OFFICIALS involved in drafting the new SME policy say they have finally succeeded in evolving a uniform definition of SMEs whose absence has been a major snag in the rapid development of the small and medium- sized industries.

The new policy also makes a distinction between small and medium enterprises and recognizes their different needs including bank credit and supporting facilities. The policy document will be circulated amongst provinces and relevant ministries for comments before submission to the federal cabinet for approval by the end of this month. The changes in the laws, rules and regulations have been proposed to make them SME-friendly.

Smeda CEO Shahab Khawaja who is involved in formulating the new policy describes formulation of a uniform definition of SMEs as the single most important achievement.

“The major problem encountered by the policy-makers while formulating support programmes and policies for the development of SMEs as well as other stakeholders like commercial banks is the absence of a consensus on uniform definition of what a small or medium enterprise is.

Everyone – commercial banks, chambers of commerce and industry, trade associations and bodies, Security and Exchange Commission of Pakistan, the State Bank of Pakistan, provincial small industries corporations, etc – defines SMEs in its own way in accordance with its own needs and convenience.

As a consequence of which, we’ve failed to develop reliable data of SMEs – required for formulating specific policies and incentive packages for the small sector – across the country. The formulation of uniform definition will make it easier for policy-makers, banks and other stakeholders to identify SME units,” he says.

“The formulation of a uniform definition will also allow us to develop reliable data on SMEs. It is going to be the first step towards the resolution of issues and problems hampering their growth.”

The policy defines a manufacturing concern with less than 50 full-time employees and productive assets of Rs30 million, a service provider with less than 50 workers and productive assets of Rs20 million and a trader with less than 20 employees and productive assets of Rs20 million as small enterprise.

Similarly, a manufacturing unit with 51-250 employees and productive assets worth Rs30-100 million, a service provider with 51-250 workers and productive assets of Rs20-50 million and a trader with 21-50 employees and productive assets of Rs20-50 million falls in the category of medium enterprise.

The SME policy is intended to usher in an “era of SME-led economic growth” that will create jobs and alleviate poverty as part of the government’s second generation reforms, says a federal official involved in the development of the policy.

“The policy covers a wide spectrum of issues confronting the SME sector. It’ll help prioritize economic and trade policies for SMEs, link federal and provincial support institutions and mechanisms, reduce the official interference in their functioning, and remove other irritants restricting their growth,” says Small & Medium Enterprise Development Authority (Smeda) CEO Shahab Khawaja.

The primary objectives of drafting the policy are to formulate a uniform definition of the and medium enterprises, and institutionalize SME support systems and create linkages between them.

“It further seeks to specify the roles of different stakeholders – federal and provincial ministries and agencies, private sector, trade associations and chambers, etc

Besides, it aims at encouraging private business development service providers and promises to build their capacities for the provision of their services to SMEs. “Last but not the least, the policy will ensure that SMEs find a separate mention and get a special treatment in all economic and trade policies of the government and that their entry into formal sector is made painless,” Khawaja says.

A Task Force constituted last year has drafted the policy after consulting all stakeholders – provinces, federal ministries, departments and agencies concerned, over 1,000 SMEs, different chambers of commerce and industry, trade associations, commercial banks, private consultants, etc – a process that took more than a year to complete. Smeda provided the infrastructural and back-up support and resources to the Task Force for carrying out the job. Need for policy: It is estimated that SMEs contribute around 30 per cent to the nation’s GDP and $2.5 billion to the manufacturing sector’s export earnings. Their share in the manufacturing value addition is estimated to be 35 per cent. Being labour intensive, the small sector is the biggest employer after agriculture with a share of around 80 per cent in the non-farm job market.

In view of the critical importance of SMEs in job creation and poverty reduction, successive governments have vainly tried in past to focus on their development. But they remain uncompetitive in world markets owing to structural weakness, obsolete technology, lack of access to reasonably priced credit and marketing and management skills, unfriendly business and regulatory environment, and other factors despite various initiatives both at the federal and provincial levels. Little wonder then that the small sector remains the most vulnerable area of the economy.

“It is because we have never had a national policy for the development of the SME sector. Though we have different support systems – provincial small industry corporations, Smeda, etc – in place for assisting small sector both at the federal and provincial levels, these initiatives had no linkage at all,” says Khawaja. Issues to be addressed: During the process of development of the SME policy, the Task Force had identified certain issues stunting the growth of SMEs into an internationally competitive sector and requiring immediate governmental intervention for resolution.

These include a) absence of a consensus on uniform definition, b) access to formal credit and related services, c) rigid and inflexible business and regulatory environment, d) outdated technology, e) lack of marketing, accounting and management skills, and f) non-existence of implementation and monitoring mechanism.

Improving business environment: For improving business environment the policy recommends to enact a SME Act 2005 to make legal and regulatory framework sensitive to SME. It also stresses changes in certain tax and labour laws (specifically with reference to inspections) and appointment of a separate SME ombudsman. It further underscores to strengthen the role of chambers and associations representing small and medium sector and simplify the process involved in corporatization of SMEs.

Improving access to finance: The policy recognizes the need for intervention in all three areas of SME financing, that is, demand side (SMEs), supply side (banks, and intermediaries and regulators (SBP, Smeda, etc) for improving the ability of SMEs access credit.

It recommends the institution of credit guarantee and credit insurance funds and SME financing credit fund, development of such financial instruments as venture capital, and establishment of specific support funds for SME development increasing SME access to financing.

It further calls for introduction of bankruptcy law, periodic review of prudential regulations, capacity building of banks and other financial institutions, improvement of SMEs’ capacity to become bankable, launch of industry based SME financing programmes, and incorporation of SME financing and its tracking in annual SBP credit plan.

Technology and marketing: The policy recommends that need assessment of SMEs’ technological requirements be carried out and interventions are made on regional or cluster basis for upgrading their technology. In order to induce SMEs to acquire modern technology, the policy suggests that such enterprises be given tax incentives.

Similarly, it recommends building capacity of SMEs in marketing their products and services and putting in place some commercially sustainable mechanism for effective linkage of SMEs with the global markets. One way of ensuring this linkage is through maximum participation by SMEs in the international fairs and exhibitions.

It also stresses the need for strengthening the role of chambers, trade bodies and private business development service providers for gathering information on international markets and establishing links between SMEs and export markets. Implementation plan and problem solving: Khawaja seeks to dispel the fears that the policy will be put in cold storage and that there is little hope of its implementation.

“It’s for the first time a government policy also contains an implementation plan as part of it. It is very important component of the policy,” he says.

“The plan defines the role of different agencies and stakeholders responsible for the implementation of the policy, and outlines a timetable for achieving different milestones. The monitoring of implementation of the policy is extremely important for its success,” he says.

“There’s no use spending your money and energies on something that is never going to be implemented. It will go a long way in addressing the issues confronting the SME sector and making them internationally competitive.” One hopes that he proves right.