23rd March, 2020

COVID-19: Short and long term policy impacts for investors and companies

The policy impacts of COVID-19 will not just extend to the many measures designed to help the economy over the next few months. The political and regulatory world will change profoundly and for the long term.

We are advising investors, portfolio companies and other organisations on what help is available and how they can best advocate for and access assistance.

The Government has shown its willingness to engage with business and respond to requests for greater clarity, revised eligibility criteria or additional support, and indeed offers of help, as we have found in our work for clients.

But there are six key questions that investors and management teams should also pose about some of the policy assumptions underlying their growth plans and existing risk assessments, as they model their businesses under a range of COVID-19 scenarios:

Will gig economy and labour regulation be revaluated?

The IR35 reforms have been delayed till April 2021, allowing time for a more significant review. But COVID-19 has highlighted how exposed many gig economy workers are to any sort of crisis.

This – as well as the criticism that the Government has received from its own benches over how it has handled the issue of employment security and workers’ lost income in the early stages of this crisis – is likely to reinforce the argument for employers to bear a greater burden of responsibility for their workers and contractors, as well as their permanent employees.

As the Government loosens some of the restrictions on access to and the generosity of Universal Credit, there may be more permanent change to how this part of the welfare system works. There are longstanding political criticisms of the design of this policy that the crisis will force policy makers to address, again particularly for households in insecure work. All of this could impact labour costs and flexibility significantly.

How reliant is your business on migrant labour?

The impact of Brexit on the availability of migrant labour has been a regular theme of our due diligence for the last two years, but this crisis has shown how many other factors – relating to pandemic control and people flows – could have a much more significant, sudden and less predictable impact than Brexit.

Will the tax holidays last longer than 12 months?

It will be extremely difficult for the government to revert to pre-holiday tax levels, unless the economy bounces back strongly, and particularly difficult to reinstate taxes on nurseries, which are already permanently exempted in Scotland and Wales. It will also be difficult because of the uncertainty of current Brexit timings (which may be revised).

This could lead to a more fundamental review of business rates or indeed any other tax measure that has a big impact on businesses that rely heavily on good cash flow. As the crisis has revealed, many businesses risk extinction even after short periods of massively depressed demand.

How might new public funding priorities impact your business?

The massive fiscal stimulus will inevitably require a reallocation of resources, if not cuts in some areas. Funding for health and social care will no doubt increase to improve long term resilience and deal with the immediate impact of COVID-19. However, some aspects of health and social care may receive less resource – particularly if they are seen as less critical to ensuring prevention and improving the capacity of the system.

Local government resourcing and priorities may also change, especially to ensure that vulnerable groups and schools and other civic amenities are better prepared (especially as COVID-19 will inevitably reappear until a vaccine is developed and made widely available).

How will public and private procurement change?

Public procurement will change to reflect new government funding priorities, but will also change to reflect the need to have more resilient supply chains in the event of further similar shocks.

This may mean encouraging more local and more national supply (especially post-Brexit), to lower exposure to long supply chains that might be vulnerable to multi-country measures that could slow exports. Some public sector bodies might choose to bring more provision in-house for similar reasons.

It may also mean that procurement tenders will be broken down into more lots, to encourage a broader supply base and reduce reliance on just one or two providers.

Procurement criteria is also more likely to require more comprehensive demonstrations of business continuity preparedness.

How will Brexit and the future of the EU be affected and what impact could this have on your business

Brexit could be delayed, justified by a more plausible and politically acceptable need for a longer implementation period.

But much bigger changes could be seen across the EU, as France and Germany’s authority and appetite for further EU integration is undermined by their own trouble managing the crisis domestically, as well as the manifest desire of all EU countries to pursue their own self-interest and impose strict border controls.

We expect many other changes, in terms of how Whitehall and Westminster and major public sector bodies operate.

Over the next 12 months, GK will be tracking these developments systematically and advising clients on how best to anticipate, prepare for and influence these changes, both in the near term and beyond the end of the immediate crisis period.