Rotary Club insight
I was at a Rotary Club forum last week on the importance of value chain development rather than just having a multitude of projects, and some interesting information was shared. This organisation that focuses on SMEs – in terms of livelihood development, poverty alleviation, health and education sector enhancement – has invested over $ 200 million in Sri Lanka. Some of the noteworthy projects are the eradication of polio, education support development post the tsunami that built state-of-the-art school infrastructure, helping the hearing impaired, livelihood development, anti narcotic drives and cancer identification units, which have been all on the strategy value chain development on a private-public-people partnership approach.
It will be interesting to see the focused project this year, the first children human heart valve machinery initiative at Lady Ridgeway that will come into play and how it will be linked to the public sector to ensure sustainability. The key beneficiaries for each of these initiatives have been the lower income families across the country whose chief wage earner belonged to the SME sector of the economy.
SME and 7%+ economy
Given the above, I got the chance to visit a Rotary project in the north last week and a key insight that I picked up was that the vocabulary we hear in the media and we rattle off ourselves is not something they can relate to well in their daily life.
Themes like Middle Income Country, 7% plus GDP growth, single digit inflation, reserves at nine billion, UN resolution on Sri Lanka, the five hub development agenda and Port City are just rhetoric strictly in the urban markets. When I did a deep dive into the SME sector to which they belong, I realised there are over a half a million SMEs and a quarter million or so micro industrialists in Sri Lanka.
SMEs generate more than 70% to Sri Lankan GDP and comprise over 70% of exporters but we never see this sector in any of the glitzy magazines or the financial section of any of the newspapers, even though in money terms they account for a colossal $ 45 billion plus or more. It may not be incorrect to say that they are the forgotten entity of the Sri Lankan economy.
Who is a SME?
One problem in this sector is that there is no proper definition of who a SME is. The problem is not unique to Sri Lanka, but common to many countries around the world, as classifying an SME can be on a multitude of variables that can vary from one country to another. Further, the absence of data in this uncontrolled sector of the economy adds to the complexity.
In Sri Lanka, some say that an enterprise which has less than 99 people and an asset base of four million can be termed an SME. Then another definition is less than 50 people but an asset base of 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 take as a country given that concessionary financial facilities can be targeted as well as availability of 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 GDP is generated by SMEs, another important point to note is that from the 4,700 odd exporters that generate almost eleven thousand billion rupees, nearly 80% of them are SMEs.
If we take another sector like the tea industry from the 300 million kilograms of tea that Sri Lanka produces, almost 70% of them are from the small holding producers that have just half an acre of land area. Hence we see that there are many unsung heroes in the SME business who never get highlighted or for that matter identified so that development can be done from a State perspective.
How SMEs evolved
If I may take you back to how the SME sector evolved in Sri Lanka, apparently way back in 1952, the World Bank had suggested that the Government develop SMEs rather than promoting 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 to spruce up employment. Thereafter in the 1977 post liberalised economy, SME were developed to drive the export market, which is actually when the SME sector was unleashed to become the backbone of the country’s economy.
With this development came the multitude of Government agencies and private sector banks that were being set up to provide the policy environment to support this fast-developing business sector. This included the department of small industries, CISIR, EDB, SLSI, IDB, SLECIC, Textile Department, National Gem and Jewellery Authority, NEDA, DFCC, NDB, SME Bank and later renamed as Lankaputhra and today, the powerful bank called Regional Development Bank (RDB) to name the key institutions. 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 SL
Visiting some of the SMEs in different parts of the country, one of the key issues that was cited was that there is no clear policy for a typical small and medium scale entrepreneur to be guided. Some SMEs in Ekala said that if one is to register property, it takes almost 258 days and 5% of the land value, which is not conducive to foster 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 district level and the linkage to export markets. Most SMEs harp on the difficulty in having access to concessionary finance, this being the key hindrance to business development. Another point highlighted by the SMEs is that almost 60 types of taxes have to be paid to a bank during year, which is very cumbersome and time-consuming and it 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 – 25 to 332 million
If I may cite an experience shared at the recent SME conference that was staged in India, in year 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 at 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 said 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 is 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 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 has not been addressed to become competitive in the global market place. 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 strategic possible. This can also lead to a once-a-month 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 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 being practiced by the SMEs so that when it comes to documentation required for one to take a loan, things are in order. Maybe the Regional Development Bank can have a unit that helps SMEs structure their documentation in a way that access to finance is 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.
"Almost $ 200 million has been invested in Sri Lanka by Rotary on projects focused on families in the SME sector on areas like polio eradication, education support systems like schools infrastructure, helping the hearing impaired and livelihood development projects linked to the value chain, not forgetting the first children human heart initiative at Lady Ridgeway to be launched later on the year"
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 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 the different competitors as well as the employment can be targeted by sector.
The turnaround of the stock market to cross the 7,000 barrier in Sri Lanka and the many infrastructure development projects – be it Shangri La, Hyatt, Movenpick, Alitia – 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 it will quicken the pace at which Sri Lanka crosses the 4,000 dollar per capita income.
The challenge is how each of us can contribute to this developmental agenda, be it via Rotary, private sector and development corporation entities supporting the country agenda.
"In India way back in 2002-03, there were around 25 million SMEs but today with key changes to policy the progress has been phenomenal with the number standing at 450 million SMEs, which is the balance we need between urban and rural development"
(The author is a Business professional by practice winning twice the marketing Achiever Award, Business Achiever award from PIM, University of Sri Jayewardenepura whilst also winning a global brand leadership award. Rohantha is a respected and top thought leader and actively involved in the growth agenda of the Sri Lankan economy as a Board Director in a multitude of private, public and international organisations.)