THE government handing out financial assistance to companies is a path strewn with minefields that can explode on its face if not handled well.
The overseas examples of how governments have come under fire for not ensuring that wage subsidies, loans, grants and government guarantees are only given to the deserving and smaller businesses should serve as a lesson for the Malaysian government in allocating funds.
The US government allocated a US$350bil bailout fund to keep small businesses with less than 500 employees afloat. But it was quickly taken up by large companies worth billions through a loophole in the rules.
Large companies took up almost US$330bil out of the first tranche through their subsidiaries. The subsidiaries generally employ less than 500 workers and took advantage of the relief from the government to pay their workers. These grants, if not paid, are forgiven as long as the workers are retained.
Among the names were food retail chain Shake Shack that has a market capitalisation of US$1.7bil and Nikola Motors that is in a merger exercise that values the company at US$4bil. Shake Shack and another food retail, Ruth’s Chris Steak Chain, have returned the money after the outcry.
Even the world’s wealthiest university Harvard that has an endowment fund of US$40bil is not spared. The university caved in and returned the US$9mil it got from the Coronavirus Relief Fund.
Companies with millionaires and billionaires as major shareholders and listed entities are scorned upon when they take advantage of cheap government funding to pay their employees or keep the business afloat.
The list of personalities who have come under fire for taking advantage of government financial assistance that are meant for only the small companies with limited resources and no access to funding include Victoria Beckham and Sir Richard Branson.
Victoria, together with her husband David, reported to be worth more than £330mil, used the funds from the government to furlough 20 of her employees. Critics have argued she should have instead used her own money.
Branson, who is the major shareholder of his flagship Virgin Atlantic, has come under fire for seeking loans on a commercial basis from the British government. Critics have sniped away at Branson for seeking money when he was worth US$4bil and had told his staff to take unpaid salaries.
Even Branson’s offer to mortgage his Necker Island in British Virgin Island was scorned upon as it was considered an illiquid asset. The critics contended that the billionaire should just sell it and save his company with his own money first.
The aviation industry is one of the most affected from the Covid-19 pandemic. Businesses have collapsed, airlines are burning cash because of fixed cost and many are seeking government assistance and intervention to save their businesses.
In relation to airlines seeking money, AirAsia’s co-founder and major shareholder Tan Sri Tony Fernandes has stated that he was seeking a loan and not any “bailouts”, without going into details.
There has been speculation that the government or Khazanah Nasional Bhd may participate in any corporate exercise that AirAsia embarks on. Khazanah holds shares in Malaysia Airlines on behalf of the government and a stake in AirAsia, which without doubt is a regional champion, would be good for the sovereign wealth fund.
However, it has to tread the path with care considering that the shareholders of AirAsia have benefited from the company monetising its value in the last two years. In the process, the company had paid dividends amounting to RM5.15bil to shareholders.
Shareholders should put back money into the airline since the company needs it now.
Low-cost carriers such as UK-based EasyJet, Delta Air and United Airlines in the US have received funds from governments. In EasyJet’s case, some of the money raised is pledged against its planes while Delta’s loans come with higher-than-normal interest rates and the company itself is going out to issue bonds on its own strength.
United Airlines has issued warrants to the government.
But not all airlines are fortunate.
Branson’s Virgin Australia, which has gone into administration, did not get funding from the Australian government. This came after its four shareholders, which included Singapore Airlines and Etihad, were not prepared to fork out money to save the loss-making airlines.
In Malaysia, the government has a RM50bil loan guarantee scheme for companies seeking more than RM20mil, funds for SMEs and a wage subsidy scheme. The loan guarantee programme is managed by Danajamin Nasional while Bank Negara and Bank Simpanan Nasional are offering loans for small and medium-sized enterprises.
The wage subsidy scheme, which is managed by the Social Security Organisation or Socso, has attracted 205,342 applications in just a week.
More than 90% of the applicants have stated that they have less than 75 workers and are seeking RM1,600 per month from Socso for the next three months. The irony is some of these employees do not even get a basic salary of RM1,600 per month.
The total amount allocated for the wage subsidy scheme is RM14bil, while the total number of workers for the 205,342 applications is 1.7 million. For now, the amount allocated is sufficient to subsidise wages for the next three months. But if the number of applications increase it may not be enough.
Before there are cries of foul play from the business sector that they are deprived of funds, it would be wiser for the authorities to ensure that only the deserving guys get the subsidies on wages.
Subsidiaries of listed companies or companies that are backed by wealthy shareholders have alternative financing methods such as funding from the parent company. The parent company has access to the capital market and can raise money from rights or bond issuances. Ultimately, the rich shareholders can even put their money if they believe in the business so much.
For instance, Serba Dinamik Holdings Bhd, an oil and gas company, placed out shares to raise RM458mil, proceeds that would be used to reduce gearing and for working capital. It was at a discount to market price but nevertheless the objectives were met.
Companies with millionaires and billionaires as shareholders should just put their money if they really believe in their businesses before tapping on government funds.
The views expressed are the writer’s own.