The private sector and bailout sustainability

The private sector and bailout sustainability MATTHEW BUGEJA

There is a term to describe what COVID19 is: a black swan event. Perhaps one of the best definitions of a black swan event comes from the website, Investopedia: A black swan is an unpredictable event that is beyond what is normally expected of a situation and has potentially severe consequences. Black swan events are characterized by their extreme rarity, their severe impact, and the widespread insistence they were obvious in hindsight.

No matter how you dissect it, COVID19 hits every single one of those factors. It was largely an unpredictable event, and has had very severe consequences. A global pandemic is rare, the impact is almost unheard of, and with the benefit of hindsight, we can probably say that the warning signs from the initial outbreak in Wuhan, China were there for all to see.

The novel coronavirus’ impact has been both wide from a geographical perspective, and deep from an economic standpoint. This piece will focus on the impact to businesses and the assistance given to them by their governments, and try to understand how certain can survive the havoc wrought by the pandemic.

Businesses have been devastated by the lockdown imposed by governments in order to contain the spread of COVID19. If people are not allowed to physically leave the house in order to engage in economic activity, a lot of businesses will suffer considerably. A few easy examples in order to illustrate this point include cinemas, airlines, hotels, restaurants and nightclubs. These businesses need people to be physically present in order to provide their service, and the more customers they have, the better. COVID19 has shut these down for the foreseeable future, through no fault of their own. So how do they move forward? Should governments continue to provide funding on an open-ended basis? Can they afford to?

They would have to find a way, or else, they would need continued government assistance for a two year period - which is a big ask for any government, anywhere in the world.

This is a difficult question, with a lot of arguments to be made. But let’s boil it down to its essence. Governments all around the world are going through the same thing, but to varying degrees. In short, their income from taxation, particularly sales taxes and VAT, has gone way down, whereas their spending to help bailout and sustain economic operators has gone way up. Any Finance Minister will tell you that they far prefer increased income and reduced expenditure any day of the week, but we live in troubled times, and governments have had to spend big to help employers keep their employees.

Governments should be helping companies out. To not do so would lead to mass layoffs, and a much long return to economic growth. This in turn would have not just economic, but also social and political implications.

But then there might be a problem. The coronavirus is not expected to go away anytime soon. We may be at least 12-18 months away from a vaccine, and you may have to add 6 months on top of that to cater for manufacturing and global distribution. That is assuming that the vaccine is effective against all strains of the coronavirus, both current and future, given that viruses tend to mutate over a period of time. But let’s assume that a vaccine is found, and is effective. Let us assume that by Spring 2022, everyone around the world will have taken the vaccine. How would business models that require the physical presence of customers cope, if they had to reduce the amount of clients in their establishments in order to respect social distancing? They would have to find a way, or else, they would need continued government assistance for a two year period - which is a big ask for any government, anywhere in the world.

Perhaps the answer should be that their business models change entirely. Cinemas can opt to reduce capacity to enforce social distancing. Hotels can continue to operate, but with regular disinfection, and by monitoring the health of its occupants to prevent an outbreak within its establishment, even through the use of wearable technology. Restaurants will need to operate at reduced capacity in order to ensure that its customers feel comfortable dining there, and waiters should work with gloves and masks in order to provide reassurance that they are taking their customer’s health and well-being seriously.

These businesses will need to be innovative in order to adapt to the change in circumstances. Governments can provide funding to help tide them over for a period of time, such as a few months, but all this does is buy time in order for things to start returning to some form of normal - a new normal. The very nature of business is to provide value to your customers through the provision of a high quality product and/or service. That requires innovative thinking. They will need to be innovative now if they are to survive.

Businesses should rely on the government to help them out, but they should also consider how they will operate in the next two years with as little government funding or assistance as possible. COVID19 has pressed the reset button on the global economy. Every business has been hit to some extent or other. But it may be the case that those companies that prove to be incapable of adapting to the change of circumstances must be allowed to perish, so that other new, and innovative companies can take their place. Governments and financial institutions should consider offering funding on the same premise of how a loan is given - on the basis of sustainability of the business model and its opportunity to grow. Bailouts should not be given for the sake of them, but rather assessed against whether the business will be able to find its own feet.

This is a tough statement to make, given that there are various livelihoods at stake. However, those companies that show they will be incapable of innovating and surviving the coming year or two may not be worth saving. Taxpayer money is more limited than people realise, and the requests are far too many. Government assistance will stop the bleeding for the moment, but it will be up to the private sector to act as the stitches that keep the wound closed. The sooner they realise that, the better.