Between 20 September 1997 and 2 October 1997, a delegation from the Portfolio Committee on Trade and Industry undertook a study tour of 3 Asian countries to investigate their small business support programmes. The three countries - Singapore, Malaysia and Bangladesh were selected because each has a reputation for innovative and effective programmes of SMME support. The following is the report to Parliament of the delegation.
All three countries add a different perspective about 'international best practise'. International best practise in these countries suggests that a strong institutional framework displays the following characteristics:
The tour provided the committee with insight into the following issues:
The Federation of Malaysia's, economy is primarily commodity based and has enjoyed a dominant world position in rubber, palm oil and tropical hardwoods. The Malaysian governments determined efforts to expand and diversify the country's economic base has met with a fair degree of success and manufacturing replaced agriculture as the largest economic sector as early as 1985. During 1993, 81.4% of Malaysia's manufactured exports (US$ 34 902 million) were electrical and electronic goods.
In June 1991, the successor to Malaysia's 20 year New Economic Policy (NEP), the New Development Policy (NDP) was introduced. The emphasis on 'racial' economic restructuring in the NEP shifted towards economic growth and the eradication of poverty under the NDP.
Malaysia has a population of around 18 million inhabitants. More than half are bumiputras or Malay, about a third are Chinese and a tenth are of Indian origin. Most bumiputras lived in rural areas and engaged in smallholder agriculture or fishing while the majority of Chinese lived in urban areas where they dominated commerce. There has been government guidance in implementing policies that assist the bumiputras of Malaysia in acquiring a larger share of the economic activity. Currently there is an unemployment rate of less than 3%. With the introduction of Government programmes these trends have been reversed as indicated in the programme shift from the NEP to the NDP economic programmes.
The Republic of Singapore is now the ninth wealthiest country in the world, and in January 1996 the Organisation for Economic Co-operation and Development declared that Singapore's could no longer be classified as a developing country.
Its economic success was based largely on its central location in the region, efficient planning, advanced infrastructure and a highly trained workforce which encouraged investment. Tax incentives were introduced to promote a regional investment programme to take advantage of the rapid growth rates of less developed countries in the region. Emphasis was also laid on maintaining Singapore's competitiveness as an investment location for higher value added activities.
Singapore's development policy focuses on the need to build fundamental activities of an enterprise through self help assistance. The holistic approach to SMME support consists of broad based assistance, industry based assistance and focused assistance.
The government's role has been to direct, encourage and directly assist the development of local entrepreneurship, particularly in the manufacturing sector, through a range of financial and non financial services. This has allowed Singapore to achieve a healthy and steady economic growth for the past twenty years. Singapore thus offers significant lessons for South Africa.
The Malaysian Economic Planning Unit is charged with the task of formulating policies, strategies in development planning and prepare long and medium term plans. It acts as an overall adviser on economic issues to government through initiating the necessary economic research and prepare projects for privatisation. The Unit is charged with the task of preparing and evaluating the development budget and acts as a secretariat to the Foreign Investment Committee. As part of its planning responsibilities the Unit conducts several mid term reviews of the medium term plan to evaluate if targets are being met within time and resource constraints.
The EPU co-ordinates policy proposals from Federal Ministries, Federal Agencies and State Governments through the Inter Agency Planning Group, which is then presented to the National Development Council, after inputs from the relevant stakeholders are complete. This is forwarded to the Cabinet and thereafter to the Parliament.
Some of the industrial development policies and strategies formulated during the 1990s included an intensification of capital and intermediate goods industries and enhancing technology and information technology intensive industries. This period also saw the strengthening of competitiveness of industries in international markets and the development of Malaysia's own brand of goods and services. The EPU has proposed several strategies directing the development of the small enterprise sector through government agencies like the Small & Medium Industries Development Corporation SMIDEC.
The Malaysian Industrial Development Authority (MIDA) is the principal arm of the government charged with the promotion, co-ordination and implementation of industrial policies and development. MIDA has 15 overseas offices overseas to assist manufacturers from these countries to invest in Malaysia. The Ministry of International Trade & Investment is charged with overseeing the second Industrial Master Plan. MIDA designs and implements programmes to meet the targets of the second Industrial Master Plan. The South African equivalent would be the Industrial Development Corporation.. The master plan moves beyond a mere focus on manufacturing to include the strengthening of industrial linkages and enhancing productivity. This requires the strengthening of R&D, supporting industries, packaging, marketing and distribution. During the second master plan there is a strategic shift to knowledge based, technology intensive and high tech industries. A package of fiscal and non fiscal incentives has been drawn up by the government to encourage investments in these targeted sectors. Some of the functions of MIDA include:
The PSB has 6 key thrusts: productivity promotion, technology application, standards and quality development, manpower development, industry development and incentives management.
For the next five years, PSB has prioritised five goals to build a highly productive workforce and industry in Singapore. These goals are aimed at achieving national targets of an average annual productivity growth of 4% and average annual total factor productivity growth of 2%. This is in line with the governments overall economic target of achieving a sustainable gross domestic product (GDP) growth rate of 7%. The PSB programmes are designed and implemented to meet these targets. The organisation receives 60% government funding and 40% from fees charged for services. The PSB continually asses what projects government ought to fund and other programmes that should be cost recovery.
The Bangladesh Board of Investment (BOI) was established in 1989 by the Government to accelerate the private investment in Bangladesh. The Board is headed by the Prime Minister. It is charged with taking decisions for speedy implementation of new industrial policies and projects which provide operational support services to these companies. It is the principal body for the promotion and development of foreign and local private investment in the country. It administers a broad range of incentives for foreign investors from tax holidays, tax exemptions, 100% foreign ownership, rebates on exporting companies, repatriation of profits and dividends, concessionaire rate of import duties on machinery etc.
PSB has also been working with Singapore based companies to encourage them to invest in technology and increase the level of innovation. Since April 1996, PSB has assisted over 2000 companies in technology projects worth more than $17 million.
The Malaysian Industrial Development Finance (MIDF)) is Malaysia's main industrial development finance institutions, established in 1960. Its objectives is to promote the development of the manufacturing industry in Malaysia through the provision of medium and long term loans for the financing of new fixed assets for industrial ventures as well as existing enterprises undertaking modernisation and expansion. (The South African equivalent would be the Development Bank) Since its inception, MIDF has granted more than 4600 loans and leases for over RM3,8 billion to manufacturing establishments.
Over the years MIDF has been one of the institutions charged with managing and disbursing funds under the various loan schemes, such as the ASEAN - Japan Development Fund, Small & Medium Scale Industry Promotion Programme/OECF Fund, the New Entrepreneurs Fund, Bumiputera Industrial Fund, Industrial Adjustment Fund and the Swedish Fund for Environmental Protection and Control. Following the Governments decision to create lead agencies towards a more focused approach in SMME development in 1992, MIDF being under the direction of the Ministry of International Trade and Industry, was appointed the conduit for channelling concessionary loans to SMMEs under the Modernisation and Automation Scheme.
MIDF has over the years developed into a diversified financial conglomerate with investments in a number of subsidiaries. Under its wing, MIDF now has a commercial bank, a licensed finance company, a merchant bank, the country's largest industrial estate developer and a corporate services company which is the first issuing house and share registrar in the country.
MIDF offers a wide range of facilities and services including fixed term loans and floating rate loans which can be in the form of finance for projects, machinery, factory mortgage, working capital, equity, leasing, equity participation, financing for reverse investments and guarantees for bond issues of public listed companies. Many of these programmes are channelled through other institutions. Loans can range between RM 100 000 to RM 5 million with interest rates between 4% to 7,75% as compared to the 11% bank interest rate. The programmes are very focused according to industry, sector and project, with a maximum loan repayment period of 10 years.
The Bangladesh Micro Industries Development Assistance and Services (MIDAS) is a non governmental organisation established in 1982 with the objective to assist and support the promotion and development of small and micro industries in Bangladesh in order to generate income and employment opportunities for the unemployed and under employed.
MIDAS Enterprise Development Project focuses on SMMEs strategic position between large scale and micro enterprises. MIDAS identifies promising established small and medium scale industries and provides financial, managerial and technical services to these institutions. It also conducts studies on small scale industrial sub sectors which have potential for growth and employment creation.
The target group of Grameen Bank, BRAC and most NGOs of Bangladesh is typically those who own less than 0,5 acres of land or are dependent on the sale of their labour but small and medium entrepreneurs in rural and urban sectors needing loans ranging from Tk 50,000 to Tk 500,000 do not have much access to formal credit provided by banks and other financing institutions. MIDAS launched a credit programme called Micro Enterprise Development Initiative (MIDI) to address the credit requirement of the above group. Under the MIDI programme loans ranging from Tk 50,000 to Tk 500,000 are provided on easy terms to small entrepreneurs with little access to institutional credit. No collateral or security is required if the loan amounts do not exceed Tk 200 000 in the case of a new loan and Tk 300,000 with repeat loans. The interest rate is 14% per annum with a three year maximum repayment period. A loan application fee of Tk 100 is charged with a one month processing period. As security members need to give a personal guarantee in addition to a guarantee of a sponsor.
The MINI MART Programme has established marketing outlets for the products of women manufacturers.
Skills upgrading and more optimal use of labour encouraging companies to prepare an annual Total Company Training Plan which encourages companies to take a total approach to systematic training for all levels of employees.
Back to Work Programme and the Skills Redevelopment Programme. So far 2,500 people have responded to the Back to Work Programme and 500 have been job matched. In addition, PSB has assumed the responsibility for manpower planning, developing a national skills certification system and retraining of workers for economic restructuring.
PSB continues to play a role in the delivery of in-house training. It has surpassed the target of having 100,000 workers trained, three years ahead of schedule. Through on the job training, 129,000 workers in more than 3,700 companies have been trained. PSB has set a new target of 500,000 to be trained by the year 2005.
Activist Mentoring and Quality Circles Coaching Schemes
Some of the programmes at the industry level include:
Industrial Technical Assistance Fund (ITAF)
This fund provides matching grants to SMMEs to participate in the Consultancy Service Scheme and product Development and Design Scheme. Some qualifying criteria include approved production facilities, shareholders fund not exceeding RM 2,5 million and at least 70% of the equity must be held by Malaysian's and 51% of the equity must be owned by SMMEs. Assistance is given in the form of a matching grant where 50% of the project cost is borne by the government and the remainder is the responsibility of the entrepreneur. The maximum grant is RM 250 000 per project.
Industrial Linkage Programme. (ILP)
ILP promotes and nutures SMMEs into becoming reliable manufacturers and suppliers of critical components and services to the larger companies. Critical sectors have been prioritised. These companies should have a paid up capital of not less than RM250 000 and at least 70% of the equity must be held by Malaysians and 60% must be held by the linkage supplier company. The incentives include a range of tax deductions for both companies on a list of products.
Modernisation and Automation Scheme for SMMEs.
The scheme promotes the modernisation and automation of SMMEs through the application of modern technology. The scheme is in the form of soft loans to assist the acquasition of new machinery and equipment. The loan size will not exceed 75% of the cost of machinery and equipment at a 4% interest rate per annum (as compared to the 11% bank rate) with a 5 to 10 year repayment period and a year grace period.
Soft Loan Scheme for Quality Enhancement of SMMEs
The scheme is to provide Bumiputera SMMEs involved in the manufacturing sector finance to modernise and automate the production process. The maximum amount is RM 1 million at 4% interest per annum over a 5 to 10 year repayment period.
Technology Development/ Technology Acquisition
The programme is to develop the capacity of SMMEs to adopt best manufacturing and management practices and R&D culture among SMMEs. The companies should have a shareholders fund of below RM2,5 million and at least 70% of the shareholders should be Malaysians. The assistance will be given in the form of matching grants or direct financial assistance for SMMEs.
Skill Development Programme
This programme helps upgrade the management of SMMEs in technical skills namely in electronics, information technology, industrial design and engineering skills. SMIDEC conducts a range of training programmes as part of this scheme. Successful applicants are not charged a fee.
Export Development Programme
The programme is formulated to develop and nurture export oriented SMMEs to become world class manufacturers.
Infrastructure Development
This programme assists SMMEs in purchasing or leasing affordable factories at the industrial sites and to equip these sites with the necessary common facilities such as testing labs, waste disposals, warehouse facilities etc. About 80% of the cost of basic infrastructure will be financed while other cost are borne by the developer.
The Malaysian Ministry of Entrepreneur Development was formed in 1995 to replace the functions of the Ministry of Public Enterprises. The ministry has the mission of creating and developing, 'genuine entrepreneurs who will be of quality, resilient, successful and competitive in all the growth sectors of potential in the economy and to cultivate an entrepreneurial culture among Malays'. The Ministry has a number of departments including:
The Malaysian National Productivity Corporation (NPC) was established in 1962 to enhance Malaysia's productivity and quality through programmes like research, training and system development and promotion. The NPC contributes to policy formulation and planning in the area of productivity and quality with the aim of enhancing the development of human resources and enterprises. This facilitates the upgrading of local expertise in the area of productivity and quality management. Enterprises registered and who have contributed to the HRD levy for a period of one month are eligible to apply for training grants for part of the cost of training their employees. To be eligible for training grants trainees must be Malaysian citizens. All manufacturing companies with less than 50 employees and non manufacturing companies regardless of size which undertake training in the approved training institutions are eligible to claim directly from the Department of Revenue for double deductions on expenses billed by the respective training institutions. Some of the programmes include: Quality Management, Productivity Management, Human Resources Management, Production Management, Small & Medium Scale Industry programmes and International Programmes.
The Public Procurement Management Division of the Malaysian Ministry of Finance ensures co-ordination and proper efficiency in all government procurement in line with the established procedures and contributing towards achieving government policy. The Division administers an Entrepreneur Development Programme, which encourages the transfer of technology and expertise, and also strengthens local manufacturing. The Programme involves the issuing of contracts and tenders, linkages with government Companies and the Bumiputera Construction Scheme. Products tendered include: food, furniture, machinery, stationary, petroleum and chemicals, rubber and plastics and motor vehicles. These Bumiputera entrepreneurs are encouraged to manufacture identified goods which also enhance the technological utilisation by the enterprises. The Bumiputera Construction Programme offers construction contracts on a negotiated basis for between 5 to 10 years. Larger contractors are required to sub contract to small contractors and act as mentors. Foreign companies are encouraged to engage in joint ventures with Bumiputera companies in the heavy engineering, telecommunications, aviation, maritime and petroleum industries.
The Bangladesh Export Processing Zone Authority is part of the governments strategy of an 'Open Door Policy' to attract foreign investment. BEPZA promotes and facilitate foreign investment in the Export Processing Zones. The EPZs provide investors with a supportive investment climate, free from administrative procedures. The three programmes include:
Industries in EPZs enjoy tax holidays for 10 years, exemption of income tax on borrowed capital, duty free import of machinery, raw materials, three motor vehicles, materials for construction of factory buildings and duty free exports of goods produced in the zones. Also industries in the EPZs enjoy freedom from national import policy restrictions.
The Entrepreneur Development Programme provides comprehensive supportive services and facilities including entrepreneur evaluation and counselling, business finance, development of business infrastructure and rural transport. The Entrepreneur Evaluation & Counselling provides training, guidance and counselling activities as well as consultancy for Bumiputera enterprises. The Business Financing scheme are provided to enable entrepreneurs to start or upgrade their business. A wide scheme of loans are offered ranging from RM 250 000 to RM 1 million at between 4% to 7% interest as compared to the 11% bank rates. The Development of Business Infrastructure provides business and industrial premises to Bumiputera entrepreneurs in strategically located areas at subsidised rates. The Rural Transport Services provide transport between rural areas and local towns.
The Education and Training Programmes produces and increases professionally trained skilled productive and resourceful Bumiputeras as part of the national objectives. The education and training programmes include: secondary education, vocational training, commercial education and educational sponsorships. Several schools, universities and training colleges have been established by MARA. These training programmes are conducted in a wide range of commercially relevant fields.
The Bangladesh Grameen Bank was established in 1976 by Professor Muhammad Yunus, to provide microfinance to the poorest of the poor. The Grameen Bank, has a world reputation for innovative financing. A study into the Grameen Bank in Bangladesh has assisted the Committee deliberate further on a recommendation made in the report of the Provincial Study Tour viz. support for an active exploration of the option of making finance available at concessional interest rates to targeted sectors. The Grameen Bank's international success in lending to micro enterprises, and particularly women, using solidarity groups is well known. Attempts have been made to replicate the model outside Bangladesh, and much of this work is taking place in African and Latin American countries.
The Grameen Bank has reversed conventional banking practice by removing the need for collateral and created a banking system based on mutual trust, accountability, participation and creativity. Today the bank serves over 2 million borrowers, over 90% are women and works in over 37000 villages of Bangladesh. The Bank not only lends money to the poor, but it is owned by the same people that it lends money to. They become shareholders of the bank by buying one share of the bank for three dollars. The average loan size is seventy five dollars, maximum loan is a hundred and eighty dollars with a 98% repayment rate. Repayment at other institutions are around 10% to 30%. The Bank does not lend to individuals but to groups of five who form a supportive network. Two of the five members will receive the loan at a time. Several of these groups would form a centre. The Bank would then meet the combination of these groups at the village. All the bank transactions will be done in that meeting. Members generally have to ascribe to a sixteen point programme which is seen as improving the conditions of their lives.
Grameen Bank borrowers pay 16% interest as compared to the 12% commercial bank rates. The loan is given at an interest rate higher than bank rates, to cover the cost of administering small loans, but lower than money lenders rates. The cumulative number of houses built with Grameen housing loans since 1980, is nearly 400 000. Loans are generally used for income generating activities such as buying, planting, selling rice and other products, building a home, general repairs on farming equipment, weddings, funerals or to protect a borrower from having to pay extortionate rate to money lenders.
The Bangladesh Rehabilitation Assistance Centre (BRAC) was established in 1972 as a relief organisation after the Liberation War. Later its objectives was changed to the 'Alleviation of Poverty and Empowerment of the Poor'. Its target is people living below the poverty line. Its strategy is focused to take resources to the grassroots level. It is involved in a wide range of areas including Rural Development Programme (RDP), Health & Population Division and Non Formal Primary Education (NFPE). BRAC covers 61 of the 65 districts (95%) or 50,000 out of 86 000 villages. Some of the above programmes cover between 14% to 40% of the villages.
The Rural Development Programme is a development strategy through credit facilities and capacity building initiatives. Some of the programmes include: poultry, livestock, vegetables cultivation, sericulture, fish culture, plantation, small trade and essential health care. This programme is reaching over 2 million members and involves nearly 50,000 villages. Over 90% of the membership is women.
The loans disbursed by BRAC amount to US$417 million. 89% of these loans are disbursed to women. The interest/ service charge is 15% with a 98% repayment rate. BRAC members are organised in similar group structures as Grameen Bank members. The saving of group members account for US$ 34 million at 6% interest. These loans have helped establish over 5,000 grocery shops and restaurants, plant over 25 million mulberry trees and actively employ over 13,000 people in the mulberry project.
The Health & Population Department conducts several programmes including Reproductive Health & Disease Control (RHDC), Essential Health Care, Family Planning Facilitation, Integrated Nutrition Programme and TB Control & Treatment. These programmes cover over 10 million people employing over 12 000 people from villages as field workers. This programme has established 24 Health Centres across the country.
The Non Formal Primary Education programme started in 1985 with 22 schools as a response to requests from mothers of members of the rural credit programme. The programme currently assists nearly 35 000 schools with nearly 1.2 million students. Over 70% of the students are girls between the ages of 8 to 14. They come from poor and landless families. The schools are located in 61 of the 64 districts. BRAC has facilitated the opening of nearly 64 000 schools to date with nearly 900 000 students graduating to formal schools. They enter formal education at level 4 or level 5 after the three year BRAC education programme. The courses include Bengali, Maths, Social studies, English and religious education. BRAC has recruited over 33 000 teachers from the villages where schools are located. 97% of teachers are women with a minimum of 9 years formal education, an intensive 12 day training at BRACs regional centres followed by a monthly one day course. The schools are housed in rented thatched structures built according to specification. One class per room with between 30 to 33 students. The teaching programme does not involve any exam, punishment, homework and school time is flexible according to the needs of the families since students help their parents in the household or in the field. Programme organisers are required to visit a schools twice a week and facilitate monthly parent teacher meetings. Over 2 500 libraries have been established. Foreign donors are the main source of funding for this programme.
BRAC employs just over 50 000 workers including teachers and health workers. Its projected budget for 1997 is US$ 102 million with 50% from foreign donors and the remainder from BRACs project income. Some of BRACs income generating projects include: BRACs Printers, Cold Storage and Milk Processing Plants. BRAC has also established a chain of marketing outlets for rural artisans.
Integral to economic planning in Singapore and Malaysia is targeted financial assistance for broad based, industry based and sector based schemes with focused assistance programmes e.g. machinery, factory premises, raw materials, training programmes, industrial linkages, technology and research and development. The interest rates for the above programmes is generally lower than bank loans. The overall plan identifies certain industries and sectors as crucial to the economic development of the country. Holistic support programmes including financial incentives are introduced for identified sectors and industries. The growth of these industries and sectors act as a catalyst in the development of other sectors. It is seen as an investment by government with spill off effects. The government financial assistance is not ad hoc but part of a broader strategy.
Non financial support programmes cover a focused and wide range of issues including targeted training, quality circles, research, mentoring, design and product development, skills development, Local Enterprise Upgrading Centre, infrastructure development, export development, technology development and technical assistance. These support programmes are closely linked to the financial packages e.g. the buying of machinery requires, optimal training in the use of such equipment. Support programmes are not seen in isolation to the broader strategy and guides entrepreneurs in fulfilling the targets set. The programmes are able to rapidly shift focus and resources. The Singapore Local Enterprise Upgrading Centre acts as a first stop for SMMEs giving assistance in technical consultancy and financing. It co-ordinates government programmes administered by a range of institutions. The first stop centre avoids bureaucracy for the entrepreneur and increases delivery efficiency. Government procurement is clearly an important mechanism in redistributing resources and opportunities in society. In Malaysia the government has actively used procurement as a means to empower, skill and redirect resources to the Bumiputeras.
As compared to the above approach , and due to different conditions, a more comprehensive strategy is used in Bangladesh by the Grameen Bank and BRAC and to some extent the Malaysian Majlis Amanah Rakyat (MARA). These programmes are generally targeted at the poorest of the poor and aim to develop all aspects of the person. as part of a broader community. This approach encompasses education, human resource development, commerce, democratising local institutions and transport. It provides sustainable access to local and rural communities.
In line with the White Paper objectives and time frames, a detailed and comprehensive support plan across industry and sectors should be explored.
The Centre for Small Business Promotion as an umbrella body should integrate and co-ordinate government assistance programmes impacting on SMMEs. The Local Business Service Centres are appropriate delivery mechanisms. It has the benefit of co-ordinating assistance and avoiding duplication of government resources.
The Centre of Small Business Promotion needs to strengthen the setting of targets for the recently established small business delivery structures at the wholesale and retail levels i.e. measure inputs invested with desired outputs and within agreed time frames.
As indicated in the White Paper (Part Six) certain 'action areas' are receiving prioritised attention as part of the short, medium and long term plans. The institutions established as part of this strategy should also prioritise quantitative and qualitative goals, co-ordinated within a broader framework.
The Department needs to evaluate the Local Business Service Centre programme. The impact of increased department co-operation and guidance needs to be considered. These areas include:
The Department of Trade & Industry needs to work closely with the SMME sector in attaining common economic targets. The National Small Business Council can play a crucial role and also act as an early warning system to vulnerable sectors.