Treasury and Exchequer
Ministerial Decision Report
Jersey Business disruption Loan guarantee scheme: AMENDMENT TO EXCLUSIONS
- Purpose of Report
To enable the approval of an expansion of eligible businesses under the Jersey Business Disruption Loan Guarantee Scheme.
- Background
The following sectors are currently excluded from the Jersey Business Disruption Loan Guarantee Scheme (“BDLGS”):
- financial services, legal and professional services businesses
- real estate
- property development
- construction
- public sector and state-owned entities
- utilities
- agriculture and fishing
The maximum annual turnover of a business eligible to benefit from the scheme is £10m, and all businesses must have a Jersey Business Licence from the Population Office. This ensures that only locally active businesses are eligible. Ministers had previously confirmed that exclusions were subject to review as the situation with COVID-19 progressed.
Since the introduction of the scheme the scope of sectors eligible under the Co-Funded Payroll Scheme Phase 2 has been expanded. This now includes sectors which are excluded from the BDLGS. Where businesses are eligible for government grants to support wage payments it is appropriate that they should also be eligible for government backed loans, given that this is closer to commercial normality. In supporting payroll costs, Government is investing in the future of the business and its employees. The business will likely face other financial pressures during this time due to overheads and ongoing non-payroll expenses, so it is appropriate to look to lending to cover these costs for the medium to long term. Therefore, in order to ensure alignment of economic support measures, it is proposed that sectors supported by the Co-funded Payroll Scheme can be supported by the BDLGS.
In reviewing the exemptions it is also appropriate to consider whether any exemptions remain appropriate under the BDLGS given the evolving pressures that COVID-19 is placing on businesses across the economic spectrum in Jersey.
Unlike the Co-Funded Payroll Scheme, the BDLGS does not provide upfront payments from the Government. Rather, it underwrites lending to businesses who have not been able to secure lending through their bank’s normal commercial terms. This could be for a variety of reasons, such as not having sufficient security available, existing levels of borrowing, or the specific nature of the bank’s credit risk appetite. It extends credit to viable businesses where banks no longer can, with more limited risk to the taxpayer than upfront grants.
When designed in mid-late March 2020, the scheme was built on a number of assumptions such as the most immediately hit sectors being those that will need support, whilst others will continue as normal with limited difficulties. It was also assumed that uptake would be significant in the early stage.
A number of these assumptions remain valid, however it is clear that the economic impact of COVID-19 related measures will be significant to varying degrees across all sectors of the economy, not just those that have had to significantly limit trading due to government imposed measures. The Fiscal Policy Panel economic forecast of 26 March implies a sharp contraction in Q2, with a partial bounce back thereafter.
So far uptake of the BDLGS has been limited, with around 15 loans approved at 1 May 2020. Feedback has implied that this may be medium-term tool to support businesses now that the wider suite of government support is clearer. Businesses are assessing their borrowing appetite with more information to hand, and taking a longer-term view about how to support their business. This may be particularly so as Jersey progresses through the Safe Exit Framework, and businesses assess their trading prospects. Further, feedback suggests that bank commercial lending has been available, reducing the immediate demand on the scheme.
Proposal to remove all exemptions and the £10m turnover cap from the scheme
It is clear that initial assumptions about the sectors most significantly impacted by Covid-19 disruption were generally valid. However, this does not preclude businesses in other sectors being impacted for a variety of bespoke reasons. The BDLGS has inbuilt protections to ensure that government backed lending is only used to support those adversely impacted by Covid-19 regardless of sector. It is therefore not clear that sectoral or exemptions or turnover caps remain necessary.
The scheme is designed to ensure that businesses lent to were viable at 10 March 2020, this being the first diagnosis of COVID-19 in Jersey. This is a key protection utilising the expertise of banks’ credit risk assessments, which is less feasible to manage in the Co-funded Payroll Scheme. Further, the bank bears 20% exposure, ensuring that lending is appropriately directed, and lending is only for working capital purposes.
In addition, as the scheme can only be used where the bank cannot lend under commercial terms. It therefore only supports those businesses who are struggling to obtain financing, but are nonetheless considered viable by the bank’s credit risk assessment and the terms of the scheme. It is appropriate to consider whether government should support such impacted businesses, as a temporary measure. The protections in the scheme act as a sufficient filter to ensure government underwriting is only extended where appropriate.
Opening the scheme up to all sectors of the economy likely removes considerations of state aid under Protocol 3, as the assistance would not benefit specific sectors.
This would also ensure that there is some proportionate assistance to those businesses in Jersey’s professional services economy, which under the currently operating schemes in the economic support package, do not currently have provision for immediate economic support, despite being considered in longer term planning on economic recovery. Further, this change could also provide an appropriate medium to longer term economic support measure for these sectors, allowing for planning to commence at this stage to provide the best chance of business viability for the duration of the crisis. Given the risk of downward pressures in terms of incoming business flows, providing the option of the BDLGS to these businesses would seem advisable at this point in the crisis. This would appear to be a more appropriate mechanism for tailored lending than the Jersey Recovery Fund, which could still be used for larger, more specific cases.
Notwithstanding the above, there is a risk that by expanding the scheme it could be used to support larger businesses who some may consider it less appropriate to support. However, scheme the scheme support viable businesses who are struggling to obtain commercial financing, this is appropriate and achieved without sectoral exclusions. Further, the scheme is capped at £500k per borrower, so the maximum exposure of the taxpayer to any particular business is limited.
This change could also increase the risk that taxpayer money to support businesses who are struggling not only because of Covid-19 related restrictions, but because of wider economic changes. However this is managed in part by the bank credit risk assessment and wider conditions of the scheme,
Increasing the scope of businesses eligible for the scheme would also increase the risk of significant drawdown. However, the existing demand on the scheme has been limited (less than £1m approved at 1 May). This may, however, significantly increase as the stages of Jersey’s Safe Exit Framework progress, and the likely impact on economic activity becomes clearer, but the early experience suggests that the risk of widespread demand on the scheme is limited.
There is also an inherent risk that banks viability assessments are incorrect. This risk already exists within the scheme. For financial services businesses, the existence of regulatory capital requirements adds further protection.
It is proposed to remove exemptions, ensuring that a wider range of local businesses have some support available to them to tide the impact of Covid-19. As a scheme which underwrites loans rather than extends grants to businesses, this is more proportionate assistance to those businesses less immediately impacted, but are suffering nonetheless. The existing protections in the scheme help to ensure that money is only used to assist those viable businesses facing disruption due to Covid-19, who cannot obtain financing on bank commercial terms.
- Reason for Decision
The decision ensures appropriate alignment of eligible sectors across the range of measures to support the economy due to Covid-19 related disruption, and opens up the BDLGS to all local businesses.
- Resource Implications
This decision increases the number of businesses who are eligible to benefit from bank lending underwritten by a Government of Jersey guarantee. However it does not increase the limits of that guarantee, so does not have direct implications on Government of Jersey finances.
Report author: Lead Policy Advisor, Financial Services | Document date : 12 May 2020 |
Quality Assurance / Review : Director of Financial Crime Strategy | File name and path: |
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