Bailouts are not just for the virtuous

The proliferation of government support and handouts to companies during the coronavirus pandemic has thrown the usual rules of fair dealing between government and the private sector up in the air, and they are falling down in a disorderly heap.

Companies and entrepreneurs of all kinds are asking, begging — pleading — for help. What they get differs wildly.

The results can often seem unfair. In the UK, for example, companies that can muster three investment grade internal bank ratings (and have none at speculative grade) can borrow up to £300m from the Bank of England at a low rate, with few questions asked.

Yet the strongest company that fails to qualify for that commercial paper scheme will have to persuade a bank to lend it no more than £50m, of which the government will guarantee 80%, and it will have to prepare a business plan and cashflow forecast.

The cliffs and thresholds involved are arbitrary. It’s possible to imagine a better designed scheme, but that is idealistic — governments have had to make up these policies and put them into action very quickly. They are, not surprisingly, imperfect and there are rough corners.

With taxpayers’ cash being ladled out, in ways that do not normally happen at all, there are inevitably many complaints from companies that cannot get the support they believe they need.

Many of them are right: they are in serious trouble. Virgin Atlantic, the airline owned by Delta Air Lines of the US and colourful entrepreneur Sir Richard Branson’s private Virgin Group, has asked the UK government for a £500m commercial loan. Virgin points out that its rival EasyJet has borrowed £600m, which was done under the BoE's CP scheme. So far, the government has not obliged.

The threat of collapse is real. Virgin Australia, in which Virgin Group owns a stake, alongside Singapore Airlines and HNA of China, went into administration last week after failing to get a bailout from the Australian government.

At the same time, the air is thick with criticism of those that have taken help — or asked for it — which others think do not deserve it.

Victoria Beckham is reported to be planning to avail herself of the UK government’s furloughing scheme to cover the wages of 30 staff of her fashion brand. Her fortune, together with her husband David, has been estimated at £355m.

The incongruity of her seeking state aid drew voluble scorn from Piers Morgan, the ITV television presenter, who contrasted her with pop star Ed Sheeran, now paying the staff at a London bar he owns out of his own pocket.

Many have attacked Branson for seeking state aid too, pointing out that in 2009 he argued that the UK government " would be better to wait for [fierce rival British Airways'] demise" than bail it out. The fact that he lives in the British Virgin Islands angers others.

As with Beckham, critics argue Virgin Atlantic is not profitable and has few valuable assets.

The bailout shaming goes much wider. LVMH and Kering, the two big beasts of the French luxury industry, had to retreat on plans to use the French furloughing scheme when smaller rivals Hermès and Chanel said they would bear the costs themselves so as not to burden the state.

The UK’s universities — facing a £790m revenue shortfall this academic year and with doubts over the £6.9bn originally expected from international students next year — have put forward a complex proposal for government support, including asking to be allowed to use the furloughing and state commercial paper and loans schemes. In return, they offered to “reduce costs, increase efficiency and moderate certain behaviours to increase stability and sustainability”.

An article in the Financial Times describing this as a £2bn bailout plan drew hundreds of comments attacking the idea of bailing out universities, blasting them for paying their vice-chancellors and managers too much, engaging in vanity building projects, delivering poor service, squeezing money out of students for worthless courses and exploiting Chinese students. It was better, many argued, to let survival of the fittest kill off the underperforming universities.

P&O Ferries, the shipping company that brings about a sixth of cargo to the UK, has asked the government for £150m. It has furloughed 1,400 UK staff because of lack of demand for passenger transport.

So far, the government has not responded, Sultan Ahmed bin Sulayem, chairman of DP World, the Dubai-based ports group that owns P&O, told the BBC. Critics object to a bailout because DP World is a foreign group with deep pockets: this week it is paying a £270m dividend to shareholders, though this accrues from its wide global activities, not P&O.

Commercial property owners are another group likely to suffer in the crisis, whom some regard with schadenfreude.

Commentators of all stripes are keen to tie bailouts — especially to groups they regard critically — to a plethora of conditions, from cutting dividends to lowering executive pay, paying living wages to staff, onshoring their tax domiciles and reducing their carbon emissions.

This hail of objections is understandable and in many instances right. But governments making decisions on bailouts should ignore it.

What the critics miss — with the same myopia as those who decry the bank bailouts of 2008-10 — is why rescues are contemplated in the first place. 

It is not to enable Branson to keep his private island, or Beckham to save her pennies, or DP World to pay its dividend, or "the bankers" to remain rich.

It is to keep businesses alive, preserve the jobs of ordinary staff — who are not tax exiles or celebrities — and enable the economy to bounce back as soon as possible when infection control measures allow. 

This is the necessary counterweight to the artificial economic slump governments have imposed to save lives.

In a market economy, the only way to avoid bailing out shareholders and bondholders, along with workers, is to use nationalisation as the only form of rescue. 

But it would be manifestly counterproductive to make the state suddenly responsible for managing huge swathes of the economy, in the midst of a health crisis.

It would be equally destructive to stick rigidly to free market principles and allow an economic plague to annihilate all but the strongest organisations.

Therefore, a necessary by-product of rescuing private sector businesses will be that shareholders — which may include sovereign wealth funds, private equity titans, foreign aristocrats, investment bankers, small business entrepreneurs, sole traders and pension savers — are protected from some of the losses they would otherwise have made.

This is not undesirable, either: if the economy is to spring back into action, private capital needs to have energy and appetite for action.

The public, media and NGOs are absolutely right to make their feelings about the ethics of companies and businesspeople known — though they ought to make sure they are well informed and not regurgitating bile from the internet.

So should investors. That is what stewardship and responsible investing mean. The social pressure on LVMH and Kering, for example, had the desired outcome.

But public policy ought to keep above such issues. All those who say “now is the time to rethink how business operates” are well-intentioned, but wrong.

If universities are shoddy and give poor value for money; if companies get away with paying too little tax or if they pay workers too little to live decently on, while enriching their shareholders and managers; if they belch out carbon emissions then government, society and investors should have stopped these abuses before now. They should stop them in the future, too.

But policy on these matters should not be made up by government advisers in the space of 15 minutes as they rush between (virtual) meetings about saving this company or the next.

That will lead to disastrous, hasty, ill thought out decisions that are also manifestly unfair.

The oil industry is a case in point. It’s a sector that needs to shrink to a fraction of its size. Burning oil and gas is causing catastrophic climate change. Plastics and chemicals, the other main uses of hydrocarbons, are only sustainable if they are fully recycled.

Investors need very good excuses to finance it.

But allowing oil companies to be destroyed by the coronavirus by excluding them from bailouts or central bank bond buying would be a terrible way to phase out this sunset industry.

It would have no political legitimacy, because this would not flow out of a proper democratic process of policy formation. Oil workers and their communities would be rightly furious.

This would be the opposite of the ‘Just Transition’ so talked up by policymakers last year.

It is for civil society and investors to shout and make value judgements. Government’s role in this crisis is to save as much of the pre-Covid economy as can be saved, acting in a measured way and introducing as few bad incentives as possible.

Perfect policy cannot be achieved, and nor can perfect equity. But the way to make bailouts as fair as possible is to ignore moral urges about this or that business, and not to try and 'kitchen sink' policy by chucking in every wish as a condition of rescue. 

If it was legal before, it remains legal. The only consideration should be: can it be saved, at a reasonable cost?