Governments are helping businesses survive the debilitating effects of the coronavirus by allocating state funds to various rescue packages to keep companies alive and preserve as many jobs as possible. With unprecedented amounts of economic stimulus planned to combat an unparalleled situation, it’s essential that the authorities spare at least some attention to what a post-pandemic exit strategy might look like.
Once the virus is subdued and the lockdowns end, governments should convert a chunk of the aid they’ve distributed into equity stakes in the recipients, with the ensuing portfolio of holdings assembled into sovereign wealth funds.
Norway currently has the world’s biggest sovereign wealth fund, overseeing about $945 billion and funded by the nation’s oil revenue. Singapore has had a wealth fund for more than four decades. Egypt, Senegal and Turkey have all set up wealth funds in recent years to manage their state-owned companies, with South Africa saying earlier this year that it plans a similar move.
Countries in Europe have toyed with the idea in the past. In August, a draft proposal for a “European Future Fund” suggested an initial 100 billion-euro ($110 billion) pot could be set aside to invest in strategic industries in the European Union. But as my colleague Ferdinando Giugliano argued at the time, the EU is not a sovereign state, and such a fund would just divert existing budget resources rather than tapping a pool of wealth.
In the U.K., the May 2017 Conservative Party manifesto proposed what it called Future Britain funds, which would “hold in trust the investments of the British people, backing British infrastructure and the British economy.” The pitch said the money would come from “shale gas extraction, dormant assets and the receipts of sale of some public assets.” Almost three years later, there’s still no sign of those plans being enacted. (That’s probably just as well given their paltry financial underpinning; as myself and my colleague Marcus Ashworth wrote at the time, those sources would have provided a minuscule capital base, even before fracking was banned in Britain.)
But the current crisis provides an opportunity for individual countries to make good on those vague promises by setting up wealth funds that are big enough to count as full-blown assets to society, given the scale of financial assistance that’s likely to be required to get through these dark days.
They could start by assigning existing state investments to wealth funds. The U.K. government, for example, still owns about 60% of Royal Bank of Scotland Group Plc, more than a decade after bailing out the ailing lender to the tune of more than 45 billion pounds ($56 billion) as part of a wider rescue of the domestic banking industry. The German government has a stake of almost 16% in Commerzbank AG, while Belgium and France have control of Dexia SA, split 53% to 47%.
The global financial crisis made many banks wards of their states. Formalizing those stakes in wealth funds would be a way to start building state-owned asset portfolios. During normal times, governments could be sleeping equity partners. But in times of crisis — like now — governments would have a more direct pathway to influence lenders to help borrowers weather any economic storm.
For the U.K., creating a wealth fund would solve the issue of preserving vital domestic infrastructure without handing free money to foreign conglomerates. The owners of Heathrow Airport, for example, include Qatar Holding, the government of Singapore’s GIC Pte Ltd., and the China Investment Corp. By making aid conditional on receipt of equity, Britain would be getting a stake at current distressed values in return for bailout funds.
Today’s situation demands aid packages for a swathe of industries feeling the pain, including automakers and travel companies. If having such a broad range of stakes feels too interventionist, wealth-fund holdings could be restricted to infrastructure that’s vital to the economic functioning of a country. Though that could prove to be a tough distinction; given initial lockdown experiences, an argument could be made that suppliers of internet broadband and food delivery should qualify.
For those who still insist the state should stay out of private enterprises, note that governments are already effectively telling companies how to run their affairs in return for aid. Earlier this week, Germany asked companies seeking help to suspend their dividends, with France also asking the same from firms that defer tax liabilities. German Economy Minister Peter Altmaier also wants senior executives to “contribute in emergencies, especially with respect to bonus payments,” according to an interview with the Frankfurter Allgemeine Zeitung at the weekend.
One of the new realities of the post-virus economy will be increased state involvement in business. Companies are likely to come under pressure to shorten their supply chains and bring more manufacturing back home, wherever home may be. The lines of production will become shorter, as regional ties replace at least some of the worldwide outsourcing that has been a keystone of the globalized economy. That will be easier to enforce if governments’ holdings give them seats on corporate boards.
Shareholdings would give governments additional clout to influence better corporate behavior as more nations embrace their responsibilities to the future of the planet. Until now, asset managers have long been leading the drive to force firms to give greater emphasis to environmental, social and governance issues.
A decade ago, a key complaint about the rescue of the global financial system was that public money was used to compensate for private risk taking gone awry. While this crisis is undoubtedly different, there’s still a danger that as governments pledge billions of dollars, euros and pounds to businesses, public support will wane as the scale of the financial challenge becomes apparent. Building equity stakes that belong to the nation will help offset voter mistrust about the wisdom of such largess, allowing everyone to participate in the economic recovery that the disbursements are designed to facilitate.
As the saying goes, never let a serious crisis go to waste. – Bloomberg