SMEs: The Little Giants of the Local Economy
September 8, 2005
Although they make up the bulk of the
SMALL AND MEDIUM enterprises (SMEs) make up around 99.6% of locally-registered establishments. Whether it is because of their sheer number or the entrepreneurial, pioneering spirit behind them, some of the most inspiring success stories of Philippine business are about SMEs.
SMEs got a major boost in 2004 when they became an integral part of President Gloria Macapagal-Arroyo’s “10-Point Agenda.” The goal was to create six million jobs in six years through additional opportunities for entrepreneurs, such as tripling the amount of funds for lending to SMEs and the development of one to two million hectares of land for agriculture-based businesses, a key focus for SMEs.
The government hopes to provide further impetus for small and medium-sized firms through the SME Development Plan 2004–2010 or the National SME Agenda, which aims to create globally competitive SMEs.
Apart from these government efforts, a number of local and international private initiatives, dealing with financing, marketing, as well as skills and technical training, to name a few, are also geared toward SME development. With these, it seems that SMEs are on track to drive the
SMEs are classified according to total assets, including those arising from loans but excluding the land on which the company’s office, plant, and equipment are located. Total assets for microenterprises range up to P3 million; small businesses, up to P15 million; and medium enterprises, P100 million. Micro enterprises usually employ one to nine employees; small businesses, 10 to 99 employees; and medium enterprises, 100 to 199 employees.
Filipino SMEs are labor-intensive and many generate jobs in the locales where they operate. They easily adapt to the latest designs and assimilate trends well. Compared to big enterprises, SMEs are far more innovative in the use of indigenous or appropriate technology and effectively increase local content in the goods they process. They are skillful in the use of scarce, capital resources, and often partner with large firms as suppliers of locally available raw materials.
In 2003, the National Statistics Office (NSO) registered a total of 810,362 SMEs in the country. The same records also showed that 60% of Philippine exporters are SMEs. They indirectly contribute to the country’s exports through subcontracting, large firm linkages, or as suppliers of exporting companies. Direct exports of SMEs comprise 25% of total exports, 5% of which form the whole output of the manufacturing sector. The National Capital Region (NCR) generated the most jobs with SMEs accounting for 23.2% of the region’s employment total.
To fully realize the potential of SMEs, Republic Act No. 6977 or the Magna Carta for Small Enterprises was enacted into law in 1991. Through RA No. 6977, the Small and Medium Enterprise Development Council (SMED) was created to oversee SMEs.
The major provisions of RA No. 6977 (amended in 1997 by RA No. 8289) are the establishment of the Small Business Guarantee and Finance Corp. (SBGFC) as the prime financial institution for SMEs, the mandatory allocation of credit resources to small enterprises, and the earmarking of 10% of the government’s total procurement as the share of SMEs.
In 1993, then President Fidel Ramos signed Proclamation No. 256, which declared every third week of July as “Small Enterprise Development Week” to inculcate a continuous awareness of the primacy of SMEs in nation-building and people empowerment.
The annual occasion’s highlights include an exposition of regional products, business-related sessions, and free consultations from various SMEs. Now known as “SME Week,” this yearly event is undertaken by the Department of Trade and Industry (DTI), SMED, and SBGFC.
According to Zorayda Amelia Alonso, DTI undersecretary for the SMED Group and SBGFC chairperson and chief executive officer, although previous administrations crafted programs for SMEs, it is only the present administration that has come up with a long-term plan.
The National SME Agenda takes a three-pronged approach to SME development. At the enterprise level, the government will provide SMEs access to comprehensive and focused support to enhance their managerial and technological capabilities. SMEs will also be given assistance in identifying and developing business opportunities.
At the industry level, the government will strengthen support for linkages that are active in international markets and provide support for industrial linkages with major Philippine industries.
On the broad level, the government will develop SME finance support programs, streamline incentives to SMEs, oversee the implementation of policies and regulations, and strengthen and build the capabilities of institutions that generate and implement program for SMEs.
Prior to the launch of the National SME Agenda, a one-year plan was implemented in 2003, aligned with President Macapagal-Arroyo’s priority strategy at the start of her term.
In 2002 when he was still DTI secretary, Senator Manuel Roxas III, teamed up with several government agencies to form the SME Core Group. The group was re-launched this year as the DTI-SMED Group, which is mandated to coordinate closely the various government agencies’ efforts for SMEs.
Major Limitations
Though they employ around 70% of the labor force, SMEs contribute only an average of 32% of the country’s gross domestic product (GDP). The non-stock, non-profit Asia Foundation states that while SMEs in the Asia Pacific help increase employment opportunities, particularly for women and the poor, they are still stymied by structural impediments. These include overregulation, corruption, poor governance, and high prices caused by monopolies. In the face of government efforts and initiatives to spur growth in the SME sector, it is ironic that these monopolies are, almost always, state-owned.
According to DTI, Filipino SMEs are “generally below-average performers” when compared to their counterparts in other Asian countries. Factors that contribute to this include fierce competition in the export market, the influx of lower-priced competition, the small domestic market, high dependence on imported parts or materials, limited industrial linkages, lack of basic operational management knowledge and expertise, lack of funding and research and development support (both market and technical), and limited economic activities at the local level.
Also, the majority of SMEs face productivity performance and structural weaknesses. Their business environments are also outmoded and less productive. There is insufficient use of technology, limited room for efficient operational levels, inadequate management and professional knowhow, inaccessible fund sources, unappreciated or scarce professional services, lack of incentives, and they are unable to meet regulatory procedures as well as access vital information.
As regards access to fund sources, most SME owners have to spend their own savings to start their businesses, while others rely on personal loans from families and friends for their initial organizational needs. According to DTI, only 10% of SMEs avail themselves of institutional debt financing partly because of fear of loan exposure, not enough collateral to qualify, and lack of knowledge on credit sources and processes.
The situation is aggravated by the inaccessibility of supplier credit and the low possibility of securing customer advances. Also, the extended repayment terms SMEs often offer to compete with bigger suppliers are exploited by supermarkets, malls, and market service networks.
The unavailability of external funds contributes to inefficient capability levels which result in low or marginal profitability. This partly explains SMEs’ predominant use of low technology, which, in turn, impedes their growth.
Lorna Chacon of Cagayan de Oro’s Chas Merchandise, a fashion accessories and houseware maker, says credit facilities are not easily available. Either that or they have terms that are too burdensome. She adds that securing a loan on sustainable terms is not that simple.
Ambassador Jesus Tambunting, chairman and chief executive officer of Planters Development Bank (Plantersbank), says that, based on his bank’s experience, most SME borrowers, especially in the rural areas, are first-timers.
“Many of them do not even know how to fill up an application form. Many of them also do not keep records. We (Plantersbank) even have to reconstruct their financial statements and other accounts,” Tambunting notes.
Apart from funding woes, SMEs are also besieged with other problems such as those that hamper their access to markets. Most SMEs sell locally to final consumers, mainly individuals and households and mostly from the poor and middle class. Market opportunities for them are limited to trade fairs and very few sell to permanent outlets such as supermarkets, department stores, and market services due to their inability to meet the required market volumes and the unfavorable terms demanded by these volume buyers.
Also, subcontracting possibilities are not exploited, as many turn out similar products. Lack of technology in terms of better packaging, wider distribution, and faster shipping also contribute to market access problems. A number of SMEs also have limited knowledge regarding potential investors or franchise opportunities.
Emerging Solutions
Thankfully, the future is now looking much brighter as solutions to these perennial problems are beginning to emerge. To begin with, finances need not be that big a concern anymore, assures Planterbank’s Tambunting, as various funding schemes and channels for SMEs are now readily available, such as the country’s first private equity fund which was launched last January. The Plantersbank-Aureos SME Equity Fund – a $25-million aid package scheduled for disbursement over the next four years -- is for SMEs with profitable growth potentials and foreign exchange savings, and who contribute to employment generation.
The 2005 SME Week in July featured the World Bank’s International Finance Corp.’s (IFC) “Assistance to Small and Medium Enterprises”, or IFC-Asenso. A program that requires a $12-million fund over a period of four years, IFC-Asenso marks IFC’s renewed commitment to help the country. This World Bank agency has continually assisted the
“This amount shall increase over the years and go a long way toward increasing SMEs access to finance, promoting responsible business practices, and creating sector-specific opportunities for sustainable growth,” Trade and Industry Secretary Peter Favila says.
Even commercial banks are now more pro-active in helping SMEs. DTI has recognized Plantersbank, Equitable PCI Bank, Bank of Commerce, Anchor Savings Bank, Export and Industry Bank, Banco de Oro, and Rizal Commercial Banking Corporation as the top bank partners of the government in providing wholesale lending and guarantee programs for SMEs. Favila announced last July that Allied Bank Corp. committed some P1 billion for an SME credit facility.
In terms of product promotion, meanwhile, SMEs are being encouraged to join fairs such as the Manila F.A.M.E., National Trade Fair and those organized by the Center for International Trade Expositions and Missions (CITEM) to give their products and services wider market exposure. Last March, the National Trade Fair, participated in by 204 SMEs from 16 regions, posted total sales of P122 million.
Alonso says SMEs may go to the DTI Web site, www.dti.gov.ph, where a database on the various issues affecting SMEs is available. Catalog Online, (www.citem.com.ph/catalogonline), a virtual showroom for companies that participate in trade fairs and missions spearheaded by CITEM, is another vital link between exporters and buyers.
Related to this, the government hopes to enable SMEs to become more IT-knowledgeable through DTI’s partnership with the Commission on Information and Communication Technology (CICT). SMEs are encouraged to join the CICT mailing list, ICTBlueprint-subscribe@yahoogroups.com, to avail themselves of vouchers that will entitle them to around eight hours of free consultation with 100 selected business advisers. Volunteers from the Philippine Business for Social Progress (PBSP), Management Association of the Philippines (MAP), and the Financial Executives Institute of the Philippines (FINEX) have also agreed to serve as SME counselors. Alonso says the DTI has 80 business counselors at each of its SME Centers as well.
Successful Partnerships
Unfortunately, many SMEs say they are not aware of any government program for them. Alonso is not surprised. She admits, “It is still difficult to reach all 800,000 of them, but we are trying.”
One of the more successful examples of the government working for SMEs is the case of the Paete Associated Enterprises for Trading, Export, and Manufacturing Inc. Engaged in handicraft business, the company was able to access credit assistance worth P1.2 million from the government. Marketing manager Veronica N. Adao says they previously thought government assistance was difficult to access, “but provided that SMEs have complete requirements, nothing is impossible.”
The credit helped the company offer its products to foreign buyers, such as those from
Another SME honoree in the micro-enterprise category is Rejano’s Bakery of Marinduque, whose products include arrowroot or uraro cookies, bread, tamarind, peanut butter, chips, and polvoron. Owner Carmelita Reyes says her regular attendance at government initiated training programs, plus the P1-million credit she acquired upon submission of the complete loan requirements, made her business thrive -- and her assistance to arrowroot farmers grew as well.
Outstanding SME honoree in the small enterprise category, Lolita Ambre of RJS Furniture of Quirino hopes that the government will further support the furniture industry in the areas of raw material procurement and transportation of finished products. She points out that the design aspect is no longer a problem as Filipino designs continually garner raves abroad.
For her part, Alonso says she still hopes “our SMEs, especially those in the areas of accessories, furniture, garments, and jewelry, will be more attuned to global trends.”
She adds that amending existing legislation (such as RA No. 6977) and strengthening the Barangay Micro Business Enterprises Act of 2002 (which aims to provide incentives and other benefits to micro enterprises) are also being pushed so they could become more potent laws in favor of SMEs.
Bureau of Small and Medium Enterprise Development (BSMED) assistant director Jerry Clavesillas says SMEs can partner with multinational corporations through DTI’s “Small Brother-Big Brother Program,” which aims to create a pool of small and medium firms that can supply the requirements of MNCs.
Clavesillas says the competitive advantage of SMES lies in the lower priced but good product quality they offer. He adds that SMEs keep their clients because they know how to be flexible in meeting their clients’ needs. This makes them ideal candidates as drivers for economic growth.
All it takes is genuine attention for SMEs, Tambunting claims. Elaborating, he says they should not be treated as borrowers or clients but as real partners of the government in spurring economic growth. “The key is to really help SMEs. Treat them well as customers and their self-esteem will go up.” Tambunting suggests even holding their hands if need be, “so they will feel that they are guided every step of the way.”
Taken from http://www.itnetcentral.com/article.asp?id=14949&icontent=18348
No comments:
Post a Comment