Competition in the Wake of Covid-19: Supporting Pacific MSMEs
This blog is part of a series of PSDI posts considering the impacts of COVID-19 on competition and consumer protection. See also “Retail Pricing in the Pacific During the Covid-19 Pandemic” and "Consumer Protection in Pacific Countries in the Wake of COVID-19." This post was originally published on DevPolicy.
The COVID-19 pandemic presents an exceptional threat to the emergence of competition in the economies of Pacific island countries (PICs). While both large and small businesses are facing very significant challenges in the wake of COVID-19, the threat will be acute for many micro-, small- and medium-sized enterprises (MSMEs) in the Pacific. The survival of MSMEs is essential to the development of competition in PICs, which is crucial for consumer welfare and long-term economic growth.
Viable MSMEs are crucial to competitive markets
Business activity in PICs is dominated by state-owned enterprises and a small number of multi-national businesses. MSMEs comprise the great majority of businesses, by number, and employ a large proportion of the workforce. MSMEs that are active in the formal economy are important agents by which competition enters monopolised markets. In PICs, markets for many goods and services exhibit little or no competition, so the dominant supplier faces little or no pressure to improve its products, delivery or pricing. Such competitive pressure drives economic efficiency and consumer welfare. The introduction and development of competition in markets where it has previously been nascent has become a priority for many PICs, so governments should consider measures to preserve emergent competition during the difficult period following COVID-19 restrictions.
Both Fiji and PNG already have competition laws in force and are in the process of updating those. Samoa enacted its first general competition law in 2016, and Solomon Islands and Vanuatu have both adopted national policies on competition and consumer protection. To avoid extinguishing the competition that PICs are endeavouring to develop, Pacific governments should adopt measures that respond to the threats MSMEs currently are facing. The survival of MSMEs after the pandemic will be crucial to those countries’ long-running efforts to establish competitive domestic markets, in the interests of consumer welfare and economic growth.
Financial support is only part of the solution
COVID-19 pandemic restrictions, and post-pandemic trading conditions, will jeopardise the solvency of many MSMEs, especially those that operate in directly-affected economic sectors such as tourism, retail and hospitality. The threats now confronting MSMEs include: increased insolvency risks (as costs such as rent remain fixed while income is falling); heightened contractual default risks (as suppliers and customers struggle with their own constraints); new compliance costs; staffing challenges; and heightened uncertainty in trading conditions.
Interim financial support is MSMEs’ most urgent and obvious need but is unlikely, by itself, to ensure their continuing viability. PICs must also consider complementary forms of non-financial support for MSMEs. Most PICs have in place laws designed to protect those who invest in or trade with companies. Such laws play an important economic role but, in the exceptional circumstances following the recent crisis, present a hazard to incorporated MSMEs and their directors and are likely to inhibit business recovery. Governments should consider the temporary relaxation of such safeguards.
Enabling use of electronic media
Online meetings and electronic communications have enabled many businesses to carry on despite restrictions on travel and personal contact. Many companies’ constitutions or internal rules do not permit the use of electronic media, however, to hold general meetings, make resolutions, sign documents, or give notices. Governments can enact legislation authorising companies’ use of electronic communications so that company governance can proceed.
Leniency in bankruptcy thresholds
While businesses that have otherwise been able to meet their debts are reeling from the impact of COVID-19, governments should consider adopting less stringent thresholds under bankruptcy and insolvency laws. For example, in Australia the minimum threshold at which creditors can serve a formal statutory demand on a company has increased from AUD2,000 to AUD20,000 for a period of six months, and companies have six months to respond to a statutory demand rather than the previous 21 days.
The object of such changes is to give affected businesses a better opportunity to continue trading before they are exposed to liquidating or winding up.
Protecting directors from liability
Under normal circumstances, a range of duties are imposed on the directors of companies for the protection of their shareholders and the public. These typically include a duty not to permit the company to continue to trade while it is insolvent. Directors can be held personally liable for breach of their duties, and a liquidator or creditor of the company can apply to a court to recover their loss or damage from a director or former director.
Australia has recently suspended for six months directors’ personal liability for insolvent trading, where the debts are incurred in the ordinary course of business and in good faith, and the losses are due to the COVID-19 situation. New Zealand has also enacted temporary “safe harbours” for directors from duties regarding reckless trading and ability to meet obligations.
Directors’ duties are essential safeguards under normal circumstances but, in the exceptional circumstances now obtaining, are likely to deter conscientious directors from being involved with a company that continues to trade.
Temporary expansion of Registrars’ discretion
Registrars of Companies can temporarily be given powers to extend deadlines for meetings or reports, reduce fees, or otherwise introduce a degree of leniency. This will encourage continued regulatory compliance and reduce the risk of penalties becoming an additional burden on struggling businesses.
The COVID-19 pandemic and post-pandemic conditions present serious challenges for the Pacific region’s MSMEs. Their survival is crucial to PICs’ economic development objectives, however, as MSMEs make up the majority of businesses and are the means by which competition emerges in goods and services markets.
Governments can improve the chances for survival of incorporated MSMEs’ by temporarily relaxing obligations (such as the duty to avoid insolvent trading) that are designed for the protection of investors and the public. A combination of temporary amendments to company and insolvency legislation, and temporary extension of the discretion of Companies Registrars are practical steps.
This blog post was prepared by Dr. Andrew Simpson, Dr. Alma Pekmezovic, and Mr. Terry Reid, members of PSDI's Competition and Consumer Protection team. PSDI has undertaken competition and consumer protection reform in Cook Islands, Fiji, Kiribati, PNG, Samoa, Solomon Islands, Tonga, and Vanuatu.
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This website provides commentary, news, and insights from PSDI about private-sector issues and challenges in the Pacific. All views expressed are those of the authors and do not necessarily reflect the views of PSDI’s partners: the Government of Australia, the Government of New Zealand, and the Asian Development Bank.