THE ROYAL Commission into Misconduct in the Banking, Superannuation and Financial Services Industry is likely to give troubling insights into a directly related area that also needs urgent reform – administration, liquidation and bankruptcy.

Business Acumen has regularly highlighted concerns about how the existing business administration and liquidation regimes work in practice. Or, more specifically, how they clearly do not work – very well – for the good of the country and our economy.

A prime example we have mentioned is Cubby Station, the cotton property in Western Queensland that held the largest water storage rights in the country. Cubby Station’s directors placed the property into the ‘protection’ of voluntary administration during the prolonged Queensland drought, because of the risk of trading insolvent. 

Three weeks after doing so, it rained – the best rains Australia had seen in a decade and Cubby Station was back in business … Or so it should have been, except the administrators refused to return Cubby Station to its management and ownership as requested by the directors.

It was later sold to a combined China-Japan conglomerate. Cubby Station’s shareholders lost their investments.

ARRIUM TOO

A similar thing happened last year, after the giant steel and mining group, Arrium, was placed into voluntary administration by its directors. Arrium was suffering what was thought to be a temporary problem due to over-investment in the mining part of its business.

Arrium still had spectacular cash-flows – and that was why its administrators were able to book an alleged $1 million a week in fees to ‘guide’ the company.

Arrium, with a capitalised value of more than $16 billion, was eventually sold for an undisclosed sum (rumoured to be around the A$1 billion mark) to British steel entrepreneur Sanjeev Gupta’s group. Thankfully, he is making good on his promise to re-invest heavily in the company and drive innovation in Australian steel manufacturing.

The shareholders of Arrium? They are out about $16 billion, but there are rumours of a class action brewing about that particular situation.

BIG HIT ON SMALL FIRMS

The stories of small business owners going into administration and re-emerging are few and fanciful.

The more likely scenario is for SME owners to hang on for a long as they can, trying to trade out of trouble, before they are taken out by either their bank or the ATO.

A sobering example Acumen knows of is a diversified printing partnership in which one of two directors decided to leave the industry, selling his shares to the other, who drew on family home equity to fund the purchase.

The departing partner miraculously showed up in another competing business and managed to draw away his original business’s major client.

With 60-70 percent of cashflow going out the door and a large existing supplier debt to service, the remaining director was quickly in all sorts of trouble, starting with the ATO.

Instead of making two-thirds of staff redundant immediately, the business owner held on with the promise of new contracts that did not eventuate. PAYE debt grew.

Reward for doing the right thing by loyal staff set the ATO on a rampage that liquidated part of the group. This triggered a major print supplier to go for the director using the director’s guarantee supplied. The business owner tried hard and nearly made it, paying down $220,000 in debt to $37,000 over a year… but the supplier opted to force bankruptcy through the Federal Court.

The SME owner lost his home and assets. The petitioner got about $5000 of the $37,000 debt, likely a net-negative after paying legal fees. The bankruptcy trustee got $15,000 out of the sale of the family home, the mortgaging bank got an extra $19,000 in penalty interest, eight staff lost their jobs.

A family was out on the streets. Other creditors got nothing.

The trustee made $15,000 from the home sale and, through a later asset sale, bumped that up beyond $45,000. The original debt, remember, was just $37,000.

It is not unusual in Australia for an administrator to profit most from such actions. Business Acumen is preparing a special edition on the current Australian liquidation and administration regime.

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EDITORIAL >>

WE HAVE DEDICATED our special report in Business Acumen's edition #89 to companies we can call – confidently – game changers.

These are businesses and individuals who have come up with a way of doing things that are not only innovative and different, they will make the sectors they operate in different, from now on. 

Take the Regional Economic Development (RED) Toolbox. For too long Australia’s regions have been developing economically in an almost haphazard way. That is, regional economic development has not been a ‘joined up’ process in which regions can see what others are doing successfully and adapt these learnings to the local situation.

For too long economic development in the regions has been focused on “we need money from the government (State or Federal) ‘to develop X’ and then the proving process of business plans and fitting in to budget cycles and the threat of another election (which will derail these processes all over again) begins.

The RED Toolbox takes the polar opposite approach. It is a grassroots by design economic growth environment. It provides a joined-up national collaboration platform where good local ideas can come forward, take form, invite in expert assistance and even finance, while governments of all colours can look on and augment the process with judicious application of expertise, regulation and funding. 

The RED Toolbox is Australian digital ingenuity at its best. It is where great regional projects will be born. Exceptional companies will be born and they will  ‘export’ interstate and abroad. Exceptional entrepreneurs and business people will put great things together using the RED Toolbox.

It is where business success stories will be showcased and learned from. It is a gathering point for people with a business challenge and others who have the products and services to help them. Business Acumen is proud to have been involved in the creation of the RED Toolbox – a world first in joined-up nationwide economic development. We are proud to be able to tell its story and, in coming years, the success stories of the businesses and entrepreneurs who will thrive as a result of its creation by Queensland company Digital Business insights and the many partners who shape the platform.

A related game changer is David Wallader’s organisation, IFO, which has brought to Australia a new way of funding major infrastructure – at no cost to taxpayers. That is, for billion-dollar projects like railways, highways, airports, ports, tunnels, even major energy projects, it is possible for a private company to establish a bank guarantee of more than A$160milllion, based on its capital assets, and use it on this secure trading platform to generate billions of dollars  for a specific government-agreed  infrastructure project.

At the end of that contact period, the guarantee is released back to the guarantor company and the project is completed debt free and able to be returned to the respective government after an operating period. For example, a government could plan a major hydro generation project, the construction company could raise a guarantee and complete the project then operate it as a going concern for 30 years, and after that it is returned to public ownership. Because the hydro power station is debt free, it is not servicing a loan, so profitability is high – or the price of that generated power could be reasonably lowered.

Another game changer in the area of infrastructure is the PileJax piling repair system of innovative Australian company Joinlox. Because PileJax can refurbish aged or degraded marine piles – taking in road and rail bridges, ports and wharves – at a tiny fraction of the cost of replacement, it is able to solve an enormous problem for end-of-life infrastructure in Australia and, now, in the US.

The method is ingeniously simple, but only made so by the bio-mimickry genius of the patented Joinlox system – which the company’s CEO John Pettigrew describes as being “like a huge industrial-size zipper”. A custom-made jacket is manufactured from fibreglass reinforced plastic, it is manouevred into position and literally ‘tapped’ together with a rubber mallet by divers below the waterline. It is then filled and bonded to the pile with a special epoxy mix and PileJax is happy to guarantee the life of that pile for another 25 years … but its research shows it could actually last far longer.

And the last but certainly not least of our game changers in this edition is Novius – a cloud-based 3D imaging platform that allows architectural, engineering and construction professionals to work on the same drawings simultaneously. It has been called the ‘holy grail’ for the interrelated industries Novius calls the ‘AEC’ sector.

Apart from the remarkably faster processing times Novius offers, its platform is also expected to significantly reduce errors on construction projects because everyone is able to view the very latest plans and drawings all the time – even on tablets on site. How much time and money is Novius going to save on construction projects in years to come?

What game changers.

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THE MAGIC word of the prevailing business age seems to be innovation – but are we desperately guilty in Australia of chasing innovation rainbows, believing in ever-more elusive pots of gold?

A very successful media sales manager who once worked for Business Acumen was fond of saying “a bird in the hand is worth much more than two in the bush”. It was his way of saying that an existing client is more valuable than an apparently attractive and apparently more lucrative potential client on the horizon. 

In other words, look after the clients and assets you have – do what you can to secure them with you – before you expend energy chasing rainbows.

In his practical manner, Business Acumen’s long lost sales manager – he left the industry, with regret, for he wanted to pursue his lifestyle dreams – put solid numbers to his ‘bird in the hand’ ethos.

If the cost of sales is about 20 percent of income, which it so often works out to be, then an existing client is already a 20 percent better bet than acquiring the next client. By our sales manager’s reckoning, practically, you could afford to discount up to 20 percent to keep an existing client.

The reality is, rarely do you have to discount – if you are treating your clients well and keeping their best interests at heart.

BEST INTERESTS AT HEART: The Cases of Arrium and Cubby Station

The same business philosophy should apply to Australia’s major business assets – but there is a problem.
Perhaps Australia’s liquidation and administration provisions under the Corporations Act have the right intentions. Perhaps, though, they have also been watered down by precedents and more recent business practices.

Cubby Station is a case in point. Moved into voluntary administration owing about $300 million when it ran into cashflow difficulties – any wonder as Cubby, with Australia’s largest private water holdings, was constructed during the longest drought in Queensland history. The vast potential cotton fields were parched.

Three months after Cubby moved into administration, it rained. And rained. The largest water holding in the country was a wet dream come true.

The directors of the Australian founding company asked to take Cubby Station back, seeing that it was now clear there would be many years of profitable growth and harvests ahead. The administrators, McGrathNicol (and banks) respectfully refused …

The administrators decided the best course of action – and the directors would question, for whom? – was to sell to a combined China-Japan-Australian group, at a knock-down price of $240 million, far less than its establishment costs, funded from offshore.

There can never be another Cubby Station created in Australia, because its location and the deals for water and land that created it were unique.

Of course, Cubby Station is still here and it’s great for Australia that it is now thriving. But where are those thriving profits going today? Largely offshore.

One thing is for certain, the liquidators – who can charge upwards of $500 an hour per executive for certain types of work – had a very profitable time.

ARRIUM, UM?

We can only hope that a similar fate does not befall the multi-faceted steel manufacturing conglomerate, Arrium.

The 94 companies that make up Arrium – whose best known brand is probably OneSteel – are currently in the voluntary administration hands of KordaMentha.

Arrium’s board was obliged to take this move early this year when cashflow was badly hit by a set of unfortunate circumstances – the most highlighted of which was the fall in resources prices, affecting mines the company had acquired in an earlier era of high prices.

But the rest of the group was trading reasonably well and there seemed to be good prospects for recovery.

However, one of the factors that can play havoc with a company in administration in Australia is the sheer costs of being in administration.

Business Acumen has reported on one case of a Queensland mining equipment company which came out of administration to find that in less than a month the administrators’ fees had run to almost $400,000, extracted from the company’s bank accounts. The loss of this cash soon forced the directors to liquidate the company.

KordaMentha’s early information for shareholders on Arrium is heartening, however. In its initial information release, KordaMentha stated:

“The role of the voluntary administrator is to maximise the chances of a company, or as much as possible of its business, continuing in existence. In addition, the voluntary administrator will investigate the company’s affairs, prepare and issue a report to creditors and provide a recommendation to creditors as to whether the company should enter into a deed of company arrangement, go into liquidation or be returned to the directors.”

As promising as that sounds, the longer it goes on, the final option of returning the company to directors seems more unlikely. The Cubby Station case is an example, where it took four years of administration before a loss-making sale was made.

With the South Australian Government having thrown Arrium a lifeline in terms of a lucrative long-term rail production contract, and with the Federal Government having ‘donated’ $40 million to assist Arrium already, it would seem there is an increasingly likely option of a break-up of the company into profitable saleable components – with losses to shareholders on the rest.

Again, a major Australian asset would go and jobs would undoubtedly vanish.

There may not be a pot of gold at the end of this rainbow, but surely there should at least be a pot of Australian steel?

Until Australia gets something like the self-administration benefits that the US has in its Chapter 11 bankruptcy provisions – which have been used to great national benefit by General Motors and most American airlines – our major business assets will continue to hang by a precious and precarious thread. 

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EDITORIAL >>

WHISTLEBLOWER protection and legislation is one of the major transformative issues facing Australian business today – and yet it is faint on the radar screens of business leaders.

The business behavioural impacts of recent information passed on by whistleblowers to media outlets have been massive. They have prompted calls for a Royal Commission into Australia’s banks. They have resulted in a Royal Commission into Australia’s union movement. 

Perhaps most spectacularly, the ‘perfect storm’ created by the anonymous whistleblower who released the Mossack Fonseca Panama Papers has rocked banks, governments – witness the resignation of Iceland Prime Minister Sigmundur Davíd Gunnlaugsson – the world’s leading business advisory firms and many of the business world’s high achievers.

And there is a lot more to come.

The Panama Papers are the basis for revelations that will play out for many years – and yet Mossack Fonseca is said to be only the world’s fourth largest organiser of ‘offshore’ low tax jurisdiction companies. Unquestionably, similar organisations, and the banks that have facilitated these transactions, will be shoring up their security (and grip on staff behaviour) to prevent whistleblower action against them.

Questionably, while it makes ‘business’ sense to boost such security, it realistically makes just as much sense for them to examine their own ethics. Right now.

Astute business leaders need to find where their companies are verging on the unethical and change that behaviour. Use this period of time as a catalyst for urgent change.

Business leaders devote so much time and money to building their brands without looking clearly for the simple ethical lapses that can sink those brands.

Change now will be the only possible defence against any revelations of poor company behaviour.

“We have just become aware of the problem and are conducting a review …” or statements of its ilk hold little traction, compared with companies acting on internal whistleblower information early, fixing the problems with staff and customers – and then openly explaining what has been done to solve such problems.

Surely, this is where company websites and social media programs earn their place in company budgets?

AUSTRALIAN ADVANTAGE

Australian business leaders have an opportunity to lead the world in this area, thanks to an Australian Research Council-facilitated project with four national universities (see story page 3).

The Whistling While They Work 2: Improving managerial responses to whistleblowing in public and private sector organisations research project is calling for Australian business leaders to complete two online surveys that will help shape recommendations on both whistleblower protection legislation and the development of strategic programs to assist business in ethical governance areas.

The research team, headquartered at Griffith University, has already said it would use the results to help develop and write the replacement to the Australian Standard on Whistleblower Protection Programs (AS 8004), which was published in 2003 but is currently withdrawn.

Astute business leaders will surely get behind this research project as this is an area in which time really is of the essence.

Just ask leaders at the Commonwealth Bank, Westpac, NAB, ANZ, 7-Eleven, Woolworths, Coles, Volkswagen and a host of others how much impact a small number of errant staff behaviours can cost in brand reputation and recovery.

Early action collaborating with, and addressing the concerns of, whistleblowers would, in every case, have been a far better alternative than the fallout of ignorance or cover-up.

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BUSINESS ACUMEN is getting right behind the Manufacturing Toolbox (see special report in the #86 print edition) because we understand that this platform can turn the tide in favour of an Australian manufacturing renaissance.

That’s a big call, but it is – amazingly – evidence-based.

Indeed, the digital Toolbox platform itself has evolved out of probably the most comprehensive research ever conducted on Australian business and its adoption of technology.

The evidential statistics: more than 50,000 deep surveys of businesses of all shapes and sizes across Australia over a 15-year period – all charting the specific technologies and services those businesses have utilised and how they rate them over time – combined with more than 300 detailed business case studies. Geoff Grantham.

From all this a digital platform has been developed by a small Brisbane-based company, Digital Business insights (DBi), whose leaders John Sheridan and Geoff Grantham firmly believe the Manufacturing Toolbox can be the catalyst for Australian industry development and growth in ways that have only become available with the digital revolution. 

Mr Sheridan is a former advertising industry creative director who has devoted the past 15 years of his life to researching and understanding the digital revolution with a view to ‘creating something’ which will help Australian businesses creatively build capability and resilience.

These digital platforms, starting with the Manufacturing Toolbox and planned to extend into other industries and specific regions – are all joined up.

Mr Grantham is a web sage and online learning systems expert who has been involved in computing hardware, software and web development for more than 35 years. His career has ranged from early PC and IBM clone development to developing global online multi-lingual training for the motor industry.

They are the antitheses of how industry support has occurred in the past ... mainly top-down government-driven financial incentive-based structures.

This Toolbox – and the many to come – have developed from the grass roots. Every step forward has been tested and augmented by key partnerships. 

Those partnerships, as you will read in the special report, involve best-of-breed organisations which have not only the wherewithal to positively influence the industry, they have the passion and desire to see Australian manufacturing succeed and grow like it has never managed in our history.

DBi is the first company Business Acumen has ever reported upon which is approaching the problems facing Australian industry by harnessing the potential of digital technologies and methods in a truly joined-up way.John Sheridan.

There are tools available and being developed now – including 3D printing, robotics and new material and biological sciences – which, if embraced and innovated by a multitude of agile Australian manufacturers will create superb new products and markets.

The key to how successful that drive is relies upon the capability of those businesses to adapt and grow. That is, they have to become better businesses, more agile, with access to appropriate knowledge, networks and – of course – growth capital.

They also have to be able to effectively seek new clients and showcase to potential new markets, both national and international. They have to be able to communicate and collaborate with others in their industry, plus those outside their industry who can help them.

These vital things are what the Manufacturing Toolbox does.

It is probably the most comprehensive and innovative platform for business development ever created.

http://manufacturing.digitaltoolbox.org

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COMMENT EXTRA >> 

QUEENSLAND, and indeed Australia, has been hearing a lot about ‘innovation’ lately – especially about finding innovative ways to fund infrastructure.

Business Acumen has written about and followed a Queensland company, Infrastructure Financial Opportunity (IFO), for the past two years with great interest. This company, developed by former banker David Wallader, is collaborating with a unique European-based infrastructure funding platform that trades an underpinning bank guarantee – usually more than €100 million (about A$155 million) – and builds major infrastructure utilising the profits from this secure and audited financial trading. 

According to Mr Wallader, the trading platform is only available to private companies, only handles large infrastructure projects, is regulated by international monetary compliance authorities including the United Nations, World Bank and the International Monetary Fund, and cannot be accessed directly by government or for military infrastructure.

But Australian governments at all levels do need to understand this system for this country to utilise it – because governments eventually end up owning this infrastructure after the ‘lease period’ for the developer expires.

Here’s how it works: A large Australian construction company may contract with government to develop, say, a rail system.

All the usual approvals apply, but it is the construction company which provides, say, a A$200 million bank guarantee – which is traded to fund this particular, say, A$1 billion project. At the completion of the project, which is conducted in the usual way, using the trading returns to service ongoing payments, there is no debt.

The developing company holds rights to operate the infrastructure for a set period (often 30 years and occasionally shorter periods) and at the end of that period the rail system is owned by the government.

Seems pretty innovative.

But Mr Wallader cannot get a decent hearing. He has been blocked by corporate middle management and dozens of disbelieving public servants and government officials for the past two years (ironically, they are often communications people). These ‘gatekeepers’ often remark to him that “it sounds too good to be true” and information about IFO seems never to be passed up the line to decision makers and government ministers.

Business Acumen, in an effort to help cut through, even recommended two leading figures in the resources sector meet Mr Wallader, briefly, to understand the IFO system and how it might be applied in Queensland. One of these resources leaders refused such a meeting on the basis that it was not core business for his organisation … without even knowing what it was about.

This ‘innovative’ organisation is now viewed in a very different light by Business Acumen.

That’s the trouble with innovation: it’s different. Without knowing how it works, it can seem too good to be true.

Business Acumen hopes this comment will at least help Mr Wallader to be heard at the right levels … the very business and government leaders talking so enthusiastically about ‘innovation’. For Queensland’s sake. For Australia's sake.

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