Government-funded Zombies: Pandemic Grants Keeping Defunct Businesses Afloat

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A woman stands next to a closed restaurant during the coronavirus crisis, Tel Aviv
A woman stands next to a closed restaurant during the coronavirus crisis, Tel AvivCredit: Meged Gozani

Prime Minister Benjamin Netanyahu and his cabinet are proud of the government’s support for businesses during the coronavirus crisis. But Tax Authority data indicates that a significant portion of the grants and government-backed loans have been used to prop up businesses that probably should have closed during the course of a normal business cycle. Now, these businesses have been artificially resuscitated using government money, and most will likely collapse once the payments end.

While a stroll through Israel’s commercial streets is enough to see that the number of shuttered businesses has increased significantly. Tax Authority data actually reveals that the number of businesses that shut down between January and September actually decreased 33% from the parallel period in 2019.

Only 14,298 business owners reported to the Tax Authority that they had closed their businesses in the first nine months of this year, compared to 21,234 during that period last year. The reduction in closed businesses is spread out over the course of the year, aside from January and May, and peaked in August, with 75% fewer businesses closed than in August 2019. The Tax Authority hasn’t yet analyzed the data in depth but officials there, too believe the drop has several reasons, including “not shutting the business in order to go on receiving grants.” While Tax Authority offices received fewer people than usual, opening or closing a business can be done online.

Data from CofaceBDI indicates that there has been a 52% increase in the number of businesses with no activity and businesses that will not resume operations once the pandemic passes.

“When we discover that a business has ceased to physically exist, or conclude that it will not return to operations, it enters our list of shuttered businesses,” says Tehila Yanai, a co-CEO of the firm. The business data company does this even if the business has not reported its closure to tax authorities, she notes.

Stores closed during the coronavirus lockdown, Tel Aviv, July 13, 2020Credit: Eyal Toueg

According to CofaceBDI data, 49,125 businesses closed in practice in the first nine months of 2020, compared to 32,400 last year. While Tax Authority data indicates that July and August were the months with the sharpest drop in business closures – by 62% and 75%, respectively – CofaceBDI data shows that the number of businesses that actually halted operations during those months increased by 87% and 99%, respectively.

The implication is that there are tens of thousands of “living dead” businesses in Israel that haven’t been declared dead by their owners, whether because they hope to resurrect them or because they want to keep receiving the pandemic support payments.

“Every day we see more businesses ceasing operations, in particular those in commerce fields such as coffee shops, restaurants and clothing stores, businesses offering services such as cosmeticians and hairdressers, and businesses in the tourism and events industries,” says Yanai.

As of the end of September, the government handed out some 36 billion shekels ($10.667 billion) in financial aid to businesses in an effort to keep them running, including a grant to cover expenses, a grant to encourage employment, assistance to specific industries (such as tourism), a discount in municipal taxes and postponed payments. This also includes 20 billion shekels in government-backed loans, government-backed credit of 1.9 billion shekels and permission to delay payments totaling 4.6 billion shekels.

Conversations with small-business owners reveal that quite a few stopped operating or decided not to return to business, but didn’t report it. They offer multiple reasons. Some aren’t interested in handling the bureaucracy, while others are still hoping for a miracle. As for as the government is concerned, they’re still considered going concerns and are thus eligible for grants.

Joe Titonovich, the owner of Yuda Bar on Tel Aviv’s Yehuda Maccabi Street, knows his bar is closed for good, but he still hopes for a miracle.

“Back in June when the government permitted bars to open, we stayed shut in order to see what would happen in the industry, and by the time I wanted to open I couldn’t because of issues with payments and orders from suppliers, and the fact that a neighborhood bar’s business model isn’t suited to deliveries. Officially I didn’t tell everyone clearly that we wouldn’t reopen and the company still officially exists but the bar has been closed since March and unfortunately I don’t have any expectation right now that it will reopen. That is, unless there’s a surprise such as serious government support or a new investor. The place is empty and ready for operation, I spoke with a potential investor but the week when we were supposed to sign the deal, the government announced the current lockdown and he decided to halt everything,” says Titonovich.

Asked whether the reason he hasn’t officially filed to close the business has to do with receiving government grants due to his drop in business revenue, Titonovich replies, “It’s not related at all; the government grants are so absurd and what I received so far barely enabled me to cover debts to suppliers. I’m just hoping for a miracle and that we can open.”

Moran Mizrahi, 42, ran Casino De Paris, a bar in Jerusalem’s Mahaneh Yehuda market, together with her father. It has been shuttered since May, and they don’t intend to reopen even once the government allows bars to operate. As far as she and her father are concerned, the business, which was successful for a decade, is done. Her father took out loans to repay the bar’s debts, and Mizrahi has found a new job. But as far as the government is concerned, the business still exists. No one has filed to close it, and it still has a lease.

“Restaurants were challenging businesses even before the coronavirus,” explains Mizrahi. “In May, when we were permitted to reopen, we needed to either reopen and hope for the best, or close. We decided that if we were to reopen, it was likely that within a few months the debts would only have grown. So my 70-year-old father took out a loan and we closed. The government gave us only 30,000 shekels out of the 90,000 shekels we were due, because absurdly they deducted from it pay for the workers on unpaid leave. In retrospect maybe we would have been better off rehiring the staff, taking the grant for it and then shutting down, but we didn’t want to pull that,” she says.

Ruti Brudo is the owner of Israel’s R2M restaurant group, which includes the famed Brasserie on Tel Aviv’s Ibn Gabirol Street. The restaurant closed in July until further notice, and she admits that its future is uncertain. “The Brasserie brand will remain and we have a long-term rental contract but we don’t know in what format it will return,” she says. “Because we have 15 businesses under the same company, and some are still operating, we didn’t receive a shekel from the government.”

An businessperson who asked to remain anonymous noted that businesses that were in dire straits unrelated to the coronavirus actually wound up better off in its wake. “They put their workers on unpaid leave, received an exemption from paying municipal taxes (arnona), and were left to pay only rent, which in some cases they negotiated to lower. They also received government grants that kept them rolling, but unfortunately after the crisis is gone some of them will collapse,” he said. Instead of inflating them, the government should have let the businesses go under and instead give grants to the owners and workers to cover living expenses and career training, he said.

An example of a company that is better off thanks to the crisis is the Castro-Hoodies clothing chain, which nearly went under before the crisis began, but produced good second-quarter results – reporting a profit of 33 million shekels, after losing 87 million in the first quarter. The main reason for the improvement is that 6,000 workers were placed on unpaid leave, and more than 1,000 were ultimately laid off. The company received millions of shekels for taking the remainder back.

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