Even though businesses are reopening, there are still difficult decisions to make on how to respond to the cumulative financial crisis in businesses.
They have seen their revenue from customers fall dramatically and face continuing overhead costs which may still exceed revenue.
Some are facing closure.
The immediate financial pressures for many firms were offset by the emergency job retention funding made available by HM Treasury. That well-administered scheme allows businesses to draw on Treasury funds for up to 80% of the pay bill, limited to a maximum of £2,500 per month for any one employee. The scheme is temporary although it has been extended on a tapering basis to the end of October.
The Treasury is under pressure to wind down the job retention scheme. Businesses will not want it to end too quickly or before commercial markets have recovered sufficiently to allow businesses to be able to meet their wage costs. The Treasury is well aware of the perverse incentive effect if businesses are shielded too well by a continuing job retention subsidy. In addition, the full cost of the job support scheme is too high for the Treasury to allow it to continue for much longer.
In essence, government policy must be designed to incentivise the earliest sensible recovery of the economy. Businesses must prepare for the ending of the job support scheme. Implementation calls for careful judgment on, first, the revival of commercial markets and the end of lockdown restrictions and, second, the differing commercial problems in sectors of the economy. The business recovery processes will not give all firms the same rate of market pick-up.
As the job retention scheme ends each business will be faced with decisions on whether to restore furloughed employees to the normal payroll or, if there is not sufficient work available, to make some people redundant. There are likely to be significant redundancies. That prospect will be used as an argument to retain a less costly job support scheme. The Treasury has made painful decisions.
Some of the businesses facing major financial tension will be those which have raised capital by borrowing heavily in the expectation that the business would be able to repay capital and interest from the normal flow of revenue from customers.
The emerging problems can be easily illustrated with reference to the question of how to treat local hotel businesses which have been part of large scale investments in recent years.
Owners of the large new hotels invested heavily in the reasonable expectation that hotel operations should normally be adequately profitable to maintain capital repayments. Since hotel revenues will fall well below adequately profitable levels for possibly two to three years, what role should Northern Ireland Government institutions (or UK Government institutions) play in offering support?
Each of the larger Northern Ireland family-owned hotel groups has spent large sums. The most recent balance sheets confirm bank loans in each of the largest companies usually in excess of £20m and in two cases of over £40m. Even with the relatively low interest rates currently available, these hotel groups could have serious problems in maintaining the scheduled repayments.
Since, in addition to hotels, there may be a large number of other businesses facing a financial meltdown, is there a justification for government support? If so, in what form? Might Invest NI be encouraged to use discretionary financial support possibly with loans convertible into equity?
Alternatively, does this crisis point to the merits of a Nama-type property (re-)possession and sale? If a Nama-type process was created, might this be, for some, an opportunity to see property assets repurchased at attractive prices, leaving the financial loss accruing to the original lenders?
As soon as possible, the Department for the Economy should ask Invest NI to propose and publish a 'lifeboat' mechanism to assess the viability of casualties and devise acceptable and affordable support ideas.
Creative optimistic entrepreneurs are now needed. Is Invest NI ready for the challenge?