Most Cat readers would agree that Government-subsidised export credit organisations (such as Australia’s Export Finance Insurance Corporation – EFIC) should be abolished. They are a means of transferring wads of taxpayers’ money to special interests/rent seekers behind the back door. The deals are non-transparent and leave the taxpayer with a contingent liability. EFIC claims that it does not provide subsidies, but that argument is highly flawed – after all, if EFIC offered the same terms as the private sector, it would not need to exist. EFIC benefits from an Australian Government guarantee that makes it effectively an agency of the Government.
The recent Productivity Commission report did not go so far as to recommend EFIC’s abolition, but it did make some serious and strong recommendations that would reduce the taxpayers’ potential exposure from EFIC errors. Unfortunately the Government rejected the Commission’s report; it’s business as usual for EFIC, which seems to be expanding under the Gillard Government.
EFIC has now crossed the Rubicon with a deal involving Nyrstar where EFIC will guarantee the equity!
That’s right, EFIC is moving from just providing guarantees for debt, to guaranteeing equity.
This is outrageous, and suggests that Nyrstar was in tremendous financial difficulty, with the Australian taxpayer coming to the rescue to save its shareholders and managers.
It would have been better for the Government to allow the company to get into financial difficulty and then buy the equity at a deep discount. At least the taxpayer would then have got some potential profits. But instead, we help out existing shareholders, while having no upside for the taxpayer.
Once governments start going down this road, we may as well bid goodbye to productivity growth. Poorly run companies, or those selling products no one really wants, should be allowed to collapse. Instead, the Government wants to keep scarce resources in poorly run organisations.
From the perspective of shareholders, Roland Junck (the CEO of Nyrstar) deserves his $2.5 million salary for first-class rent seeking and bringing on board an equity partner who is happy to chip in more money and doesn’t want any dividends. Or, rather, the equity partner is happy to shore up some votes.