Comment On: Government Bail Outs

By Poole, Gareth | New Zealand Management, April 2009 | Go to article overview

Comment On: Government Bail Outs


Poole, Gareth, New Zealand Management


Byline: Gareth Poole

There has been much said on the matter of Fisher & Paykel AppliancesCO profit downturn and the possibility of a 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 a dangerous precedent. In addition, caution also needs to be exercised to avoid a long line of entrepreneurs simply looking for a government hand-out which would be inappropriate in their particular circumstances.

In this current economic cycle, it is likely that a 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 a profit. This raises the argument whether it really is a case for a 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 a 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 a 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 a 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, a thorough screening and evaluation process will need to be put in place.

That will inevitably add a layer of cost as it will necessitate an independent, professional appraisal of the causes of the problem and a plan being identified to rectify those causes before money is handed out. …

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