline by its non-government shareholders.

If much of the tailor-made assistance offered by the Government to large firms is structured in a similar way to the Air NZ deal, that raises the prospect that the Government could emerge as a shareholder in dozens or even hundreds of more hard-hit large firms that limp through the crisis, over the next few years.

Oliver Hartwich, executive director of the New Zealand Initiative think-tank, notes that was what happened to some businesses, such as banks, that were bailed out by European governments during the Global Financial Crisis.

It would also be 'deja vu' for Air NZ which has been majority-owned by the Government since it was bailed out in 2001 from its disastrous purchase of Ansett and foray into Australia.

'It is not desirable to keep these shareholdings in the long run and what governments should then do is to start privatising them again,' Hartwich says.

Until the next crisis, presumably.

Hartwich would rather see the wage subsidy scheme hugely overhauled to mirror Germany's short-time working support scheme.

That would allow businesses to reduce hours and cut their wage bill accordingly, with the Government paying workers for a large chunk of their lost earnings.

As well as replacing New Zealand's existing coronavirus wage subsidy scheme, which Hartwich argues is not sufficiently generous, that might also remove the need for tailored assistance for large firms, he says.

But assuming there is no such major rethink, the boards of big businesses that reckon they will need government assistance to see them through the crisis have some difficult decisions to make, one of which is how early to go cap in the hand to the Government.

Those decisions may be dictated by events, and in any case it will be up to the Government to decide which businesses to prioritise for tailor-made help.

It is understood the Government will be looking – with the assistance of the Reserve Bank and the Treasury – to prioritise negotiations with businesses that they feel are most critical to the economy, rather than entering into too many discussions all at once.

But those big businesses that have some capacity to wait for help will need to figure out if they want to join Air NZ as one the first guinea pigs, or whether there is a realistic chance of that tailor-made government assistance getting more generous over time.