However, the formal announcement of the policy was delayed because the prime minister wanted Smeda to revise the Policy Statement to make it more precise and SME-specific.
Smeda officials say they have already altered the statement, adding that the policy will be announced as soon as the new statement is approved by the prime minister.
The need for a comprehensive SME policy was being felt for a very long time because none of the existing industrial, fiscal and other policies prioritise the small enterprises sector or respond to its specific requirements.
The absence of a “coherent and separate regulatory and fiscal regime and unfriendly business environment” was identified a long time back as the main obstacle in the way of development of the small scale business sector, which is considered to be a major employer around the globe. It was because of this that all programmes and initiatives undertaken by successive government over the last two decades or even more for promoting and encouraging growth of SMEs fell through without producing the desired results. The small entrepreneurs were left on their own to do whatever they could for their survival.
Though no separate data have ever been tabulated to evaluate the contribution of the SMEs to the national economy, it has been estimated in Census of Establishments conducted by the Federal Bureau of Statistics that the SMEs (with the employment base of up to 99) constitute around 90 per cent of 3.2 million private enterprises in the industrial, services and trade sectors, and employ around 78 per cent of non-agriculture labour force.
The SMEs, census shows, also contribute over 30 per cent to the GDP and 25 per cent to the country’s total export earnings. Their share in the manufacturing value addition is estimated to be 35 per cent.
The SME policy has been developed by a Task Force constituted by the federal government in January 2004, which formed four committees to deliberate and propose interventions and actions in areas ranging from business environment for the SMEs to the issues relating to their access to finance, resources, technology and related services as well as to evolve and develop a comprehensive, single SME definition and monitoring mechanism.
The SME policy, Smeda Chief Executive Officer Shahab Khawaja says, gives a “broad framework for promoting and developing” small sector, and outlines a strategy for SME-led private sector growth for poverty reduction and job creation.
The policy gives a framework for SMEs to institutionalise the support structure and specify the role of all the stakeholders. It’s for the first time ever that the country shall have a policy detailing SME-specific interventions and initiatives for enhancing their contribution to the economy in an organised manner.”
In addition to recommending wide-ranging interventions and initiatives to improve the regulatory, fiscal and business environment for the small sector, he says, the policy also defines the “precise role of all the stake-holders, including the federal and provincial governments, ministries and departments, and proposes a mechanism for its implementation and monitoring for the benefit of the target sector.”
SME DEFINITION: The policy proposes a single definition of both small and medium enterprises in all three sectors – manufacturing, trade and services. The definition suggests that “a given firm in manufacturing, services, or trade sector will be classified as a small or a medium enterprise either on the strength of the number of people employed by it taken together with the total assets excluding land and building, or the number of people employed by it taken together with its annual sales.
Officials say the formulation of a single definition for the SMEs will help in identification of the target firms, alignment of development programmes as well as in the collection of exact data and monitoring of their progress.
The document recommends that the various organisations and departments like the central bank, the Central Board of Revenue and others may be allowed two years to align their current SME definition in line with the one proposed in the policy.
BUSINESS ENVIRONMENT: The policy recommends promulgation of an SME Act in order to provide a conducive business environment to the SMEs. The proposed act, in addition to addressing other issues related to the SMEs, should identify fiscal, registration, labour, and inspection laws that may not apply to the small or medium enterprises and simplification of those that are required to be complied with.
Other recommendations for making the business environment favourable for the growth of the small and medium sector call for certification of the SMEs through a simple process. Any firm that chooses to do so voluntarily will benefit from the support mechanism and the simplified regulatory regime proposed in the policy.
Besides, the government has been urged to adopt a simplified tax policy for small enterprises on the line of 0.75 per cent turnover tax for retailers as well as to periodically review all fiscal and labour laws in force to facilitate growth of the small and medium sector.
Yet another proposal calls for the establishment of SME Desks at the federal, provincial, banking and tax ombudsman offices for addressing grievances of SMEs. A complaint cell at the central bank has also been proposed for facilitating the redressal of SME complaints.
It is proposed that all industrial estates should provide land to the SMEs at discounted rates. Moreover, all existing SME clusters be provided adequate physical infrastructure, including roads and utilities. Besides, the government should consider supporting the establishment of an SME Promotion Council and SME specific trade associations for organising them and providing them with a platform to lobby for favourable policies in addition to inducting genuine SMEs representatives to all federal monitoring and dispute resolution schemes with private sector participation. ACCESS TO FINANCE: In order to improve their access to formal finance, the policy urges the central bank to incorporate SME financing in its Annual Credit Plan, and undertake periodic review of its prudential regulations in line with the SME credit demand and supply data.
It has been suggested that a Credit Guarantee Scheme and a Credit Insurance Agency be established to provide incentives and risk cover for banks so as to provide them comfort in financing the small entrepreneurs. It is proposed that the financial institutions may be supported in designing and launching industry based programme-lending schemes besides improving the regulatory procedures and fiscal incentives for venture capital companies. Yet another recommendation calls for introduction of bankruptcy laws with dedicated and effective judicial process.
HRD, TECHNOLOGY & MARKETING: In the area of human resource development, the policy recommends the establishment of Institutes of Small and Medium Enterprises and Entrepreneurship Development in select business schools in addition to building capacity and upgrading selected sector specific technical training institutes in major SME clusters and the setting up of new ones in areas where none exist at present. The private sector is also recommended to be roped in for the provision of technical training infrastructure.
For helping technological up-gradation of the SMEs, the establishment of Technology Innovation Centres (TICs) offering common facility, technology up-gradation, R&D and design related services to the SMEs has been proposed. It is suggested that pilot technology up-gradation projects be launched for major SME clusters on cost sharing basis with them.
The government is recommended to allow fiscal and tax incentives for investments in new, emerging sectors and skills up-gradation for enterprises that sign up for up-gradation of business products, processes, quality accreditation, through a business improvement programme.
In the field of marketing, it is recommended that the establishment of SME sector specific export marketing companies be encouraged, a quota for the SMEs be fixed in the trade delegations supported by the EPB, and annual SME awards be instituted.
Smeda CEO Shahab is hopeful that the policy recommendations will be implemented as the government is “serious” about helping the small and medium sectors overcome their problems and play their part in the economic development. He says no legislation is required for the execution of the policy because the mechanism for implementation of the policy has been built in the document.
For instance, he says, a Policy Implementation Unit will be created within Smeda to prepare periodic reports on the enforcement of the policy and progress made on it.
He says these reports will be sent for the consideration of the proposed Executive Committee on Small and Medium Enterprises (ECSMEs) to be chaired by the minister for industries and production. Besides, Provincial Committee on Small and Medium Enterprises (PCSMEs) to be chaired by the chief executives of the provinces have also been proposed in the policy.
He says a baseline survey of 1,500 SMEs will be conducted for benchmarking. “Their progress or lack of it after the announcement of the policy will be studied to assess whether the policy recommendations are being implemented or not. This study will form part of the periodic reports to be prepared by Smeda for the consideration of the ECSMEs. Moreover, we shall also send an annual report to the parliament for its consideration.
These measures will ensure that the policy recommendations are enforced by all the stakeholders in letter and spirit. If the parliament deems it fit, it can also set up a standing committee on the SMEs for considering the report and monitoring its implementation by all the stakeholders,” the Smeda CEO says.
However, some of those who were involved in the formulation of the policy insist that the implementation of the policy could not be guaranteed without legislation. They hold that the government needs to get the SME Act passed by the parliament if it was sincere about the implementation of the policy. “That is precisely why the policy has recommended the promulgation of an SME Act,” says a senior Smeda consultant.
Whether legislation is necessary for the implementation of the policy or not, one thing that is clearly required for the successful execution of the policy is the political support from the highest authorities in the country. “The real benefit of the policy will start trickling down when the programmes, initiatives and actions recommended by the policy are implemented.
The policy, however, will be implemented only when the prime minister and the president own it. You may or may not enact a law for the policy implementation, but nobody is going to follow it unless the highest political authorities own it. Unless there is political support for the policy, it will remain yet another well drafted document,” says a former Smeda official.
At present, there appears very little political support and ownership of the SME policy at the highest level because the government, which is under severe pressure to deliver the goods to win the next general election, is preoccupied with devising and undertaking schemes that can produce the “desired results” in the short-term.
“Since the implementation of the SME policy is a tedious and time consuming exercise, which will produce results after quite a few years, nobody is going to bother much about its implementation or the survival of vulnerable and powerless small businessmen like us,” comments an exporter from Sialkot.