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Atif S. Malik
Presentation Contents
Concept and Importance of SME Development Situational Analysis of SMEs in Pakistan Importance and Core Problems
enterprise development.
The major Stanford recommendation was the adoption of the so-called Indian model - the recommended government programme for supporting small enterprise development in India.
Indian Model
The Indian model concentrated on the creation of special public institutions and directed programmes for assisting the small enterprise sector. The government offered assistance in all fields and directly implemented the programmes - in the identification of opportunities for small enterprise development, in the provision of factory space on industrial estates, in direct financial assistance and in obtaining government orders as well as advice and training for small enterprises. All these services and inputs were to be offered on a subsidised basis (usually given free), since the small enterprise sector was regarded as needing special help to overcome its weaknesses.
European Union
Less than 10 Emp 50.00%
10 - 99 Employees 38.00%
10 - 50 Employees 5.90%
UNITED KINGDOM:
SMEs constitute about 99% of businesses Account for 57% of employment Account for about 38% of total exports Main source of new employment
GERMANY:
SMEs constitute about 99% of businesses Account for about 58% of employment Account for about 35% of total exports
ITALY:
SMEs constitute about 99% of businesses Account for 77% of employment Account for about 40% of total exports
USA
SMEs constitute about 96% of businesses Account for about 60% of employment Account for about 35% of total exports
SOUTH KOREA: SMEs constitute about 98% of businesses Account for 75% of employment of the total national workforce SMEs represent about 92% of all manufacturing companies SMEs represent 69.3%,46.3% and 46.5%, respectively, of the employees, production and value-added activities
Employment Tree
Labour Force in Pakistan (Millions)
Labor Force35.9
Non-Manufacturing 5.5
Manufacturing 0.6
Non-Manufacturing 9.8
Manufacturing 3
Rs. 76,775 per unit Small Establishments: 920,139 Average Asset Size by Employment Household Units: 338,407 Rs. 26,096 per person Urban: 572,170 Rural: 686,376 Average Employment Size 3 person per unit Male: 1,038,000 Female: 221,000 Contribution to GDP
Establishments: 427,784
Small Establishments: 266,686 Household Units: 161,098 Urban: 175,078 Rural: 252,706
15,215
10 and Above
Upto 9 Persons 0
412,515
Persons Engaged
100,000 200,000 300,000 400,000
261,349 10 and Above
Upto 9 Persons 0
997,201
Sectoral Shares
Sectoral Share by Units
Other Indus. 18% Metal & Metal Products 11% Mineral Products 4% Petro/Chem. Products 1% Paper Products & Print. 1% Wood & Wood Products 12% Leather & Leather Products 6% Food, Bevg Etc 20%
Mineral Products 8% Petro/Chem. Products 2% Paper Products & Print. 1% Wood & Wood Products 10%
5 Persons 6%
4 Persons 11%
3 Persons 15%
1 Person 30%
1% 7% 19% 34%
39%
10% 20% 30% 40%
Sources of Financing
Friends & Relatives 6% Financial Inst 4%
0%
Establishments:4,474
1 to 9 Persons: 671 10 to 49 Persons: 2,291 50 to 99 Persons: 511 100 & Above Persons: 1,001
1 to 9 Persons: 423 10 to 49 Persons: 6,200 50 to 99 Persons: 4,673 100 & Above Persons: 81,749
Employment
50 to 99 Persons 11% 10 to 49 Persons 52%
Upto 9 Persons 1%
10 to 49 Persons 9%
50 to 99 Persons 6%
Census of Establishment
Persons Engaged: 5,766,583
Employed: 3,485,596
Self Employed: 2,280,987
Establishments: 2,018,986
Urban: 1,202,159 Rural: 816,827
0%
20%
40%
60%
80%
100%
0%
10%
20%
30%
40%
50%
60%
Status in Establishments
stnemhsilbatsE
laruR %04
nabrU %06
No of Self Employed 40%
No of Employees 60%
Transport 0.94%
Employment in Sectors
Employment Split of Manufacturing Sector
Less than 10 39% 100 or more 35%
50 to 99 5%
20 to 49 9%
10 to 19 12%
50 to 99 7% 20 to 49 11% 10 to 19 9%
0%
20%
40%
60%
80%
100%
Structure of Establishments
Govt/Corporat Companies ion/Local-GEst (Public/Privat 6.71% e ltd) 0.50% Partnerships 2.50% Others 7.58%
10 to 49 1 to 9
97%
0%
20%
40%
60%
80%
100%
Slightly above 2 million enterprises out of which the share of MSMEs is 99%
2,065,208 2,298,303
1,508,796
1,426,710
875,449
Trade Services Manufactu 2,014,489 1,508,796 875,449 45,664 584,124 439,044 5,056 205,383 112,217
45,664 5,056
112,217
Trade Micro
Manufacturing
Definitions of MSMEs
No single definition of MSMEs at a country level Results in absence of MSMEs in the policy formulation process Definitions currently recognized, formulated to cater to the needs of manufacturing sector small firms Definitions formulated to meet credit requirements of the small manufacturing concerns Need to regularly compile statistics to build a profile of the MSME sector in Pakistan
Medium
N/A
N/A N/A
N/A
N/A
Prod. Assets of Rs. 100 million N/A 36-99 employees Prod. Assets Rs. 20 40 million
N/A
Less than 10 10-35 employees employees Prod. Assets Prod. assets upto Rs. 2 20 million Rs. 2 million
Reduced corporation tax rate Special 14% depreciation rate of the initial acquired machinery Deduction of charges from the members incomes as expenses Special initial depreciation on 29% of the amount drawn from reserves Special deduction for retained profits of co-operatives Reduction or exemption of certain local taxes
30% tax abatement on approved investment in machinery Grants for developing Exemption from Corporate Income tax Exemptions from Tax exemption for a 5 year period
purchasing from
small industries Full exemption from import duties on machinery & raw materials
business
opportunities in all markets Grants upto 50% of direct development
withholding tax on
foreign loans Tax exemption on pre- operation & organization expenses technology & Other benefits according to the
Preferential treatment
in govt. purchases Soft loan scheme with priority given to loans less than $5 million
Extension periods
to avail export incentives
production used by
the enterprises
Source: Kim Seung Jin and Suh Jang-Won : Cooperation in SMI Industries in ASEAN (1993; 117-118)
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RESULTS (1994)
SME Share No. of Firms No. of Employees Mfg Output 99 % 78 % 51 % SMEs Large Companies 0.06 11.89
million
6.47 42.27
million
million
million
$ 1.13 trillion
$ 1.07 trillion
$6 Billion
to support SMEs
Finance
Subcontracting
HR Development Information
Institute for Small Business Management & Technology Japan Small Business Co. Human Resource Development
Guidance
Japan Chambers of Commerce & Industry / National Federation of Commerce Industry Trade Associations
Chamber of Commerce (513) Commerce-Industry Trade Asc. (2822) Prefectural Federation of Commerce-Industry Trade Associations (47) Prefectural Fed. Of Small Business Association Prefectural Federation of Shopping Districts Promotion Associations 52
Organization
Provincial Agencies
Federal Agencies
Training Institutions
Punjab Small Industries Corporation Sindh Small Industries Corporation Sarhad Small Industries Development Board Directorate of Small Industries, Baluchistan - Establishment of industrial estates for small scale industries - Provision of credit for SMEs
Small Business Finance Corporation (SBFC)- SME Bank financial assistance on soft terms for small/ cottage industries Self Employment Scheme (SES) loans granted to unemployed youth/skilled professionals for small businesses and small industries
SMEDA - Apex policy advisory making body for SMEs - Provide and facilitate support services generate employment opportunities - Revitalize small business through aggressive support programs
Pakistan Industrial Technical Assistance Corporation (PITAC) provides advanced training to industrial personnel in metal trade, tool engineering designs and in production of tools, moulds and fixtures
Skill Development Councils Assess training needs, facilitate training of workers through training providers in the public and private sector
Technical Education & Vocational Training Auth. Facilitation of technical & vocational training in Pakistan
Aurat Foundation
Summary of Issues
General findings:
Absence of a uniform MSME definition Lack of awareness of policy formulation and its impact Centralisation in policy making Non recognition of impact on employment generation Generally MSMEs are considered to comprise only manufacturing sectors Short term nature of policies Survival strategies reforms opposed to long-term market demands Extremely low awareness of all industrial laws Large number of laws resulting in greater complexity Lack of availability of laws in national or regional language Gap between design of policies and laws and their subsequent implementation Inconsistencies in policy direction Lack of SME representation in industry and trade associations
Absence of Redress
Discretionary Powers
Regulations: Where Government formulates laws in the shape of Acts, Ordinances and Statutory Regulatory Orders (SROs) Execution: Where the regulatory framework is implemented through the Governments administrative setup
Federal & Provincial Governments Institutions: departments/agencie s, industry/trade assoc. NGOs MSMEs: actual performers
Meso Level
Micro Level
Focussed Awareness MSME Policy Making
8
Screening
10
No of Procedures
80 60 40 20
77 50
35 22 4 4
UK
0
India Pakistan Thailand Singapore USA
The small entrepreneurs spend, on the average, over Rs. 15,000 per year and 12% of their entrepreneurial time in coping with government regulations, mostly on top of or around the legitimate government demands.
More than 90% of the respondents highlighted one or another hurdle posed by the government in their smooth functioning. The principal focus was on the rising cost of business due to government taxes (56%), corruption (39%), enhanced utility charges (30%) and oppressive role of local officials (26%).
Income Tax
42%
45%
67%
20% 40% 60% 80%
0%
Business Operations
Key Observations
Business Structures lack of awareness regarding Impact of business structures on operations Business decision making rarely effected in micro & small firms by structures 80% of MSMEs exist as Sole proprietorship and Partnerships
Administrative Setup
Registrar of Firms
Registrar of Companies
Partnerships
Management of Regulations
Intellectual Property Laws
Copyrights
Trade Marks
Patents
Ministry of Education
Ministry of Commerce
Turkey
Plans to establish new stock market for small start-ups with growth potential
Finance
Statistics
According to a study conducted by SMEDA in collaboration with ILO:
78% of SMEs do not access credit from any source Out of the remaining 22%, less than half ever approached the formal lending sector Success rate among those who approached the formal lending sector lies between 20% & 66%
Key features
Sectors relating finance are governed under
State Bank of Pakistan Act, 1956, State Bank of Pakistans Prudential regulations State Bank of Pakistans rules and circulars.
SBP acts as a custodian over the local commercial banks Various targeted schemes
Micro credit scheme Self Employment Scheme Export Finance Scheme Locally Manufactured Machinery Scheme Foreign Currency Export Finance Facility Pakistan Export Finance Guarantee Scheme
Key Observations
Low awareness level amongst micro & small enterprises as compared to medium & large scale enterprises Due to lack of access to formal credit, 90% of MSEs are equity financed
Lack of familiarity with accounting systems within micro and small sized
firms Similar credit evaluation system used by financial institutions for all types and size of businesses Approximately 80% MSMEs have loose structures in place such as proprietorships and unregistered partnerships Time consuming credit evaluation procedures of financial institutions SMEs unable to meet high collateral requirements of financial institutions Limited financing options available in the country Difficulty to benefit from schemes like Export Refinance, etc
Low
Access to loans
High
Access to loans
High
Low
Timeliness of loans
High
India
Low Access to loans High Timeliness of loans High
Indonesia
Pakistan
Source: The SMEs and the Global Market Place, ITC publication
Time Frame
Months
4 2
Approval
Source: The SMEs and the Global Market Place, ITC publication
Disbursement
686,160
82,119
75,159
90%
0.60%
1.50%
1.75%
Labour
Key features
Promulgation & implementation of labour laws
At Federal level At Provincial level Derived from Federal laws Factories act, 1934 (Federal Law), Punjab Factories Rules, 1975 (Provincial Law) ESSI applicability limit (Punjab 10 workers, Other provinces 5 workers)
Few provincial variations Approximately more than 100 Labour Laws in force Role of Directorate of Labour Welfare
Responsible for maintenance of industrial peace Directorate of Labour Welfare governs on average 12 to 15 laws It also acts as a registering authority
Key Observations
Lack of awareness about laws & policies amongst small & medium scale enterprises Due to low literacy level Due to non-availability of laws in simplified Urdu or regional languages Lack of awareness plays a catalytic role in enhancing inspectors discretionary powers Lack of proper mechanism and implementation machinery
compliance
Minimum wages are not aligned with the inflation rates Laws not run in consonance with latest developments in industries
Administrative setup
(Factories act, 1934)
Regulatory Agency - Directorate of Labour Welfare Recognition of Enterprise size - Yes Applicable on 10 or more workers Variation by Region - Yes provincially Powers & Penalties
Power to exempt any factory from the provisions of the Factory Act 1934 Inspectors discretionary powers To enter without warrant To inspect documents Instruct to adopt any measures The penalties range upto Rs. 2,500
Inspectors discretionary powers The fines are not deterrent Discretionary power of granting festival holidays
Sindh & N.W.F.P has discretionary power
Impact on MSMEs
High cost of compliance Considerable pressure due to inspector`s discretionary powers Lack of awareness in respect to health & safety provisions Lack of awareness due to non-requisite of welfare officer
Duty of welfare officer to make the factory comply with law
CONTRIBUTION BY AN INDIVIDUAL ESTABLISHMENT CONTRIBUTIONS: Employees Social Security 98,280 Ordinance, 1965 Workers Children (education) 4,900 Ordinance Employees Old Age Benefits 70,200 Act, 1973 (in Rupees) Employees Cost of Living 61,225 (relief) Act, 1973 (in Rupees) Professional Tax (in Rupees) 5000 Workers Welfare Fund 39,000 Ordinance, 1971 Total Contributions to be paid 278,605 annually (in Rupees)
Appeal to be filed with in 60 days Appeal to High Court under article 199 constitution of Pakistan In reasonable time as decided by the High Court
Taxation
Key features
No specific tax policy with in Pakistans policy framework Taxation reforms are made through tax measures mentioned in the yearly fiscal policy SRO system is common making the reforms inconsistent The aim of the tax measures primarily is to increase the tax-to-GDP ratio The present governments tax strategy is of two-fold. One is to address the problems of a weak tax administration, and on the other to ensure that the process of collection is with out loopholes Overall tax rate and structure is uniform across the country due to centralization of decision making
Key Observations
Negative perception of the tax agencies Lack of awareness about the taxation system
Change in Policy
Books Records
Calculation of total taxable income Tax deductions Calculation of tax at applicable slab rate Application of surcharge Deduction of tax credit Deduction of advance taxes Total tax payable with return (Total income deductions) * slab rate + Surcharge tax credit- Advance taxes = final tax payable.
RELEASE OF REFUND
Trade
Key features
Trade policy is formulated by the Ministry of Commerce It shows the drift of country towards its economic approach Becomes inconsistent due to rapid amendments Due to non-existence of any uniform definition of MSMEs, the policy formation has to a certain degree been sector specific and at times inharmonious The laws covered under trade sector are: Import & export control act Exports quality control order Import and export procedures Anti dumping laws Trade organisation ordinance The registration of export houses order Various Statutory regulatory orders Customs Act
Key Observations
Short-term nature of trade policies Lack of planning to deal with international issues like WTO (case in point Auto-ind) Lack of proper monitoring to protect local industry against dumping and international subsidies Under utilization of schemes and incentives by MSMEs due to low awareness levels Generally schemes are only meant to facilitate the large-scale sector
Jan.92Dec.96
1994-Dec.96
1995-Dec.96
Jan.96-Dec.96
Jan.97-Dec.99
-10% of -10% of growth growth quota quota for new for new units units No -25% of -25% of growth Newcomer provision growth quota quota for rural for rural areas areas and and transferable transferable Performa nce Holders: Allocation 50% Basis Q:50% V
-10% of growth quota for new units -25% of growth quota for rural areas and transferable
All discretionary quotas No Provision abolished including new units and rural areas.
1st Year: 75%Q:25%V 2nd Only on Year:65%Q:35 Quantity based %V rd 3 Year onward: 50%Q:50%V
Based on Quantity
Jan.92Dec.96
1994-Dec.96
1995-Dec.96 Jan.96-Dec.96 Jan.97-Dec.99 Growth and residual quota both through auction and nontransferable
Residual Quota
Through auction
Quota Transfer
Transfera ble
-performance and -For -performance -performance open market transfer performance and open and open able holders -For market market -auction quota nontransferable performanc transfer able transfer able transferable e holders -non -New passbook -auction -auction performance transferable quota nonquota nonholders have to ship holders, not transferable transferable 90% of quota transferable allocated.
Globalisation
Globalisation
The idea of a global economy key image is that of a borderless world. i.e. stress on increasing transnational macroeconomic links
Many organisations adopting a Global Rationale in management and marketing Stress on strategic networking where coordination of a Single Face is achieved by independent companies working together
Advances
876,514 421,933 138,490 187,656 128,435 163,893 121,943 41,950
Principal
129,127 84,501 22,704 16,854 5,068 56,393 42,698 13,695
Markup
38,595 28,870 3,741 3,232 2,752 35,168 24,243 10,925
Total
167,722 113,371 26,445 20,086 7,820 91,561 66,941 24,620
Thank You