Future of SMEs in Pakistan
• MEs or Small and Medium Enterprises are widely considered by experts as the key to solving a variety of problems pertaining to the economy. SMEs are considered the engine of economic growth in both developed and developing countries. There are a number of factors that contribute to this: • Acceleration of rural industrialization by linking it with the more organized urban sector. Helping achieve fair and equitable distribution of wealth through regional dispersion of economic activities. Significant contribution to export revenues through low-cost, labour intensive products. Positive effect on trade balance, since SMEs generally use indigenous raw materials. • Assistance in fostering a self-help entrepreneurial culture by bringing together skills and capital through various enhancement schemes. • Resilience to withstand economic upheavals and maintain a reasonable growth rate. In Pakistan’s context, as defined by the State Bank of Pakistan, the term SME stands for an entity that does not employ more than 250 persons (manufacturing concern) and 50 persons (trading/service concern).
Under this definition, there are about 80,000 SMEs operating in the country which are mostly involved in trade and services.
Significance of SMEs
SMEs have been found to have played an enabling role in transforming the economies of low to middle income level economies. SMEs help in generation of higher levels of competition and mobility and help produce higher turnover among firms. The imposed competition forces firms to innovate faster in order to survive. SMEs also allow for greater experimentation, which increases the probability of a firm to develop or adopt better organizational and technological traits.
The role of SMEs in Pakistan’s economy is evident from the fact that 90 percent of all private sector manufacturing units employ less than 99 workers. SMEs also employ some 78 percent of the country’s non-agricultural labour force. They contribute about 30 percent to GDP and Rs.140 billion to exports and contribute 25 percent to export of manufactured goods.
The Board of Investment, the Export Promotion Bureau (now the Trade Development Authority of Pakistan) and the Central Board of Revenue (CBR) have played an important role in the development of the SME sector. The development of SMEs is also an integral part of such initiatives as the Poverty Reduction Strategy Paper (PRSP), Micro Finance Sector Development Program, SME Sector Development Program, Education Sector Reforms, Reform of the Financial Sector and Reforms in Tax Administration.
Diversity of SMEs
The extent of diversity of SMEs is based on size, product lines, resource base, management structure and growth requirements. Medium-sized units are more resourceful with better access to markets and supply side inputs, including technology.
Accordingly, the two groups of firms i.e. medium and small, have their own characteristics in terms of product quality and growth potential. The extent of SMEs diversity can be gauged from the fact that they operate in the manufacturing, agriculture and services sectors at different production levels despite many institutional and firm-level constraints.
Besides these divisions, they operate in urban and rural areas.
Despite their heterogeneity, SMEs are generally concentrated in selected activities such as, metal working, furniture, agro-based industries, sports goods, fisheries, poultry, gems and jewellery and food and catering.
Rules and Regulations
Among the five major types of business structures that SMEs follow (sole proprietorship, partnership, companies, cooperative societies and non-profit associations), the first is the most common in Pakistan. This form particularly suits small businesses for reasons of cost efficiency, low complexity and ease of compliance with regulations.
Sole proprietorships and unregistered partnerships do not legally require registration or prior approval from any government department. However, this type of organization does not absolve itself of obligations concerning labour, taxes and other regulations. But these firms enjoy tax concessions and low fixed costs because their documentation costs are very low. Similarly, micro firms (employing 1-9 persons) operate as sole proprietors with no legal obligations.
Small and Medium Enterprise Development Authority (SMEDA)
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 constituted an SME Task Force under which in 1998, the Ministry of Industries, Production & Special Initiatives, established the Small and Medium Enterprise Development Authority (SMEDA).
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:
1. Business Environment - Creating a favourable business environment for SMEs in the country’s economy.
2. 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.
3. Access to Resources & ServicesImproving 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.
4. SME Definition, Feedback, Monitoring & Evaluation Mechanism - Establishing appropriate and harmonized definitions for Pakistan, of what are considered micro, small, medium and large enterprises. Furthermore, the establishment of a sound mechanism by which the development of the SME sector and the effectiveness of the assistance provided to SMEs can be monitored.
Projects of SMEDA
Cognizant of the need of innovation and promoting public-private dialogue to increase competitiveness and support “secondgeneration” reform, the Small and Medium Enterprise Development Authority undertook a benchmarking exercise with other successful government SME development authorities to identify gaps and areas to build up SMEDA’s capacity and improve its operations.
Presently SMEDA is focusing on four priority areas reflecting its entire spectrum of delivery of activities and services; Policy-related interventions, Business support servicesrelated activities with a priority to develop a market for their provision in the private sector, Sector and cluster development programs and Enterprise development initiatives.
1) SMEDA initiated an Industry Support Program in 2003, for technical support of different industrial sectors in Pakistan under collaboration with international organizations like Japan International Cooperation Agency (JICA) and Gesellschaft für Technische Zusammenarbeit (GTZ). These organizations provide foreign experts to enhance the capabilities and operational techniques of local industry in different ways.
2) SMEDA organizes training programs, seminars, workshops and conferences of short duration in major cities across the country for raising awareness and capacity building of SMEs.
Business Plan Development Services
is one of the key services provided to enable existing, as well as, potential investors to make wellresearched and informed investment decisions.
SMEDA Information Resource Centre (IRC)
maintains a collection of more than 3400 books and CD-ROMs/ DVDs besides subscribing to leading newspapers and more than 20 journals of international repute on diverse business sections and related fields. A number of full text online journals are also available for SMEs.
SMEDA-IRC serves as an information repository for entrepreneurs, research students, academicians and other business stakeholders. IRC is an information resource sharing partner with a number of public and private organizations.
SMEDA Assistance for Intellectual Property Management
SMEDA ‘IP Helpline’ assists SMEs on all forms of IPs including trademarks, patent, copyrights and industrial designs. Keeping in view the information needs of SMEs, SMEDA conducted eight IP awareness programs across Pakistan in collaboration with local chambers of commerce and industry, IPO Pakistan and trade associations.
World Intellectual Property Organization (WIPO) assisted SMEDA in drafting the national adapted version of books published aunder Intellectual Property for Business Series.
6) The Industrial Information Network (IIN) connects and facilitates businesses in Pakistan. IIN is the first dual-purpose portal, providing business-to-business and information services to businesses from various industrial sectors in Pakistan.
7) SME Cluster Development - Clusters are geographical concentrations of enterprises. Cluster development is supporting and strengthening the clusters by creating networking among the stakeholders to reduce the cost of doing business, bringing them on a single platform to create more voice aimed at policy makers, reducing risk of doing business and capacity building of the enterprises. Cluster development has also proven its contribution in employment generation and poverty reduction worldwide.
8) Strategy Development - A Strategy Working Group (SWOG) was constituted by the then Federal Minister for Industries, Production and Special Initiatives, Jahangir Khan Tareen to develop a Dairy Sector Development Strategy. The SWOG includes members from prominent stakeholders of the dairy industry who are working together voluntarily to identify issues and propose a strategic framework to upgrade the dairy sector.
9) Gems & Jewellery Sector StrategyThe strategy is a combined effort of Gems & Jewellery industry’s stakeholders, SMEDA (MOIP&SI) and J.E Austin Inc. (USAID). It is for the first time that a working strategy from mine-to-market has been developed and is based on first-hand information from different stakeholders.
Agribusiness Services at SMEDA (B&SDS) (Agriculture & Horticulture Sector) -
Business and Sector Development Services (B&SDS) department of the SMEDA is responsible to provide technical assistance to
SMEs. The Agribusiness Development Services of B&SDS is providing proactive technical and managerial assistance to agro SMEs in the country.
Women Business Incubation Center (WBIC)
is an initiative of the Government of Pakistan to provide ‘hands-on support’ to Women Entrepreneurs (WEs) in an exclusive female-oriented environment. It is the first of its kind in Pakistan wherein, offices, exhibition/ display facility and business development services (including training programs) are being offered to women entrepreneurs under one roof. The entire effort is focused at encouraging new business start-ups and support to existing businesses, including the right environment for nurturing women-owned and managed businesses to an extent that these become sustainable.
Required Policy Reforms for SME Sector
The two suggested touchstones to assess the efficacy of current SME Policy in Pakistan are:
Under a revised policy (announced in 2005) the SME support initiatives are now being designed on the pattern of the Japanese model, which provides guidelines for structured SME development. As is well known, factors which make for success in small-scale business are to be found in the set of techno-economic conditions which bear directly on the scale of plant and how these conditions interact with marketing, financial and managerial factors that influence the size of firms. The ultimate success of small business will be influenced by the interacting effects of production costs, economies of scale, market characteristics and location factors.
This is the reason why Pakistan’s small businesses operate in selected product markets of children’s clothing, specialized products, precision hand work such as jewellery, hand printing and metal products. These product lines sustain a large number of small producers who have small initial resources. So the lesson of experience is that wherever made possible by the techno-economic factors, entryfacilitating conditions must be created for small businesses through policy measures, directed to selected product markets. SMEDA’s targeted schemes for the priority sectors appear to be the correct approach under the present conditions.
Role of Donors
Pakistan Enterprise Competitiveness Support Fund (CSF) with support from USAID has been set up to encourage start-ups and to support existing small and medium size ventures. The principal outcome of CSF is to upgrade the competitiveness of Pakistani industry, reinforce economic growth, and create new job opportunities. The fund comprises of the following financing instruments: • Matchmaking Grants • Equity Financing • Credit Guarantees • Technical Assistance
Business Support Fund (BSF)
Business Development Services (BDS) are a key instrument for enhancing competitiveness of Small and Medium Enterprises (SMEs). Business development services are demanddriven and include a large variety of services including business planning, production management, product design, quality standards and control, productivity studies, marketing, information systems and training.
Currently, Pakistan lacks a BDS market for SMEs, with constraints on both the supply and demand side. On the supply side, BDS providers target the larger well-established enterprises, while on the demand side SMEs lack access to a wide range of competitively priced services targeted at their business needs. The ADB funded BSF will provide financial assistance for: • Business Plan Development • Marketing • Training • Research & Development • Technology acquisition and upgradation The Government of Pakistan is committed to developing the SME sector for achieving higher economic growth and maximizing creation of jobs for poverty alleviation. SMEs will be made more competitive by providing a compliant business environment, greater access to formal financing and support in technical upgradation, human resource development, marketing and innovation. The government is determined to facilitate establishment of new businesses by developing policies that help in realizing the entrepreneurial potential of the people of Pakistan