Treasury and Exchequer
Ministerial Decision Report
Business disruption Loan guarantee scheme – March 2021 EXTENSION
- Purpose of Report
The Business Disruption Loan Guarantee Scheme provides banks with government backed guarantees to ensure that they can lend to businesses which they consider to be viable, but cannot lend to in accordance with their usual commercial terms. This in turn creates new lending capacity in the Jersey economy, ensuring that credit is available to businesses which could not otherwise have obtained bank lending.
This report outlines the current status of the scheme, and proposes the extension of the Business Disruption Loan Guarantee Scheme by 3 months until 30 June 2021.
- Background
Legal position:
P.28/2020 Draft Public Finances (Amendment of Law) (Jersey) Regulations 202-, approved by the States Assembly on 24th March 2020, agreed a number of temporary modifications to the Public Finances (Jersey) Law 2019. The added modifications included an increase to the limit on guarantees and indemnities that the Minister may provide in a financial year from £3 million to £100 million and the limit on the total outstanding guarantees from £20 million to £100 million.
The amendment to P.28/2020, brought by the Corporate Services Scrutiny Panel and adopted by the Assembly, clarified that:
• the amended powers expire on 30th September 2020; and
• where the Minister has obtained financing, lent money or provided guarantees or indemnities under Articles 26 to 28 while Article 24(8) applied, the financing, lending or provision of guarantees or indemnities remain valid and are not included in any monetary limits set out in Articles 26 to 28 as those Articles apply after the expiry of the modifications.
This in effect increased the limit on guarantees and indemnities that the Minister may provide in a financial year from £3 million to £100 million, and the limit on the total outstanding guarantees from £20 million to £100 million.
The Minister brought these amended powers into effect through MD-TR-2020-0029 by deciding that she considered there exists an immediate threat to the health or safety of any of the inhabitants of Jersey and to the stability of the economy in Jersey.
MD-TR-2020-0030 established the Business Disruption Loan Guarantee Scheme and delegated management to the Treasurer. As part of this, the Minister approved “associated guarantees to Jersey banks of up to £40 million”.[1]
MD-TR-2020-0113 extended the scheme until 31 December 2020, and MD-TR-2020-0161 extended the scheme until 31 March 2021.
Accordingly, the contract expires at 31 March 2021. In the absence of any further decision, the scheme will expire at that date.
Performance of the scheme:
The scheme remains largely static since the previous extension in December 2020. The analysis in the written report accompanying MD-TR-2020-0161 remains largely valid. There continues to be limited evidence of a material contraction in banks’ credit risk appetites, and lending generally appears to be taking place on commercial terms rather than through reliance on the scheme.
The February 2021 Economic Indicators Report[2] showed that around 60 loans had been approved under the Business Disruption Loan Guarantee Scheme, and the total amount of loans approved was £3,428,700. This reflects very limited change since previous economic indicators reports from late 2020.
Given the limited uptake of the scheme in recent months there is a case for allowing the scheme to expire and run-off. This said there is relatively little cost incurred in extending the scheme, and it is one of the few Covid-19 economic support schemes which does not incur an upfront cost in order to assist businesses – the cost is only borne by the taxpayer if a loan defaults and is unrecoverable, and the bank claims on the guarantee.
On Friday 5 March 2021 the Chief Minister announced a reconnection plan which concludes in a review of all Covid-19 laws and guidance on 14 June 2021. Under that roadmap the public health measures directly restricting businesses ability to operate in their usual way would be lifted. Accordingly, government Covid-19 measures directly restricting business activities would no longer be in place. Businesses may however continue to experience a reduction in trading and/or profitability compared to previous years due to competitive pressures, structural adjustments in their market, and changes in consumer behaviour.
Notwithstanding the limited continued use of the scheme, there are merits in continuing to make it available through the roadmap announced on 5 March 2021. This would ensure that the support is available to those businesses who need it whilst public health measures prevail, and plays part of a wider reassessment of Covid-19 business support being considered by Ministers.
Considering against the broader range of business support schemes currently available, a significant merit of extending the Business Disruption Loan Guarantee Scheme is that it supports business by extending additional credit in the economy without an immediate outflow of public money. It also continues to utilise banks’ expertise, controls, risk management and regulation in the allocation of public resources into the economy.
There is also a risk that the roadmap changes in response to prevailing risks to public health. Whilst the Business Disruption Loan Guarantee Scheme contract was negotiated with banks in less than 3 weeks, it is very unlikely that this could be redrafted and agreed in a similar timeframe if it was considered necessary in the future, but the scheme had expired.
In the absence of the States Assembly approving further guarantees the Scheme would need to rely on the Minister’s powers to approve up to £3m of guarantees under normal Public Finances (Jersey) Law 2019 powers. The limited uptake of the Scheme during 2021 suggests that this is likely to be sufficient for the further extension. This risk is controlled by limiting the Guarantee Portfolio Cap allocated to each bank, as was been done between 1 October and 31 December 2020, and again between 1 January 2021 and 31 March 2021.
Should demand for the scheme exceed the £3m limit a proposition would be required to extend the Minister’s powers, should the Minister wish to do so.
It is also possible that not all banks will wish to extend the scheme. One bank has previously indicated that it may not wish to extend the scheme beyond March 2021. Whilst this would limit the availability of the scheme as businesses will generally need to be existing customers of banks in order to obtain a loan, it does not materially reduce the benefits of the scheme and additional credit it creates. It is therefore considered that this alone should not be a reason for ending the scheme, when the majority of banks wish to extend.
- Recommendation
For the reasons outlined in this report it is proposed to extend the Scheme. This approach:
- Ensures that additional credit is available to those businesses which are considered viable but cannot be lent to on bank commercial terms;
- Aligns this business support scheme with the roadmap to easing Covid-19 restrictions announced by the Chief Minister on 5 March 2021;
- Ensures that exposure is limited to the caps in the Public Finances (Jersey) Law 2019, and controls are established between government and participant banks;
- Is consistent with the extensions of the scheme taking place in Guernsey and Isle of Man;
- Allows a further extension of the scheme to be assessed against prevailing public health restrictions; and
- Allows further consideration of whether the scheme can be adjusted to assist in Jersey’s economic recovery.
- Reason for Decision
Article 28 of the Public Finances (Jersey) Law 2019 provides that:
28 Guarantees and indemnities
(1) The Minister may, in the name of the States, provide guarantees or indemnities.
(2) The total amount of all guarantees and indemnities under paragraph (1) that may be provided during a financial year must not exceed £3 million.
(3) The total outstanding amount of all guarantees and indemnities under paragraph (1) at any given time must not exceed £20 million.
- Resource Implications
The approach does not allocate further funding to the scheme, but relies on the Minister’s ability to issue guarantees under the Public Finances (Jersey) Law 2019. Accordingly, the extension of the scheme in this manner restricts the ability of the Minister to issue guarantees for other purposes.
Government employees have been engaged in monitoring the scheme since its launch at the beginning of April 2020. This will continue regardless of whether the scheme is extended due to the need to monitor existing exposures, so the staffing impact of extension is limited.
Report author : Associate Director, Financial Services | Document date : 29 March 2021 |
Quality Assurance / Review : Director of Treasury ＆ Investment Management/ Head of Financial Governance | File name and path: L:\Treasury\Sections\Corporate Finance\Ministerial Decisions\DS, WR and SD\2021-0032 - Business Disruption Loan Guarantee scheme extension |
MD sponsor : Treasurer of the States |
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