The sudden, massive government intervention to bail out the entire economy in the face of the COVID-19 crisis has raised issues of private benefits received in return for bailout packages, especially for heavily impacted sectors.
These interventions have been rolled out on an ad hoc basis. The private health and aviation industry examples demonstrate a stark contrast.
The private health industry has received a very restricted bailout by the Commonwealth. Hospitals can have their operational costs covered (by opening their books), in return for their resources being integrated into the public system and job security guaranteed for staff.
Meanwhile, the international aviation industry has received a waiver of $715 million in fees and charges – with no corresponding public benefit attached. Although notably, Qantas has helped the government bring back stranded residents from overseas. Conversely, New Zealand Air (52% owned by the New Zealand government), was provided a highly conditional loan with options to repay in equity.
The crisis comes with opportunity. In order to achieve the most desirable public outcomes we need a set of guiding principles to navigate our way forward and protect us against moral hazard, rent-seeking and cronyism. How do we fairly assess what return we should demand for our tax-funded bailouts?
We’ve come up with three such guiding principles:
- It is not in the public interest for reasonably competitive markets to fail and become monopolies due to most firms becoming insolvent. The government should not create new monopolies by nationalising industries that enjoyed healthy competition prior to the crisis.
- Where unearned superprofits exist, such as capital gains from land and other finite natural resources, it is not in the public interest for these to remain in majority private hands. Essential services, public and natural monopolies should be owned and operated for public benefit, pandemic or no.
- Wherever the public carries risk from an industry that is “too big to fail”, we should have equity to enjoy the sunshine as well as rain.
Given these principles, the type of public benefits expected should differ from industry to industry. It doesn’t make sense for the government to take equity stakes in local cafes and barbers around the country. We have an opportunity now to take equity in some private companies, and in some instances should take equity on principle.
There are many ways government-ownership or part-ownership can work. In Norway, the government has a State Direct Financial Interest in all petroleum projects. It covers its share of investment cash and costs in return for non-voting shares and dividends in those projects.
Singapore’s Sovereign Wealth Fund owns shares in many domestic businesses, including monopolies such as utilities.
The Bank of Japan, through quantitative easing, holds 5% of the local stock market and a land area greater than 1.7 km squared.
Our Government could easily set up facilities to acquire equity in key industries to receive a public return on investment and reduce the cost of the bailouts for future taxpayers. One such scheme could be an equity standing facility.
It’s well worth noting that if the government took equity in Virgin Australia to keep it solvent, any future dividend would be the first contribution Australians have received from Virgin in a long time – it has paid no company tax for a decade.