How the Rudd Government is destroying jobs: Gottliebsen

Almost every time Kevin Rudd appears on television he talks about saving jobs.

I have now discovered a situation where the Government on a net basis is actually paying millions to destroy jobs. And in the process it is setting up a chain reaction that could potentially destroy many thousands of jobs, costing taxpayers vast sums. Amazing but true.

But in fairness to Kevin Rudd and his ministers, the Government’s mistakes mask a much deeper problem that is not the Government’s fault, which could trap many thousands of Australian companies, including many smaller listed groups.

I ran across the Government’s job destruction machine when looking at a company called Melba Industries. Let me tell you the Melba story which explains it all. There will be many Melba’s around the country, and what happened to Melba could also hit “your company” – whether you are an employee, a shareholder or a supplier/unsecured creditor. The problem starts with the latent undisclosed liability in most company accounts – the potential liability for retrenchment and severance pay.

Melba had a brilliant high-technology operation, buying commodity yarn from overseas and using patented technology that turned that yarn into vital cloth for the military, fire and health industries. Unfortunately Melba also supplied certain materials to the automotive industry, and here it was hit hard by the downturn.

Melba had two plants, but one was not necessary – a management mistake of earlier years. If it could consolidate the business into one plant Melba would have been very viable. But to consolidate involved retrenching about one third of its 170 to 180 staff and the company did not have the $2 million required for retrenchment and other severance payments.

Last year the Victorian Government recognised its unique technology and decided it did not want the whole company destroyed and tried to save the remaining 70% of staff by agreeing to pay the $2 million for retrenchment payments.

In a step that resulted in the ultimate destruction of Melba, the Victorian Government would not allow the truth to be told and so the $2 million had to be allocated for everything else but the retrenchment payments where it would actually be spent (research, centralisation in a regional centre etc were to be the smoke-screens). Everyone, including the Victorian Government, knew what the money was actually required for. Smoke-screens are dangerous.

Then suddenly there were more blows. After the Lehman crisis hit world markets late last year, Melba could not get the credit insurance it needed to cover overseas supplies of its yarns. Administrators were appointed in February and came to the conclusion that to be really viable the company not only needed insurance help but extra money for additional plant and technology. Maybe the $4 million the administrators asked Canberra for was too much, but that’s a detail.

So that background becomes the prelude to explaining the Government scheme to effectively outlay money to destroy jobs.

The Victorian Government money was still there, but only if Melba was viable. The Melba administrators explained to Canberra than they would be shutting the Melba doors and the group’s total retrenchment/severance liability would be around $10 million. The company’s assets were plant and intellectual property, but these were secured by the banks.

Canberra would be up for close to $5 million from its retrenchment pay guarantee fund. There would be no other payments to workers so in essence they would receive half their retrenchment “entitlement” from the Federal Government. So if the Government chipped in $4 million it would save close to $1 million. This would also trigger the Victorian Government’s $2 million payment.

Most of the workers would keep their jobs, and we would also have a first-class company generating PAYG tax revenue instead of dole payments. In addition $8 million was owed to unsecured creditors that on a wind up would get nothing. Some of those unsecured creditors have been hit by other collapses, and have the same hidden retrenchment liability as Melba. They could fail, giving the Government an even bigger retrenchment fund payout.

But Industry Minister Kim Carr could not deliver, and so Melba went belly up and Canberra’s eventual payout will be many times the $4 million payment they rejected.

I know the purists would say governments should not be involved. And in former times they would be right. But in this case the Government is already involved because it has backed the retrenchment deals that make companies unviable and have not been provided for in accounts.

The Government had to pay almost $5 million via the retrenchment guarantee while spraying money all over the place to save jobs. Here was a way to reduce outlays and save jobs. In fairness, in any such situation the Government must be sure the company it is helping is viable – but in the Melba case the administrators could show this very clearly.

Maybe governments should have a sub-ordinated loan, but it makes perfect sense to spend money to save a company if it slashes the taxpayer liability. Any business person would do that, but in Canberra ministers do not understand these things. Carr’s Melba mistake could cost the Government many millions.

Melba is also a warning to thousands of Australian companies that their balance sheets do not tell the whole story. The latent retrenchment pay liability may mean that you cannot cut labour when you need to. Accordingly, if Carr keeps making the same Melba mistakes, very much larger sums will be required by taxpayers with enormous consequences for Australian unemployment.

This article first appeared on Business Spectator