COVID-19: South African Government Financial Assistance Measures
Rescue Measures for South African Businesses to Stay Afloat in Turbulent Waters
16 min read
On 21 April 2020, the President of South Africa addressed the nation yet again to inform South Africans of additional economic and social relief measures to be put in place as a result of the novel coronavirus ("COVID-19") pandemic. This comes after the President declared a nationwide lockdown in late March, followed by the enactment of regulations to the Disaster Management Act, 2002, a COVID-19 Block Exemption for the Retail sector, a COVID-19 Temporary Employee/ Employer Relief Scheme and a Draft Disaster Management Tax Relief Bill to name a few. These measures which aim to assist South African businesses in surviving the detrimental effects of COVID-19 are referred to as the first phase of the Government's economic response to COVID-19. Since then, the Government has embarked on a second phase and has further announced that there will be a third phase implemented to drive the recovery of the economy.
Industrial Development Corporation ("IDC") Support1
The IDC and the Department of Trade, Industry and Competition have compiled a more than R3,000,000,000 package for industrial funding to help vulnerable businesses.
Furthermore, the IDC is providing a capital allocation of R3,000,000,000 in the second quarter of 2020 to support businesses during the COVID-19 pandemic.
There are two forms of relief that the IDC has put in place for South African businesses namely the IDC Distressed Funding and the Essential Suppliers Intervention.
IDC Distressed Funding
The terms of facility include:
- debt and guarantees only (equity on a case-by-case basis); and
- scheme-related concessionary pricing.
This funding is only available to South African-owned businesses, and the qualifying criteria includes that:
- it applies to existing IDC clients and new clients in distress as a result of COVID-19;
- companies should demonstrate strong business fundamentals and be considered viable;
- relief is only for clients impacted by COVID-19 with a sustainable business plan;
- intervention plans must show the business case recovering within 18 to 24 months;
- there must be evidence that concessionary finance will enable the business to trade out of any short-to-medium-term financial crisis;
- risk must be shared with other funders, not just the IDC;
- distressed funding cannot be used to fund bonuses or dividends; and
- the company's financial needs must be in excess of assistance from the Unemployment Insurance Fund ("UIF"), the Compensation Fund, the IDCs funding and any other support schemes, and the IDC's funding should only be used to fund any shortfall.
There are also exclusions which include:
- normal expansions;
- refinancing of existing facilities;
- share buy-backs; and
- payment of non-operational expenditure for example bonuses.
Essential Suppliers Intervention
The terms of facilities include:
- IDC loan and trade finance facilities: P + 1% per annum;
- MCEP loan facilities: 2.5% per annum; and
- guarantees: 2% per annum.
The following financial instruments are available:
- a short-term loan for once-off contract or import funding;
- a revolving credit facility; and
- guarantees to banks for banking facilities, imports and ordering requirements.
To qualify, the business must, inter alia:
- have a track record of manufacturing similar products;
- in the case of imports, be able to import at the required scale (and insufficient local manufacturing capacity);
- be an accredited supplier (either in public or private sector);
- have a contract or purchase order with either the South African government or similar large customer for essential services;
- be able to demonstrate historical profitability;
- have a mark-up that is reasonable to prevent profiteering and price-gouging; and
- have a geographical focus in South Africa and Southern African Customs Union.2
Social Relief and Economic Support Package3
In terms of President Cyril Ramaphosa's recent announcement on 21 April 2020, as part of the second phase of measures taken by the South African Government, this social relief and economic support package will comprise of R500,000,000,000, which is 10% of the GDP. 4
Some of the following forms of relief have been proposed:
- an employer is usually entitled to claim the Employment Tax Incentive ("ETI") (an incentive to encourage employers to hire young work seekers)6 for qualifying employees who are between the ages of 18 and 29 years old, and have a monthly remuneration of less than R6,500. In respect of the relief measures proposed:
- there has been an increase in the maximum amount of ETI claimable for a 4 month period (for employees eligible under the current ETI Act) from R1,000 to R1,500 in the first qualifying 12 months and from R500 to R1,000 in the second 12 qualifying months; and
- employees earning R6,500 or less and who do not qualify for the ETI (either because the employer has claimed the ETI for 24 months or because the employees are between the ages of 30 and 65 years old, and thus do not qualify because of their age) will receive a monthly ETI claim/tax subsidy of R750 per month over the next 4 months, provided that employers were registered with the South African Revenue Service ("SARS") as at 1 March 2020;
- a deferral of pay-as-you-earn ("PAYE") liabilities over the next 4 months - in order to qualify for a deferral of 35% of its PAYE liabilities, the business in question must:
- be a taxpayer as defined in section 151 of the Tax Administration Act that conducts a trade;
- have an annual turnover of R100,000,000 or less during the year of assessment ending on or after 1 April 2020 but before 1 April 2021;
- have a gross income that does not include more than 20% income derived from interest, dividends, foreign dividends, royalties, rental from letting of fixed property, annuities and any remuneration received from an employer; and
- be tax compliant.
These businesses will also be eligible to delay their provisional corporate income tax payments without penalties or interest over the next 6 months;
- donations made to a COVID-19 disaster relief organization will qualify for a tax deduction in the hands of the donor during the period 1 April 2020 to 31 July 2020. The donor may deduct 10% of the taxable income. Any portion not claimed may be carried forward to the subsequent year of assessment. Donations made to disaster relief organisations will also be exempt from donations tax; and
- taxpayers who donate to the Solidarity Fund will be able to claim up to an increased amount of 20% as a deduction from their taxable income.
President Cyril Ramaphosa also announced on 21 April 2020 that in addition to the tax relief mentioned above, there will be a 4 month holiday for the companies' skills development levy contributions, fast-tracking Value-Added Tax refunds and a 3 -month delay for filing and first payment of carbon tax.7
Labour & Employment8
In terms of the COVID-19 Temporary Employee / Employer Relief Scheme (C19 TERS), 2020 (as amended), should an employer as a direct result of the COVID -19 pandemic have to close its operations for a period of 3 months or less, employees of the company shall qualify for a COVID-19 benefit.
The salary to be taken into account in calculating the benefits will be capped at a maximum amount of R17,712 per month, per employee and an employee will be paid in terms of the income replacement rate sliding scale as provided in the Unemployment Insurance Act 63 of 2001.
An employee shall receive a benefit of no less than R3,500. Should an employee's income in terms of the income replacement sliding scale fall below R3,500, the employee will be paid a replacement income equal to that amount.
For the company to qualify for the temporary financial relief scheme, it must satisfy the following requirements:
- the company must be registered with the Unemployment Insurance Fund UIF;
- the company must comply with the application procedure for the financial relief scheme (employers apply by reporting their closure to '[email protected]' after which an automatic response sets out the application process); and
- the company's closure must be directly linked to the COVID-19 pandemic.
On 15 May 2020, further amendments were made to this scheme which effectively provide that in certain instances an employer whose employees are entitled to receive COVID-19 benefits provided by the UIF from a bargaining council or entity (as defined in the directive) may not make an application in terms of this scheme and, the employees of that employer may not receive any payment in terms of the scheme other than through the bargaining council or entity.
An employee may also individually apply for COVID-19 benefits if:
- the employee meets certain requirements in terms of the directive;
- no bargaining council or entity has concluded an memorandum of agreement with the UIF; and
- the employee’s employer has failed or refused to apply for COVID -19 benefits.
The Minister of Trade, Industry and Competition has issued a block exemption ("Block Exemption") for the Retail Property Sector in respect of a category of agreements or practices between designated retail property tenants and landlords.
These agreements or practices are exempt from the application of section 4 (Agreements between competitors) and section 5 (Agreements between suppliers, firms and customers) of the Competition Act 89 of 1998 (as amended).
The Block Exemption applies only to agreements or practices related to, inter alia, payment holidays and/or rental discounts for tenants.
The Block Exemption extends to all South African designated retail tenants, including small and independent retailers, unless otherwise authorised by the Minister or the Competition Commission.
National Empowerment Fund ("NEF") Support10
The NEF is making R200,000,000 in loans available for black entrepreneurs to manufacture and supply a range of medical products, including medical masks, sanitisers, dispensers and related healthcare products to support the healthcare sector during the COVID-19 crisis.
The requirements to qualify are, inter alia, that the business:
- is a registered legal entity in South Africa in terms of the Companies Act, 2008 (as amended); the Close Corporations Act, 1984 or the Co-operatives Act, 2005;
- is a taxpayer in good standing with a valid tax clearance certificate at assessment as well as before the loan is disbursed;
- is a current and registered supplier with retailers and other institutions in good standing or have a purchase order/ contract/ letter of intent;
- has greater than 50% Black shareholding and management control;
- has a project with a minimum requirement of R500,000 in working capital, machinery and equipment;
- must be directly involved in the day-to-day running of the operation and must have requisite expertise in the sector; and
- is owned by black South Africans as defined by the Broad-Based Black Economic Empowerment (B-BBEE) Act.11
The fund will not service any pre-existing debt or help settle monies owed.
There is also a Solidarity Response Fund which is independently administered through professional managers and organizations in the private sector. This aims to alleviate suffering and distress caused by the COVID-19 pandemic through care, support, prevention and detection.
However, for now it seems that the Solidarity Fund is not looking to provide relief or financial support to businesses or informal traders but is rather focusing on health (ventilators and test kits etc.), humanitarian efforts and the Solidarity Campaign to flatten the curve.
Small, Micro and Medium- Sized Enterprises ("SMMEs") Support Intervention13
The Department of Small Business Development has introduced a "SME Support Intervention" which involves a Debt Relief Fund and a Business Growth/Resilience Facility to mitigate the impact of the expected economic slowdown on SMMEs in South Africa.
The Department has also made over R500,000,000 available to the Debt Relief Fund, and the SMME Finance Scheme will comprise of soft-loan funding for a period of 6 months from 1 April 2020.14
The Business Growth/Resilience Facility will provide working capital, stock, bridging finance, order finance and equipment finance to small businesses which supply in-demand medical supplies.15
Furthermore, the Department of Tourism has made an additional R200,000,000 available to assist SMMEs in the hospitality and tourism sector.
In order to qualify for the SME Support Intervention relief, there is a certain criteria which includes, inter alia, that:
- the business must have been registered with CIPC by at least 28 February 2020;
- the business must be 100% owned by South African Citizens;
- employees must be 70% South Africans;
- priority will be given to businesses owned by Women, Youth and People with Disabilities; and
- the business must be registered and compliant with SARS and the UIF.16
South African Future Trust ("SAFT")17
The local banks (Absa, First National Bank, Investec, Mercantile Bank, Nedbank and Standard Bank) (the "Partner Banks") have partnered with SAFT (an independent trust set up by the Oppenheimer family) to extend financial support to SMMEs.
SAFT funds will be disbursed as concessionary loans to qualifying SMMEs, and these loans will be interest-free over a 5-year term and will be administered by the Partner Banks on behalf of SAFT.
SMMEs who meet the following criteria will be eligible for support:
- their turnover is below R25, 000, 000 per annum;
- the business has been adversely affected by COVID-19;
- they have been trading for at least 24 months; and
- the business was sustainable on 29 February 2020.18
Guaranteed Loan Scheme for Small and Medium-Sized Enterprises ("SMEs")19
On 21 April 2020, President Cyril Ramaphosa also announced a R200,000,000,000 COVID-19 loan guarantee scheme in partnership with the major banks, National Treasury and the South African Reserve Bank.
This announcement was followed by, inter alia, a media statement and a publication issued by National Treasury, the South African Reserve Bank and the Banking Association of South Africa confirming that the COVID-19 loan guarantee scheme would operate from 12 May 2020 and that National Treasury will initially provide a R100,000,000,000 guarantee with the option to increase it to R200,000,000,000 if necessary and provided that the scheme is successful. In addition, the aforesaid publication raises some noteworthy points for SMEs that wish to apply to their relevant participating banks (currently being the Partner Banks) for a COVID-19 loan which, inter alia, are as follows:
- in essence in order to qualify for the COVID-19 loan guarantee scheme, the relevant business must:
- have a group annual turnover of less than R300,000,000;
- have been up to date with its loan payments to the relevant bank or be an account holder without any loans at the relevant bank as at end-February 2020;
- have an existing relationship with the bank that grants it the COVID-19 loan;
- be registered with SARS; and
- be financially distressed as a result of the COVID-19 outbreak and subsequent lockdowns; and
- the material conditions imposed in relation to the COVID-19 loans include the following:
- the loan can only be used for operational expenditure such as salaries, rent, utilities and ordinary-course supplier payments;
- the loan cannot be used to pay dividends, make investments, pay bonuses or pay off other existing loans that the business may have;
- the loan amount will be disbursed in up to 3 monthly instalments, thereafter no payment will be expected for a further 3 months;
- the relevant business will have 5 years to pay off the loan and associated interest. In this respect, the interest rate is fixed at the repo rate plus 3.5% and the participating banks cannot vary this condition;
- each applying business is entitled to only one loan;
- banks can require businesses to provide security or suretyships and may impose additional conditions as they deem fit; and
- banks are not obliged to extend COVID-19 loans and will therefore use their own risk-evaluation and credit application processes to decide whether or not to approve an application.
The South African Government has implemented several relief measures which, at this stage, focus on providing support to SMMEs as well as in providing tax relief, unemployment support, support for black entrepreneurs who manufacture and supply a range of medical products and various loan funding to help support vulnerable South African businesses as a result of the COVID-19 pandemic.
Further relief has been provided by the Partner Banks together with independent private parties and organizations to help assist the country overcome the detrimental effects of COVID-19.
We encourage our clients to consider these measures carefully, consulting with us as appropriate.
In addition, White & Case has carried out an analysis of global governmental responses to the COVID-19 crisis. These vary considerably from country to country and are being updated and amended regularly.
The South African Government have implemented urgent measures to deal with the impact of the COVID-19 outbreak. The applicable measures are described and compared here.
1 Patel, E 'Government's intervention measures on Coronavirus' (24 March 2020). Available at: gov.za/speeches/minister-ebrahim-patel-government%E2%80%99s-intervention-measures-coronavirus-24-mar-2020-0000. See also: IDC Covid-19 Essential Supplies Intervention, available at idc.co.za/wp-content/uploads/2020/03/IDC-Essential-Supplies-Funding-Intervention-COVID-192.pdf, and 24 Mar Covid-19 IDC Funding Interventions, available at idc.co.za/2020/03/24/idc-interventions-in-response-to-covid-19/.
2 Note: other considerations may be taken into account.
3 President Cyril Ramaphosa: Additional Coronavirus COVID-19 economic and social relief measures dated 21 April 2020, available at https://ewn.co.za/2020/04/21/full-speech-ramaphosa-announces-latest-economic-and-social-response-to-covid-19.
4 Note: the details are still to be finalized and as such this note does not deal with this form of relief in a great amount of detail.
5 Draft Disaster Management Tax Relief Bill and Draft Disaster Management Tax Relief Administration Bill, 2020 (collectively referred to as the "Draft Disaster Management Tax Relief Bills").
6 Employment Tax Incentive (ETI), available at https://www.sars.gov.za/TaxTypes/PAYE/ETI/Pages/default.aspx.
7 President Cyril Ramaphosa: Additional Coronavirus COVID-19 economic and social relief measures dated 21 April 2020, available at https://ewn.co.za/2020/04/21/full-speech-ramaphosa-announces-latest-economic-and-social-response-to-covid-19.
8 The COVID -19 Temporary Employee / Employer Relief Scheme (C19 TERS), 2020 (as amended). See https://www.gov.za/sites/default/files/gcis_document/202003/43161gen215.pdf, https://www.gov.za/sites/default/files/gcis_document/202004/43216gen240.pdf, and https://www.gov.za/sites/default/files/gcis_document/202005/43330rg11114gon541s.pdf.
9 COVID-19 Block Exemption for the Retail Property Sector, 2020.
10 Media Statement "NEF COVID-19 R200m Fund – March 2020 – R200m set aside for Black Business to fight COVID-19" (26 March 2020), available at: https://www.nefcorp.co.za/wp-content/uploads/2020/03/Media-Statement-NEF-COVID-19-R200m-Fund-March-2020-website.pdf.
11 COVID-19 Black Business Funding Solution, available at https://www.nefcorp.co.za/wp-content/uploads/2020/03/COVID-Fund-Brochure-2020_9.pdf.pdf.
12 Solidarity Fund, available at https://www.solidarityfund.co.za/. See also: Understanding the Solidarity Response Fund, Gloria Serobe explains, available at https://www.iol.co.za/sundayindependent/understanding-the-solidarity-response-fund-gloria-serobe-explains-46378333.
13 COVID-19 Relief Funding, available at https://www.fundingconnection.co.za/covid-19-relief-funding.
14 Coronavirus COVID-19: Advice for South African SMEs, available at https://blog.lulalend.co.za/2020/03/coronavirus-and-business-funding/.
15 Covid-19: Financial Relief Options and Advice to Help Entrepreneurs Survive and Thrive, available at hhttps://sabfoundation.co.za/news-1/2020/4/2/covid-19-advice-to-help-entrepreneurs-survive-and-thrive dated 2 April 2020.
16 Debt Relief Finance Scheme and Business Growth/Resilience Facilities published by the Department of Small Business Development.
17 South Africa Future Trust, available at //saft.africa/.
18 South African Future Trust, available at https://saft.africa/#eligibility.
19 President Cyril Ramaphosa: Additional Coronavirus COVID-19 economic and social relief measures dated 21 April 2020, available at https://ewn.co.za/2020/04/21/full-speech-ramaphosa-announces-latest-economic-and-social-response-to-covid-19, Media Statement Loan Guarantee Scheme Opens, available at http://www.treasury.gov.za/comm_media/press/2020/20200512%20Media%20statement%20-%20Loan%20guarantee%20scheme%20opens.pdf dated 12 May 2020, and Answering your questions about the COVID-19 LOAN GUARANTEE SCHEME, available at http://www.treasury.gov.za/comm_media/press/2020/COVID-19%20Loan%20Guarantee%20Scheme%20Q&A.pdf dated 12 May 2020.
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