What are the government’s emergency coronavirus business loan schemes – and can we trust their integrity?

Did these schemes serve a valuable role in preventing viable businesses from collapsing? Or are they a major scandal which will, in time, be fully exposed? Ben Chu investigates

David Cameron lobbied Greensill to access publicly guaranteed funds (Reuters)

The Greensill lobbying furore has shone a spotlight on the government’s emergency coronavirus lending schemes established last year.

David Cameron was seeking to persuade the government to permit Greensill Capital to access publicly-guaranteed funds under one of these schemes.

The financial firm also participated in another scheme, with Greensill passing on the funds to its client, Sanjeev Gupta’s Liberty Steel, which is now in financial crisis.

The collapse of Greensill and the difficulties of Liberty have raised a question over whether those loans will ever be repaid, creating a potential loss for the taxpayer.

This week the Treasury tried to distance itself from the loan schemes, saying they were administered by the Business Department. This was despite the chancellor, Rishi Sunak, loudly claiming credit for them last year.

So what exactly are these schemes? Did they serve a valuable role in preventing viable businesses from collapsing? Or are they a major scandal which will, in time, be fully exposed?

To understand the nature and design of the schemes it’s important to recall the economic context in which they were set up.

In March 2020 the entire UK economy was plunged into an unprecedented crisis.

Many businesses, large and small, saw their customers and clients disappear, almost overnight, because of the government-ordered lockdown. The threat loomed of a destructive cascade of bankruptcies.

On 17 March, in this atmosphere akin to the shock of a major war, the chancellor pledged £330bn of state-guaranteed loans for firms.

It was a vast sum, equivalent to around a sixth of the entire economy, as Sunak himself stressed.

But the precise number was less important than the signal the chancellor wanted to send to the private sector that the UK government would stand behind those otherwise viable firms who risked running out of cash because of the emergency.

“Any business who needs access to cash to pay their rent, the salaries, suppliers, or purchase stock, will be able to access a government-backed loan, on attractive terms,” said Sunak.

The first scheme announced on 17 March was the Covid Corporate Financing Facility (CCFF), under which the Bank of England would help distressed large UK corporations by buying up their short-term bonds.

The Bank of England lent £37bn to 107 large companies through the CCFF over the following year. It was this scheme that David Cameron lobbied (unsuccessfully in the end) ministers and civil servants to enable Greensill Capital to access.

But the CCFF was only very short-term lending.

There have also been three longer-term state-guaranteed lending schemes in the form of the Coronavirus Business Interruption Loan Scheme (CBILS), the Coronavirus Large Businesses Interruption Loan Scheme (CLBILS) and the Bounce Back Loan Scheme (BBLS). There is also a Future Fund, providing state-backed convertible loans to “innovative” firms that can generate equal matched funding from private investors.

The CBILS and CLBILS came first. They were administered by private banks and provided a government guarantee for 80 per cent of any new loans made to firms in financial trouble because of the pandemic.

Guide to the acronyms

Pandemic schemes

• Covid Corporate Financing Facility (CCFF) – investment grade rated firms
• Coronavirus Business Interruption Loan Scheme (CBILS) – annual turnover less than £45m
• Coronavirus Large Businesses Interruption Loan Scheme (CLBILS) – annual turnover more than £45m
• Bounce Back Loan Scheme (BBLS) – business of any size
• Future Fund – firms that have raised at least £250,000 in equity from third-party investors in previous funding rounds

Because they retained a 20 per cent stake in the loans, private banks had an incentive to scrutinise prospective borrowers to ensure they would be able to pay it back in the fullness of time.

The trouble was that this scrutiny was slowing down the process of getting cash to firms, who risked going under in the meantime.

And many small firms were simply being rejected for support by private banks, whose internal computer risk models suggested would be unable to repay.

Business organisations and MPs, under pressure from distressed firms in their own constituencies, raised a clamour for the government to significantly ease the access to the loans.

In response, the government created the Bounce Back Loan Scheme (BBLS). This included a 100 per cent state guarantee of the loans, meaning banks had no real financial incentive to turn down requests.

This successfully broke the credit logjam. By the end of March this year, according to official figures, £46.5bn had been lent out under the BBLS, benefiting more than 1.5 million mainly small firms.

In the end, under the CBILS, £23.3bn was lent to around 98,000 mostly medium-sized companies.

Finally, under CLBILS £5.3bn has been lent to 716 larger firms. The beneficiaries have not been published, but they reportedly included Liberty Steel companies, who accessed the funds via Greensill Capital which was acting as intermediary.

It’s widely accepted that not all of that money will be repaid. Some firms will likely ultimately go bust before repaying the money and some of the money will be lost to fraud as a consequence of the rapid dispersal of the cash and the minimal checks.

Various official bodies have estimated the share of Bounce Back Loans which will go bad, in one way or another, as a result as between 15 and 80 per cent of the total.

That implies a loss to the taxpayer of between £7bn and £37bn.

The Treasury’s independent fiscal watchdog, the Office for Budget Responsibility (OBR), has a central estimate of losses from all government loan schemes of around £28bn.

15-80%

Range of official estimated credit and fraud loss rates for emergency loan schemes

That’s doesn’t seem an unreasonable assumption, but the reality is that it’s impossible to be sure about the size of the final bill.

The full extent of losses will not come into focus until after borrowers are due to start repaying loans, says the National Audit Office.

That starts from next month.

It’s also impossible to state what proportion of taxpayer losses will be due to criminality and what proportion due to innocent financial difficulties by firms.

There is certainly circumstantial evidence of fraud. Private banks have already filed 24,000 suspicious activity reports to the police. And two people have been convicted of defrauding the BBLS.

Yet, at this stage, claims of the magnitude of the criminality drain are inevitably speculative.

It’s also important to set such public costs against the broader economic benefits of the schemes.

It was the right priority at the time

James Smith, Resolution Foundation

“What we were seeing before Bounce Back loans were these bottlenecks in getting money out of the door, so you had to do something pretty radical,” says James Smith of the Resolution Foundation think tank.

“[The Bounce Back Loans] just stopped those cash positions deteriorating. Cash is about survival. As long as you’ve got survival you can think about recovery later. It was the right priority at the time”.

The Resolution Foundation, concerned over the economic drag from elevated debt on firms during the recovery, now urges ministers to switch to providing grants, rather than additional loans, to support companies.

However, the Treasury has, instead, established a new Recovery Loan Scheme (RLS), to replace the other schemes that closed to new borrowers in March. As with the CBILS, the government will guarantee 80 per cent of the RLS loans and the new scheme will run until the end of 2021.

The appropriate policy response changes as wider circumstances change. And at the height of the pandemic getting money out of the door quickly to struggling firms was the lesser of two evils for policymakers say many analysts.

The danger is that high-profile cases of business failure or fraud in the coming months – perhaps involving companies and lenders with links to influential former senior politicians and financiers with privileged access to Whitehall – will distract from that crucial context and lead to the wrong conclusions about the broader merits of these emergency lending schemes.