Role of SMEs In Pakistan

Below is an article of mine that won the Inter University Article Contest in 2005. The article is published in Pakistan & Gulf Economist Sep 19 25 2005. I am sharing it with you for your interest. Pakistan has emerged as the second rapidly growing economy in Asia after China in 2004 2005, as claimed by government and well accepted by international raters and financial institutions. According to Economic Survey 2004-05 this increase in real GDP is the courtesy of robust performance of large scale manufacturing and services sector. Even though the large scale manufacturing registered 15.4% growth but small and medium enterprises (SMEs) is the core issue in the countrys progress and especially for the prosperity of masses that are surviving with low scale income due to which Pakistan ranks 135th out of 174 countries on Human Development Index. When we think about SMEs, we consider it as one person manufacturing enterprise but according to SMEDA Small Enterprises should possess ten to thirty five employees with two to twenty million rupees capital intact in equity. Medium Enterprises should possess thirty six to ninety nine employees with twenty to forty million capital intact in equity. Here we have to see the role SMEs have in the progress and well being of masses in Pakistan. The assessment of the role of SMEs in Pakistan is of vital importance. Sometimes we have shinny figures and data regarding economy like GDP growth or per capita income but these can be misleading because the earners of these massive growth are not masses but the capitalists in the country. SME produces the income stream for masses located in the countryside and the capitalists associated with this activity that is generally medium or small as the name suggests. In Pakistan SME sector is not only the minor sharer till yet, reality is that Pakistans whole economy is highly dependable on the pace and productivity of SMEs. Out of Pakistans 3.2 million enterprises 95% are those who possess 99 employees in private industrial sector and employ about 78% of non agriculture labor force. SME contributes 25% export of manufacturing goods and 30% of GDP is the outcome of business efforts of SMEs. The vital question is not what SMEs have produced? But, what they are capable to produce? The simple answer is if they produce on their full potential and capacity Pakistan would be way ahead on economic racetrack of the world. They can produce billion of dollars worth items that is why SMEDA is quite right in stating its mission as Turning potential into profits. Turning potential into profits gives us a truer and fair picture of the role of SMEs in Pakistan. Now we will see what potential we have and the threats associated with it and how we can turn potential into profits by overcoming existing threats. Firstly we have to talk about the main potential we have to boost the progress and efficiency of SMEs. The real potential of SME growth in the country is the deprived people of this country who are quite keen to raise their standard of living. It simply means the future of SMEs is associated with the temptations of highly talented but deprived masses of Pakistan and their will to turn their dark days in to glittering ones. But the real problem associated with their will and dreams is finance and technical assistance. Financing concerns have two issues; first is availability of finance and second is the rate plus the terms on which the finance is available. Financing SMEs in heavy liquidity period for banks is not a burden but an opportunity because bank can utilize their liquidity by advancing finances to SMEs. By advancing to SMEs they can have two advantages. First when they advance to many small and medium enterprises as compare to large

ones, their lending amount will be distributed to a number of clients that will increase the probability of recovery. Secondly, the contribution in national economic growth via utilizing their liquidity that is excess due to great activity in economy in the period after 1999 and especially after 2001 that will further expand the activity in banking sector in near future. Exploring a specific niche product is another way to boost SMEs sector. Niche is a unique product that we can produce at low cost with an absolute advantage. In Pakistan we are producing Niche from Wazirabad by producing the international quality surgical instruments and Saialkot is there for sport goods. SMEDA and other concerns like EPB have to come up to explore more niches that are sure available in this country of highly skillful workforce. In this regard Prime Ministers program of ONE VILLAGE ONE PRODUCT is of high importance. Even we could not achieve economy of scale through this niche but available glittering demand in international market can offset the cost burden and causes the inflow of foreign exchange. The movement of masses from rural to urban areas is another hot slot of the time. While developing a well integrated SME sector in the country, it is the clear cut advantage that we can stop this mobilization that certainly is creating the urban problems and increasing the urban development overheads and cost of maintaining big cities like Karachi. Even it will be a factual probability that through SMEs we can convert our villages into new towns and sources of revenue and progress. Stock markets in the country are in deprivation of number of newly listed companies; I think it is for the sake of well being of stock markets and SMEs that SMEs should be authorized to get listed in shape of a venture of 3 to 5 SMEs on stocks on relatively smaller amount of capital that is how the SMEs could muster the very capital and while becoming a part of corporate culture that can give way for them to have good management. In early stages the board of SME companies (as they would not be able to pay handsome amount to experts) should consist of experts of Federal, Provincial governments and specialized financial institutions and the small and medium enterprises. Small and medium entrepreneurs should possess the majority shares and the shares of these stakeholders have to be to the extent of their support and inline to compensate nominal through the profitability of the companies. SMEs will be the main source of poverty reduction in Pakistan that will create the value and innovation for the country in the days to come. The thing that really needs serious attention is to remove the unnecessary bureaucratic procedures. It is essential to make it possible that the opportunities for small entrepreneurs should not be wasted through excess processing of finance applications or other official terms. Assistance to SMEs is not enough; the government and specialized financial and technical institutions should stand as partners of small and medium entrepreneurs, this is the only way that the financial institution can recover their funds with yield. Government could achieve its goal for poverty reduction, economic progress and above all the value creation process by promoting the culture of SMEs. This is the only way that can make sure the poor masses of Pakistan shall not live poor anymore.s

S MEDA-JICA IN D USTRY S UP PORT PROGRA M (Auto Parts Secto r Pakistan)

SMEDA and JICA (Japan International Cooperation Agency) have initiated an Industry Support Program in Pakistan. These two organizations are working together to provide technical assistance to various industrial sectors through Japanese Senior Experts. The Automotive Sector in Pakistan is dominated by the Japanese companies. These companies carry out the assembling operations and are heavily dependent upon the local auto parts vendors for parts supplies. Improving the vendor industry will directly benefit the assemblers in terms of cost, on time delivery and quality. The vendors of the sector are facing a major challenge with the liberalization of economy and phasing out of deletion program. They need to be educated in Capability Building, Application of TQM & JIT techniques, Production & Operations Management and Integrated Problem Solving. It was therefore essential to start an Industry Support Program for assisting the Auto Industry to enhance its competitiveness. SMEDA has requested JICA for six automotive experts as Senior Volunteers (SVs) to be based at SMEDA. The tenure of each of the SVs will be for one year.

The Automotive Experts work for technical support to Automotive Vendor Industry in Pakistan. Industry Support Cell (ISC) comprises of automotive professionals at Lahore and Karachi. These professionals are working closely with the Japanese Expert(s). With around 40 years of experience, coupled with pertinent education in respective fields, the experts will transfer their knowledge, expertise and methodology to the local industry on truly voluntary basis. As a part of the program, Japanese expert(s) will be attached with industrial unit(s) for a certain time period. In the process of technical guidance, the selected units are evaluated thoroughly by the expert(s) and comprehensive advice and guidance is given on improving the levels of productivity, efficiency, quality, cost controls and effective management techniques (based on the needs of each individual unit). Normally, a time period of Nine Weeks is allocated to each individual unit for technical assistance and then after a certain time the same unit is again re-visited to evaluate the changes that take place in light of the guide lines provided earlier. Significant results have been achieved in following areas: Productivity Improvement Optimal capacity utilization Introducing efficient management techniques Cost controls Skill up-gradation at middle management level Introducing concept of on-job-training Awareness of International Quality Standards Cultural change by introducing concept of Continuous Improvement It is estimated that around 150 industrial units will get a direct benefit from the program during the stay of SVs in Pakistan in next two years. After the departure of these SVs, the Industry Support Cell at SMEDA with Pakistani professionals will continue to provide these services to the industry. It is anticipated that this program will lead to improvement of Automotive Vendor Industry at various steps of the value chain. These improvements will lead to higher productivity of Pakistani manpower and

better product quality for enhancing exports for the Auto sector. In order to share the benefits of the expertise and knowledge of the Japanese Expert(s), the relevant industrial units are invited to be the part of this program as model unit(s). Upon request, the expert would spend a defined time at the factory and will guide about the improvements that can take place based on the specific needs of unit. We would also request the concerned trade associations to select their members who are relatively small to medium scale in size, genuinely interested in up-grading their level of operations through the Japanese Experts and are ready to put-in the required time, effort and investment for moving on to a higher level of business operations. Please let us know by letter or fax about your willingness to participate in this program so that the name of the nominated unit(s) could be included in the schedule of next phase of the program. In case if any clarifications required, please do not hesitate to contact the undersigned.

References http://www.unido.org/fileadmin/user_media/UNIDO_Worldwide/Offices/UNIDO_Offices/Pakistan/Auto _Parts_Lahore_-_Edited_May_16__2006_1_.pdf

www.smeda.org.pk/downloads/cluster_dev_punj.pdf www.smeda.org/ISC-auto-sector_201.html www.competitiveness.org.pk/.../MotorcycleIndustryReport.pdf www.tradecapacitypakistan.com/new/pdf/itc/SS3.pdf

http://www.iin.com.pk/IINSiteData/images/grrsection/pdf/Regulatory%20Procedures/Getting%20Fina nce/How%20to%20Obtain%20Finance%20from%20SME%20Bank.pdf