Researchers at ISM University of Management and Economics conducted a study to explain the business implications of the COVID-19 pandemic.
The results of the research showed that the most popular state support measures are the simplest. Due to the complex bureaucratic machine, much of the support has not even been used. Another finding of the study shows that as a result of the pandemic, companies faced liquidity challenges, with the overall number of employees dropping during the pandemic.
“In the wake of the first wave of the pandemic, decisions were taken on support measures aimed at cushioning the negative effects as soon as possible. The study examines how effectively the support has been used and what shortcomings the business has faced. The findings and recommendations of the study can help not only to distribute support more efficiently during the second wave of the pandemic, but also to help Lithuanian businesses exit the pandemic smoothly, while maintaining competitiveness in international markets”, says Dr. Dalius Misiūnas, Rector of ISM University of Management and Economics and one of the authors of the study.
The best state aid measures for business are the simplest
The ISM study shows that small businesses were not able to benefit from many state aid facilities because they have been excessively complicated, bureaucratic and accompanied by a lengthy administrative process. Thus, companies tended to use the simplest and minimal effort of state aid measures (compensation for downtime, STI, Sodra provisions, etc.). According to business leaders, most state support measures were very limited, too fragmented, too complex and overloaded with excessive bureaucratic requirements, too strict in terms of time constraints, etc.
During the interview phase of the ISM study, company managers were positive about the very existence of state aid measures. The tax deferral measure has received a particularly strong response.
“It had a simple application procedure, it could be used remotely, therefore, it was used by the vast majority of respondents. However, representatives of business associations noted that public authorities should closely monitor whether the persistent accumulation of tax debts in certain companies indicate long-term business continuity problems, and then propose measures to restructure such debts in due time: e. g.: conversion into long-term interest-free loans, bonds or share capital”, says ISM doctoral student, one of the authors of the study Egidijus Kundelis.
The number of employees decreased in the industrial, construction and real estate sectors, and grew in the IT
Despite the state support for retaining jobs, the total number of people employed during the pandemic fell and remained lower compared to the corresponding months in the last year. Based on the analysis of available data from Sodra, it can be stated that a larger decline occurred in the manufacturing, construction and real estate sectors.
During the nine months of 2020, the number of employees in enterprises reduced especially in Marijampolė, Klaipėda, Tauragė counties, which are characterised by a larger number of operating enterprises, compared to the relevant months of 2019.
“Due to the ongoing business changes in the pandemic, the number of employees in the information technology sector and large companies increased. Consequently, they get additional orders, and look for employees to fulfil them. In small businesses, meanwhile, the number of employees was initially declining, then recovered, indicating that businesses are flexible and responsive to changes in the economy. The decline in the number of employees in medium-sized companies is raising concerns – the number is declining and not recovering. Such a situation could have long-term negative consequences for our economy through declining consumption “, says Prof. Dr. Valdonė Darškuvienė, ISM lecturer, researcher, and the research supervisor.
Liquidity crisis – insolvency problems are forming in the future
The analysis of the data of Lithuanian companies (source: Creditinfo) has shown that although the overall business situation does not show significant negative changes, the amount of overdue debts increased dramatically to 49 million euro during and after the pandemic in Q3 2020 compared to 9.8 million euro at the same period in 2019. This indicates the growth of business insolvency problems, the consequences were of may become notable in the coming years. During the first 9 months of 2020, corporate arrears grew particularly in micro-enterprises (up to 10 employees). In terms of the situation in the counties, Klaipėda county stood out with the particular growth of overdue debts – where they grew 4.5 times to 18.2 million euro in Q3 2020 compared to the same period in 2019, and Vilnius county, where overdue debts grew sixfold to 12.1 million euro in the same period.
“One of the stages of the research – interviews with business representatives – revealed that micro-enterprises face their own internal constraints – they are small, have a small scale of activity, earn relatively low profits, thus they are sensitive to fluctuating external circumstances. Meanwhile, the major companies are rather resilient and we see that their overdue debts are quite stable. The study revealed that medium-sized enterprises also face difficulties. In their work, we see a fluctuation that shows that, in the face of difficulties, action has been taken – strict cash flow management measures, possibly state aid measures, etc.”, says Prof. Dr. V. Darškuvienė.
“COVID-19 has affected businesses differently, thus support should be differentiated in accordance with the location, sector and size of the company: regions should pay greater attention to the preservation of jobs. Increasing competitiveness, etc., is important for big business”, recommends V. Darškuvienė.
Dr. Siuzana Ščerbina-Dalibagienė, an expert on insolvency issues at the Ministry of Finance of the Republic of Lithuania, one of the authors of the study says that this year no growth in insolvency proceedings in Lithuania has been observed, on the contrary, much less of them than in the previous year were launched.
“This is due to the imposed temporary restriction on the initiation of insolvency proceedings and the state-proposed business aid measures, in particular for the maintenance of jobs and the of liquidity of undertakings”, says Dr. Siusana Ščerbina-Dalibagienė.
Business representatives spoke about what support they would need from the state
The study carried out by researchers at ISM University was presented on 16 December to the representatives of Lithuanian industrialists and Lithuanian business confederations, economists of the Bank of Lithuania and other financial institutions, financial experts, business leaders who discussed during the teleconference on the expediency of state support to enterprises, possibilities for effective access to support measures by enterprises, and the potential distortion of competition.
Participants of the event provided their insights and recommendations.
“During the discussion, it was noted that companies, especially in the construction sector, face additional, excessive burdens due to the provision of additional guarantees both in public procurement procedures and in the implementation of projects already awarded, and that significant amounts of working capital of the undertakings are frozen for the long term. The proposed state aid measure could therefore include the temporary waiver of certain guarantees, a reduction or state guarantees granted to customers where the service provider is a reliable company,” V. Darškuvienė shared information from the discussion.
Participants of the discussion also noted that most of the support is assigned for small and medium-sized businesses, and large business was able to benefit relatively less from public support. Representatives of manufacturing companies also noted that large business in Lithuania is the size of a “micro” business in international terms. Therefore, the support measures applied by other countries to the large business enterprises of their countries will inevitably weaken the international competitiveness of Lithuanian companies and will negatively affect Lithuania’s exports in the long run.
It was also noted that state support could be more focused on the provision of long-term interest-free loans and guarantees rather than subsidies (aimed at short-term amortisation of the negative shock caused by the COVID-19 pandemic) (for long-term investment aimed at transformation, development, expansion into new export markets), which could be related to the stable situation of the company (sales revenue or profit) in the past period, growth and development opportunities in the future.
The results of the research are based on in-depth interviews with managers of companies in different economic sectors, a survey of companies in different economic sectors and an analysis of financial data of companies, overdue debts and the number of employees, and wages in January-October 2019-2020.
This research is one of 29 projects for decisions on the consequences of COVID-19, funded by the Lithuanian Science Council.
Research authors: Prof. Dr. Valdonė Darškuvienė, Rector of ISM University Dr. Dalius Misiūnas, ISM doctoral student Kristina Griškevičienė, ISM doctoral student Egidijus Kundelis, Head of the Audit, Property Valuation and Insolvency Management Division of the Ministry of Finance, expert of insolvency issues of the Ministry of Finance Dr. Siuzana Ščerbina-Dalibagienė.