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Going back to the basics: SMEs need a single line ministry


Comments / 3432 Views / Tuesday, 30 August 2016 00:02


Let’s accept it - we are facing challenging times politically and economically. While some can blame the past, the fact of the matter is that the private sector is crying out for policy consistency and the support of the public sector through the proper implementation of consumer-driven policies. 

The recent development of finance ministry officials sitting on public sector boards adds to the current challenges. But the good news is that the governance that Prime Minister is advocating by remanding private sector board members of the former regime enables the system to conscientiously and responsibly handle public funds. 

The challenge once again is how these developments will be seen in the post-2020 period. The logic here is that as public sector reforms have not happened, there will be violations of public policy given the changes required to be competitive in the marketplace.

In view of this, I feel that we must go back to understanding and focusing on the SME sector. 

SMEs generate more than 70% of Sri Lanka’s GDP and are comprised almost entirely of exporters but we never see this sector mentioned in any of the glitzy magazines or in the financial sections of any of the newspapers, even though in money terms they account for more than $ 45 billion. It is not incorrect to say that they are the forgotten entity of the Sri Lankan economy.

18-02SMEs in Sri Lanka account for 83% of exports and 70% of the economy 



What is an SME?

The major problem with this sector is that there is no proper definition for an SME. The problem is not unique to Sri Lanka since classifying an SME can depend on a multitude of variables that can change from one country to the next. Furthermore, the absence of data in this uncontrolled sector of the economy adds to its complexity.

In Sri Lanka some say that an enterprise which has less than 99 people and an asset base of Rs. 4 million can be termed an SME. Then another definition lists the parameters as less than 50 people with an asset base of Rs. 20 million. The World Bank states that if any enterprise has less than 99 people it can be termed an SME. Hence it is very clear that this is one key decision that Sri Lanka needs to make as a country, given that concessionary financial facilities can be targeted and specific business development services can also be made available if there is a clear classification of an SME.

Apart from the fact that over 70% of the country’s GDP is generated by SMEs, another important point to note is that from the 4,700 odd exporters that generate almost Rs. 11 trillion, nearly 80% of them are SMEs.

If we look at the tea industry, from the 300 kg million of tea that Sri Lanka produces, almost 70% of it is from small holding producers that have just half an acre of land. Hence we see that there are many unsung heroes in the SME business who never get highlighted or identified so that development can be done from a State perspective.

 

 

"The first key task is for this sector of business to have a single line ministry. This can result in a clear and focused agenda that can be developed, which will be followed by a set of policy guidelines. If this is done, some of the key issues highlighted can be addressed straightaway with a minimum impact to the tax revenue model of the country"

 



How SMEs have evolved

If I may take you back to how the SME sector evolved in Sri Lanka, way back in 1952 the World Bank had suggested that the Government develop SMEs rather than promote large industries. Then in the 1960s the Sri Lankan Government began focusing on developing cottage industries and SMEs for the sole purpose of saving foreign exchange through import substitution and employment development.

Thereafter in the 1977 post-liberalised economy, SMEs were developed to drive the export market, which is actually when the SME 16-Rohanthasector became the backbone of the country’s economy.

With this development came the multitude of Government agencies and private sector banks that were set up to create the policy environment to support this fast-developing business sector. These included the Department of Small Industries, CISIR, EDB, SLSI, IDB, SLECIC, the Textile Department, the National Gem and Jewellery Authority, NEDA, DFCC, NDB, the SME Bank later renamed Lankaputhra and the Regional Development Bank (RDB). In the recent past we have seen many line ministries like the Ministry for Traditional Industries and Small Enterprises coming into the fray, which explains the fast-growing importance of this sector.



Key issues in Sri Lanka

Visiting some of the SMEs in different parts of the country, one of the key issues that was cited was that there was no clear policy for a typical small- and medium-scale entrepreneur. Some SMEs in Ekala said that if one was to register property, it took almost 258 days and 5% of the land value, which is not conducive to fostering entrepreneurship. I guess that is why Sri Lanka’s rating in the Ease of Doing Business Index is way below that of a country that demonstrates 8% GDP growth.

Some went on to say that very few business development services are available, such as research and development facilities, quality certification at the district level and a link to export markets. Most SMEs harp on the difficulty of accessing concessionary finance, this being the key hindrance to business development. 

Another point highlighted by the SMEs was that almost 60 types of taxes had to be paid to a bank during a year, which is very cumbersome and time-consuming and must be a priority item that must be addressed. Some went on to say that a typical SME being stretched for talent results in these archaic tax systems affecting the productivity of the organisation.



Indian SMEs – from 25 million to 332 million

If I may cite an experience shared at the recent SME conference that was staged in India, in 2002-03 there were around 24.9 million SMEs in India but with key changes to policy on the lines discussed above, the progress has been phenomenal. 

As of today, the number stands at 332 million SMEs as per the statement by the Minister of Small Scale Industries –Agro and Rural Sector. The Secretary of the ministry went on to say that with minimum policy changes, the greatest results were being achieved, given that there was a passionate commitment to drive strategy. I guess we need to pick up a few lessons from this experience.



Next steps – Sri Lanka

The first key task is for this sector of business to have a single line ministry. This can result in a clear and focused agenda that can be developed, which will be followed by a set of policy guidelines. If this is done, some of the key issues highlighted can be addressed straightaway with a minimum impact to the tax revenue model of the country.

“Even with a multitude of State organisations surrounding the SME sector, the fact of the matter is that the challenges faced by an SME have not been addressed to become competitive in the global marketplace. Some even say that the problems of an SME are so basic that just a single powerful ministry is the need of the hour.”

Secondly, a SME policy unit must be set up so that very close contact can be made with the SMEs, which will result in an updated database which will make the task of developing specific business strategies possible. This can also lead to a monthly SME forum to be organised where the key obstacles that SMEs are faced with can be highlighted so that a PPP model of problem-solving can be applied just like the Samatha Piyasa Exporters Forum that was staged at one time at the EDB.

Thirdly, support linkages can be developed with ITI, EDB, SLSI and the Department of Registration so that at the regional level too this service can be accessed by a typical SME.

Fourthly, the issue of access to finance must be addressed. This can only be done if financial rigour is practiced by the SMEs so that when it comes to the documentation required for one to take a loan, things are in order. 

Maybe the Regional Development Bank can have a unit which helps SMEs structure their documentation in a way that makes access to finance possible even if the cost of the capital is not as attractive, the logic being that even if interest rates are reduced to levels that are very attractive, if financial discipline is not being practiced by an SME, access to finance will still remain an issue.

Finally, maybe we need to drive industrial estates in different parts of the country but in a sector-specific manner, just like in India, so that there is greater focus and stronger networking that leads to the industry as a whole becoming very competitive. This can also help drive specific technology that can be shared by different competitors while enabling employment to be targeted by the sector.

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Conclusion

The turnaround on governance and the recommencement of infrastructure development projects – be it Shangri La, Hyatt, Movenpick or Alitia - is encouraging but we have to focus on a robust strategy of developing SMEs so that regional disparities can be cut and poverty issues in places like Monaragala, Mannar and Mullaitivu can be corrected. But more importantly this will quicken the pace at which Sri Lanka crosses the $ 4,000 per capita income mark.

The challenge is how each of us can contribute to this developmental agenda, be it through the Rotary, private sector or development corporation entities supporting the country agenda.



(The author serves as a director on the boards of several private, public and international organisations)


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