Review of the SME Sector - Free Essay Example

2.0 REVIEW OF SME SECTOR 2.1 BACKGROUND SMEs all over the world play an important role in the economy by creating employment, contributing significantly to GDP and socio-economic development of a nation. It plays a major role in the democratization of the economy. The latest CSO Report 2007 on Small Establishments and itinerant units indicates that there were 91 979 small production units employing 208 797 persons. In many countries, particularly in East and South East Asia, SMEs are the leading force of the economy. For example, in 2006 SMEs constituted 99.2% of the business establishment in Malaysia and employed 65.3% of the national workforce, contributing 47.3% of GDP. (Thurasamy et al., 2009) Another example is Thailand where SMEs account for 99.5% of enterprises in 2006 and about 80% of all employment in 2004-2006 contributing 38% to GDP. 2.2 HISTORY OF SME SECTOR IN MAURITIUS 1976: Establishment of Small Scale Industry Unit (SSIU) under the aegis of the Ministry of Commerce and Industry. Guidance and general advice were given to small entrepreneurs. 1983: The Small Industry Development Organisation (SIDO) took over from SSIU. 1988: Enactment of Small Scale Industries Act which provided for a legal definition of Small Scale Industry (SSI), voluntary registration of SSI and duty exemption on production equipment. 1993: Setting up of Small and Medium Industries Development Organisation (SMIDO). The SMIDO Act 1993 established SMIDO as a parastatal body with a vision to develop a modern SME sector that was competitive, efficient and export-oriented. 2005: Creation of Small Enterprises Handicraft Development Authority (SEHDA) following the merger of SMIDO and the National Handicraft Promotion Agency (NHPA). The aim was to rationalise and optimise the resources allocated to the small enterprises. 2009: The SEHDA Act was repealed and the Small and Medium Enterprises Development Authority Act 2009 established the Small and Medium Enterprises Development Authority (SMEDA) as a parastatal body with the vision to be the centre of excellence for servicing SMEs and the mission to establish SMEDA as the institution to promote, serve, support and strengthen SMEs to face the challenges of globalization. SMEDA operates under the aegis of the Ministry of Business, Enterprise and Cooperatives. (Source: SME Portal, Office of Public Sector Governance (OPSG)) 2.3 SME DEFINITION SMEs are involved in a wide array of business activities. There is no universal definition of SMEs. The table 2.1 below gives the UNIDO definition of SMEs in some Asian Countries. Table 2.1: UNIDO definition of SMEs in some Asian Countries Country Definition of SME Measurement People Republic of China Varies with industries, less than 100 employees Employment Indonesia Less than 100 employees Employment Korea Manufacture: less than 300 employees Service: less than 300 employees Employment Malaysia Varies, turnover: less than RM 25 million and 150 employees. Shareholders, Funds and Employment Philippines Less than 200 employees, less than P 40 million assets Assets and Employment Singapore Manufacture: less than S$12 million fixed assets Service: less than 100 employees Assets and Employment Table 2.2 gives the definition in the European Union. An SME should satisfy either the turnover ceiling or the balance sheet ceiling, but not necessarily both: Table 2.2: Definition of SMEs in the European Union Enterprise category Headcount Turnover or Balance sheet total medium-sized 250 à ¢Ã¢â‚¬ °Ã‚ ¤ à ¢Ã¢â‚¬Å¡Ã‚ ¬ 50 million à ¢Ã¢â‚¬ °Ã‚ ¤ à ¢Ã¢â‚¬Å¡Ã‚ ¬ 43 million small 50 à ¢Ã¢â‚¬ °Ã‚ ¤ à ¢Ã¢â‚¬Å¡Ã‚ ¬ 10 million à ¢Ã¢â‚¬ °Ã‚ ¤ à ¢Ã¢â‚¬Å¡Ã‚ ¬ 10 million micro 10 à ¢Ã¢â‚¬ °Ã‚ ¤ à ¢Ã¢â‚¬Å¡Ã‚ ¬ 2 million à ¢Ã¢â‚¬ °Ã‚ ¤ à ¢Ã¢â‚¬Å¡Ã‚ ¬ 2 million (Source: SME Portal) The Central Statistical Office defines a small unit as a production unit employing less than 10 persons. It can be an establishment or an itinerant unit. As per SMEDA Act, SME definition includes enterprises in all sectors. There is no differentiation between services and manufacturing sectors for small enterprises. An enterprise with an annual turnover of up to Rs 10 million is defined as a small enterprise whereas one whose turnover is more than Rs 10 million but not more than Rs 50 million is considered as a medium enterprise. 2.4 POLITICAL AND LEGAL ENVIRONMENT Mauritius is a member of the World Trade Organization (WTO) since 1 January 1995. It is committed to adopt the WTO rules towards trade liberalization. We are also a member state of regional blocks namely: Southern African Development Community (SADC) and Common Market for Eastern and Southern Africa (COMESA). SADC: It is a Regional Economic Community comprising of 15 Member States esta blished in 1992 and committed to regional integration and poverty eradication through economic development and ensuring peace and security. COMESA: It is a block of 19 member states with the aim to strengthen regional cooperation. Through greater regional co-operation and networking between regional and international partners, COMESA strives to improve access to technology and other resources and thus enhance productivity and competitiveness. Membership of SADC and COMESA gives Mauritius access to a market of more than 440 million people. The Regional External Trade for period 2009, 2010, 2011 and 2012 are given in Table 2.3 Table 2.3: Regional External Trade for period 2009, 2010, 2011 and 2012 REGIONAL EXTERNAL TRADE Regional External Trade (Rs M) 2009 2010 2011 2012 Total Exports (FOB) ACP 7,998 9,103 11,146 13,802 COMESA 4,972 4,945 5,579 6,496 SADC 7,352 8,193 10,114 12,763 Imports (CIF) ACP 13,595 15,485 15,520 15,690 COMESA 3,311 3,997 4,565 4,683 SADC 11,972 13,480 13,534 13,553 (Source: The Mauritius Chamber of Commerce and Industry) Through US-Africa Growth and Opportunity Act (AGOA), Mauritius benefits from preferential access for apparel exports to the US. It mitigates the negative effect of elimination of Multi-fibre Agreement and gives Mauritius a chance to diversify its textile sector by favouring spinning and weaving activities and promote regional integration of the local textile sector with other Sub-Saharan countries eligible for AGOA benefits. Over the years, government has passed laws and regulations to facilitate business. It is committed to promote a conducive business environment with the appropriate incentive to support and modernise the SME sector. In the 2014 Budget Speech, the Minister of Finance and Economic Development described measures taken in the last three budgets as a à ¢Ã¢â€š ¬Ã…“Marshall Plan for SMEsà ¢Ã¢â€š ¬Ã‚ . The following measures in favour of SMEs were announced: Government procurement from SMEs will reach about 11% in 2013 as compared to 6% in 2012. The aim is to reach 20% within the next three years. A National Business Award to encourage large businesses to support SMEs will be set up. A free basic website will be provided to all SMEs. More elaborate website costing up to Rs 6000 will be subsidised at 50%. Government will guarantee loans for small enterprises directly to commercial banks up to 70% of any amount of loss incurred. This will remove the need for small enterprises to provide collateral and third party guarantees. Rs 70 million will be provided under the SME Factoring Scheme for 2014. The National Productivity and Competitiveness Council (NPCC) will offer training to 500 SMEs to improve their productivity and will organise a National Productivity Award. Two SME parks will be constructed and delivered to 80 SMEs, in addition to the 55 already delivered in 2013 with a 50% subsidy. The Global Competitiveness Report 2013-2014 of the World Economic Forum ranks Mauritius in the 45th place in terms of Global Competitiveness Index out of 148 countries surveyed. Among other things, it describes Mauritius as a country with an independent judiciary, with clear property rights and strong investor protection. Furthermore it has noted an improvement in market efficiency and access to different types of financing and financial services. As for the number of procedures to start a business, Mauritius ranks 30th and for the number of days to start a business, we rank 16th. To facilitate business, Government has consistently streamlined procedures governing business operations, namely in the field of company laws, tax laws and labour laws. 2.5 SME ESTABLISHMENTS The last Census of Economic Activities published by CSO reveals an increase in the number of small production units by 23%, a rise in employment by 19% from 2002 to 2007 as shown in Table 2.4 Table 2.4: P roduction units, persons engaged and value added (CEA 2002 and 2007) 2002 2007 Percentage change Production units 74 928 91 979 22.8 Persons engaged 175 791 208 797 18.8 Value added (Rs million) 23 202 42 126 81.6 (Source: Statistics Mauritius and SME Portal) Figure 1: The distribution of small units in 2007 by industry group. (Source: Statistics Mauritius and SME Portal) There are a considerable number of small enterprises that do not register with SMEDA. The possible reasons are: They are not aware of benefits to which they are eligible and the fiscal and non-fiscal incentives at their disposal through registration. They are operating in a sector where they do not perceive any significant benefit through registration. E.g. seller/producer of dholl puree. They are operating in the informal sector and do not want the Mauritius Revenue Authority to probe into their business activities. Table 2.5: Small and Medium Enterprises registered during the period 2005 à ¢Ã¢â€š ¬Ã¢â‚¬Å" 2012 Enterprises In Operation 2005 New Registered 2005 2012 Total Registered 2012 New In Operation 2012 Total in Operation 2012 Food Beverages 473 1884 2357 607 1081 Leather Garments 886 1819 2705 670 1556 Wood Furniture 262 236 498 98 360 Paper Products Printing 69 72 141 26 95 Chemical, Rubber, Plastic 46 62 108 28 74 Handicrafts, Pottery Ceramics 476 990 1466 373 849 Jewellery Related Items 67 63 130 27 94 Fabricated Metal Products 251 338 589 126 377 Profession/Vocation/Occup 764 2274 3038 788 1552 Trade Commerce 1463 5054 6517 1431 2894 Business Support Service Sector 67 158 225 48 115 Others 338 866 1204 248 586 Total 5,162 13,816 18,978 4,470 9,632 (Source: SMEDA and OPSG) The above table indicates that the mortality rate for registered SME is high. Employment status In 2007, out of 208 800 persons in the small units, 18.5% were employers with paid employees. 24.7% were on their own account or with the help of unpaid family members. The total number of employees was estimated at 47.2% and contributing family workers at 9.6%. (Source: CSO) 2.6 INSTITUTIONAL SUPPORT To promote the SME sector, the Government has set up several support institutions. These institutions cater for a wide range of support and services: access to finance, training, business counselling, marketing assistance, innovation, business plan elaboration etc. The ministry dedicated especially for SMEs, the Ministry of Business, Enterprise and Cooperatives has some of these institutions under its aegis. SMEDA: The objectives of the Authority are inter alia: To promote a conducive business environment and empower SMEs to emerge and grow. To enhance the competitiveness of SMEs To facilitate, assist SMEs to gain market and business opportunities and to compete successfully in national and international markets Enterprise Mauritius: Enterprise Mauritius is a Trade Promotion Organization. It is a collaborative partnership between the public and private sectors. The various types of supports provided include: Market development Financial assistance Consultancy Product and quality improvement Market intelligence Skills and trend monitoring Networking Strategy development For the benefit of businesses, Enterprise Mauritius coordinates every year the participation in Trade fairs, Buyers and Sellers Meetings and Business to Business meetings in local and international events. Enterprise Mauritius has set up liaison offices in Kenya and USA and is opening other offices shortly in Tanzania and South Africa with a view to targeting emerging markets in Africa. The Mauritius Business Growth Scheme (MBGS): The MBGS was established by the Government in collaboration with the World Bank. Its aim is to bring innovation, improve productivity and competitiveness of enterprises, particularly SMEs by targeting specifically areas of skills and training, technology upgrading, innovation, quality standards and business development. The Development Bank of Mauritius Ltd (DBM Ltd): The DBM Ltd provides an array of support facilities to all those engaged in socio-economic activities. It assists the government in achieving the economic and social objectives and has devised various credit schemes to finance SMEs. The Mauritius Post and Cooperative Bank Ltd (MPCB): The MPCB has devised special schemes for SMEs and micro enterprises at preferential and concessionary rates as well as a wide range of banking products and services in line with government policy. The National Women Entrepreneur Council (NWEC): The NWEC is a parastatal body under the Ministry of Gender Equality, Child Development and Family Welfare. It provides support and assistance to would be and existing women entrepreneurs. Services provided by NWEC include: Information Programmes Counselling Trade fairs (Local and International) Training Marketing Other institutions which provide support to SMEs in some way or other are: Mauritius Institute of Training and Development (MITD) University of Mauritius (UOM) Mauritius Standards Bureau (MSB) National Computer Board (NCB) National Productivity and Competitiveness Council (NPCC) Human Resource Development Council (HRDC) Board of Investment (BOI) State Land Development Co Ltd (SLDC) 2.7 INCENTIVE FRAMEWORK Over the years, Government has provided several incentives to allow SMEs to grow: in particular through various exemptions from customs duty on raw materials and imported production equipment. SMEs have also obtained concessionary rates on interest on loans from DBM Ltd. SMEs operating in the EPZ benefit from other incentives as well. Incentives to registered SMEs include: Fiscal Incentives: Exemption from Land conversion tax for relocation, expansion or launching of an industrial business Exemption from Customs duty on some types of utility vehicles Reduction in payment of Road Tax for Dual purpose vehicle. Non-Fiscal Incentives: Obtention of Building Land Use Permit 3 days after complete submission of application and notification procedures. Payment of Rs 500 of fees for Building and Land Use Permit for construction, extension or conversion of existing building for up to 250 square metres of floor area. 2.8 FINANCIAL SUPPORT TO SMES SMEs have at their disposal several support institutions that provide either loans, cash support, refund scheme, leasing, subsidies for participation in trade fairs, refund of costs of buying bidding documents etc. The DBM Ltd has a variety of financing schemes to service a wide range of businesses such as: Value addition projects for small enterprises in the manufacturing, agricultural, agri-business, and handicraft sector etc. Agricultural Diversification Loan Scheme Loan to finance trade, commerce and other related activities Loan to manufacturing sector: start-ups, expansion, modernization, computerisation, working capital finance. This list is not exhaustive, other sectors also are serviced. The interest rate charged is at a concessionary rate of: Repo Rate +3 %. Small businesses also resort to other sources of finance. These include personal savings, loans from family and friends who may join in as business partners. A summary of schemes from support institutions are shown at Appendix 1. 2.9 FINANCIAL DIFFICULTIES The success of an enterprise depends heavily on a good financial planning and a good business plan. In many cases, finance is required during the start-up, operating and growth stages. The traditional source of finance is from commercial banks and other financial institutions. These banks prefer to deal with established or large businesses rather than SMEs, particularly start-ups owing to higher risks and potentially low profitability of the business. The difficulties in obtaining loans or satisfactory loans from commercial banks stems mainly from the following reasons: Unsatisfactory or unrealistic business plans Inadequate accounting records and other information Insufficient assets as security or no personal guarantors Potentially low profitability and stability of small businesses not well established High administrative costs to banks for relatively small amounts of loan High interest rates from commercial banks 2.10 ACCESS TO INFRASTRUCTURE A satisfactory infrastructure is a pre-requisite for the setting up and growth of SMEs. DBM Ltd has pioneered the construction of industrial buildings in the 1970s. Subsequently other government support institutions have created a number of industrial estates at different locations. These are made available to SMEs at a subsidized rate of 50% for the first three years. SLDC is constructing more industrial parks destined to SMEs at an affordable rate. However, there are still vacant industrial spaces at various localities. Vacant Industrial Space available as at July 2012 is shown in appendix II. It is observed that many of the vacant industrial space in various localities belong to private owners. This may suggest that SMEs cannot afford to pay the rent or that they are relying on SLDC to provide the space at a subsidized cost. An Incubator Centre of 10 000 sq. ft. has been constructed at SMEDA Headquarters at Coromandel and is made availab le at a subsidized rate to start-ups for a period of five years.