WHY SMALL AND MEDIUM SIZE ENTERPRISES ARE IN THE SLOW LANE

OPINION:
The economic revival agenda of President General Pervez Musharraf as announced by him on December 15, 1999, envisages the promotion of small and medium enterprises (SME) as one of the focal points for the country’s development and prosperity. In response to this vision, the various governmental agencies accelerated the process of industrialization by laying emphasis on this aspect. During the past two years, the government has initiated programs that have been directed towards this goal. The available structure was institutionalized while other avenues were channelized to bring about this change.

The government primarily focused on the imperative need to broad base the economy by providing incentive-tuned policies and facilities, by gradually discarding the antiquated rules and regulations, and by announcing development projects that aimed towards poverty alleviation and, in the process, bringing about betterment in the existing or non-available infrastructure. These measures were visualized to kick-start the economy thru the establishment of a web of small and medium size enterprises.

The proliferation of SMEs is ideally suited for a country like Pakistan where the majority of the population is primarily rural-based, is not functionally literate, is subject to chronic lack of utilities and even social infrastructure, and is reluctant to interact with government agencies. In this scenario, it is incumbent upon the policy makers to blueprint schemes that reflect the rationale of this majority, and at the same time, induces them to move out of the self-imposed time warp and blend in with the modern modes of self-development.

The government has come up with such projects as SMEDA to provide intensive guidance and expertise to SMEs, the SME Bank to provide credit on favorable terms, and financial support from such avenues as Export Development Fund for training and testing. At the same time, the Provinces have all developed programs and projects to assist and promote SMEs. The availability of funding support, technical cooperation, and active involvement of foreign-based organizations has also been instrumental in promoting the establishment of SMEs.

According to SMEDA, the SMEs are the “unsung heroes” who are silently contributing to the nation’s progress. Their contribution to GDP is $20 billion or 40%, and to the export regime, it is $4.8 billion of all exports. SMEDA reckons that $75,000 investment is required to create one job in a large-scale enterprise while an investment of only $800 creates one employment opportunity in a SME in Pakistan.

It can be said with authority that Pakistan needs far more SMEs to propel out of the economic doldrums and get into the mainstream of economically active nations. Inspite of the vision of the Government, there are many roadblocks in the way of the SMEs. Some of these are inherent, pertain to the structure of SMEs, and require proper guidance to get out of this syndrome. However, it is important to note that there is still massive governmental action required to make the concept of SMEs a workable solution leading towards the industrialization of the country that would usher in an era of prosperity.

There is an imperative need to place on record some of the irritants that hamper SMEs development and to formulate strategies to resolve these constraints, irritants, or mind-set. Some of these can be broadly presented as follows:

1. INFRASTRUCTURE:
The success of any country's industrialization vision depends largely on the smooth and continuous availability of infrastructure. The Governments, whether Federal or Provincial, go all out to set up industrial estates under their various schemes. However, it has been the norm for the allotees to then run from pillar-to-post for getting connections for power, water, gas, and telephones. The lack of proper visualization and estimation of required infrastructure, the dominance of discretionary powers wielded by sanctioning authorities, and the haphazard implementation system prevalent in these utility-providers leaves much to be desired. These have resulted in the mess seen in various estates where the enterprises have found their feasibility go askew, their efficiency and productivity registering low indicators, and the entrepreneur's time and energy wasted looking for proper infrastructure to operate the enterprise smoothly. The road network is one of the major impediments in the proliferation of industries. The access to industrial estates is generally thru roads that have potholes, that are not carpeted properly, and that are encroached by roadside vendors or unauthorized edifices. In many areas, where there are facilities for setting up industries, the non-availability of access roads thwart all chances of these enterprises becoming working entities.

2. GENERAL SALES TAX:
The policy of the government to impose General Sales Tax is a practical move and is a source of additional and substantial revenue. However, the misplaced priorities of the CBR hierarchy, the blotched attempts of its officers who maneuvered to influence the GST registration drive by involving the armed forces, the unplanned designing of the tax that created many anomalies, and the cold feet attitude demonstrated by the government in implementing the GST regime across the board ensued into a scenario where this scheme has become a nemesis of the business community, and could very well turn out to be an albatross around this government's neck. The manner in which the CBR officials are trying to enforce this scheme reeks of a conspiracy to discredit this system and in the process, the mud would squarely fall on the face of the Federal Cabinet. The provisions of the GST regime are so cumbersome, so draconian, and so unfeasible, that the SMEs are defying the compulsion to register and come under the GST net. The system is not perceived to be tax payer-friendly and is looked on as a source of intense corruption and a tool for destroying the country's business and industrial base.

3. SMUGGLING/UNDER-INVOICING:
The scourge of smuggling has taken on ominous proportions with Pakistan becoming the dumping ground for all kinds of products that are not manufactured, or even those that are produced, in this country. The blatant misuse of the Afghan Transit Trade Agreement has played havoc with this country's enterprises and has been instrumental in the closure of many a unit. The casual and conspiratorial attitude of the law enforcers towards the Khepia syndrome was instrumental in making thousands of people closet smugglers that paved the way for a systematic and well-organized network that has its tentacles in all spheres. The country's bazaars and marketplaces are inundated with smuggled or under-invoiced goods since the law enforcers have conveniently turned a blind eye. The smugglers manage to bring in nearly US$ two billion worth of goods from India alone, ranging from supari and soap to livestock and foodstuff to equipment and machinery. Anything and everything that is advertised on Indian satellite TV is openly available here. Pakistan, although a major producer of cloth and apparel, has become a haven for smuggled/under-invoiced fabrics and garments. The Customs authorities are unable or are not keen to check the actual prices of these goods and so the result has been devastation for the domestic textile industry. Apparel and sweaters are available aplenty all over the country and these come from China, Far East, and UAE. Pakistan's polyester industry has matured tremendously, but today it is a victim of gray and processed polyester fabrics clandestinely entering this country. The Anti-Dumping Law is just for the statute books and there have been no actions taken to enforce the law. Pakistany industries have been victimized under the Anti-Dumping Laws enforced by many countries such as Japan, Europe, USA, and South Africa. Pakistany entrepreneurs have spent millions fighting the imposition of Anti-Dumping on their products. At home, the government has yet to take a pragmatic stand against smugglers and under-invoicers. The government has miserably failed to control smuggling. In fact, after the "re-opening" of the Afghan route, smuggling has intensified with a vengeance.

4. LAW AND ORDER SITUATION:
A major concern is the deterioration in the law and order situation. The government has been proclaiming that effective measures have been taken or are being contemplated to check the rise in incidences of crime. The much-ballyhooed Deweaponization Drive turned out to be a sham. The enterprises in any industrial estate are no more immune from dacoities and thefts. Vehicle snatching has become a common phenomenon with the sad fact that now the victims just routinely register the snatching or car lifting with Police Control and forget about it. There is no respite from this menace. Kidnapping for ransom is an everyday news item. Police reforms are talked about at every forum but, as always, the outcome is another scheme gathering cobwebs in the government's archives. Traffic management is something the Police have yet to learn and implement. Vehicles of industries and business are periodically stopped for checking and money extorted as a matter of right by the Police personnel. Extortionists, claiming to be workers of political or ethnic parties, continue with impunity to demand money from enterprises in one form or another. This is an additional business cost, plus it creates a sense of terror among the entrepreneurs who desire a peaceful environment to operate their business ventures. Another spectacle is that the country is hostage to those who call strikes and lead processions for every conceivable cause. The influence of religious elements have also affected the smooth functioning of many an enterprise as these rabble rousers have the pulpit power to bring to halt economic activities. This is more apparent in towns and villages where this influence is more profound.

5. INTERFERENCE/OVER-REGULATION BY AGENCIES:
Inspite of the government's roadmap that envisages liberalization and devolution of authority, the fact is that interference of government officials thru visits, thru official correspondences, and thru incomprehensible policies has been formidable irritants in retarding the growth of SMEs. The entrepreneur is unable to handle the load of frequent visits and multiple record keeping. The capricious attitude of many officials has been a root cause for distrust in governmental policies. The penchant for obtaining information and data by officials has discouraged enterprises to go "official" and instead they prefer to be a part of the undocumented economy. It is estimated that about seventy different government agencies make life difficult and cumbersome for the SMEs. The talk about rightsizing and elimination of various departments has become nauseatingly monotonous and humdrum. The government resorts to setting up Task Forces whenever an unpalatable decision is to be undertaken with the obvious result that nothing comes out and the matter is again shoved under the proverbial carpet. No government is serious about making life simple for the SMEs or any business entity. Thus, economic activity is stifled and retarded.

6. HUMAN RESOURCE:
Pakistan's workforce is increasing by more than a million every year and it is estimated that about 12,000 babies are born every day. The job opportunities are far less to absorb the new entrants into the job market. Moreover, the emphasis is also on the introduction of female workers into the mainstream and this has also put pressure on the limited jobs available. At the same time, the SMEs, which are predominantly labor-intensive, are the panacea for resolving the unemployment monster. Yet, these industries suffer from attracting the right worker. Lack of education, lack of financial resources, and lack of skill development institutes has had a deep impact on productivity, quality, and value of the output. The government policy makers talk about increasing the budgetary allocation for health and technical training, but there is no seriousness on the part of those who implement the educational policy of the country. The vocational training institutes managed by the government have proven to be disasters and they churn out ill-trained graduates. There is a lot of hullabaloo on introduction of a broad-based Information Technology system in the country in which the IT facilities would be made available to even the remotest part of the country. However, there is no infrastructure to put into action the vision and thus not much skill development is attained. The advent of state-of-the-art and highly sophisticated machinery necessitates that trained and skilled operators run them. The country is sorely lacking such trained personnel and the only convenient avenue is on-job-training done on an individual base rather than institutionalizing the vocational training procedures. The apprenticeship method of learning has proven to be effective but this is primarily confined to the informal sector where skills are passed on to the next generation either thru an Ustad-Shagird mode or thru hereditary traditions. The SMEs also suffer from the brain drain that has been a common occurrence lately. A good number of trained personnel either have emigrated or have chosen to work in foreign countries where the pay and perks are more attractive. Furthermore, many SMEs also suffer from workers drifting from one enterprise to another and thus these SMEs have to have a continuous training activity to offset the loss of a competent worker. Most of the SMEs have working conditions that affect the welfare of the workforce. The SMEs avoid contributions to the labor welfare schemes such as EOBI, Social Security, Education Cess, and Worker's Profit Participation, etc. Many SMEs work under the labor contract system and thus the workers are denied their fundamental rights. Workers are also kept off the rolls of the enterprise and hence unable to demand their just claims. This scenario is prevalent in most enterprises because of the progress-retardant labor legislation as well as the intimidatory attitude of officials of labor welfare agencies that have been instrumental in bringing about this type of recourse.

7. FINANCIAL INSUFFICIENCY:
The SMEs owners may have entrepreneurial skills, technical expertise, and marketing channels, but one sector that impedes their progress is availability of cheap financial resources that are essential in sustaining the enterprise. The financial institutions, both state-owned as well as those set up by the private sector, primarily focus on funding the projects or providing working capital to well-established enterprises. A large number of SMEs have collateral-deficiency and credit-worthiness affecting their success in obtaining financial support. Nevertheless, the State Bank of Pakistan has been concentrating on providing export-refinance at affordable levels and also relaxing various controls on financial institutions. However, various provisions of the Income Tax, Excise Duty, Property Tax, and General Sales Tax, etc have made it difficult for SMEs to attract official investment or to market goods thru recorded invoices. The outcome of this is that the true picture of the enterprise is not reflected in the balance sheet and this ruins the chance to seek more financial support. This vicious circle thus has the tendency to retard enterprise growth and also hinders the business-related opportunities that are crucial for the survival of the enterprise. There is also the imperative need to further reduce the bank mark-up rate so that enterprises can utilize more loans for their business activities and for making their products competitive. The SMEs are also wary of the conditionalities of NAB and this has also affected the planning of many SMEs who believe that if their project becomes unviable and if they may have to resort to delay in discharging their financial obligations, they may become susceptible to the ramifications of these NAB conditionalities.

8. PSEUDO-INVESTMENT INCENTIVES AND INCONSISTENCY IN POLICIES:
The various governments have propagated and promoted the facilities and incentives offered to investors, whether domestic or foreign. These incentives have been projected a lot at many investment road shows held not only locally but also in many countries around the globe. The incentives range from investment protection, to profits repatriation, to tariff protection, to tax breaks, to duty reductions, to buy-back guarantees, to provision of basic infrastructure, to relaxation of rules and regulations, to removal of impediments, to minimization of avenues of corruption, to claims of one-window facilities, etc. Notwithstanding the sincerity of the government and its higher echelon, the fact of the matter is that the policies are seldom consistent or sustained and this not only affects the working of an enterprise, it totally negates the faith in government policies and actions. The viability of the enterprise is frustrated with frequent policy changes, and this vitiates the efforts aimed at pursuing investment-oriented measures.

9. PURCHASING POWER:
This is another issue that needs to be analyzed since this environment very seriously affects the viability and need of enterprises working at near to optimum levels. The past decade has witnessed a marked deterioration in the disposable income of a large majority of citizens. This has become more apparent with the unbridled increase in utility rates, with the imposition of GST on consumer goods, with the high import rates of petroleum products, with the upsurge in food and edible oil prices, with the general trend of mounting unemployment figures, with the collapse of institutions such as financial cooperatives, and the evident downslide of the Rupee. Moreover, there has been a decline in development projects because of increase in administrative and non-development costs, defense, and debt servicing.

10. SYSTEM OF GOVERNMENT:
Although Pakistan is a democratic state and there are democratic institutions in place, the ground reality is that whether it is a democratically elected government or it is established by a military junta, the national policies are based on the mind-set of the government of the day. From a highly centralized policy making apparatus, to one of state-owned enterprises thru nationalization of private industries, to a policy calling for massive privatization, substantial liberalization, and visible deregulation, the structural changes have been more of incredible experimentation rather than sustainable endeavors. The vision is prominently highlighted at every available opportunity but the fact is that when it comes to implementation of these policies, there is excessive red tape, there is a lethargic or non-chalant attitude, and there is an inherent disdain for change especially at the lower hierarchy. With the advent of the system of Local Government, another tier has been added to the decision-making process that, of course, may smooth out in the near future when elections take place. At present, this has led to a lot of ambiguities, especially for the foreign investor who is unable to find out where the decision-making lies. It seems that the National Reconstruction Bureau may have to be the arbiter regarding this issue since the various tiers of government routinely pass around the buck. The government may have a vision about SMEs and what the policy should be all about, although when it comes to implementation, every government agency or ministry has its own concept about the SME policy. CBR has a different outlook about SMEs than EPB, while SMEDA and State Bank of Pakistan may differ on the modalities defined in the policy.

FINAL POINT:
In conclusion, these irritants and roadblocks are not something new or something exclusively home-based. This malaise is present in most of the developing countries with the intensity particular to that country's system of governance. However, in Pakistan the present government has laid down a framework to bring about fundamental changes in the country's economic environment. The concept for a paradigm shift has been visualized and the parameters defined. The macro economic indicators point towards the avenue of growth that would instill investor confidence, that would attract massive investment, and that would stimulate industrial activity. The imperative need is for the government to shed the antiquated inhibitions dominant in officialdom and galvanize the bureaucracy to harvest with a pronounced zeal the fruits of this government's vision and roadmap to economic prosperity. Pakistan has had some opportunities to get the country out of the economic rut, but all were lost due to myopic comprehension, inability to strike while the iron was hot, and self-centered priorities of the implementers and policy makers. One opportunity that is more fortuitous is now on the horizon. The hope and prayer is that this time this government would not let it pass into oblivion.

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modified on: December 23, 2004