The Government’s Boost to Small Business
One of the little noticed pieces of legislation that will likely be tabled in this last session of Parliament for 2019 is the bill to establish a Small Business Growth Fund. The facility is a $500 million fund that will be supported by Treasury and five banks: CBA; Westpac; NAB; ANZ; and HSBC. It will make up for a shortfall in capital for small and medium businesses. It is based on a similar British government fund that has already provided $2.5 billion to SME’s in the UK.
The fund will provide capital to established businesses with turnovers of between $2 million and $50 million. The bids for finance will be competitive with only 50 packages a year being allocated.
At the moment the Government has indicated that it will contribute $100 million with the banks topping the fund up to between $500 million and $1 billion. At the moment the banks are yet to indicate their commitment (if AUSTRAC extracts billions from Westpac because of money laundering the banks might argue that should be used to capitalize the fund).
The objective of the fund is to provide expansion capital for businesses that need it but can’t raise equity through traditional channels. However the recipients will be winnowed down to the cream of the SME’s so the investments will be very low risk propositions. From this perspective it is really a ‘money for jam’ proposition for the banks, which in normal circumstances are reluctant to provide venture capital without extracting an arm and a leg as security.
The fact that the growth fund is necessary is a demonstration of how thin the Australian capital markets are. Most importantly this growth fund is not likely to do anything for regional SME’s, a fact pointed out by the Australian Investment Council in its submission to a parliamentary inquiry into exports and investment.
In its submission the Australian Investment Council, which represents private sector funders, argues that a regional innovation fund could boost economic activity across Australia, particularly in agriculture. The argument is that there are lots of underutilized human resources in metropolitan areas that would relocate to the country if regional businesses had sufficient investment capital to underwrite their employment.
The downside of government underwritten bank financed funds is that they weaken the Australian Prudential Regulation Authority’s capital adequacy standards. This comes at a time when the ratings agencies are looking at rating downgrades for the banks because of their compliance breaches. The banks may not want to risk their ratings just to capitalize a government fund.
The other issue is that the more these funds proliferate the less money there is for ordinary commercial business that is the backbone of the economy. At a time of weak economic activity the last thing a government should do is suck any steam out of the economy. At the same time it is likely that fast expanding medium sized businesses are he ones most liely to provide a catalyst for economic growth.
At the moment it feels as if the government is putting hundreds of millions into investment funds in a way that is redolent of a punter buying a fistful of lotto tickets in the hope they get a big win.