SMEs like the professional legal services sector hoping for critical care — Christopher Leong

MARCH 29 — The “Pakej Rangsangan Ekonomi Prihatin Rakyat” or roughly translated as the “Peoples Caring Economic Stimulus Package” announced on 27th March 2020 does not have a real or significant impact for a lot of the businesses, especially SMEs, which includes the services sector like the professional services sector of which the professional legal services sector is one.

An economic stimulus package should not be focused on cash assistance or allowances to individual Malaysians, (although it can make such provisions as an adjunct). This is merely an immediate ‘feel good’ measure, and not sustainable. The government cannot afford to and should not keep paying such allowances. Instead, the focus at this stage must be on immediate mid-term measures for businesses. 

For the kind of focus announced yesterday it is a misnomer to call it an "economic stimulus package"; it would be more aptly called a "welfare package". It is of course good to help individual Malaysians, but there was no need to have made provisions in the economic stimulus package for broad based or general payments of this nature, namely, payments of allowances to individual Malaysians, especially to the civil servants. At this point in time, it does not make sense as many of them are employees and are being paid their usual salaries. In particular, the civil servants are not facing imminent retrenchment. However, they are now all being given more cash handouts/allowances from public funds/tax payers money in addition to their salaries, bearing in mind the limited public funds available for use in this crisis. Some ask why then is this being done? Some say it is because the government just cannot get out of the BR1M and vote buying mentality.

No doubt there needs to be assistance to small holders, day traders, stall owners, the self-employed etc who are facing difficulties. In addition, the economic stimulus assistance should have also focused on and been directed towards providing much needed financial assistance to small and medium sized business enterprises (“SME”), which includes the services sector like the professional legal services sector, that are employers. Help these businesses keep afloat and this would in turn help maintain employment, and contribute to tax payments. These businesses make up a substantial portion of Malaysian employers.

In the mid-term to long term, this would benefit more Malaysians. The moratorium on repayment for loan and credit facilities, as well as the allocation for further loans, are welcome measures. However, there must be much more assistance of diverse nature provided in the economic stimulus package for businesses. The assistance cannot primarily be by way of bank loans, as businesses cannot afford to borrow monies when there is no business to be had and overheads remain the same. There is a need to drastically lower overheads of such businesses immediately - items such as salaries, EPF/SOCSO contributions and rental are usually the other big or biggest overhead costs of businesses (that is, aside from loan/credit facilities repayments). These must be cut immediately.

As stated, I can understand payments to small holders, stall owners, traders, hawkers and the self-employed; but for a lot of Malaysians it is about job security in the mid-term till end of the year and beyond. These employees are already being paid their full salaries because the government has said they must be paid in full and the “Movement Control Order” period cannot be deducted as unpaid leave nor from their annual leave, although business premises are closed. And then there is the economic downturn, and recession to follow. The economy was already sluggish in the first quarter of this year, and the International Monetary Fund has just announced that the global recession has started. I hope that the government will listen more to the industry advisers, in particular to the SME voices on measures needed.

For it to be called an "economic stimulus package", the main focus should not be about payments or allowances to individual Malaysians. It has to be about mid-term support for the economy, assistance and viability for businesses, and sustainability of employment as a consequence. The term ''consequence' is critical to an understanding of what is needed. The government is not going to be the employer for everyone nor can it continue to pay allowances. The government must therefore empower and enable businesses who are employers, and if this is successful then retention of employment will follow as a consequence. In other words, the government must be an enabler to businesses.

The employees must also be made to realise and understand that they too must do their part and contribute some measure of sacrifice in this extraordinarily difficult time. They must take responsibility for their continued employment, for the continued employment of their colleagues. Taking a pay cut through for example a 1 week’s unpaid leave per month program and suspension of EPF to help with the cashflow of their employer’s businesses, and keeping prospects of their own employment and that of their colleagues is much better than having retrenchment or closing down of businesses. Better 20 per cent to 30 per cent  temporary reduction of salary then to be out of a job altogether. Employees and the government must understand this.

Below are some of the measures that the government could provide for to have effect for 6 months or until the end of this year starting from April 2020 :
(1) suspended all EPF and SOCSO contributions, or at least suspend the employers' 13% contribution for the rest of the year whilst employees’ contribution of 11% to be paid straight out to employees as part of their monthly take-home pay for the rest of the year;
(2) at the same time, permit employers to reduce salaries of all employees (irrespective of amount or salary grade) by 25 per cent to 30 per cent; or alternatively to permit employers to implement a 1 week unpaid leave per month for all employees (would need legislation but this is an occasion when the government can call for urgent special sitting of parliament in the public interest to pass a Covid-19 Special Measures Bill). In terms of money, the employee would have added take-home pay in terms of the 11% EPF paid directly to them so this would ameliorate the cut in salary of 1 week per month. The nett effect to employees in terms of take-home salary would be about negative 14% to 19%. For employers, the combination of suspending the 13% employers’ contribution to EPF plus the 1 week unpaid leave for all employees will tremendously help with cashflow;
(3) the government should suspend all employee income tax instalments to assist employees with cash in hand. Again this would further ameliorate the 1 week unpaid leave per month for employees. Also suspend all CP240 and CP500 tax instalments for businesses and employers for the rest of the year. This would again release stress on cashflow for businesses and employers;
(4) as part of the Covid-19 Special Measures Bill, to provide for all landlords of business premises to provide a 20 per cent to 25 per cent reduction in rental. Landlords should aim to keep their tenants in order to maintain the landlords’ revenue stream. Defaulting business tenants or tenants who fold up would not provide rental revenue, thus it is a matter of landlords helping with the rental overheads of their business tenants so as to help themselves as landlords; and
(5) the government should get BNM to direct banks to provide short to mid-term loan facilities at minimal interests, perhaps 0.5 per cent or 1 per cent, for SMEs

A quick ‘back of an envelope’ illustration from costs perspective of a professional legal services firm premised on the RM600 wage subsidy for SME businesses, which includes professional legal services firms, with less than 50% revenue since January 2020. For a lot of businesses, their profit margin is about 10% to 20% depending on which industry. If revenues are down by at least 50%, and assuming there is no profit margin for the year, then the 50% or less revenue goes completely to cover overheads. Such businesses would still need to find an extra 30% to 40% from somewhere to meet the balance of their usual total overheads and other costs of doing business. This is just to stay afloat without retrenchment or reduction in salaries of employees.

Salaries as an item is usually one of the bigger overhead expense and can make up about 30% to 40% of the total overhead expenses – again depending on the industry. For example, in the professional legal services industry, salaries can usually be a higher percentage as human resource is the ’raw material’. On assumption that the average monthly salary of the employees is RM3,000. With the RM600 per employee subsidy for those earning RM4,000 or less per month, this would be a subsidy of about 20% of total salaries as an expense item (for simple calculation purposes, it is assumed that every employee qualifies). Hence, it translates to about a 20% reduction of the 30% to 40% expense item, that is, in nett terms it is about a 6% to 8% reduction in overheads.

Given the 50 per cent revenue and 6 per cent to 8 per cent reduction in salaries as an item, where is the balance of 24% to 32% needed to cover the rest of the overheads coming from? Such a business would need to close down if it cannot retrench staff or implement a 1 week unpaid leave programme for all employees, as well as suspend its EPF contributions. Businesses would not be able to sustain themselves even if they were permitted to only suspend the employer's contribution of 13% for EPF. A combination of measures is required.

Two other factors should be born in mind as follows :
(a) The SME businesses and their employees make up a substantial number of tax payers. The government would need these taxes generated and paid moving forward, and therefore these businesses and their ability to maintain employment are crucial.

(b) Some professional services, for example, law firms are sole proprietors or partnerships, and thus the employers have personal liability, unlike other businesses which are incorporated. Incorporated businesses can close down and their liabilities are capped by what the businesses have or do not have as assets. In this regard, the legal services sector is in much need of assistance.

The government has provided for some measures in the recent economic stimulus package for SME businesses, but the SMEs which are the engines of the Malaysian economy and one of the largest employers are hoping each day that the government would be able to address their concerns and worries more extensively. Immediate and critical care is needed.

 * This is the personal opinion of the writer or publication and does not necessarily represent the views of Malay Mail.

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