The COVID-19 outbreak is first and foremost a human tragedy of unimaginable scale. Addressing this with the urgency it demands has quite rightly engaged the brightest minds across the globe.
While we do not share Mr. Trump’s view that “the cure cannot be worse than the problem”, any prudent risk analysis mandates that we must now also consider how to best manage “the greatest threat that the Irish economy has faced since the financial crisis”[2].
Kristalina Georgievsmo of the International Monetary Fund (IMF) has warned that the world is facing a recession at least as bad as the global financial crisis or worse.
Mario Draghi former President of the European Central Bank has urged the world to “mobilise our entire financial systems” in an effort to protect jobs and sustain the real economy[3].
We need to interrogate all possible supports for business to ensure that the ESRI projected 7.1% shrinkage in the Irish economy represents the worst and not the best-case scenario.
In Ireland if we are to avoid the predicted recession turning into a depression we must focus supports on the engine of growth in our economy, namely the SME sector. The SME sector constitutes a substantial proportion of our enterprise economy, comprising approximately 99% of active businesses and 65% of people employed[4]. Many of these businesses measure their success not just in terms of economic profit and growth but in terms of long-term commitment to communities and employees[5] and this is precisely the type of commitment we need now more than ever.
As economies across the world shut down save for essential services bills must still be paid if not now then at the end of temporary payment holidays. In an attempt to to mitigate the worst a global recession might throw at us governments across the world have unveiled economic stimulus packages to keep economies alive while attempts are made to get the COVID-19 outbreak under control and to ensure, insofar as possible, that viable businesses can be sustained through this critical period.
Similar to their response to the health crisis presented by the COVID-19 pandemic, the Irish government has not been found wanting in this regard and has introduced a range of supports for enterprise across income, credit and investment. Their response to date has been immediate, well articulated and considered, but this is just the beginning.
Irish Economic Responses to COVID-19
Income Support
The COVID-19 Income Support Scheme was announced by the Irish Government on 24 March 2020 and offers assistance to:
employers in paying employees’ salaries in these difficult times; and
individuals who have lost their jobs as a result of COVID-19
A €200m Package for Enterprise Supports including a Rescue and Restructuring Scheme is being made available through Enterprise Ireland for viable but vulnerable firms that need to restructure or transform their businesses.
Details of these supports are being finalised at this time.
The SBCI Covid-19 Working Capital Scheme is offered in partnership with the Department of Business Enterprise and Innovation, the Department of Agriculture Food and the Marine and is supported by the InnovFin SME Guarantee Facility, with the financial backing of the European Union under Horizon 2020 Financial Instruments. Full details of this scheme are available at https://sbci.gov.ie/schemes/covid-19-loan-application
Employment Focussed Supports
A Short Time Work Support is available from the Department of Employment Affairs and Social Protection and is an income support payment for employees who have been temporarily placed on a shorter working week due to COVID-19 and is intended to help employers during periods of temporary difficulty.
The Credit Guarantee Scheme is a government supported product from the banks for small and medium businesses who have difficulty borrowing from their bank. Businesses can apply for loans of up to €1 million at AIB, Bank of Ireland or Ulster Bank. Loans can be for terms of up to seven years. The scheme provides an 80% guarantee to participating banks which are AIB, Bank of Ireland and Ulster Bank.
Similar to how we learned from the manner in which governments in Italy, South Korea or China addressed the health crisis, it is also worthwhile interrogating the economic stimulus made available elsewhere to ensure we are making all possible supports available to the engines of our economy.
We consider below some of the other supports rolled out or under consideration elsewhere which might merit consideration here.
Cash Flow/Working Capital Facilities
In the UK a new temporary Coronavirus Business Interruption Loan Scheme, delivered by the British Business Bank, has been announced with the intention of supporting businesses to access bank lending and overdrafts. Under this scheme the government will not charge businesses or banks for this guarantee, and the scheme will support the provision of loans of up to £5 million in value to businesses with a turnover of £45millon or less. Distinguishing this from a similar scheme in Ireland it is worth noting that the first 12 months of these loans will be interest free, the UK Government will cover these payments. The British Business Bank will act as the intermediary between the Treasury and the High Street banks who will then provide the loans under this scheme to customers.
In the few days since this scheme has been rolled out it has been plagued with problems with high street banks looking for guarantees with collateral for amounts over a certain threshold. This undermines the value of the facility and creates real delays in getting the facilities to the businesses which need the cash yesterday. We must learn from these teething problems and ensure that any impediments to immediate roll out of a similar but more restrictive scheme are addressed as a priority.
The UK has also now announced new Insolvency measures to prevent businesses, that are unable to meet their debts as they fall due, from having to declare bankruptcy. These measures involve the suspension of the wrongful trading law to protect directors from potentially exposing themselves to prosecution during the pandemic.
It is expected that the measures will include a temporary moratorium for businesses undergoing a restructuring giving them “extra time and space to weather the storm”[6]. The new legislation, once enated, is expected to apply retrospectively from the beginning of March.
This is a very practical step. Governments are supporting companies who may not otherwise be in a position to keep staff on the payrole to do just that. Company directors should not have to worry that in doing so they are exposing themselves as directors to criminal prosection or potentially personal liability. Such a provision should be considered here provided, once enacted, the protection will be automatic and only subject to satisfaction of certain conditions and will not involve the expense or detailed negotiation and evidentiary requirements as are currently required here before such protection can be afforded.
The US stimulus package passed in the last few days includes “forgiveable loans” of 8 weeks worth of cashflow and zero interest loans for businesses that have seen 25% or more decline in revenue.
Assistance like this is vital as it potentially lowers the debt burden for the months after the initial insentive periods have passed. There is limited value in keeping businesses afloat now if future debt servicing arrangements are crippling.
Cash Flow stimulus must pass right through the supply chain so that businesses receiving state support can rely on the fact that those due to pay them will be similarly supported to meet their obligations. A piecemeal approach will undermine the whole system. The chain cannot be broken.
Sector specific proposals
The UK has also announced that certain businesses in the retail, hospitality or leisure sector in England may also be entitled to a cash grant. Businesses with a property that has a rateable value of less than £15,000 will be entitled to a grant of £10,000. Businesses with a property with a rateable value of between £14,999 and £51,000 will be entitled to a cash grant of £25,000.
In Belgium one-off payments are also being made available to companies forced to close in the catering, retail, sporting/leisure sectors. In addition arrangements are being made for the spreading of utility bills.
In Dubai the government is exemptiong certain companies from fees charged for the postponement or cancellation of sports and tourism events scheduled for 2020 and is freezing rates on all hotels for 2020.
In Abu Dhabi a 20% rebate on rental values for businesses operating in the restaurant, tourism and entertainment sectors is being made available.
Many Irish businesses in these sectors experiencing some of the most immediate mandated closures are also calling for more sector-specific supports. According to the Irish Hotels Federation “current and future bookings vanished in a matter of days” and while they have welcomed supports today they have called on government to provide more sector specific supports. Tourism represents 4% of Irelands GNP and accounts for €8.75 billion in annual spending. Supports for this sector will be critical.
While it is acknowledged that time is of the essence and that we must prioritise the immediate roll out of key supports, we should not assume a one size fits all approach will suffice. Every sector is impacted in different ways and to drive a recovery we will in time need to dive into the detail.
Capital Supports
In an effort to stabilise companies operating in the real economy and whose failure would have a significant impact on the economy, technological sovereignty, critical infrastructure or the labour market, the German government has opened up some valuable recapitalisation measures.These measures include acquisition of subordinated debt, silent partnerships and the acquisition of shares or other equity-like instruments.
While the elegibility criteria in Germany excludes SME’s these proposals should be explored for certain SME’s operating in Ireland. Companies will only be able to service a finite amount of debt and the right combination of debt and equity is likely to make the difference between success and collapse in the months and years ahead.
Innovative Leadership
In Ireland for many years we have legitimately trumpeted our innovation culture and our smart workforce. Earlier this year our government called out its ambition for Ireland to become a Global Innovation Leader[7].
We now have an opportunity we never expected or wished for ― to demonstatrate Leadership in Innovation.
We must enable our smartest and most creative thinkers, avoid the temptation to fall back on traditional remedies or financial tools used back in 2008 and instead develop the heretofore unimaginable solutions and stimulus to help our SME sector honour their commitment to their communities and employees in the most sustainable way.
That will involve longer-term financial supports to those business that survive the next few weeks and months, financial supports that deliver what those businesses actually need and avoiding generic solutions that are deemed easy to roll out. We won’t find these solutions by looking in our rear view mirror but we will find them by engaging now with our economic front line defenders, the women and men sustaining our SME sector, and the communities that rely on them.
Immediate Recommendations
The Irish government is to be commended for its swift actions to prioritise the health of our people above all else and its initial and immediate supports for business, however we will need innovative sustained leadership in the weeks and months ahead. To kick start this process we should:
ensure haste does not hinder our ability to develop and drive innovative solutions to this global crises;
engage with the SME sector early, seek to better understand their challenges and how we might best meet them;
rule all potential solutions in and nothing out;
set up an economic task force fully resourced to interrogate all proposals from debt to equity to supply chain modelling solutions to sustain business in the medium term; and
revisit supports to the charity sector who we will be forced to call on more than ever before to support our communities in the journey back to work.
For more information on the content of this Insight, please contact: Gillian Keating, Partner | E: gillian.keating@rdj.ie | T: +353 21 480 2712
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