The idea of establishing a government fund that is meant to rescue firms from liquidation is one that is best, well, liquidated.
It was mooted this week at a meeting of stakeholders in the R18-billion liquidation industry. The idea, presumably, would be to preserve jobs and support new black enterprises, which suffer a high attrition rate.
Econometrix chief economist Tony Twine seems unenthused by the idea. ”I fear that without a solid set of rules, decisions on who will be rescued will be arbitrary,” he said.
He also notes that ”it is not government’s place to prop up business in times of trouble”. Its task is to create a stable macroeconomic environment that minimises liquidations by eliminating currency crises, rampant inflation and choking interest rates.
The fact is that if a company is under threat and has the commercial merit to be rescued, another company or a financial institution will step in.
The Banking Council favours the state bail-out idea. But you would expect it to, wouldn’t you? It would be supportive of any idea that shields it from risk. That is why we have development finance institutions.
Cas Coovadia, managing director of the Banking Council of South Africa, emphasises that the fund should not be used to rescue badly managed outfits, only those that suffer because of circumstances beyond their control. Examples of these would be a sudden strengthening of the rand or sudden removal of a trade barrier, like a tariff.
But Twine asks what would happen to an importer when the rand suddenly weakened — could he or she apply to be rescued?
Coovadia notes that the facility would be used to bridge a short-term difficulty. But if the stress is temporary and a turnaround is not far off, is that not where the banks will step in? ”This [fund] would help us manage a particular risk more effectively,” says Coovadia, adding that part of the rescue process would be to help place a business on a long-term growth path.
If the fund is in place and a rescue package is provided, but a firm still fails, could the bank, usually the largest creditor, claim what is owed from the proceeds of liquidation? ”Not at all,” responds Coovadia, noting that all funding should be directed at the rescue effort.
Enver Daniels, head of the liquidation master’s office, argues that the fund would serve to save jobs and would not look to rescue a firm that was hopelessly insolvent. Deserving enterprises would include those experiencing temporary cash-flow difficulties and those suffering ”engineered” liquidation. He expects banks to be involved in setting up the fund and envisages that rescue packages will be repaid.
Ironically, the only sector where the government can and must intervene to ensure continued liquidity is the financial services sector. This is through the Reserve Bank’s function as a lender of last resort to the banking sector.
If the government plays this role effectively, the moneylenders can improve their risk management to ensure that other sectors remain liquid. Part of that process, unfortunately, involves letting some firms go under.