Friday, 19 December 2008

Who and how to rescue

So Jaguar might be "rescued" by the UK government. Robert Peston gives a summary of some of the arguments. Even more quickly, here they are:
  • The company is not able to refinance its loans, but is still fundamentally a good business
  • 15,000 people are employed by Jaguar and up to 60,000 second-order jobs are dependent on it
  • It is one of the remaining UK-based manufacturers with substantial ongoing R&D
But:
  • It is owned by Tata, the (profitable) Indian multinational
  • There's a risk of moral hazard - if Tata can get finance for its UK operations like this, why wouldn't other companies do it and use their scarce private funds elsewhere?
There is no doubt that Peter Mandelson is aware of these arguments - he makes it pretty clear in the interview with Robert Peston. What other criteria or safeguards might he use to make sure that public money is genuinely providing a public good which would not be financed by the private sector; and that it gets a positive return?

Suggestions:
  1. Finance provided on terms profitable for the government. If Jaguar can't get finance elsewhere, the government can demand a good price.
  2. Equity in return for the investment. This will disincentivise companies from going to the government unless they have little or no other choice.
  3. Viability of the business. There's no point lending to a company which is going to fail a year later anyway.
  4. An estimate of multiplier effect. It does seem that car companies always advertise their huge multipliers - the suppliers and employees who will be laid off, and the devastation wrought on Midlands towns which lose their anchor employers. It's true that a local economy highly centred around one employer may suffer its own mini-depression if that company disappears; an equivalent job loss dispersed around the country will more easily be absorbed by other employers. This argues for a rescue of Jaguar which would not have applied to Woolworths, and it argues for rescues in times of recession which would not be appropriate in boom times.
  5. An estimate of positive externalities from the company's operations. Jaguar apparently has extensive R&D operations, which arguably have a knowledge spillover effect that helps other businesses to be more productive.
  6. A demonstration of why we should ignore the signal of private lending being unavailable. If Jaguar can't borrow elsewhere, that tells us something. If it means Jaguar is a hopeless case, the government should not lend either. If it simply means that external problems in the finance markets - illiquidity or friction - has stopped credit being available even for a good company, then that might be different.
  7. Benefits to both supply and demand. For example if people want to buy Jaguars, and Jaguar wants to make them, but both are stymied by lack of credit, then government intervention would support both sides of the economy.
The first three criteria would apply to any private investment. The last four are specific to the government, and may make a sufficient case for an investment which would not happen privately.

How does Jaguar stack up against these criteria? 1 and 2 are under the control of the government and can be incorporated into any offer it might make. 3 is probably a yes - the company looks viable on balance.

4 and 5 are probably yeses; 6 and 7 would require further research but I would certainly not assume a yes.

Overall then, there is not yet a clear-cut case for rescue (based on the information I have) but with further work, such a case might develop. I may revisit this posting and add further criteria.

Two items I did not add (despite many of the comments on Robert Peston's article linked above):
  • Jaguar is owned by a foreign company - completely irrelevant. The government needs to protect itself by criteria 1 and 2 above, to dissuade any private concern from illicitly taking advantage of public funding. Whether the company has Indian or British shareholders or is profitable - is beside the point.
  • Jaguar cars are probably not the most environmentally friendly on the market. Well, the market needs to be guided by carbon taxes or other mechanisms to make sure that buyers of Jaguars are willing to pay the cost of their pollution. As long as that happens, this factor once again becomes irrelevant.

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