SME POLICY IN THE OFFING

The areas of constraints are normally identified as labour, taxation, trade capacity, finance and credit availability

By MOAMY GULL
Feb 27 - Mar 05, 2006

The government is set to announce the first ever SME policy whose draft document had been prepared after holding extensive consultations with all stakeholder of the four provinces. The recommendations compiled during the consultative process will result in the formulation of an SME Policy to be put forth to the Federal Cabinet in March 2006.

The broader objectives to be achieved by this policy exercise are: across the board recognition for SMEs as a sector requiring separate policy & regulatory space, define SMEs that qualify for support, propose counterbalancing measures to eliminate disadvantage of size, remove unnecessary regulatory burden, institute SME support mechanism in both public & private sectors, improve support delivery mechanisms and establish policy evaluation and review systems.

In order to achieve the above, wide scale consultation with the provinces is being undertaken to elicit views of the ultimate beneficiaries, i.e. SMEs. The participation of stakeholders has, therefore, been the cornerstone of the policy development process.

Promotion of Small and Medium Enterprises (SMEs) entails enhancement of the competitiveness of the economy and generation of additional employment. A thriving Small and Medium Enterprise (SME) sector has long been recognized as one of the key characteristics of any prosperous and growing economy.

Pakistan is an economy mainly comprising SMEs. The significance of their role is clearly indicated by various statistics. According to more recent estimates there are approximately 3.2 million business enterprises in Pakistan. Enterprises employing up to 99 persons constitute over 95per cent of all private enterprises in the industrial sector and employ nearly 78 percent of the non-agriculture labour force. They contribute over 30 percent to the GDP, Rs.140 billion to exports, and account 25 percent of exports of manufactured goods, besides sharing 35per cent in manufacturing value added products.

However, there has been concern that in Pakistan the SME sector has not been able to realize its full potential. The SMEs continue to suffer from a number of weaknesses, which hamper their ability to take full advantage of the opening of economy and the increasingly accessible world markets. The areas of constraints are normally identified as labour, taxation, trade capacity, finance and credit availability.

It is understood that despite previous efforts the SME sector has not received due priority on account of segregated efforts and non-consolidation of programs to achieve well targeted results. In order to move forward, we need to develop a common vision for SMEs to be the real engine of growth. Our vision also needs to be achievable so we may find motivation in implementing phase.

Implementing change requires the formulation of a policy for SME development and assigning specific responsibilities for its implementation and continuous improvement. The Government of Pakistan has thus constituted the SME Task Force, by Notification No.1(68)/2003-Inv-III of 29 January 2004 of the Ministry of Industries and Production, which is to define the basic elements of our SME policy.

As there are many cross-cutting issues to be addressed, the SME Task Force is composed of diverse sectors and levels of government and includes major stakeholders of the private sector, and SME in particular. Where the SME Task Force deems it necessary or useful, it may invite specific organizations or individuals to assist its work. It may also co-opt further members.

The Small and Medium Enterprises Development Authority (SMEDA) was established in 1998 under the Ministry of Industries and Production in order to foster the development of SME in the economy and was expected to take a key role in this process. Its functions include, inter alia, the facilitation on policy making and the provision of overall planning, programming, research and evaluation of matters related to SME in Pakistan; monitoring and evaluation; encouraging and facilitating development of SME and to protect their interests.

In order to enable the SME Task Force to work effectively, four Working Committees were set up to carry out technical analyses and deliberate the findings.

The Working Committees addressed the following core issues:

i. Working Committee on Business Environment - Creating a favorable business environment for SME in Pakistan's economy and eliminating unnecessary obstacles.

ii. Working Committee on Access to Finance - Increasing SMEs' access to formal finance including equity financing while addressing the question of "lacking documentation" and banks' technical capabilities and improving SMEs' capacity to become bankable.

iii. Working Committee on Access to Resources & Services - Improving the delivery mechanisms for assistance and the access to resources for SME in Pakistan, inter alia business development services, qualified human resources, and technology, so as to improve their productivity and capacity for employment generation.

iv. Working Committee on SME Definition, feedback, Monitoring & Evaluation Mechanism - Establishing appropriate and harmonized definitions for Pakistan of what are to be considered micro, small, medium, and large enterprises. Furthermore, the establishment of a sound mechanism by which their development of the SME sector and the effectiveness of the assistance provided to SME can be monitored.

Chief Executive Officer SMEDA Shahab Khawaja told PAGE that the draft document had been prepared after extensive consultations with all the stakeholders of the four provinces. He said that a final workshop would be conducted in Islamabad within couple of weeks for finalizing the detailed recommendations to be submitted to the federal cabinet for approval. He said that Federal Minister for Industries and Special Incentive, Jahangir Tareen would chair the final workshop.

SMEDA chief said that seven priority sectors have been encompassed for the upcoming SME policy including marble & granite, dairy, gem & jewelry, fisheries and surgical goods.

Shahab regretted that SME sector in Pakistan had not been able to realise its full potential and continued to suffer for a number of weaknesses, hampering their ability to take full advantage of the opening up of economy and the increasingly accessible world markets. He said that areas of constraints were normally identified as labour taxation, trade capacity, finance and credit availability. Talking about the document prepared for SME policy, he said that a public-private partnership company, Pakistan Dairy had been created to finance the technology up-gradation by providing chillers, milking and fodder cutting machines at subsidized prices.

SMEDA chief further said that Rs 2.5 billion company, public-private joint venture would provide ways in developing 11,000 rural entrepreneurs till 2015. He said that the company would provide 50 per cent cost of the value addition instruments like chillers, milking machines and fodder cutters in the shape of grant while the remaining 50 per cent would be provided as an easy loan. He said that the loan would be adjusted against milk supplies by these entrepreneurs.

Shahab said that the company was calculating the means and modes of working and those of intending dairy farmers, adding, "but initially we would be considering only those farmers, who have 10 to 100 cows and buffaloes".

He said that the government was also working to develop a standardized cotton-ginning sector, besides small engineering sector would be developed to improve standard of ginning cotton in the country. Talking about the new initiatives being floated in the policy, he said that a grant agreement with USAID for $10 million for setting up Enterprise Competitiveness Support Fund had been signed to provide a boost to this sector.

He said that a complete cognisance of the issue had been taken in consultation with all of the stakeholders, believing that SMEs in Pakistan could not grow without a paradigm policy shift. He said that implementing change was required in the formulation of a policy for SME development. He said that the SME Task Force had been constituted in January 2004 of the Ministry of Industries and Production, which was to define the basic elements of SME policy.

Shahab asserted that four working committees had been setup to carry out technical analyses and deliberate the findings on following core issues of business Environment, creating favourable business environment for SME in Pakistan's economy and eliminating unnecessary obstacles enabling the SME Task Force work effectively.

Dispelling impression that the SMEs were prone to default, the SMEDA chief said the chances of default in small and medium entrepreneurs were less than large enterprises. Citing the examples of the role of SMEs in the development of Thailand and Japan, he said that the second major developed country of the world had 52 per cent role of SME sector.