COVID-19 and its impact on the SMME sector

COVID-19

and its impact on the SMME sector SURVEY - HOW ARE SMMEs COPING WITH THE CORONAVIRUS LOCKDOWN AND PROPOSED MEASURES TO ALLEVIATE FINANCIAL DISTRESS?

CONTENTS I. Setting the scene and objectives of the survey 2. Key findings 2.1 Are SMMEs able to cope during the initial lockdown (which includes the two-week extension to 30 April 2020?

2.2 How have the workers of these SMMEs been affected?

2.3 How would the survival prospects change for the SMME sector should there be a further extension of the lockdown beyond 30 April 2020?

2.4 What has the take-up been with regard to the financial aid measures announced to alleviate the impact of the lockdown on business?

2.5 The testing of the acceptability of a selection of potential post-COVID-19 recovery measures.

3. Survey methodology 4. Recommendations 5. Summary of detailed data 5.1 Summary of detailed data for all enterprises surveyed 5.2 Summary of selected data for manufacturing, services and wholesale & retail sectors

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List of figures Figure 1.2: The lockdown and its effect on business Figure 2.1: Indicators with regard to the enterprises’ chance of survival Figure 2.2: Composition of SMME enterprises surveyed Figure 3.2: Composition of SMME enterprises surveyed Figure 5.1: Sector indicators compared with all enterprise averages

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ReferencesÂ

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SETTING THE SCENE 1. Setting the scene and objectives of the survey On 31 December 2019, the World Health Organisation (WHO) was informed about the outbreak of a pneumonia of unknown cause, which was detected in the Chinese city of Wuhan. On 30 January 2020, the WHO declared the outbreak a Public Health Emergency of International Concern; and on 11 February 2020 it announced the name for the new coronavirus: COVID-19 (WHO, N.d.). On 12 March 2020, Dr Hans Henri P. Kluge, WHO Regional Director for Europe, confirmed that COVID-19 was declared a pandemic (WHO, 2020).

On 5 March 2020, South Africa’s National Institute for Communicable Diseases announced the first case of COVID-19 in the country (NICD, 2020). With more and more cases being declared on a daily basis thereafter, the President of the Republic of South Africa announced on the evening of Monday, 23 March 2020, that in terms of the Disaster Management Act, in a decisive effort to save millions of South Africans from infection, a nationwide lockdown for 21 days would come into effect at midnight on Thursday, 26 March 2020. During the lockdown, all South Africans, except for designated essential workers, would have to stay at home and would not be allowed to leave their homes except under strictly controlled circumstances (RSA, 2020).

The president acknowledged that the measures would have a considerable impact on people’s livelihoods and on the life of society and the economy, but believed that “the human cost of delaying… [the] action would be far, far greater” (RSA, 2020). Workers and enterprises exempted from the lockdown included health workers in the public and private sectors, emergency and security services personnel, other persons necessary in response to COVID-19 and “those involved in the production, distribution and supply of food and basic goods, essential banking services, the maintenance of power, water and telecommunications services, laboratory services, and the provision of medical and hygiene products” (RSA, 2020).

Figure 1.2 The lockdown and its effect on business

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(Source: News24) 3

All other workers had to stay at home for the full period of the lockdown and enterprises not considered essential had to remain closed. While emphasising the importance of a lockdown, the president urged all firms that were able to continue their operations remotely, to do so (RSA, 2020).

In response to the impact that the lockdown will have on the economy, government announced various relief measures aimed at assisting enterprises to retain staff and remain afloat. These included amongst others, the setting up of a Solidarity Fund aimed at assisting small businesses to endure, the setting up of a temporary employee relief scheme and debt relief schemes for both enterprises and employees (Mail & Guardian, 2020).

Other measures included employer relief measures, such as the provision of a four-month tax subsidy for employees in the private sector. The aim thereof would be to encourage employers to retain workers during the lockdown.

It was also announced that the payment of employment tax incentive reimbursements would change from twice a year to monthly, so as to ensure that cash got into the hands of compliant employers as soon as possible, and tax compliant businesses with a turnover of less than R50-million were, for a four-month period, allowed to delay 20% of their employees’ tax liabilities. A portion of their provisional corporate income tax payments could also, over a six-month period, be deferred without penalties or interest (Deloitte, 2020).

On the evening of Thursday, 9 April 2020, the president announced a further two-week extension of the lockdown (News24, 2020). At the time of undertaking this survey, the lockdown was scheduled to run until 30 April 2020.

The Inclusive Society Institute, with a view to post-COVID-19 policy planning, undertook a survey immediately after the extension was announced by the president. The objective of the survey was to: Assess how SMMEs were coping with the lockdown Determine SMME confidence levels in their survival post-COVID-19 Consider the potential impact that a further extension of the lockdown on their survival prospects would be Test a number of potential post-COVID-19 policy measures that could be implemented to ease the South African economy back into normality Stimulate SMME thinking as to measures that could be taken through a public-private participative approach aimed at overcoming the calamity that befell the country.

The survey period ran from the evening of 9 April to close of business on Monday, 13 April 2020, and should be viewed as a snapshot of SMME thinking during said period.

The institute will promote the survey to public policymakers as its contribution towards consolidating national reflexion on economic recovery. The institute supports economic measures that will enhance equality, inclusiveness and solidarity.

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KEY FINDINGS 2. Key findings Given the urgency to issue the report prior to the conclusion of the lockdown period, this report mainly confines itself to a global overview of all the enterprises that participated in the survey. It does, however, also provide a high-level analysis of the three largest sectoral components of the survey, namely manufacturing, wholesale and retail, and services. The report therefore covers the data captured for 1 084 enterprises from across all sectors. With minor exclusions, they are micro-, smalland medium-sized enterprises.

These findings restrict themselves to five main themes: I. Are SMMEs able to cope during the initial lockdown (which includes the two-week extension to 30 April 2020)?

2. How have the workers of these SMMEs been affected?

3. How would the survival prospects change for the SMME sector should there be a further extension of the lockdown beyond 30 April 2020?

4. What has the take-up been with regard to the financial aid measures announced to alleviate the impact of the lockdown on business?

5. The testing of the acceptability of a selection of potential post-COVID-19 recovery measures.

The vast majority – 72 per cent – of the 1 084 enterprises surveyed were not able to operate during the lockdown period. Combined, they employ 39 943 workers and have a turnover just on R33 billion.

Twenty-eight per cent of the enterprises were considered essential services.

As mentioned, the analysis did not test all individual sectors. It did, however, examine the three largest sectors in the sample survey, namely manufacturing, services, and wholesale and retail. In the main, the conclusions on manufacturing as well as wholesale and retail correlated with the ‘all enterprises’ trends. The services sector, it appears, finds itself in a particularly difficult position and will face greater challenges to recover once the economy normalises.

The key finding of this survey is that the SMME sector will most probably be able to recuperate should the lockdown be lifted at the end of April 2020. However, any further extension of the lockdown, in its current format, will have dire consequences for the sustainability of this sector in the longer term.

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2.1. Are SMMEs able to cope during the initial lockdown (which includes the two-week extension to 30 April 2020)?

Almost all enterprises, that is 98 per cent, have seen a decrease in their turnover. Seventy-eight per cent of the enterprises do not have sufficient cash flow to see them through the lockdown period.

Despite these drawbacks, 69 per cent of the enterprises are of the opinion that they would survive the setback presented by the COVID-19 lockdown measures.

"69% will survive" The sectoral analysis revealed that in terms of those enterprises that were confident of surviving the initial lockdown period, services as well as wholesale and retail were slightly more confident than average, whilst the manufacturing sector was considerably less confident. Seventy per cent of enterprises in the services sector and 74 per cent of those in the wholesale and retail sector were confident of surviving, whilst only 47 per cent in the manufacturing sector expressed confidence in enduring beyond 30 April 2020.

Similar patterns were detected across all sectoral analyses with regard to the percentage of enterprises that did not have sufficient cash flow to see them through the lockdown: Seventy-two per cent of manufacturing enterprises, 82 per cent of services enterprises and 83 per cent of wholesale and retail enterprises lacked adequate cash.

2.2 How have the workers of these SMMEs been affected?

It appears that the enterprises have in the main managed to make arrangements to retain most of their workers, although it still bled 7,5 percent of their workforce. Only 202, or 19 per cent, of the enterprises surveyed laid-off staff during the lockdown. If this percentage were to be extrapolated to the full number of workers employed in the SMME sector as per the SEDA report mentioned in the methodology section of this report - 10,839,819 workers - then the lockdown could result in the loss of 812,986 jobs.

"That is a combined job loss of 812,986" With regard to the sectoral breakdown as it relates to enterprises that had to reduce their staff levels during the lockdown, 15 per cent of manufacturing enterprises, 24 per cent of those in services and 29 per cent in wholesale and retail indicated that they had to do so. "negative impact on jobs will be somewhat mitigated" However, it appears the aforementioned negative impact on jobs will be somewhat mitigated, in that 21 per cent of enterprises indicated that they would re-employ the workers once they were able to again operate after lockdown, whilst a further 68,5 per cent of enterprises said that they would reemploy the workers once cash flow permitted. As a result, in time almost 90 per cent of the workers will be re-employed. The real job loss could therefore be contained to around 80,000, should enterprises be in the position to re-start at the beginning of May 2020.

"90 per cent of the workers will be re-employed"

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In manufacturing, the percentage of enterprises that would re-employ retrenched staff, either when they re-open or once cash flow permitted, was 60 per cent; in services, it was 47 per cent, and in wholesale and retail, 97 per cent. This would indicate that the services sector would find it more difficult to revive themselves, whilst the manufacturing and the wholesale and retail sectors would find it easier. "opposite will hold true should the lockdown be extended" That being said, the opposite will hold true should the lockdown be extended beyond 30 April 2020.

Seventy-six per cent of enterprises indicated that, in such instance, they would have to reduce their staff complement. This should be read together with the statistic indicating that 70 per cent of enterprises do not believe they could survive a further extension of the lockdown; and 92 per cent of them would not have the cash flow to carry them over an extended period beyond 30 April 2020.

2.3 How would the survival prospects change for the SMME sector should there be a further extension of the lockdown beyond 30 April 2020?

The situation becomes somewhat bleaker, should government decide to extend the lockdown beyond 30 April 2020. Respondents were requested to give their assessment should the lockdown be extended "a far greater number of enterprises that believed they by a further month. would not survive such an extension" It was found that there was a far greater number of enterprises that believed they would not survive such an extension. Whereas 69 per cent of enterprises were confident that they would survive the initial lockdown period, this declined dramatically to only 29,5 per cent. Ninety-five-and-a-half per cent of the enterprises are of the opinion that their turnover would decline and 76 per cent would have to lay off more staff.

A similar trend was detected in the manufacturing, services, and wholesale and retail sectors. Only 29 per cent of manufacturing enterprises, 25 per cent of those in services and 30 per cent of those in wholesale and retail believed they would survive should the lockdown be extended by another month.

A startling statistic has been revealed apropos the ability of the enterprises to fund themselves beyond 30 April 2020. Ninety-two per cent of the enterprises indicated that they do not have the necessary cash flow in place to carry them beyond the end of April. Whilst the manufacturing and the wholesale and retail sectors reflected a similar trend, the services sector was particularly hard hit. Less than one per cent had sufficient cash flow to see them through an extended lockdown. "do not have the necessary cash flow"

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Figure 2.1: Indicators with regard to the enterprises’ chance of survival

(Source: Inclusive Society Institute) 2.4 What has the take-up been with regard to the financial aid measures announced to alleviate the impact of the lockdown on business?

Only 22 per cent of enterprises indicated that they have sufficient cash to carry them over the lockdown period. This means that they have had to make alternative arrangements to secure funding to see them through until 30 April 2020. To this end, 56 per cent have applied to the various funds set up to assist with the alleviation of the hardships imposed on business by the COVID-19 lockdown decision.

However, as of 13 April 2020, only 4 per cent have received approval for such assistance. The full effect of these measures is still to be determined.

"56 per cent have applied to the various funds" "only 4 per cent have received approval" 2.5 The testing of the acceptability of a selection of potential post-COVID-19 recovery measures.

In this part of the survey, two new financial measures, which have to date not been widely promoted, were put to the respondents for consideration, together with five policy measures that are already widely publicised in the media. This report will expand on the machinations and potential of the new concepts, whilst only report on the level of support for the others.

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The first of the two new concepts is a proposed once-off “COVID-19 RECOVERY LEVY”, which would be a levy on turnover. The survey suggested that the levy be set at 2,5 per cent, although, alternative levels should form part of any economic modelling – which has not been done – in this regard. The intention of this proposal at this point is to merely consider the willingness of the business community to make financial sacrifices in the national interest. "a levy on turnover" As stated, no economic modelling has been done, and in retrospect the percentage is in all probability too high. Nevertheless, even a fractional percentage on the R9,986,053-million combined annual turnover of all industries (Stats SA, 2020:8), would yield a sizable contribution that could help off-set the repercussions of the COVID-19 lockdown. At a mere quarter of a percentage point, tax revenue of close on R25-billion could be raised.

Even at such a high level, more than a third of the respondents (34 per cent) indicated support for the idea. Set at more realistic levels, the concept would in all probability receive broader support.

The second new measure that was proposed was the concept of a “SOLIDARITY TAX” of between 1 and 2 per cent on personal incomes above a R240,000 per annum threshold. In the 2018 tax year, at 74,9 per cent returns assessed, the South African Revenue Services collected R332,595-million in personal income tax from taxpayers that had a taxable income in excess of R250,000 per annum (BusinessTech, 2019). The taxable income for personal taxpayers with a taxable income above R250,000 per annum, amounted to R283,920-million. Thus, a one per cent solidarity tax would yield approximately R2,8-billion, and at two per cent between R5,6- and R5,7-billion (SARS, 2019:44).

The imposition of a solidarity tax was supported by 44 per cent of respondents.

"1 or 2 per cent on personal incomes above a R240,000" The results from the survey for the other measures proposed, were:

%

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The SMME preferences with regard to the types of government interventions preferred are indicated in figure 2.2 below: Figure 2.2: SMME government intervention preferences

(Source: Inclusive Society Institute)

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METHODOLOGY 3. Methodology The estimated SMME population size in South Africa is around 2,550,540, of which 736,198 are formal and 1,754,443 informal. Combined, they provide approximately 10,839,819 jobs (SEDA, 2019).

Sampling, data collection and data subjects Sampling was carried out through the dissemination of the survey by electronic means to a representative database comprising SMME businesses drawn from across the country and from all sectors. In total, 1 084 responses to the questionnaire were obtained. Since “the quality of the sample will be higher, the more completely the sampling frame covers the target population� (European Social Survey, 2016), the data-base selected contained only SMME enterprises, which was the subject of the study. Standard data cleansing and validation procedures were carried out. The chart contained in figure 2.2 below, reflects the composition of the subject SMME enterprises.

"1 084 responses" Figure 3.2: Composition of SMME enterprises surveyed

(Source: Inclusive Society Institute)

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Confidence level and margin of error In determining the sample size, the research relied on the standard 95 per cent level of confidence and 5 per cent margin of error, which is common for social sciences studies (Royse, 2008:209).

"95 per cent level of confidence" Sample size In determining the sample size required to achieve a confidence level of 95 per cent and a margin of error of approximately 5 per cent, the author was guided by the table published in Glenn (1992) and Cochran’s (1963) formula for calculating a sample for proportions. The former suggested a sample size of 400 obtained responses and the latter 385. Whereas the survey size should accordingly not be smaller than 400, the actual number of obtained responses amounted to 1 084, nearly three times the standard minimum. This would serve to strengthen reliance on the report since the margin of error would be closer to 3 per cent (Creative Research Systems, N.d.). "margin of error would be closer to 3 per cent " Question set The survey contained a total of 26 questions, which could be grouped into five categories: Category 1 – questions of a demographic nature In category 1, the series of questions designed was aimed at eliciting information that would assist in answering questions related to the nature of the enterprise participating in the survey. This would help the stratification of enterprises in terms of their size (micro or medium), sector, whether they are considered essential services or not and/or whether they are reliant on government for business. In so doing, findings could be made, amongst others, as to outcome differences between the various sectors, and the extent to which an enterprise being declared an essential service improves their ability to survive.

"the nature of the enterprise"

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Category 2 – questions related to the impact on workers The series of questions contained in the second category of questions was designed to assess the impact that the lockdown has had on workers, and to assess the impact that an extension of the lockdown will have on workers.

"impact that the lockdown has had on workers"

Category 3 – questions pertaining to the impact of the lockdown on the viability of the enterprise The series of questions contained in the third category of questions was aimed at assessing the impact of the lockdown on the enterprise itself. It would assist in gaining answers to the enterprise’s likelihood of survival during the current post-COVID-19 lockdown and how a further extension thereof would exacerbate the situation.

"impact of the lockdown on the enterprise" 13

Category 4 – questions aimed at testing the enterprises’ reliability on financial aid The fourth set of questions was designed to enable findings to be made with regard to both whether the affected enterprises are reliant on the relief measures announced by government, and whether three weeks into the lockdown any access has been achieved.

"reliant on the relief measures"

Category 5 – questions aimed at testing potential post-COVID-19 economic recovery measures The last series of questions was designed to initiate thinking with regard to relief measures that could be instituted post-lockdown to mitigate the negative effects that the lockdown has had on the enterprises, the economy and society in general.

"to mitigate the negative effects"

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RECOMMENDATIONS 4. Recommendations Recommendation 1: Enterprise Survival The results of this survey would suggest that SMMEs across the board are experiencing hardship as a consequence of the COVID-19 lockdown implemented by the authorities. There has been a material impact on the enterprises’ cash flow and ability to retain staff. Notwithstanding, indications are that the majority of these enterprises will survive the lockdown scheduled to end on 30 April 2020, and most jobs lost will be recouped. The policymakers should, however, take cognisance of the finding that 70 per cent of enterprises surveyed believe they would not survive a further extension of the lockdown under the current rules, and that 76 per cent of enterprises would reduce staff in such event.

It is recommended that any extension take these findings into account and that, should a further extension of the lockdown be required, mechanisms be considered to allow businesses to operate more effectively, albeit with strict social distancing rules. "allow businesses to operate more Recommendation 2: Recovery Measures effectively" Part of the survey tested enterprises’ willingness to accept new fiscal measures that would require further sacrifices in terms of higher taxations. This survey introduced two new concepts that do not form part of the current public discourse. The once-off “COVID-19 RECOVERY LEVY” based on company turnover and a “SOLIDARITY TAX” on personal incomes above R240,000 per annum (also once-off) was introduced. More than one third of the respondents supported the former, and 44 per cent the latter.

Whilst retrospectively grasping that a 2,5 percent levy on turnover is too high, and that only a fraction thereof – still with the ability to generate substantial revenue – will most probably be feasible, it is proposed that the policymakers undertake economic modelling to examine the feasibility of such new financial measures. "examine the feasibility" Recommendation 3: Relief Measures The survey finds that the vast majority of SMMEs require financial assistance to see them through the lockdown period and that sustained support will be required to aid the recovery of the sector. It is accordingly proposed that the policymakers consider additional mechanisms to support the SMMEs and that the mechanisms, current and future, be streamlined to ensure speedier decision-making and transfer of financial aid to the enterprises.

"ensure speedier decision-making and transfer of financial aid" 15

SUMMARY 5. Summary of detailed findings 5.1 Summary of detailed data for all enterprises surveyed

No.

%

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5.2 Summary of selected data for manufacturing, services and wholesale & retail sectors

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Figure 5.1 below, which contains trends with regard to a selection of indicators, is included in order to compare the performance of the manufacturing, services and the wholesale and retail sectors against the ‘all enterprise’ average.

(Source: Inclusive Society Institute)

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REFERENCES 6. References BusinessTech. 2020. These 3 graphs show who’s paying South Africa’s income tax. [Online] Available at: https://businesstech.co.za/news/finance/363120/these-3-graphs-show-whos-paying-southafricas-income-tax/ [accessed: 12 April 2020].

Cochran, W. G. 1963. Sampling Techniques, 2nd Ed. New York: John Wiley and Sons, Inc. Creative Research Systems. N.d. Sample Size Calculator. [Online] Available at: https://www.surveysystem.com/sdesign.htm [accessed: 13 April 2020].

Deloitte. 2020. South Africa: Tax relief measures announced in response to COVID-19. [Online] Available at: https://www2.deloitte.com/za/en/pages/tax/articles/south-africa-tax-relief-measures-inresponse-to-COVID-19.html [accessed: 10 April 2020].

European Social Survey. 2016. Sampling Guidelines: Principles and Implementation for the European Social Survey. [Online] Available at: https://www.europeansocialsurvey.org/docs/round8/methods/ESS8_sampling_guidelines.pdf [accessed: 13 April 2020].

Israel, G.D. 1992. Determining sample size. Fact Sheet PEOD-6. Gainesville: University of Florida.

Mail & Guardian. 2020. South Africa’s economic plan for Covid-19. [Online] Available at: https://mg.co.za/article/2020-03-23-south-africas-economic-plan-for-covid-19/ [accessed: 10 April 2020].

National Institute for Communicable Diseases (NICD). 2020. First case of covid-19 coronavirus reported in SA. [Online] Available at: https://www.nicd.ac.za/first-case-of-covid-19-coronavirusreported-in-sa/ [accessed: 10 April 2020].

News24. 2020. Struggle is far from over. [Online] Available at: https://www.news24.com/SouthAfrica/News/in-full-struggle-far-from-over-read-ramaphosasstatement-on-2-week-lockdown-extension-20200409 [accessed: 10 April 2020].

Republic of South Africa (RSA). 2020. President Ramaphosa announces a nationwide lockdown. [Online] Available at: https://www.sanews.gov.za/south-africa/president-ramaphosa-announces-nationwidelockdown [accessed: 10 April 2020].

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Royce, D. 2008. Research methods in social work, 5th edition. Belmont: Thomson Higher Education. mall Enterprises Development Agency (SEDA). 2019. SMME Quarterly Update, 1st Quarter 2019.

Pretoria: SEDA South African Revenue Services (SARS). 2019. Tax Statistics 2019. Pretoria: SARS. Statistics South Africa (Stats SA). 2020. Quarterly Financial Statistics (QFS) December 2019. Pretoria: Stats SA. World Health Organisation (WHO). N.d. Rolling updates on coronavirus disease (COVID-19). [Online] Available at: https://www.who.int/emergencies/diseases/novel-coronavirus-2019/events-as-theyhappen [accessed: 10 April 2020].

World Health Organisation (WHO). 2020. WHO announces COVID-19 outbreak a pandemic. [Online] Available at: http://www.euro.who.int/en/health-topics/health-emergencies/coronavirus-covid19/news/news/2020/3/who-announces-covid-19-outbreak-a-pandemic [accessed: 10 April 2020].

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