A dodgy deal?

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.

About J

J has an economics background and is a part-time consultant
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10 Responses to A dodgy deal?

  1. kingsley

    Well Nyrstar does kind of rhyme with Solyndra

  2. manalive

    Roland Junck .. great name for a metals smelter.

    …. suggests that Nyrstar was in tremendous financial difficulty …

    Nyrstar is a Belgian/Swiss Company with extensive international interests; I can’t imagine it relying on Australian taxpayers to prop it up, nor should we.

  3. Nyrstar is a Belgian/Swiss Company…

    It almost seems you get an advantage if you are a foriegn company as all our biggest subsidies are to foreigners like car makers.

  4. wreckage

    It almost seems you get an advantage if you are a foriegn company as all our biggest subsidies are to foreigners like car makers.

    It always works out that way! End the bloody subsidies!

  5. Leigh Lowe

    Nyrstar is a big power user so cannot fail.
    It would hand the Coalition a huge gift in terms of a Carbon Tax scalp if Nyrstar fell over.
    It operates in Port Pyrie …. OK, it’s not Whyalla, but if Nyrstar went splat it would make Craig Emmerson’s Whyalla ditty look pretty stupid.

  6. Samuel J

    To be specific, this suggests that Nyrstar’s Australian operations are in significant financial difficulty. Leigh is right too – Labor won’t let them fail, so the taxpayer picks up the tab.

    How else can you account for the equity deal? If they were financially strong, the deal wouldn’t be necessary. Or is it Labor’s job now to ‘bail out’ financially healthy companies as well as financially stricken companies?

  7. Splatacrobat

    Another Kodak moment?

  8. Tel

    … 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.

    Agreed. If only more people would get this, then the trick would lose merit.

    Consider that in the USA the FHA and GNMA were agonizing over bailout money — they needed to be bailed out because the market for mortgage securities is crap, but the government would do anything other than admit they had failed, because they they couldn’t blame the speculators for the housing crash.

    Soooo enter the Fed buying mortgage securities using printed money. All the bailout you need, with a lot more obfustication to keep the voters guessing. After all, government was on the hook for the guarantee anyhow, might as well distort the market (err wait, prop up the market).

  9. Scott

    Is it true that Nyrstar’s parent is incorporated in Belgium and have their headquarters in Switzerland?

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