Monday 27 January 2020

We have the cash -- but we don't use it where it matters

Continuing our series where business leaders suggest ways of kickstarting the Irish economy, entrepreneur Sean Melly says better access to capital and education are the two prime drivers

IRELAND is experiencing an economic crisis as never experienced before. We now have a two-tier economy: international businesses based in Ireland continue in large part to thrive -- while a lack of liquidity and ebbing confidence has brought the local economy to a virtual standstill.

There are few, if any, signs of real improvement and in fact we may have more bad news to come as, for example, problems resulting from excessive corporate and personal debt have yet to emerge or be fully recognised.

As a person who interacts with the owners and management of established and entrepreneurial businesses on a daily basis, I am only too acutely aware of the problems and frustrations out there. Many businesses have, what is now recognised as excessive levels of debt that need to be rescheduled or reduced.

The natural instinct of most business people is to try and deal with the issue promptly and move on -- but this has proven tricky in a country where many lenders refuse to deal with the issue in an expeditious manner and the option of a 12-year bankruptcy looms.

The pain of adjustment is sharp but is only added to by having it drawn out where the consequences of stalled businesses and a loss of shareholder value are often coupled with personal anguish.

With regard to local business and personal insolvency issues, Ireland is also running a two-tier system.

Through the property crash there are many individuals who are personally insolvent. Not traditionally thought of as entrepreneurs, these people nevertheless overextended their borrowings and now are in a critical situation where they are unable to meet repayment requirements and sustainable living standards.

New personal insolvency laws must be introduced swiftly to tackle this real issue, where mental health, suicide and poverty threaten families. Personal insolvency laws need to be rigorous, fast and fair. We cannot wait much longer to get this section of society back on their feet, contributing to the economy and to local communities.

The second tier is the actual entrepreneurs who grew businesses in the boom. Where these have failed, we need to also extricate them quickly from their stagnant financial states and let them move on.

What is sometimes ignored in cases of business bankruptcy is the personal, emotional and intellectual cost. It is not just the loss of assets but the failure of a business. We don't need to punish these people. We need to adopt fast and fair bankruptcy rules to allow them to clear the decks and start again. These people now being punished by penal bankruptcy laws are the very ones who will get up again, build a business again, create jobs again and create wealth for the economy again.

New laws are being developed to reduce the cleansing period from 12 to five (or less) years and these will be very welcome -- otherwise we may drive bankruptcy tourism over to the less penal UK laws, a tourism which may mean we will not see the return of these entrepreneurs.

Entrepreneurship

Liquidity is also a major issue in Ireland, as the banks are not lending. Slow to regulate during the boom years, they are now closing the stable door after the horse has bolted. So while everyone is drowning in a sea of debt, those companies and individuals that can justify additional debt are finding it difficult.

Entrepreneurship is actively encouraged in this country -- but without funding it is an empty sounding vessel. The availability of seed capital and first round funding for start-up and developing business is available. But while this is all terribly exciting and makes for good headlines, the migration of fledgling start-ups to robust organisations is thwarted by the so-called Financing Valley of Death -- lack of second round or follow-on funding. Headlines are no replacement for solid businesses.

There is also a misconception of what makes a great start-up. Sometimes the adage that there is nothing new under the sun holds true. Some of the most successful organisations can often be very mundane in the start-up sense. Not every great new idea merits a new company and new funding. Sometimes a great product or service is just that: a great product and service that would find a happy home with an existing business -- but not a new business in its own right.

We need to better define what makes an entrepreneur and how to achieve second round funding. Otherwise we shall end up as busy fools.

As an example of business failure, Eircom was a case in point. In fact it was a slow car crash waiting to happen.

From being a fully funded wealthy utility to a broke organisation with seven not-so-careful owners, the fall of the great white government body is a mirror to our banking crisis. Lack of regulation led to the destruction of its wealth through asset stripping by a series of foreign owners. Where were the regulators to halt the flood of debt into the organisation? No entrepreneur would argue for over regulation, but none like to see the needless loss of value through greedy, out of control pilots.

But there is one major difference between the plight of Eircom and that of our banks. Unsecured bondholders who invested in Eircom have been burnt. We were not asked to bail them out.

Education

Investment in education helped to build this nation in the past, and we can do it again. However, this time we need to invest in, and support, the best third and fourth level educational establishments in the country. Our top ranked university, Trinity College, is facing the real risk of losing its global standing if we do not both understand and act to ensure that the best are backed -- even in times of austerity.

Education is a key factor in our survival. Prior to our economic property boom, it was the "young people of Ireland" that created our new vibrant economy towards the end of the last century. Lest we forget, before property tycoons, we had become the darling of Europe and America in the way we attracted inward investment from international companies and organisations. It wasn't just the low corporate tax rate; we had an abundant supply of well educated, hard-working people.

The combination of good tax laws, a welcoming government and talented people allowed Ireland to stand tall and generate wealth, jobs and a thriving economy.

Clever graduates who had been forced to emigrate in lean years, started making their way home where a surplus of jobs awaited across IT, finance and services. We had real jobs and an exciting economy. The past 15 years of the property bubble have made us forget that our original economic boom was based in reality-- not a rising and unrealistic property boom where money changed hands in a doomed merry-go-round.

In order to create this vibrant economy we had invested heavily in our education system, but along the way we got lost. Instead of aspiring to develop and maintain world class educational institutions, we decided that everyone should enjoy tertiary studies. We decided that universal access was more important than best of class access.

This let government decide to grow universities all over the country. Why, they reckoned, should students have to travel to university -- why not have one at the doorstep? And fees were abolished and funding for third-level institutions parcelled out uniformly -- regardless of tenure, standards and resources and return.

The national college grant scholarship system personally enabled me to enter and complete both undergraduate and post graduate degrees in the early Eighties.

College fees existed back then and it is unlikely I could have afforded to go without this financial support. Ironically, I would argue that it is senseless to avoid reintroducing college fees.

Currently, all universities are funded on what can only be best described as a "headage" payment, where the college receives a fixed sum per student and where the amount per student reduces as more students enter the college. This structure can only result in lowest common denominator thinking -- and a focus on quantity rather than quality. For those who want to, and have achieved the academic standards to enter college, many "equal access" programmes exist to help with any financial difficulties that might otherwise stop that student participating in third-level education.

For Ireland to succeed we need to shore up the best of our universities. These need to take priority if we want our graduates to compete on an international level. We are not flush with cash, so we must use it wisely. Established universities should be given back the right to self-determination to produce students that amaze the world. We have done it before, we can do it again, and we can shine though excellent education.

IN conclusion, If we step back and think about the Ireland of just 20 years ago, we can see we were getting it more right than wrong.

The early success of our country towards the end of the last century precipitated the property bubble which has more than knocked us sideways, it has nearly knocked us out. But pre-property madness, we were seen a leader in education and in delivering intelligent, articulate, bright, innovative graduates.

This natural resource can be drawn upon again, but we need to compete on an international level -- and that takes funds. I am not denying the right of anyone to a tertiary degree, but let there be ability on the side of the student, and quality on the part of the educational institution.

Secondly, the Government needs to clear away the backlog of debt and enable ordinary people participate in society again. Clean and fair insolvency laws need to be in place immediately. As Samuel Beckett wrote: "Try again. Fail again. Fail better."

This is critical -- currently it appears those responsible for mis-managing the country (both in private and public capacities) have escaped scot free from any financial or legal censure. There cannot be one law for the rich and one for the poor. Swift steps need to be in place to counter this.

Finally, the country needs cash to survive. By again producing sought after graduates, cleansing old debts and insisting the lending institutions do what they say on the tin, we can pick ourselves off the floor and move forward again as a vibrant, intelligent and robust economy.

Sean Melly is managing director at Powerscourt Capital Partners

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