Government policy-makers should consider taking the “sandbox” approach to encourage fintech innovation in seeking creative financing for companies challenged by Covid-19, says a report from a C.D. Howe Institute working group.
The Toronto-based think tank’s working group recommended that the government and regulators support innovation in financing for companies that need capital, but are reluctant to take on traditional debt from government support programs launched in response to the pandemic.
The report noted that certain government financing initiatives have seen relatively low demand from businesses that are wary of taking on too much debt, particularly given the prevailing economic uncertainty.
“While it is early days in the recovery, only a small fraction of earmarked funds for the Business Development Bank of Canada (BDC) co-lending program have been used,” the report said. Less than half of the $55 billion Canada Emergency Business Account program has been utilized, it dded.
“Some demand for current programs might pick up as the recovery gathers strength,” the working group’s report said. But, it added, “governments need to look at ways to unlock more capital,” particularly to enable more equity and equity-like investments.
“Governments and regulators need to ask themselves how they can motivate more interest from investors in supplying equity and/or equity-like capital to businesses looking to build capacity during the re-opening,” it said.
Among other recommendations, the report suggested that policy-makers look for ways to facilitate retail investment in recovering companies “possibly through various types of collective investment schemes — or investment funds — such as mutual funds, which bring a number of investors together with the intention of sharing in any profit from the investment, and benefiting from, among other things, the economies of scale of investing together.”
Given the need for creativity to unlock capital for needy companies, the report suggested, policy-makers should consider employing the “sandbox” concept, used by securities regulators, to allow testing of innovative approaches to financing.
A financing sandbox could allow for experimentation and creativity in designing and delivering credit facilities and other investment arrangements, it said.
“We need to create an environment where there is enough confidence for lenders and investors to engage with businesses,” the report said. “Different businesses might need different types of support, making one-size-fits-all programs less appropriate. The approach needs to find ways to create custom-designed solutions.”
Alongside innovation, the report recommended that governments try to reduce uncertainty for businesses and investors as much possible.
In particular, it suggested that “governments could provide more clarity on how they will approach a second wave [of the coronavirus],” and it called on them to adopt a more targeted approach to future outbreaks, rather than comprehensive lockdowns.
Additionally, governments should provide certainty about how support measures will evolve during the recovery, and on how they plan to restore fiscal sustainability over the medium term, it said.
“Such clarity would help to tangibly reduce the uncertainty that is currently hindering business planning and associated investment and lending decisions,” the report said.