Fu­ture of SMEs in Pak­istan

Enterprise - - COVER STORY -

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• 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.

3)

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.

4)

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.

5)

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.

10)

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.

11)

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

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