In June, senior cabinet minister Michael Gove delivered a thought-provoking speech on the “privilege of public office”. He said Britain, like other western democracies, was suffering from a number of “disease symptoms”. Drawing on great historical examples of countries that have faced and overcome such challenges, he cited inspiration from US President Franklin D. Roosevelt’s “bold and persistent experimentation” to find new and innovative policy solutions to problems. of his time.
Among the major obstacles we face today are the consequences of the COVID-19 pandemic and the resulting global lockdown. It fundamentally changed behaviors across the world and challenged assumptions about our economy and our society.
The cause, nature and response to this crisis are totally different from the last major financial crisis of 2008-09. It started as a health crisis and quickly turned into an economic crisis. On this occasion, the banking sector was not the source of the problem but worked closely with the government to be part of the solution. The industry has helped millions of people and businesses across our nation manage cash flow, protect jobs, and facilitate government-backed COVID-19 loan programs.
This rapid, high-impact government and industry response has helped hundreds of thousands, if not millions, of businesses survive the initial economic impact of the crisis. But as we look to the months ahead, it’s clear that many businesses will need additional help to deal with a debt burden that could hold them back or drag them down.
Without urgent and decisive action, our analysis shows that up to three million jobs in the UK – equivalent to every job in the West Midlands – and 780,000 businesses are at risk. To solve this problem, TheCityUK, supported by EY, brought together a group of more than 200 experienced practitioners from 50 companies in the sector to find new solutions to this challenge. A project of unprecedented scale and speed in such unprecedented times underscores not only what TheCityUK was set up to deliver, but also the commitment and rigor of the many people who played a part.
The group, chaired by TheCityUK Board of Management Chairman Sir Adrian Montague, with technical work led by EY’s Omar Ali, quickly established a number of dedicated workflows. Each of them provided a detailed analysis of the problems faced by SMEs (small and medium-sized enterprises) and considered the optimal solutions. This has been underpinned by consultation and input from government, policy makers, the Bank of England (BoE), the Financial Conduct Authority (FCA) and trade associations representing a wide range of sectors as well as owners companies themselves.
Our latest report, published in june, outlined a far-reaching set of options to convert, restructure and repay projected unsustainable debt to help get hundreds of thousands of viable SMEs back on their feet, save millions of jobs, protect billions pounds of taxpayers’ money and help fuel Britain’s economic recovery and future growth. We believe that, if put forward, the options present a real opportunity for the government to leave a lasting positive legacy of regional growth and investment in all regions of the country.
The principle of these options is to offer viable but highly indebted SMEs in the UK a means of reducing their overall debt load by allowing them to manage their government guaranteed loans in a more sustainable way. Depending on the size of their debts, SMEs could access one of two new products: a business repayment plan that would convert unmanageable loans into means-tested tax debts or, for larger debts, capital recovery plan that would allow loans to be converted into preferential loans. shares or long-term subordinated debt. Both of these instruments avoid having to issue common stock and eliminate business owners’ fears of losing control of the businesses they’ve worked hard to build.
At the heart of these options is the creation of a new government-backed UK Recovery Corporation (UKRC). This entity would issue and hold as well as oversee and manage the unsustainable debt that is already guaranteed by the government. It would also help prevent moral hazard and maintain a healthy distance between private enterprise and the state. While the government would initially be the main investor, by inviting private investment into the UKRC over time it could create an ongoing funding channel for SMEs across the UK.
Despite the current challenges we face, we must not forget the potential opportunities that the future may hold for us. Many entrepreneurs will already be thinking about how to take the next steps in growth. For them, securing the capital they need will be essential. This is why we are proposing to create growth shares for companies, backed by a growth capital fund. This would support viable SMEs that don’t have a problem with their current indebtedness but still need large-scale financing – a critical piece of the puzzle to spur the resumption of business across the country.
We believe that while these options are new, far-reaching and ambitious, they provide the tools to help SMEs play their important role in the post-COVID-19 economic recovery. There are no easy options, silver bullets or one-size-fits-all solutions, but what we’ve come up with is what we believe is the best range of options to recapitalize businesses across the country and save taxpayers.
We have been encouraged by the initial response from government, policymakers, regulators and industry stakeholders and will continue to engage broadly on these options over the coming weeks and months. It’s not something that can be postponed to a later date. Failure to act decisively now will condemn many SMEs and communities across the country to default and decline, with resulting impacts on personal lives, communities and taxpayers.
The projected high levels of unsustainable indebtedness that the country’s SMEs will face in the months and years to come are a real obstacle to the UK’s recovery. These small businesses are the backbone of our economy and a major employer in every region and across the country. What our work has shown is that the current unprecedented challenge requires more than greater flexibility or experimentation in the policy-making process. This requires greater experimentation with our industry’s ability to collaborate and work with government and regulators to drive change forward.
