Cosy plan will allow banks to cream off even more cash

Why is government investing heavily in institutions that have failed us so badly?

The federal goverrnment is going on a small business buying spree with the Big Four (AAP Image)

Westpac has longstanding experience with payments and international transfers but still managed to display, as anti-money-laundering and counter-terrorism financing regulator Austrac has revealed, remarkable incompetence in its LitePay facility, allegedly making possible a market for child pornography.

Westpac and the other big banks have no experience investing in small business, yet the federal government is about to embark on a $500m joint venture with Westpac, Commonwealth Bank, National Australia Bank and HSBC to do just that.

The Australian Business Growth Fund, expected to be legislated in coming weeks, will be another case of crony capitalism, bringing together the government and the biggest financial institutions in a cosy venture that will crowd out existing private sector investors.

While Scott Morrison and Josh Frydenberg have condemned Westpac and other banks, they have been planning to put $100m of taxpayers’ money in a fund that will enable the banks to cream off the best investments.

Not content with giving the big banks the right to join a fund that will enjoy artificially low borrowing costs by virtue of government involvement, the banking regulator even has agreed to pervert prudential regulation so the banks can treat high-risk investments through the fund as loans.

This double whammy of market manipulation will ensure the ABGF has a huge advantage in the market for providing equity finance to small to medium enterprises. If you were private business with revenue between $2m and $50m, the type the fund will target, of course you’d prefer to obtain cash from a passive government investor than private investors, who might demand a say.

The government is riding roughshod over 830,000 Commonwealth Bank shareholders, too, some of whom have directed the bank expressly not to invest in the ABGF for fear of missing out on investing in SMEs themselves.

“A proposed BGF will compete with the bank’s own shareholders, as SMEs currently typically turn to these same retail investors, among others, for equity funding,” the shareholders said. “The fund will compete with the existing private market ecosystem and cherrypick the best SMEs,” they added, in vain.

While the shareholdrs’ direction was received in August and the bank’s annual general meeting was last month, the bank won’t put the resolution to a vote of shareholders until next year, after it has invested in the fund which will have started hoovering up the best small business investment options. Existing private investors will be starved of opportunities, perhaps withdrawing from the market. However, the ABGF will be uncon­strained, having the freedom to change its investment criteria at will.

The ABGF policy, announced in November last year, rests on superficial analysis by the Australian Small Business and Family Enterprise Ombudsman published in the middle of last year.

“A study undertaken in NSW indicates SMEs are four times more likely to be rejected for lending than large businesses and 30 per cent more likely to be rejected for equity finance,” it says.

Doesn’t that imply obtaining equity finance is far less of a problem than debt finance, which the ABGF is doing nothing about?

Even the debt story is debatable. The approval rate for small loans under $2m hasn’t changed in six years, according to analysis by the Australian Banking Association, while the level of applications and approvals has fallen — suggesting demand rather than supply of credit is the problem.

It’s inevitable larger businesses find it easier to borrow and attract investors as they are less risky.

Small may be beautiful politically but small businesses are far likelier to fail than large ones.

The report also complains of a lack of patient capital: “For many SME business owners it is difficult to cede partial or full control to external parties.” A better term might be “dumb capital”, as the point of equity is to give shareholders control. The risk of losing the equity requires compensation.

Overall, the idea credit or equity is in short supply is farcical given the explosion of bank credit and assets in superannuation funds. Credit has surged by $1 trillion to $2.9 trillion in a decade, while superannuation funds have soared to $2.9 trillion, including $719bn in self-managed super funds, many of whose trustees would love greater access to small business investments.

Much of the analysis rests on self-congratulatory reports by equivalent funds in Britain and Canada. Since 2011 Britain’s Business Growth Fund has invested £2.5bn ($4.73bn) in 220 SMEs. It hasn’t paid a dividend in eight years. The Canadian growth fund, charged with investing $C545m ($603m), made its first investment last year — in a smash repair company with six outlets across Canada. Growing smash repair companies is hardly in Canada’s public interest. Additional mechanics hired might have been hired by other companies that haven’t enjoyed public subsidy.

The ABGF almost certainly will grow to $1bn, yet fund size is proof only of success as an investment cartel, not broader economic benefit. Rather than set up a new public sector investor the government should work on opening up the capital markets to smaller investors.

Initial public offerings are still dominated by investment banks, which reserve shares for favoured clients. SMSFs don’t get a look-in. Hong Kong guarantees 25 per cent of new IPO shares for public bidders. Singapore and New Zealand similarly guarantee the small guys get a look-in.

Government should change prudential regulations that favour home over business lending. For every dollar of equity, banks can lend about $50 for home loans but only $12.5 to businesses. No wonder the share of credit with business has shrivelled from 70 per cent of outstanding loans to 33 per cent since the late 1980s.

The Austrac accusations against Westpac may be worth it if they derail the ABGF. Perhaps the government was always a little embarrassed by the idea. Fancy a Liberal government, with its commitment to free markets, giving a $100m subsidy to the big four banks to create an investment monopoly. The Treasury allowed only a five-day consultation period this month and hasn’t published any of the submissions.