Good intentions may fuel bad business ethics

The below reflection highlights the uses of EU grants applied to the olive oil industry as an example of the backside of subsidies. I will use this industry to exemplify a structure that is counterproductive to its purpose and ultimately feeds an unethical business behaviour. It is my firm belief that the same problems are seen in other industries when grants or subsidies are an important factor for a whole industry.

During and after the financial crisis in 2009-2011 better controls were implemented and put in place for the industry to sober up. The structural problems still remain.

When a farmer makes an investment in an olive oil plant (processing olive oil from the olive to ready and packed oil) he can apply for investment support from the local government and EU. The support spans between 40-70% of the total investment. Regions that are underdeveloped with high unemployment rates can get a higher percentage. The funds are transferred to the company after the investment is done. Invoices must be received and paid before the funds are released.

The first problem: The percentage of support is so high that there is no need for upgrading / refurbishing the old equipment. An example of capital destruction.

The second problem: Unethical suppliers over invoice the customer giving a higher value of the subsidies. Then, the “over invoiced” value is given as kick back to the buyer.

The third problem: Many of the investors are small farmers who have limited cash available, leading to long payment terms (2 years) and very creative ideas to release funds early.

Consequence: The tax payers support this system and what do we get in return? If the lower investment costs follow the value chain, we should get lower prices when buying olive oil at the retailer. Does the olive oil price need to be lower? I do not think so.

Does the subsidies serve its purpose: Unfortunately not. This is ONE example of politically driven subsidies towards weak regions that have no real effect. It may win votes for the next election, but it does not build a sound and healthy industry.

When I worked in this industry, the company I represented was very clear on what our business ethics stood for. This resulted in volume loss, but the customers buying from us shared our values and the business generated a sound bottom line result. It is always tempting to take that order and meet your sales targets. Good managed companies encourage and reward their leaders to also say no.

/Göran