Mixed signals at train’s arrival

INSOLVENCY practitioners are expecting growing demand for their services as the combination of an economic downturn, the GST, the weak Australian dollar and poor business management takes hold.

But the news is not all bad. The announcement from North West Shelf Venture partners that the $2.4 billion fourth LNG train is on track has provided a boost for WA’s business investment-reliant economy.

Some economists believe this could signal the rebound in business investment WA has been waiting for.

In the five years to the 1999-2000 financial year, business investment made up 18 per cent of the WA economy. Over the same period, it made up 12.6 per cent of Australia’s economy.

But after hitting a peak in 1997-98, WA’s business investment levels have been poor, hitting a 14-year low last March.

While the weak Australian dollar has been bad for some businesses, in economic terms its combination with low interest rates is good news for export reliant and capital intensive WA.

BankWest chief economist Alan Langford said while the economic picture had been poor at a national level, economists were confident WA’s business investment would rebound this year.

"Businesses run the risk of divert-ing too much time to doom and gloom and missing the opportunities that are coming through," Mr Langford said.

Yet there is a feeling the 10 years of uninterrupted growth most businesses enjoyed is coming to an end.

The latest Australian Bureau of Statistics retail figures showed WA’s retail trend estimate fell by 0.2 per cent. The ABS reported food and household goods retailing continued to fall while there was strong sales growth in recreational good and hospitality-services industries.

Sales have started to decline around the same time some busi-nesses’ access to finance has started to dry up.

Notable insolvencies in the past fortnight have included HIH Construction, threatening work on the Mounts Bay Village project; 33-year old family-owned pool maker Buccaneer Pools; Mediterranean Ceramics and farm machinery dealership Agro Holdings.

Even Australia’s third-largest department store operator Harris Scarfe has felt the bite and appointed administrators.

Some insolvency experts believe the combination of low interest rates and banks’ attempts to grow their asset bases and loan books have helped disguise some of the problems in poorly performing companies.

Institute of Chartered Accountants in Australia spokesman Garry Trevor believes easy access to finance has masked the problems endemic in some WA businesses.

"The banks have been keen to build their loan books and asset bases so they’ve made it easier to get money," Mr Trevor said.

"In the old days you had to go cap in hand to your bank manager to arrange a loan. Now they send you stuff through the mail And, despite the huge pre-GST demand for new homes, most builders did not make huge profits out of it. The huge demand created high prices for building supplies and skilled labour.

Ms Cusworth said the residential building slowdown was such a big event, it had flowed through to the rest of the economy.

"Vehicle registrations are weak, pretty much as they were this time last year. Except back then we thought that was due to people holding off their new car purchases until after the GST," Ms Cusworth said.

"National retail figures have spiked, probably due to people having more money to spend from interest rate cuts.

"WA’s retail figures are probably down because State growth is weak and business investment is down. The agricultural sector is still hurting from a series of poor harvests.

"Importers are being burnt by the weak exchange rate and because the demand for imports is lower, they can’t pass these price rises on to their customers," Ms Cusworth said.

Mr Trevor said some of the insolvency issues were related to the GST.

"I’ve not had anyone come to me and say they have to appoint a liquidator because of the GST. But it has been the straw that broke the camel’s back for some micro businesses," Mr Trevor said.

A recent Australian Business Limited survey found the GST was hurting businesses’ cashflow.

Of the 501 businesses surveyed, 65 per cent found the GST had a negative impact on their cashflow. Only 8 per cent said it had a positive impact.

ABL economics adviser Jeff Schubert said the business sector was trying to deal with the new tax system by juggling the timing of payments and receipts of funds.

"Because so much of the business sector is attempting to do this, the process is having a cumulative and disruptive impact on the normal flow of inter-business payments," Mr Schubert said.

PPB Ashton Read partner Cliff Rocke said in his experience insolv-encies were nearly always the result of some form of bad management.

"When sales are going well, businesses can afford to be a little reactive but when sales start going down, they have to start being proactive and some managers get found out," Mr Rocke said.

"When New Zealand introduced its GST, it brought forward the inevitable for poorly performing businesses and rewarded those companies that had good structures and practice."

"But in a market like Perth there are only a limited number of A-class borrowers. The banks have started listening to B and C-class borrowers.

"Those companies have kept borrowing to cover their losses but it hasn’t solved the core problem – that they were non viable businesses. Eventually they’ve run out of assets to back their borrowings."

However, Chamber of Commerce and Industry chief economist Nicky Cusworth does not subscribe to that view.

"While debt has risen, so has asset value. The growth in liabilities has been matched by the growth in asset values. Unlike the late 1980s, asset values look to be based on real terms, rather than price driven," Ms Cusworth said.

A large part of the woes facing WA have come from the downturn in the residential building sector thanks to the GST-induced rush on new homes.

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