I am pleased to be appearing in the Seanad as the Minister of State with responsibility for employment affairs and retail businesses to bring forward the Credit Guarantee (Amendment) Bill 2020. The €2 billion scheme is a cornerstone of the suite of supports being announced by the Government as part of the July stimulus package. It is focused on SMEs, which is key. I want to be absolutely clear that the aim of the Government is to make money available to SMEs, including producers, farmers, fishers and so on who have not previously been included in such schemes. We need to make money easier to access at a lower cost. That is what we are trying to do.
This scheme is about businesses and specifically SMEs. I have listened to some conversations where people have said this legislation is about the banks. It is not. This is about using the banks to get money out. This is a business support, not a banking support, and I want to be absolutely clear about that. Some of the conversations I have heard seem to misinterpret what a credit guarantee is about. Similar schemes work very well all over Europe and beyond. We have used such a scheme here for the past number of years. Much of the criticism of the scheme that has been in place here since 2012 has focused on the eligibility criteria for that scheme. Those criteria will be completely changed by this legislation. I wanted to be clear on those points in case I do not get a chance to say it later on.
People often use the statistics from the last seven or eight years but they are in no way reflective of what the scheme being brought forward now, during the Covid pandemic, should be like. They would be completely different. The purpose of this Bill is to make certain amendments to the Credit Guarantee Act 2012 in order to help businesses access the additional finance they may need as a result of the Covid-19 crisis. SMEs, primary producers and small and mid-cap companies have an immediate and urgent need for liquidity in order to meet ongoing expenses and to prepare for a return to more normal economic trading conditions. These businesses are essential to employment throughout the country. The debate we had here two weeks ago recognised the value these SMEs and microbusinesses of all sizes bring to our local communities, towns, villages and cities. They are essential and they are major employers but they are also part of our communities. It is important that we reach out to them. As a Government, we recognise that they need different kinds of supports and that it is not just a matter of access to low-cost finance or loans. This is only one part of the toolbox. We have already announced many other supports including various funds, the wage subsidy scheme, restart grants, online trading vouchers and so on. We also recognise that businesses will also require access to funding and that is what this guarantee is about.
According to the Central Bank's third quarter report for 2020, real-time data about the Irish economy pointed to a trough in activity in April. Activity is now, thankfully, above this low point as the economy has started to reopen. Activity, however, remains significantly below pre-Covid levels. Again, the levels are different in different parts of the country and in different sectors. We recognise that. There might be a quick return to activity for some but it may be a very slow journey over a long period of time for others. We want to be able to reach out to the different sectors that need that support.
The Central Statistics Office, CSO, survey measured the impact of Covid-19 on business in Ireland. Data from more than 3,000 enterprises were collected on 1 June 2020. The survey reports that almost nine in ten enterprises that responded were trading at some capacity as of 31 May. Just over one in ten had ceased trading either temporarily or permanently. Fewer than one in ten enterprises closed temporarily while 1% closed permanently.
The impact of Covid-19 on SMEs has not been uniform across different sectors. As the country has reopened over the different phases set out by the Government, different businesses have required different supports. We recognise that this will continue. Initially, supports were focused on cutting costs for businesses. These took the forms of the very successful wage subsidy scheme and the pandemic unemployment payment, alongside commercial rate deferrals from local authorities. These same businesses now have different needs. They need to buy stock and to make changes to comply with Covid-19 working conditions. They also need to refinance loans, where necessary.
Data from the CSO show that, in 2017, SMEs accounted for 99.8% of the total number of enterprises and nearly 70% of all persons employed. We went into those data when we debated the Microenterprise Loan Fund (Amendment) Bill 2020 but I will now add further detail. When these figures are broken down further, we see that microenterprises accounted for approximately 26.5% of persons engaged and the greater number of enterprises, at 92.1%. Small and medium enterprises combined accounted for 42% of total persons engaged in employment in 2017 and just under 8% of the total number of enterprises. Again, the statistics back up what we all sense, feel and know from the streets regarding the importance of SMEs to our country.
According the 2019 OECD review of SME and entrepreneurship policy in Ireland, the total number of people employed increased across all SME firm size bands over the period from 2011 to 2016. This was during another jobs-led recovery. We are probably back in that space again as we come out of the Covid-19 pandemic, which is to say we need another jobs-led recovery. That is why there is great demand for businesses to reopen, restart, re-employ and build capacity again so that we can recover from the effects of Covid-19 over the next year and a half or two years through a jobs-led recovery. I keep stressing that we need people at work and businesses open if we are to be able to collect the taxes we use to enhance and build upon all public services, including health, education and roads. That is often missed in many parts of this House. If we do not have economic activity, we cannot have the services we all want and demand for our counties every day.
The Central Bank’s SME market monitor for 2019 notes that loan application rates by Irish SMEs are quite similar to euro area averages, but rates for overdrafts are lower. Credit demand remains low compared with previous years. This is probably expected in light of what has happened over recent months. A large majority of micro, small and medium firms finance investment from internal funds. Working capital remains the most common reason for credit applications among micro and small firms, whereas credit for growth and expansion is more common among medium firms.
We are now, however, in a much different environment. We must anticipate an increased need for liquidity by companies and that this will in part be satisfied by way of debt.
I know there will be a discussion about more grants and more of everything else, but what we need is a combination of supports, grants, access to loans and equity. We will stretch the taxpayers' purse as far as we can to reach and support as many people as we possibly can to get back to work and to keep businesses open. The Covid-19 credit guarantee scheme will be available for the products most utilised by SMEs, especially small and micro firms.
I wish to use this opportunity to give Senators an overview of other supports available to SMEs, because each business has different needs. I will not go into too much detail but I remind the House that we have the Covid-19 working capital scheme, which is a €450 million fund. We have the future growth loan scheme, which has an additional €500 million. It can fund for longer terms than the credit guarantee scheme, which is for six-year loans. The future growth loan scheme can extend to more than ten years. The sustaining enterprise fund is a €180 million fund that is specifically aimed at firms operating in the manufacturing and internationally-traded services sectors, with ten or more employees. There is a range of funds.
The pandemic stabilisation and recovery fund is also operated by the strategic investment fund. Its focus is on investment in medium and large-scale enterprises in Ireland. The fund is worth up to €2 billion. There are also grants available, including the €250 million restart grant, the enterprise support grant for self-employed people and the Covid products scheme of €200 million in targeted support to facilitate the research and development of Covid products. The Department is constantly trying to push the agenda of investing in research and development, and in innovation. The companies that do that are the ones that will expand, create more jobs and survive for longer. We also promote the online agenda and try to get people thinking about trading online. The trading online voucher is another support that was enhanced by the Department and the Department of climate action, communication networks and transport, under the Minister, Deputy Eamon Ryan, in recent months. I want to keep enhancing those schemes along with the retail online scheme grant. I wanted to bring this to the attention of Senators because the Covid-19 credit guarantee scheme will be one of the largest funds available to SMEs. It has an allocation of approximately €2 billion, with a potential draw on the taxpayer of €1.6 billion. It is a significant investment in business. The investment is in business, not the banks. It is about getting money out to businesses at a lower cost and with better conditions.
I will refer briefly to the July stimulus package. I have been working with the Tánaiste, the Department and with other Departments in recent weeks to build it to a stage where it can be announced today, with the approval of the Cabinet. It will be radical, of scale and far reaching. It will build on the €12 billion in supports in taxpayers' money that were already announced in recent months, but it will also lead us to an economic plan that we will produce around budget time in October to build on more supports and long-term strategies over three years. The stimulus package is about having an impact now, in the next couple of months to give businesses a chance to reopen, restart and to build capacity as well.
I thank all the Senators who contributed to the previous debate we had on the Microenterprise Loan Fund Bill. At the time we asked Senators to send their ideas for the July stimulus package, which many did. Many Members took the opportunity to highlight problems as well as solutions and we did listen to and analyse all of that. All of those ideas will not necessarily be in the July stimulus package but we will work on them and use them in the recovery plan we will bring forward in October. I thank Members for their feedback. Many others have engaged since then, some of whom have been in touch with departmental officials. That is a great system and I would encourage more of the same. I am very happy to engage with Members as we proceed in the coming weeks and months.
In considering the various analyses, I see five areas which we should focus on in helping our enterprises in the future: income support; direct grants for businesses; cheaper finance; new opportunities for future jobs; and support for the hardest hit sectors. That is where we will try to target the July stimulus, but also our ongoing supports as well.
I will now focus on how the credit guarantee scheme will work. The policy objective or mission statement is to maximise the impact of the scheme for borrowers in the short to medium term to address the liquidity requirements of small businesses. The main features are as follows. This is a scheme for SMEs, primary producers and small mid-caps with up to 500 employees. SMEs are expected to be the main beneficiaries. In order to qualify for the scheme, the borrower will have to declare an adverse impact of a minimum of 15% of actual or projected turnover or profit due to the impact of Covid-19. In reality, this will not be difficult for most businesses to demonstrate because they have already had three or four months of adverse economic conditions.
The total amount available under the Covid-19 credit guarantee scheme is up to €2 billion. The guarantee rate is 80% for the State with the lenders retaining 20% of the risk of the loan. We believe that is the right balance or blend. I heard references to what different countries are offering but the majority are in the same space of roughly 80:20 and we think it is the right place to be because we want the lenders to do their job properly too and to also take some of the risk, which reduces the exposure of the taxpayer as well.
There is no portfolio cap for lenders in the Covid-19 credit guarantee scheme. Members might note that a portfolio cap has been a feature of the previous schemes and they might quote statistics from today.
The removal of the cap is essential to ensure lenders provide an interest rate reduction to borrowers and also comply with capital requirements regulations. That is probably a game changer. We could achieve lower interest rates by removing that cap. Many in this House and beyond have called for that as have our own officials and agencies. We targeted it there and we believe it is the right decision.
The facility size available is for financial products ranging in size from €10,000 to €1 million, which is a fair offering and will help generate activity.
The products covered under the scheme will include a broad range of credit facilities including overdrafts, working capital and term-loan facilities up to six years. There have been calls to go beyond that. I will be clear in case I do not get an opportunity to respond later that under the EU framework, six years is the maximum. We cannot go to seven years. We agree with every Member that the longer the better but in this scheme under this EU framework, it is six years as it stands. If that changes, we will change accordingly.
The scheme will permit lenders to refinance and to roll over credit facilities, which will be beneficial for many people in difficult circumstances at the moment. Capital or interest moratoria for up to one year will be permitted under the scheme but it is important to emphasise that any decision regarding this will be at the discretion of the lender on a one-to-one basis with their customers, whom they know best. Naturally, we will monitor that and work with the banks as we introduce this scheme in the next weeks and months.
I can confirm that, based on recent discussions between the Tánaiste and the three main pillar banks, the banks have indicated that an interest rate reduction for facilities will be included in the Covid-19 credit guarantee scheme. Precise reductions are still under discussion. That work will be completed over the next couple of weeks and it will be transparent to everybody on what the difference in interest rates is and what the reductions are because it is important that lower interest rate products are developed out of this. That is the aim of the scheme.
Members will ask why it is the three pillar banks. I want to be clear that this applies to all the banks, the credit unions, An Post and anybody involved in lending. Our engagement so far has mainly been with the three pillar banks because they have used this scheme so far and they are responsible for about 90% of lending to SMEs. The initial part of this will be for the three banks and then there will be an open call involving more than 70% of the funding under the scheme for anybody who wants to avail of it and supply good products to the SME sector.
There has been considerable comment on the schemes being operated in other countries. I will take a moment to compare our scheme with those in the UK and elsewhere around Europe. There is a lot of misinformation and it is important that we understand what we are comparing. Sometimes, one hears people comparing apples and oranges.
The UK's bounceback loan is targeted at very small businesses and covers loans of up to €50,000. It is 100% guaranteed by the UK Government and there are no fees or interest to pay for the first 12 months. After 12 months, the interest rate will be 2.5% a year. It is similar in structure to the Microfinance Ireland loan discussed in this House a couple of weeks ago, when I said we are looking, in terms of that scheme, at a lower interest rate for the first 12 months of 0% or the best we can do, but that the effective rate would be 2.5% to 3% over a three-year loan. The product is similar and in a similar space at about €50,000. The UK's coronavirus business interruption loan scheme is very similar to the proposed Irish credit guarantee scheme. It is 80% guaranteed by the UK Government with no portfolio cap. Through that scheme, lenders can provide an eligible business with loans of up to £5 million, with repayment terms of up to six years. It is pretty similar to our scheme and people can choose to use the other one when comparing to our scheme, as opposed to using like-for-like. This will help the debate.
Denmark and Austria’s guarantee schemes are also operating as 80% guarantees. People often tell me they are great countries and we should learn from them. To be clear, we are on the same level as them. Portugal is operating different schemes depending on the business size, with microbusinesses able to access a guarantee of 90% and small and medium businesses, 80%. France is operating its scheme as a 90% guarantee. Some schemes in European countries such as Spain and Sweden are lower than the Irish guarantee at 70% and others are lower again at 33%. We will monitor all these schemes. We keep an eye on what is happening and if we see something working better in another country, we will naturally try to adapt our own schemes to match that but we think we are more or less on the right track with this. We will monitor the results of this and it will be transparent with regular reporting.
The Irish scheme will also fulfil the criteria set out in the European Commission’s state aid temporary framework. It is a temporary framework and if it changes, we can change. The framework allows for the relaxation of state aid rules for participating enterprises. It means that the Government can raise the thresholds of state aid to €800,000 for an SME and €120,000 for a primary producer.
It also allows for small mid-caps and primary producers to take advantage of the credit guarantee scheme and I hope they do so. It is something that is not permissible under normal state aid rules. Members have been calling for years for Governments to allow these players to have access to this fund and that will now happen. As such, not only can the businesses be supported to a higher level but the breadth of businesses being supported has been also greatly improved. The businesses can also use the guarantee scheme with other loans and grants from the Government and there are the new raised cumulative totals within the temporary framework until the end of 2020. Companies have a window of six months or so to avail of these schemes and I hope they do so. I also hope they use the other supports we will announce as we go along.
I do not know how much time I have left but it might be helpful to Senators if I go through each section briefly. Section 1 provides that references to "Act of 2012" means the Credit Guarantee Act 2012. This is not brand new legislation. We are adapting existing legislation from 2012 which was amended in 2016.
Section 2 amends section 2(1) of the Act of 2012 to provide for the inclusion of a new definition of "COVID-19 credit guarantee scheme". For clarity, the existing credit guarantee scheme, which has had a much smaller impact than this one will have, continues on its journey. This is a new element but all of it comes under the same legislation.
Section 3 amends section 3 of the Act of 2012 to allow for the extension of classes of enterprises which can qualify for the Covid-19 credit guarantee scheme. As I said, these include small mid-caps and primary producers, albeit in the statutory instrument when we name the producers.
Section 4 amends section 4 of the Act of 2012 to include the new Covid-19 credit guarantee scheme within certain subsections of that section, thus giving the Minister the power to give guarantees. This section also disallows subsections (3) and (4) of section 4 of the Act for the purposes of the Covid-19 credit guarantee scheme, as different provisions are being made for those aspects through the new section. We can discuss that further on Committee Stage.
Section 5 introduces a new section 4A into the Act of 2012, which gives power to the Minister to give guarantees in accordance with the Covid-19 credit guarantee scheme. I addressed this earlier but the gist of it is the six-year timeframe, the sum of up to €2 billion and the 80% guarantee.
Section 6 amends section 12 of the Credit Guarantee (Amendment) Act of 2016 to ensure that the maximum liability of the Minister in relation to the existing credit guarantee scheme shall remain as not exceeding €15.6 million. It is a much smaller scheme with a maximum drawdown of €150 million. If it were all drawn down and all the loans were unsuccessful or did not work out, the taxpayers' exposure would be €15.6 million. That scheme is separate and is still in play. We are talking here about additional guarantees with an exposure of €1.6 billion to the State.
Section 7 contains the Short Title and commencement arrangements.
That is a quick description of the Bill. I look forward to Senators' contributions. I hope I will have time to answer any questions but, if not, I will be pleased to engage with Senators afterwards.