Can Government of Pakistan Lay a Pivotal Role in this Sector?:Business Environment

<< Agriculture Sector and Financial Institutions of Pakistan:What is SMEs

Financial Crimes:Process of Money Laundering, Terrorist Financing >>

Management of Financial Institutions - MGT 604

Lecture # 39

Can Government of Pakistan Lay a Pivotal Role in this Sector?

In the recent past SMEDA stands out as a significant step towards Govt of Pakistan

commitment to SME development. Created as an autonomous institution with private

sector led governance structure, SMEDA promises to become an important institution

spearheading Government's SME development efforts. However, in absence of a

coherent SME development policy framework it is unrealistic to expect a single

organization such as SMEDA, to be able to implement aggressive SME development

initiatives because:

1. Issues to be addressed for SME development fall within the

purview of a large number of Ministries and Departments at the

Federal, Provincial and Local government levels. SMEDA has no

institutional jurisdiction or linkage with such institutions; and

2. 2. SMEDA has limited budget and manpower, posing restrictions

on its capacity to launch capital intensive initiatives and extend its

outreach Thus to provide a coherent policy mechanism, there is a

need to develop a comprehensive SME Policy for Pakistan that

defines the role of concerned public sector institutions. Such a

Policy framework will provide the required direction and focus

for achieving SME led economic growth resulting in job creation

and reduction in poverty. Private sector growth in SME sector (as

opposed to the large scale manufacturing) will result in lesser

investments per job created, wider geographic and social spread

of investments and better income distribution.

SME Policy & Their Objectives

The objective of SME Policy is to provide a short and a medium to long- term policy

framework with an implementation mechanism for achieving higher economic

growth based on SME led private sector development.

The SME Policy suggests concurrent and specific policy measures in all possible

areas of SME development:

1. Business environment

2. Access to finance

3. Human resource development

4. Support for technology up gradation and marketing

A single SME definition is recommended to be applicable to all institutions

countrywide to allow uniformity in designing support systems and incentives and

also to monitor progress.

The SME Policy also contains an implementation and adjustment mechanism that

identifies the following:

Implementation and monitoring mechanism

Capacity building requirements of the public institutions

Resource allocation and potential sources of funding

Linkages with other initiatives and public sector reform processes (Social

Sector Reforms)

146

Management of Financial Institutions - MGT 604

Self contained framework for ongoing feedback and adjustment

Role of various public and private sector players at Federal, Provincial and

Local levels

The Policy finds it appropriate to highlight the key principles on which i t is

being based. They are:

The recommendations proposed in the SME Policy may be implemented /

supported through an SME Act 2006

The SME Policy covers measures for promotion of `Entrepreneurship

Culture' and support for growth of existing enterprises

The SME Policy realizes the different approaches required for supporting

Small Enterprises as opposed to Medium Enterprises. Thus, wherever

required, separate policy measures are proposed for small and for medium

enterprise growth

Women and other marginalized groups are proposed to receive special focus

within the SME Policy.

Rural based and agro processing enterprises are proposed to receive special

attention while devising specific support mechanisms

SME development offers most viable option for private sector led growth

that reduces poverty and creates a large number of jobs all across Pakistan.

SME development must be at the center stage of all economic growth

policies of Pakistan

SME development in Pakistan will require decisive and concurrent measures

in a number of policy areas such as business regulations, fiscal, trade rules,

labour, incentives and support (Human Resource Development, Technology,

Marketing, etc.) leading to an `SME Space' in these domains.

Sues face inherent disadvantages (because of their size) vis-à-vis large firms,

which need to be offset by government support mechanisms and incentives

Effective implementation of the Policy framework will require ownership,

commitment and monitoring at highest level of the Government

SME development requires provision of level playing field for smaller firms

vis-à-vis large enterprises.

Private sector will be encouraged to play a key role in implementation of the

SME Policy including mobilization of capital and operational responsibility

for implementing policy measures suggested in this document.

Financial support to enterprises will be, wherever possible, at a collective

level, and will essentially require resource commitment on behalf of the

beneficiaries.

Pakistan does not have a single definition of Small and Medium Enterprises.

Various Government agencies, e.g., State Bank of Pakistan (SBP), Federal

Bureau of Statistics (FBS), Provincial Labour Depts., etc. use their own

definition. Absence of a single SME definition makes it difficult to identify

target firms, align development programs, collect data and monitor progress.

147

Management of Financial Institutions - MGT 604

Business Environment

The fiscal, labour and enterprise regulations of the Federal and Provincial

Governments in Pakistan do not provide for a focus on SMEs that is in line with

their specific needs. Generally the fiscal regulations divide enterprises by income

levels and labour related regulations realize only two forms of enterprises, small and

large, thus, not providing laws and implementation mechanisms that are sensitive to

SME needs. Largely, the support and grievance redressal regime of the Government

does not differentiate between enterprises on the basis of their size thus making i t

difficult for SMEs to access public support programs and attention of public

authorities when competing for i t with the large firms. This dilutes the ability of

SMEs to effectively compete with large firms.

Access to Finance & Related Services

Now banks provide for only 7-8% of the total funding requirement of SMEs. Also,

as per a study by researches on `Barriers to SME Growth in Pakistan: An Analysis

of Constraints' , access to finance, was identified by SMEs, as the single most

important impediment to growth. This problem increases in magnitude with

reduction in size and experience of the firm. With the promulgation of the Prudential

Regulations for SME Financing by SBP, the basic regulatory framework for

promoting SMEs' access to formal financing has been provided. However, increased

SME access to financing will require interventions in all three areas of SME

financing, i.e., demand side (SMEs), supply side (Banks) and intermediaries and

regulators (SBP, SMEDA, etc)

Supporting Human Resource Development Technology Up- gradation &

Marketing

Need Assessment Survey to identify major SME needs in HRD, technology

up gradation and marketing.

Establishment of Institutes of Small and Medium Enterprise &

Entrepreneurship Development in select business schools.

Capacity building and up-gradation (curriculum redesign, provision of

equipment, teachers training, SME liaison, etc.) of selected sector specific

technical training institutes serving in major SME clusters and establishment

of such institutes where none exist.

Encouraging use of the technical t raining infrastructure by the private sector

BDSPs serving SME sector and incentives for investment in setting up SME

training facilities Induction of genuine SME representatives in private sector

boards of the technical training institutes.

Entrepreneurship Development

Pakistan is a society of `employees'. The education and social system does not

encourage entrepreneurship as a preferred career option amongst the youth.

Entrepreneurship is usually undertaken by those belonging to the existing business

families. As a result the economy witnesses a small number of new enterprises being

created and that too in traditional areas of business overcrowding the supply/product

base and their markets. On the other hand, there are no limitations in the

entrepreneurial capabilities in the populace. If, this entrepreneurial potential can be

unleashed, by providing level playing field, information, awareness and support in

establishing enterprises, Pakistan can witness fast paced growth in establishment of

new enterprises creating new employment opportunities, improving distribution of

wealth and exploiting the opportunities offered by international markets in the

148

Management of Financial Institutions - MGT 604

liberalized WTO regime. The past Government programs to encourage

entrepreneurship were limited and not too comprehensively designed and thus

achieved little in promoting entrepreneurship amongst the educated Pakistani youth.

There is a need for Govt. to actively promote entrepreneurship through changes in

education curricula, by creating awareness amongst youth and by providing effective

support to those who wish to establish new enterprises.

SME Policy Ownership and Implementation

A large number of Government Ministries and organizations (in addition to the

private sector) will have to play their role in removing impediments and providing

support for SME growth. Therefore, it is imperative that the SME Policy is approved

by the Prime Minister and endorsed by all Provincial Governments. Such support

coupled with clear definition of responsibilities of various Government institutions

will provide the required policy vehicle for promoting SME led economic growth in

Pakistan.

SME Policy Investment & Expected Impact

The SME Policy also presents the estimates of public and private sector investments

for implementation of the policy recommendations and envisages benefits in terms

of enterprise growth, job creation and poverty reduction.

149

Table of Contents: