LABOR ISSUES:Delivery of Assistance and Access to Resources, Finance

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SME Management (MGT-601)

Lesson 11

We are dealing with the short and medium term issues for SME policy formulation. In fact this

whole issue is inter-related in lessons No 10,11,12,13 and14.

LABOR ISSUES

Likewise, the intensity of the regulations is the second most important reason for firms to drift into the

informal economy all over the world. Labour Laws and regulations in Pakistan7 are considered to be one of

the most complicated areas with which any business enterprise deals. The present set of the labor laws was

the result of checkered initiative of various governments to create a healthy business environment for the

labor. Consequently, enterprises have to deal with fifty six (56) labor laws with some of them being industry

specific. The existing plethora of labor laws has made compliance impossible for the enterprises due to their

inherent inconsistencies. Numerous labor inspections under these laws are yet another impediment that

retards the growth of SME.

The labor market dynamics have changed considerably over the years, a higher degree of adaptability and

flexibility along with Labor market security, including protection against arbitrary loss of employment,

reductions in income and healthy work practices are essential requirements of new environment. Besides,

the condition for compliance for international labor standards under the global economic system is another

issue.

Taking into account the need of labor market and employers, the Ministry of Labor and Manpower

introduced an employment security regime. The new labor policy initiatives is aimed at creating a favorable

environment for facilitating industrial promotion and revival along with legislative and structural changes to

bring in an environment to devoid of restrictive labor practices, but protecting the rights and interest of the

workers.

It was proposed that existing labor legislation be simplified and rationalized into six basic laws. In addition,

for promoting bilateralism among government employer and employees, government established a forum

Workers Employers Bilateral Council of Pakistan (WEBCOP). The government is also working in the

development of Labor Inspection Policy under the SME Sector Development Program to reduce the

interface of government officials with businesses without compromising on the unhealthy work practices.

The only issue highlighted thus far through direct interaction with SME is that of co-ordination. The

business and labor community at large has been supporting the reforms.

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A committee on Reforms in Regulatory Legal and Policy Environment was established in the Ministry of

Industries and Production in 2000 with the purpose to co- ordinate, review, identify issues of concern and

formulate recommendations on several laws affecting businesses. Some of their efforts have resulted in the

consolidation of the labor laws as announced in the Labor Policy 2002 and proposed amendments in the

Factories Act 1934, Drug Act 1976, Boiler Act 1923, and Explosive Act 1884, and as such reviewed 101

commercial and labor laws that affect the industrial sector.

Delivery of Assistance and Access to Resources

Competitive advantage is determined by the productivity with which a country, region or cluster uses its

human, capital and natural resources. Pakistan's international competitiveness markedly declined over past

few years1. Part of the blame is shared by lower productivity of the workers. The evidence reveals that

median labor productivity, as measured by annual value added per worker, is 25 percent lower in Pakistan

than in India and 35 percent lower than in china2.

Trade liberalization at the global and regional levels and the new information and communication

technologies have entwined to create rich opportunities as well as formidable challenges to all independent

countries and enterprises. Competition has become increasingly fierce among the global and regional

economies and enterprises. The structure of markets and their demand3 is increasingly complex.

SME Management (MGT-601)

Despite operating locally, Pakistan's SME need to be increasingly aware of the world market. They cannot

escape it even in their local economy. To meet this challenge, there is growing need for information on

global technology trends, rules and compliance cost including facilitation services regarding global issues.

An integrated program for improving competitiveness, promoting trade, and developing workforce can

help4. Training, research and development, labor productivity enhancement, technology transfer and up-

gradation and support to business startup through business incubation and various other business support

services, including finance, are issues that need to be addressed separately by the SME policy.

What is important is that access to resources and services necessary to compete in this global environment

are being provided to SME because their size poses an effective limit on their capacity to assess world

market conditions and tap appropriate resources. Old policy tools of protection now require replacement

with promotional and facilitation functions. The roles of business development services, hence, become

imperative.

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1 World Bank, Development Policy Review 2002, reveals that the annual manufacture exports of Pakistan

are barely 12 percent of those of Malaysia. 18 percent of Thailand's and less than a third of Philippines----

countries whose combined manufacturing exports were lees than Pakistan's in the mid 1960's.

2 Investment Climate Survey of Pakistan- 2003.

3 Consumer preferences and market standards have become more sophisticated and exacting. Competitive

advantage is now determined bu several non-price parameters such as quality, health and safety, social

equity in employment and production and ecological compatibility of products and processes.

4 The Ministry of Science and Technology is preparing a National Quality Policy and Plan and another

initiative of the government is working on the development of National Productivity Policy.

The capacity to deliver such services by the public or private sector led institution is a major topic for

debate but also relates to the specifics of the service in question. However, market-driven support programs

are a cornerstone in any SME support system which strives for sustainability. This also maximizes the

potential for cooperation with private sector organizations and minimizes the distortions in the market

economy. Yet the structures for such a system still need to be mutually agreed and implemented in Pakistan.

Below we flag the important issues.

Finance

Access to equity and formal debt financing has repeatedly been identified as recurring constraint to SME

growth and development. Commercial bank apply conservative policies in lending to SME. More,

importantly the existing structure of financial sector was developed to serve medium to large enterprises

which are organized as a formal business. Most banks prefer to hold risk free-income generating assets and

lending to SME is unattractive due to a range of objective and subjective factors. These include high

transaction cost, inability to do away with tangible collateral requirement, no linkage of financial products

with sector needs and the inability to structure/ offer and manage risk-prone SME specific medium to long

term financing options.

It has been observed that 57% of new investment for small and Medium Enterprises and 67% of working

capital finance come from internal finance or retained earnings; only about 7% of funds for investment or

working capital come from banks or other financial institutions. Even suppliers' credit rivals the

contribution of the banks as a source of working capital (4.5%) 5. Another survey6 concludes that SME are

indeed being rationed out of the credit market, rather than merely exhibiting a lower demand for credit.7

However, financing SME is one of the key pre-requisites for the future development of the national

economy and the achievement of economic growth. The government of Pakistan had originally responded

to the growing needs of the sector by introducing a Self Employment Scheme through Small Business

Finance Corporation (SBFC) in 1992. SBFC continued to grant loans to small business and disbursed 12

million by June 1998, catering to the needs of 157,162 unemployed persons. Other schemes for SME

development or employment generation included the Youth Investment Promotion Society, and Yellow

SME Management (MGT-601)

Cab scheme. But all of these efforts lacked coherence across institutions, and, in the absence of any national

policy, resulted in disjointed efforts and even corruption

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5 SMEDA- World Bank Investment Climate Assessment Survey was conducted between May and

November 2002 by using SMEDA in collaboration with the World Bank covering a random selection of

965 mainly manufacturing businesses (90% being SME), drawn from 12 largest cities of Pakistan. To date it

represents the most comprehensive data set.

6 Faisal Bari, Ali Cheema, & Ehsan-ul-Haque; Barriers to SME growth in Pakistan: An analysis of

constraints, June 2003.

7 This finding is corroborated by the World Bank (2001) survey, which finds that over 50% of their sample

SME who had ever approached a bank reported difficulties in obtaining credit. SMEDA-ILO Study 2001

also reports a similar finding.

Previous efforts have therefore had limited results and were highly inefficient because the financial sector

accumulated a huge portfolio of non-recoverable loans under these schemes. The SME Bank will need to

undergo restructuring for next three years.

Furthermore, severe damage has been done because the financial sector has developed disinterest for any

such initiatives in future, and we need to basically start from a scratch. The banking industry in general is

also not venturing into the areas where new processes and procedures with a view to improve SME's access

to credit are required. It is likely that market-led mechanisms will take some time to improve the access of

smaller firms to formal credit. In particular, outreach shall remain to be a problem for the due to the limited

presence especially in the rural SME market.

The government is seeking to facilitate the participation of commercial baks in SME leading by training

with the assistance of the ADB. The sooner commercial banks obtain the know-how how to successfully

engage in cash-flow based lending to small business enterprises, the better.

Finally, new prudential regulations increase the likelihood of viability and sustainability in the financial

sector. However, the broad definition of SME also bear a risk of upward filtering of the loan portfolio

towards the higher-end medium enterprises unless targeted programs for micro and small enterprises exist.

The creation of SME credit endowment fund may be one way of mitigating the effect.

REFERENCES

1-Gallup/BRB world bank survey

2-Policy issues papers by SMEDA

3-50 years of Pakistan's economy by Shahrukh Rafi Khan

4-Reseasch cell LCCI

Book Recommended

Small entrepreneurs in developing countries by DR Asghar S. Nasir

KEY TERMS

Productivity (The rate amount produced by a worker)

Tangible asset (An asset that has physical existence and value at least equal to liability)

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