Let’s go back in time a bit. At the start of the Covid-19 crisis, governments around the world recognised that businesses, particularly small businesses, were at risk of getting into trouble. The crisis was obviously going to affect the economy as a whole, and some businesses, particularly those in the public space, such as restaurants, were going to get hit hard. And they were.

Various schemes were designed to help, and the most obvious was for governments to provide some kind of loan guarantee scheme. The way these schemes unfolded around the world is enormously instructive.

In SA, the government set aside R200-billion in 2020 for the Covid-19 Loan Guarantee Scheme. It was a centrepiece of the R500-billion government scheme to mitigate the effects of the economic downturn.

Despite being below commercial interest rates, the loans turned out to be unpopular with businesses. One problem was that to ensure banks did proper due diligence, the banks were required to take the hit if the businesses failed. That provision made the loans very unpopular with banks.

They were also unpopular with the prospective loan recipients, mainly because banks insisted on the personal liability of the owners. In other words, if the business foundered, the banks would come after the houses and personal property of the business owners.

The loan sizes were also a bit off. In the initial scheme, businesses had to have a maximum turnover of R300-million, but the maximum loan was set at R10-million per business. For smaller businesses, that could have made a major difference, but for larger businesses, it was chump change.

There were big administrative problems too because banks, if I understand it correctly, were prohibited from making a profit on these loans. The result was, Daily Maverick, among others, was told repeatedly by applicants that businesses were being refused the government’s Covid loan but were then quickly offered commercial loans by banks. Pretty cynical. Or, to put it another way, the incentives for banks to participate were negative.

Ultimately, the scheme more or less bombed. Only about R20-billion was ever dispersed, about 10% of the money set aside. About 15,000 loans were handed out.

So in 2022, the government had another crack at this problem. The decision was to substantially reduce the red tape involved, scale down the size of the eligible businesses, and explicitly shift some of the risk to the government itself. Hence, in what was called the Bounce Back Support Scheme, only R15-billion was set aside, business eligibility was reduced to companies with a maximum turnover of R100-million, and the government took on the risk of about 20% of the loans should the business concerned go belly-up.

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We don’t know yet how successful that scheme has been but, as of August last year, the omens were tangible. At that point, only R140-million in loans had been distributed or promised, with 4,500 of the 7,000-odd applications processed. If these figures extrapolate to the end of March this year, the Bounce Back Support Scheme will have failed even more dismally than the original Covid loan scheme.

Contrast this with what happened in the UK, which introduced similar schemes. The UK, it turns out, had precisely the opposite problems: huge numbers of applications, enormous payouts and quite a bit of fraud.

The UK introduced three schemes starting in March 2020: the Bounce Back Loan Scheme, the CBILS (Coronavirus Business Interruption Loan Scheme), and the CLBILS (Coronavirus Large Business Interruption Loan Scheme).

In total, the three schemes loaned £80-billion to businesses — that’s R1.3-trillion. About 2 million businesses applied for and got one of these three loans. I am not making this up: 2 million. It was a complete loan-fest party, and the UK government is still trying to clean up the mess. The level of fraud is now estimated at £4.9-billion, or about 7% of the total loan distribution. The graft alone amounted to about five times the total cash distributed in SA. Amazing.

What was the difference between the two schemes? One big difference was that the UK taxpayer was and remains on the hook for all of the loans that went bad because, from the start, the UK government took on 100% of the risk in at least some of the loan books.

But the bigger problem, I suspect, is vested in a single word: trust. South African businesses are extremely debt-averse; in fact, many of the larger businesses are sitting on big cash balances. They don’t know what laws the government is going to thump them with, the levels of corruption are now pretty bad, and the overall business environment is horrible. To make it worse, many SA businesses operate under the table, so they were never going to be eligible for these loans in the first place.

The trust issue extends further. Clearly, in comparison with the UK government, the SA government’s trust in SA businesses is also very low. Hence, the government was unwilling to take on 100% of the risk of business failure, and only did so to a very limited extent in the Bounce Back Support Scheme.

And this is the hardest of all: judging by the failure of these schemes, SA banks’ trust in SA businesses is also pretty low. Why else would you insist on personal guarantees when making a loan technically encouraged and supported by the government?  

Although SA business suffered financially during the Covid-19 period, like the population as a whole, it is remarkable how insolvencies did not explode. The number of insolvencies in SA increased horribly to about 250 in March of 2020, but after that, decreased to an average of about 150 per month for the rest of the Covid period, which is more or less the level it has been over the past decade.

Clearly, companies weren’t rushing to stave off bankruptcy with government-backed loans to any large degree.

So now it appears that the government is going to give this a third shot with financial support for going solar. The details will be announced in the Budget, but the idea was already flagged by President Cyril Ramaphosa in his State of the Nation Address.  

I just hope this time the government can find a way to actually make this work. The key will be to think of it as a kind of distribution effort, rather than its approach to the Covid business support, which was characterised by suspicion and caution and was not very generous.  Clearly, the UK government went overboard in its efforts, but let’s tend towards that approach rather than risk yet another local failure. DM/BM