6._SME_Policy_Review_5_Aug_2013.pdf

USAID FIRMS PROJECT

Review of SME Policy

January 2013

This report and its contents are made possible by the support of the American people through the United States Agency for International Development (USAID). The contents are the sole responsibility of Chemonics International Inc. and do not necessarily reflect the views of USAID or the United States Government.

Review of SME Policy

DISCLAIMER

The author’s views expressed in this publication do not necessarily reflect the views of the United States Agency for International Development or the United States Government.

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Contract Number: Task Order No. EEM-I-00-07-00008-00

Contractor Name: Chemonics International, Inc.

USAID Technical Office: Office of Economic Opportunities, USAID Pakistan Date of Report: January 18, 2013 Document Title: SME Policy: Support for Legal Framework Author’s Name: Dr. Ernest Koch, Adeel Faheem SOW No and Title SOW#1921, SME Policy: Review of SME Policy Work Plan Level No: Level # 33400, Action # 6454

Name of Component: Business Enabling Environment

Author: Dr. Ernest Koch, Adeel Faheem Practice Area: Business Enabling Environment Key words: Business Enabling Environment – SME Policy: Policy Design, Policy Implementation

A. Abstract

Small and Medium-sized Enterprises (SMEs) play a vital role in the economy in terms of employment creation and poverty reduction. Yet the recent development of the sector has not lived up to its expectations. Still there is no commonly agreed legal definition of SMEs that would unambiguously guide government support, quite a number of SMEs operate in the informal sector and even those in the formal sector hesitate to incorporate. Constraints that hinder the development of the sector are numerous ranging from an unfriendly business environment to limited access to finance and other factor markets. The SME policy 2007 has not provided the expected results due to flaws in its design but in particular unsatisfactory implementation. Unclear roles and responsibilities, limited institutional capacity, lack of coordination among different stakeholders and insufficient consideration of the voice of SMEs are the major factors that led to implementation deficiencies. These are the focus of the SME policy review.

B. Definition of Key Terms

Prudential Regulations Statutory instruments which regulate the conduct of deposit taking institutions. The aim of prudential regulation is to ensure the safety of depositors' funds and keep the stability of the financial system

C. Abbreviations

ADB Asian Development Bank

ADP Annual Development Program

BDS Business Development Services

BDSP Business Development Services Provider

BIZPRO Support to Micro, Small, and Medium Enterprise Development

BSF Business Support Fund

CCI Chambers of Commerce and Industry

CEO Chief Executive Officer

CFC Common Facility Center

CIB Credit Information Bureau

CSF Competitiveness Support Fund

EPB Export Promotion Bureau

EPZ Export Promotion Zone

EU European Union

FBR Federal Board of Revenue

FY Financial year

GDP Gross Domestic Product

GoM Government of Moldova

GoP Government of Pakistan

GTZ German Agency for Technical Cooperation

HEC Higher Education Commission

HRD Human Resource Development

ICT Islamabad Capital Territory

IFC International Finance Corporation

IMF International Monetary Fund

INSMED Institute of Small and Medium Enterprise and Entrepreneurship Development

IPO Intellectual Property Organization

IPR Intellectual Property Right

KPI Key Performance Indicator

ICCM Islamabad Chamber of Commerce and Industry

ICT Information and Communication Technology

IT Information Technology

JICA Japan International Cooperation Agency

LCCI Lahore Chamber of Commerce and Industry

LUMS Lahore University of Management Science

MINFAL Ministry of Food, Agriculture and Livestock

M&E Monitoring and Evaluation

MoT Ministry of Textiles

MoF Ministry of Finance

MoI Ministry of Industry

MoIT Ministry of Information Technology

MoST Ministry of Science and Technology

MTBF Medium Term Budget Framework

MTDF Medium Term Development Framework

NCSME National Committee for Small and Medium Enterprises

NFC National Finance Commission

NGO Non-governmental Organization

NIRC National Industrial Relations Commission

NPL Non-performing Loan

OECD Organization of Economic Development and Cooperation

PAPAM Pakistan Association of Automotive Parts Accessories Manufacturers

PCSME Provincial Committee for Small and Medium Enterprises

PR Prudential Regulations

PREGMEA Pakistan Ready Made Garments Manufactures and Exporters Association

PRSP Poverty Reduction Strategy Paper

PSEB Pakistan Software Export Board

PSIC Punjab Small Industries Corporation

R&D Research and Development

RIA Regulatory Impact Assessment

SBP State Bank of Pakistan

SECP Securities and Exchange Commission of Pakistan

SMART specific, measurable, relevant, time bound

SME Small and Medium Enterprise

SMC Single Member Company

SMEDA Small and Medium Enterprise Development Authority

SSIC Sindh Small Industries Corporation

OSI Open Society Institute

TA Trade Associations

TDAP Trade Development Authority Pakistan

TIC Technology Innovation Center

TUC Technology Up-gradation Center

TUSDEC Technology Up-gradation and Skill Development Company

UNCTAD United Nations Conference on Trade and Development

UNIDO United Nations Industrial Development Organization

USAID United Stated Agency for International Development

UNISAME Union of Small and Medium Enterprises

D. Table of Contents

A. Abstract 2

B. Definition of Key Terms 2

D. Table of Contents 6

1. Introduction 10

2. The SME Sector 11

2.1. Definition 11

2.2. Legal Status 11

2.3. Performance 11

2.4. Sectoral and Regional Concentration 11

2.5. Role in the Economy 12

2.6. Major Constraints 12

2.6.1. Business Environment 12

2.6.2. Financial Markets 13

2.6.3. Other Factor Markets 14

3. Policy Response 15

3.1. National Development Framework 15

3.2. Design of SME Policy 16

3.2.1. Intervention Logic 17

3.2.2. Problem Statement 18

3.2.3. Objectives 18

3.2.4. Policy Recommendations 22

3.2.5. Monitoring and Evaluation 24

4. Implementation of SME Policy 2007-2009 27

4.1. Implementation Plan 27

4.2. Status of Implementation 30

4.3. Efficacy of Policy Recommendations 31

4.3.1. Business Environment 32

4.3.2. Access to Finance and Related Services 34

4.3.3. Access to Resources and Services 36

4.3.4. Entrepreneurship Development 39

4.3.5. SME Definition and M&E Mechanism 40

4.4. Major Implementation Issues 42

4.4.1. Ownership 42

4.4.2. Roles and Responsibilities 46

4.4.3. Institutional Capacity 48

4.4.4. Coordination 49

4.4.5. Voices of SMEs 53

5. Conclusions and Recommendations 57

Appendix I: List of Persons interviewed/consulted – September 2012 61

Appendix II: List of Persons interviewed/consulted –January 2013 63

Appendix III: Summary of Stakeholder Consultation 65

E. List of Tables, Figures and Boxes

Page

List of Tables

1. Key Constraints affecting the Performance of SMEs 11

2. Steps of Policy Development 15

3. Objectives and Sub-objectives in the SME Policy 17

4. SMART Criteria for Formulating Objectives 18

5. SMART KPIs, Baselines and Targets 18

6. Possible Relationship between KPIs and Objectives 19

7. Business Environment – Problem Statement and Policy Recommendations 21

8. Major Stakeholders of SME Policy 26

9. Status of SME Policy Implementation 2007-2009 27

10. Stakeholders and their Interest in SME Development 41

11. Framework for Amending the SME Policy 2007 54

List of Figures

1. Hierarchy of Objectives 17

2. Results-based M&E 22

List of Boxes

1. Key Concepts 30

2. Compliance Burden 31

3. Regulatory Guillotine Approach in Moldova 31

4. Pillars of an effective Collateral System 33

5. SME Observatory in the EU 40

6. Fiscal Decentralization in Pakistan 43

7. Provincial SME Support in Pakistan 44

8. Principles for the Role of the Central Government in SME Support 44

9. Approaches to SME Policy Coordination 49

10. Characteristics of an effective System of Policy Coordination 50

11. Coordination of Trade and Investment Policy in Pakistan 50

12. Criteria for an effective Mechanism for Public Private Dialogue 52

13. Examples for Hearing the Voice of SMEs in Pakistan 52

14. ‘Think Small First’ Principle in the EU 53

1. Introduction SMEs play a vital role in the economic and social development of the country. Supporting them assumes paramount importance in the government’s strategy for economic revival, employment generation and poverty alleviation.

From an international perspective, economies that have strong SME sectors also have in place focused visions, clear guidance and appropriate strategies arising from a well-designed SME development plan. The necessity of such a plan stems from the multi-dimensional problems that SMEs are facing and the need to address these by an equally diverse range of policies. SME development usually runs through the horizontal as well as vertical structures of government. An SME development plan or strategy integrates the various policy dimensions and actions of a number of actors and establishes an appropriate institutional framework for implementation and accountability.

Effective implementation of any SME policy depends on clarity on assigning responsibilities and roles to different stakeholders. This facilitates smooth operationalization of programs and projects with a clear demarcation of levels of accountability. Coordination is of critical importance. Mechanisms conducive to participation and consultation are desirable in various interventions aimed at implementing the SME policy as well as facilitating effective monitoring and evaluation (M&E) of impact. Such an integrated approach is required over the different layers of SME development planning, from strategy, to programing and action planning.

In this paper, we explore the role SMEs play in the economy, the state of the SME sector, major constraints and the policy response of the government with a view to highlight major issues that need to be addressed to increase the efficiency of the policy response both in terms of the design of the SME policy and its implementation.

2. The SME Sector

2.1. Definition

Public support of the SME sector requires a clear understanding of the target group. Support schemes need to have a common understanding of SMEs that will benefit from the assistance.

A definition of SMEs acts as a first level filter to segregate them from the total enterprise population and further when it comes to support them as a second filter to separate out qualified SMEs. Currently no unified definition of SMEs is used. Different organizations use their own definition. For example, the Small and Medium Enterprise Development Authority (SMEDA) identifies SMEs on the basis of employment (up to 250 employees), the paid-up capital (up to RS 25 million), and the annual turnover (up to RS 250 million), while no distinction is made between the size categories micro, small, and medium. According to this definition almost all businesses are SMES. The downside of having various definitions is that they compromise the identification of the target group of support systems and incentives, the alignment of programs, the collection of data and monitoring sector progress. Therefore, the SME Policy 2007 identifies this issue for further investigation, but without being solved up to date.

2.2. Legal Status

A sizeable portion of SMEs operates in the undocumented informal sector of the economy to keep their business transactions and identity hidden from the state. Apparently, the high cost of doing business and complying with the regulatory environment of the formal sector create incentives to operate in the informal sector. Poorly designed and administered regulations are among the major reasons. The majority of SMEs operating in the formal sector are either sole proprietorships or partnerships1 where the owner also serves as a manager of the enterprise.2 Fewer enterprises choose to be registered as a company due to cumbersome regulatory procedures and the related documentation requirements3.

2.3. Performance

In recent years the growth in SME output has shown a decreasing tendency. Poor performance of SMEs is a result of internal and external constraints that negatively impact on their productivity and competitiveness, quite in contrast to large firms that are more productive.4 Often SMEs lack the managerial expertise to efficiently operate and expand their business. In the informal sector the growth of SMEs is compromised. Owners want to keep firm size small and avoid arm’s length transactions with suppliers, banks and customers.

2.4. Sectoral and Regional Concentration

SMEs are spread across all sectors of the economy with services having over 78 per cent, manufacturing 20 per cent and agriculture 2 per cent of the total establishments. The most important manufacturing sub-sectors are: textile/apparel, light engineering, dairy products, 1Sole proprietorships are not required by law to register, while partnerships have only to register either as a private or public company if the number of partners exceeds 20.

2O.Siddique: Simplification and Promotion of Laws and Procedures for Corporatization of Small and Medium Enterprises, 2005 ( http://www.secp.gov.pk/IACCD/pub_iaccd/LegalRegulatoryReport.pdf) 3 For details see A. Murtaza: Report for Legal Environment, January 2013.

4World Bank:Investment Climate Assessment, unpublished Report, 2009.

http://www.secp.gov.pk/IACCD/pub_iaccd/LegalRegulatoryReport.pdf sports, surgical products, leather, furniture, and marble. Roughly 65to 70 per cent are located inPunjab; Sindh has a 20 per cent share while Khyber Pakhtoonkhawa has around 15 per cent of the enterprises in the country. Baluchistan accounts for just 1to 2 per cent5.

2.5. Role in the Economy

The strategic role and importance of SMEs in the economy is illustrated by their staggering contribution to value addition, exports, Gross Domestic Product (GDP), and employment.

Almost 99 per cent of the 3.2 million businesses are SMEs. Broadly, they account for almost 35 per cent of total value addition;they have a 30 per cent share in export earnings of the manufacturing sector, while they contribute 40 per cent to annual GDP and 78 per cent to non-agriculture employment6.

2.6. Major Constraints

SMEs face a number of constraints7in operating and expanding their business as outlined below.

Table 1: Key Constraints affecting the Performance of SMEs

Area Constraints Business environment

Unsteady electricity supply High level of corruption Macroeconomic instability Underdeveloped transport/road infrastructure High Tax rates and cumbersome tax administration Onerous labor regulations Unstable Security

Access to finance Collateral requirements High interest rates Limited size of loan

Other factor markets Lack of skilled workforce High cost of raw material Cumbersome procedure of land registration

2.6.1. Business Environment

Institutional and regulatory factors negatively affect the performance of SMEs. Institutional factors like unsteady electricity supply, macroeconomic instability, corruption and ineffective rule of law (specifically insecure property rights) are often a greater obstacle to doing business than regulatory aspects. Time and resources spent on overcoming these factors divert SMEs from more productive activities, undermining their growth.

5http://www.smeda.org/business-development/sector-briefs.html. The State Bank of Pakistan (SBP) has identified ten key SME sub-sectors (http://www.sbp.org.pk/departments/ihfd-IFC.htm).

6Government of Pakistan: Economic Survey of Pakistan 2011-12.

7World Bank: Investment Climate Assessment, 2002; World Bank: Investment Climate Assessment, (unpublished report), 2009; Bari et al.: SME Development in Pakistan – Analyzing the Constraints to Growth, Asian Development Bank (ADB) Pakistan Resident Mission Working Paper Series, Working Paper No. 3. 2005; Hussain et al: Constraints Faced by Industry in Punjab, Pakistan, Development Policy Research Center, Lahore University of Management Science (LUMS), 2012.

http://www.smeda.org/business-development/sector-briefs.html http://www.sbp.org.pk/departments/ihfd-IFC.htm

Unsteady electricity supply is identified by SMEs as the most serious constraint and a chronic problem for industry. The loss in annual sales due to frequent electricity cuts varies among different sectors and may range from 8 to 15 per cent as illustrated by reports from firms in Punjab8.Frequent outages and non-availability of electricity hurt the smooth functioning of SMEs in many ways. Apart from disruption in fulfilling regular orders, they have to bear significant overhead costs of alternative energy supply (like generators) and overtime of workers for smooth running of their businesses.

Macroeconomic instability and corruption are identified as the most serious constraints after electricity. Macroeconomic instability increases uncertainty in the business environment through inflation, interest rates, and exchange rate volatility. Corruption is felt increasingly as a major obstacle, in particular for firms that have to interface with tax and labor officials, apply for utility connections or licenses and want to receive financial state support. Rent-seeking increases transaction costs, raises uncertainty and reduces investment thus leading to lower growth. It impacts decisions to start businesses because potential market entrants face uncertainty as to what bribes to pay and when to pay while it also acts as a heavy drain on existing businesses.

Regulatory factors that impact on SMEs include market entry and exit procedures, labor inspections, as well as cumbersome tax administration. The sheer number of laws and regulations imposes a substantial compliance burden on SMEs. Often regulations are not necessary or too demanding for SMEs. While efforts towards lowering regulatory hurdles for business have had a positive impact on SMEs, high and uncertain entry, operation and exit costs continue to create market frictions and result in inefficient allocation of resources. The registration of companies is unevenly enforced except for public companies. As a result SMEs either do not register at all or - if they do - they do not comply with record keeping and procedural obligations. In addition, there are a huge number of labor related laws which are unequal in their reach and effectiveness providing further incentives for not registering. Contract enforcement procedures are not uniform. There are special courts for enforcing banking, insurance, labor and small contracts.Other contracts are enforceable through ordinary civil courts where case processing takes considerable time.

2.6.2. Financial Markets

SMEs are being rationed out of the credit market. Commercial banks are reluctant to provide loans to SMEs. Insufficient assets and low capitalization, low prospects for growth and the vulnerability to market fluctuations combined with the limited technical, managerial and marketing skills of the owner lead commercial banks to perceive SMEs as a high-risk clientele.

They usually do not disclose information to the extent and quality required by banks to properly assess their creditworthiness in cash flow-based lending. In asset-based lending excessive collateral requirements together with the type and quality of collateral asked for, put a particular strain on SMEs. All of this is compounded by more promising and less risky investment opportunities such as government securities and lending to large borrowers. In spite of the efforts of the SBP9 to enhance access to finance by softening prudential regulations, loans provided to SMEs are only a small fraction of the total loan portfolio of the banking industry, estimated at 7 to 8 per cent and falling. Overall the funding gap is thought to reach Rs. 277

8 S. T. Hussain, U. Khan, K. Z. Malik and A. Faheem: The Constraints to Industry in Punjab, Pakistan, in: The Lahore Journal of Economics,Vol.

17, September 2012.

9State Bank of Pakistan: Prudential Regulations for Small and Medium Enterprises Financing, 2011 (http://www.sbp.org.pk/publications/prudential/PRs-SMEs.pdf).

http://www.sbp.org.pk/publications/prudential/PRs-SMEs.pdf billion10. Hence, businesses often start with personal savings and loans from family and friends.

Their working capital and investment needs are met from their profit or from purchases or credit and advance from customers.

2.6.3. Other Factor Markets

An unskilled workforce, difficulties in acquiring land for setting up and expanding a business, and an unpredictable supply of raw materials tend to add to the difficulties of doing business.

While the country has a relatively young population, low enrollment in schools and high dropout rates along with the poor quality of general and technical education limits the availability of qualified labor for the industrial sector. Contrary to large enterprises, SMEs find it difficult to train workers. Predominantly the medium-scale enterprises in garments, printing, and light engineering industries recognize that the poor quality of the workforce is a major obstacle for their businesses.

SMEs are also faced with difficulties in acquiring land and securing titles due to cumbersome land registration processes and inadequate protection of property rights. As a consequence they are less competitive and less able to expand production and employment. This can contribute to financing gaps because SMEs have lower asset values that can be used to secure loan contracts while lower productivity renders them less creditworthy.

10A. McCartney: Developing a Sustainable SME Banking Franchise in Pakistan: Best Practices and Policy Insights, International Finance Corporation (IFC), Karachi 2011.

3. Policy Response

Recognizing the potential of SMEs in economic growth, job creation, poverty reduction and rural development, the Government of Pakistan (GoP) developed legal (SME Ordinance 2002, SME Bill 2010, Prudential Regulation for SMEs Financing), institutional (SMEDA, SME Bank) and policy frameworks (SME Policy 2007) for the development of the SME sector. Government intervention is based on the understanding that markets fail to effectively allocate resources and disseminate information. Thus there is a need to correct such failures and make markets work.

SMEs can then set up easily and operate efficiently. Contrary to previous practices of focusing on selected sectors, a wide range of SMEs from various sectors has become the target group of government intervention.

SME development usually runs through the horizontal as well as vertical structures of government. An SME policy should integrate the various policy dimensions and actions of a number of actors and establish an appropriate institutional framework for implementation and accountability. The SME policy 2007 was intended to provide such a broad framework and to determine the direction for SME development. It was supplemented by a 3-year implementation plan (2007-2009). SMEDA – created as an autonomous body - was meant to be the apex institution spearheading the government’s SME development efforts. According to the SMEDA Ordinance 2002 its mission is to promote and facilitate SME sector development as well as provide, arrange and facilitate service delivery to SMEs. While according to the Ordinance SMEDA can enter into any agreements with any public authority, it was not provided with institutional jurisdiction over SME-relevant institutions. Hence from the outset, coordination loomed to become an issue. Now the draft SME Bill entrusts the National Committee on SMEs (NCSME) with developing a five year roll-over plan for SME sector development that would enunciate tasks and institutional responsibilities ‘in sufficient detail’ to be subsequently monitored.

3.1. National Development Framework

SMEs cut across sectors and policies. SME policy needs to be coherent, i.e. it has to ensure that all parts of government seek to collectively work in the interests of SMEs. Yet it is unlikely to be ‘coherent’ where it is delivered by many different government departments without co-ordination or where some departments focus upon regulation of SMEs and others focus ‘upon ‘support’, without an adequate dialogue between them. Policy therefore has to be designed to meet the strategic goals of the government and show how it contributes to the key targets (e.g.

growth, productivity, employment) and themes (e.g. competitiveness, sector development, privatisation, industry restructuring).

There are a number of policy documents that articulate SME development and place the SME Policy 2007 in the context of the government’s economic development strategy:

• The Poverty Reduction Strategy Paper (PRSP), the second version finalised in 2009, outlines a comprehensive policy framework for continued economic growth and development.

• To implement the PRSP strategies, the government presented a Medium-Term

Development Framework (MTDF) for 2005-2010, which was incorporated in its annual development planning11. It replaced the existing Five-Year-Plans. The MTDF was envisioned to turn the country into a major industrialized nation, rapid human development and to sustain an ingenious economic system for reducing poverty. Agriculture and manufacturing, including SME development, were given priority.

• The Framework for Economic Growth (or the ‘New Growth Strategy’),adopted by the National Economic Council in 2011 aims at generating a maximum of employment and entrepreneurial opportunities by making and maintaining space for private sector development and reducing the role and improving the efficiency of government.

3.2. Design of SME Policy

A well-developed SME Policy design not only prioritizes the complex web of issues but also conceptualizes them using a measurable and verifiable yardstick of instruments. The relationship between general objectives and specific targets is a challenging task for any policy.

A much-utilised means for reviewing policy is the logical framework or log frame. There are several variations of the framework but broadly it divides itself into a number of key headings as follows:

• The overall development objective (goal), which provides the basic framework;

• The immediate objectives, defining the focus of the overall objective and indicating what specific changes are planned and who will benefit;

• The outputs, also indicating the specific means by which the objectives are to be met;

• The activities needed to achieve the outputs, including responsibilities and timetables;

• The inputs (financial, human resources) required to undertake the activities.

Like all planning frameworks, log frames are based on analysis at a particular period of time and need to be used as a basis for regular discussion and review. They should preferably be set up with the close involvement of the relevant institutions, the intermediaries and the key stakeholders. Under these conditions they are a useful instrument for change in response to circumstance.

The development of the SME Policy 2007 was initiated as early as 2004 by the establishment of an SME Task Force that included both public and private sector members and that was supported by Working Committees to address core policy areas. The process of drafting the SME policy was quite an inclusive exercise consulting a wide range of interest groups on the basis of the deliberations and recommendations of the Working Committees. Several ministries, non-government organizations (NGOs), Chambers of Commerce and Industry (CCI) hadparticipated in the discussions that led to the development of the SME policy. Therefore issues could be defined and informed by a full range of perspectives.While it is never the case that all of these participants will agree to a particular policy package, a critical mass of agreement had been achieved at which ownership of the policy promised to be broad enough to be operationally meaningful.

While the very term development of SME policy may be taken to imply a neat, incremental, highly rational, and structured approach in reality this is rarely the case. Nonetheless, to be

11For details on the economic planning process see chapter ‘coordination’.

effective the policy development process needs to be viewed as a logical progression through six steps: problem definition, goal clarification, option generation, selection, implementation, and evaluation. While not analysed in detail, it appears that in the case of the SME Policy 2007 the major steps have been followed through.

Table 2:Steps of Policy Development

1. Problem definition

(a) problem recognition

(b) situation analysis

(c) problem definition

(d) priority determination

2. Value and Goal Clarification

(a) consideration of values and goals

(b) clarify normative foundation

(c) describe desired results

(d) develop criteria and indicators

3. Option Generation

(a) focus on goals

(b) develop alternatives

(c) think broadly and outside of established norms

4. Selection

(a) use tools to evaluate alternatives

(b) understand potential impacts

(c) consider, debate alternatives

(d) compromise, make trade-offs, bargain

(f) decide/recommend

(g) close the loop

5. Implementation

(a) understand success factors

(b) assess capacity

(c) assign responsibility

(d) choose instruments

(e) align

(f) transfer

6. Evaluation

(a) monitor/obtain feedback

(b) compare actual and desired results

(c) learn

(d) modify as necessary

3.2.1. Intervention Logic

Does the drafted SME Policy consistently reflect the application of the logical framework approach?

A well drafted SME policy and implementation strategy would describe in a clear, concise and coherent manner the logical series of events that are to be taken to achieve development results.

Policy formulation usually starts with an analysis of a given situation of the SME sector, compares it with a desired situation and formulates any significant deviation as a problem that needs to be addressed. Problems, which can be described in a hierarchical order, are then converted into a hierarchy of objectives that the policy wants to achieve through interventions (activities). Interventions that promise to render the best development results are chosen for implementation. These in turn require certain inputs in terms of financial and human resources (Steps 1-5 in Table 1).

Mainly, the policy document has been structured into three chapters (i) objectives, (ii) measures (termed ‘policy recommendations’), (iii) M&E. Policy interventions are categorized according to policy areas (business environment, access to finance, etc.) aptly following a common sequence of problem statement, measures and expected results (impact) within each of these areas. An implementation plan for 2007-2009 has been introduced as a separate chapter ‘SME Policy Implementation and Resource Allocation’ rather than as an attachment. This is quite uncommon since the policy itself is supposed to be valid for a longer period (up to 2015) than the three years of the implementation plan.

3.2.2. Problem Statement

Does the problem analysis (statement) reflect the situation of the SME sector?

Are the problems consistently converted into objectives?

Is a clear hierarchy of objectives established?

Do the objectives fulfil the SMART (specific, measurable, realistic, time bound) criteria?

Problem/issue recognition and definition is a critical first stage in policy development (step 1 in Table 1). This is where the nature and scope of an issue is analysed and determined just how ‘cross-cutting’ it is. Problems (negative situation) need to be put in hierarchical order starting with the core problem and followed by sub-problems that trigger the core problem (the ‘problem tree’). Problems find their counterpart in the objectives (positive situation) which are equally to be placed in hierarchical order (objective tree).

Under each policy area the policy document contains a brief ‘problem statement’. However, often these statements do not fully reflect the problematic situation of the SME sector as could be derived by the interventions listed in the different policyareas that aim at solving them(see chapter 3.2.4.). If at all, they reflect the situation of the SME sector in 2004-2007 which may not be quite the same as in 2012.

3.2.3. Objectives

During this stage of policy formulation the framework for later performance measurement should beestablished (see chapter 3.2.5.). In particular it should include SMART objectives -hierarchically structured -, key performance indicators (KPIs), baselines and targets. However, the SME policy is deficient in many of these aspects.

(i) Hierarchy of Objectives

Objectives are a statement about what the SME policy wants to achieve. They are stated in various parts of the policy document (under ‘objectives’, in the ‘SME Development Vision’12 and in the ‘SME Policy Statement’). The statements sometimes vary.

Table 3:Objectives and Sub-objectives in the SME Policy 2007

Section Area of Policy

Document Assumed Problems Stated Objective/Sub-objective

II Objective • Low economic growth • To achieve higher economic growth based on SME-led private sector development13

The vision establishes the long-term direction that guides the operations of the SME policy. The ultimate goal or result of SME development expected for 2015 is ‘(higher) SME-led economic growth’.

III Development Vision

• Lack of economic growth led bySMEs

• SME-led economic growth resulting in Poverty reduction Creation of jobs Unleashed entrepreneurship

III SME Policy Statement

• SMEs are globally not competitive because of Troublesome business environment Outdated infrastructure for accessing resources & services Outdated institutional support structures for accessing resources & services

• To create globally competitive SMEs by creating a hassle free business environment ensuring provision of modern infrastructure unleashing entrepreneurship potential

However, rather than appearing in various parts of the policy document and in different ways objectives should be aligned and placed into one hierarchical set differentiating between overall (goal) and specific objectives. In the absence of a coherent set of objectives andbased on the information contained in the policy document the objective tree could be reconstructed as outlined in Figure 1 below.

Figure 1: Hierarchy of Objectives

(ii) SMART Objectives

To be meaningful, the objectives and sub-objectives formulated in the policy document should fulfil the SMART criteria commonly used as a benchmark for efficient policy formulation:

Table 4:SMART Criteria for Formulating Objectives

Specific Specific, clear and concise Measurable Quantitatively or descriptively measurable Achievable Realistic given the resources that are available

13The objective of the SME policy is not ‘to provide a short and a medium to long-term policy framework with an implementation mechanism’.

Policy is not itself an action but rather a framework that guides a small or even large number of specific actions. Therefore ‘policy’ does not need to be defined.

SME Policy Purpose:

To create globally competitive SMEs

Result 2:

Modern infrastructure for accessing resources and services

Result 3:

Modern institutional support structures for accessing resources & services

Result 1:

Hassle free business environment

Overall Objective:

To achieve higher SME-led economic growth

Relevant Aligned with goals or larger strategies.

Time-bound Deadline so a call to action is clear

This is not always the case. Although a timeline (2015) has been established for achieving the objectives, they are formulated in general rather than specific terms. For example, neither is ‘economic growth’, ‘SME-led growth’ nor ‘higher economic growth’ defined. Not being specific it cannot be determined whether the objectives are achievable.

(iii) SMART KPIs

In practical terms KPIs are objectives to be targeted when implementing the policy.They should also follow the SMART criteria.

Table 5: SMART KPIs, Baselines and Targets

No. KPIs as per SME Policy Fulfilment of SMART Criteria

Comment Specific Measurable Achievable Relevant Time-bound

Threshold on taxation and density of regulations rationalized No If specified

‘yes’ ? Yes Yes

Two KPIs are stated as one;

what is ‘rationalized’? no baseline

Small manufacturing enterprises increase their share from 5.5% to 7%

Yes Yes ? Yes Yes The policy does not define small enterprises;

Share of micro enterprises in employment decreases by 7% Yes Yes ? Unclear14 Yes

The policy does not define micro enterprises; no baseline

4 SMEs increase their share in value added to 40% Yes Yes ? Yes Yes No baseline

5 Share of women ownership in SMEs increases to 6% Yes Yes ? Yes Yes No baseline

Number of start-ups by university graduates increases to 6%

Yes Yes ? Yes Yes No baseline

SMEs observe basic responsibilitiesfor social & corporate compliance

No If specified ‘yes’ ? Yes Yes What are ‘basic responsibilities’?

SMEs have developed mutual cooperation and trust

No Limited ? Yes Yes No baseline

GoP facilitates access to sustainable BDS15 in all areas of the country

No Limited Yes Yes No baseline

10 SMEs get access to support funds across the country Partly Yes ? Yes Yes No baseline

GoP is continuously documenting statistics on SME development and international benchmarks

Partly If specified ‘yes’ Yes Yes Yes

What is ‘continuously’

(monthly, quarterly, annually)?

GoP is delivering reliable periodic reports on SME development incl. details on funding and efficiency of system

Partly If ‘periodic’ is defined Yes Yes Yes

What is ‘reliable’ and ‘periodic’

(monthly, quarterly, annually)?

14The economic logic of targeting a decrease in the share of microenterprises is unclear.

15 Business Development Services

The majority of KPIs are not specific; they are therefore not measurable and hence it cannot be ascertained if theyrealistically can be achieved. Yet they are time bound since the deadline 2015 has been established for their accomplishment. For most part KPIs are also relevant in the sense that they can be aligned with the overall objective (goal) of ‘higher SME-led economic growth’ mentioned in the SME Development Vision. However, they are not tightly linked to the sub-objectives (e.g. ‘hassle free business environment’) while they are supposed to measure progress towards their achievement. A possible relationship could be reconstructed as follows:

Table 6:Possible Relationship between KPIs and Objectives

Objective Definition Target KPI

Overall objective Higher SME-led economic growth

• Manufacturing small enterprises increase their share from 5.5% to 7%

• Share of micro enterprises in employment decreases (?) by 7%

• SMEs increase their share in value added to 40%

• Share of women ownership in SMEs increases to 6%

• Number of start-ups by university graduates increases to 6%

Specific objective Globally competitive SMEs Sub-objective 1 Hassle free business environment

• Threshold on taxation and density of regulations rationalized

Sub-objective 2 Modern infrastructure for accessing resources and services

• SMEs get access to support funds across the country

Sub-objective 3 Modern institutional support structures for accessing resources & services

• GoP facilitates access to sustainable BDS in all areas of the country

Other (supportive) • GoP is continuously documenting statistics on SME development and international benchmarks

• GoP is delivering reliable periodic reports on SME development incl. details on funding and efficiency of system

(iv) Baselines and Targets

In order to be able to measure progress or change, there must be a baseline against which performance can be assessed. It is a description of the status quo at the time when the policy starts to be implemented and it isusually statistically stated. Targets are the quantifiable levels of the KPIs that the government wants to achieve. They should specify what is being tracked, the expected amount of change or improvement, and a timeframe by which the target will be achieved. Targets are set according to what the means and strategies (inputs, activities and outputs) potentially can yield. Practically they are minor objectivesalong the way to ensure the policy is on track in reaching specific and overall objectives.

A baseline value has only been established for KPI no. 1 (Table 5).Targets have been set forKPIs no. 2, 4, 5 and 6 (‘by x%’, ‘to x %’). This is however of little value unless the baseline value is provided. Other KPIs would need to be further defined to be meaningful (e.g. ‘GoP is delivering reliable periodic reports on SME development’). Yet other KPIs are qualitative escaping quantitative assessment. In regard to the timeline for both baselines and targets – while not specifically stated in the policy document –from the context it can be derived that these are beginning of 200716 and end of 201517 respectively.

3.2.4. Policy Recommendations

Are the measures properly tailored to achieving the objectives of the major policy areas – business environment, access to finance, access to resources and services?

Are the measures tailored to gender sensitivity issues?

Policy recommendations (or measures) are outlined in Chapter III of the policy document. They are classified into five policy areas:

1. SME Definition

2. Business Environment

3. Access to Finance and related Services

4. Supporting Human Resource Development, Technology Up-gradation and Marketing

5. Entrepreneurship Development

Under no. 2 to 5 measures are listed that aim at achieving the policy objectives. Under no. 1 a definition of SMEs is provided which are the target group of policy recommendations.

Proper targeting of measures requires a coherent system of goals and objectives based on a well-structured problem analysis which identifies causative factors as well as consequent effects as a basis for solutions. The policy document is deficient in this regard. Measures are often not put in relationship to problems and objectives they want to solve or pursue. An example is the policy area ‘business environment’.Here the SME policy mainly deals with (i) simplifying fiscal, labour and enterprise regulations and (ii) tailoring the support and grievance redress regime to SME needs. The aim is a ‘hassle free business environment’.

16 The SME policy was approved by the Cabinet on 17 January 2007.

17 As stated in the SME Development Vision.

Table 7: Business Environment – Problem Statement and Policy Recommendations

Problem Statement Sub-objective Policy Recommendations The fiscal, labour and enterprise regulations of the Federal and Provincial Governments do not provide for a focus on SMEs that is in line with their specific needs.

Provide laws and implementation mechanisms that are sensitive to SME needs (not formulated)

• Promulgation of an SME Act18 for identification of laws for simplification to benefit SMEs

• SME certification by SMEDA to benefit from support mechanism and simplified regulatory regime

• Periodic review of all fiscal laws

• Periodic review of labour legislation

No differentiation of the support and grievance redress regime between enterprise size making it difficult for SMEs to access public support programs and attention of public authorities when competing for it with large firms

Support and grievance redress regime tailored according to enterprise size (not formulated)

• Establishment of SME Desks at Federal, Provincial, Banking and Tax Ombudsmen Offices to handle and address SME grievances

• Encourage SME participation in public procurement; tendering of certain contracts/products to SMEs

No problem statement No objective statement • Minimum quota for allocating land to SMEs in Industrial Estates and Export Processing Zones (EPZs) at concessional rate (cost recovery)

No problem statement No objective statement • Establish SME Promotion Council (incl. local chapters) and SME-specific Trade Associations

No problem statement No objective statement • Provision of physical infrastructure for SME clusters

No problem statement No objective statement • Capacity building for CCIs and TAs and Tax Registration and Labour Departments

No problem statement No objective statement • Induct SME representatives in all federal monitoring and dispute resolution schemes

No problem statement No objective statement • Introduce regulatory regime for specialised sectors in provinces (e.g. mining)

No problem statement No objective statement • Implement strategy to reach out and communicate with SMEs through electronic and print media

No problem statement No objective statement Improve and enforce Intellectual Property Rights (IPRs) for SMEs

Since the role of women in the social development process is crucial, both as agents of change at decision-making level and also within the family and the community, mainstreaming gender in the SME policy is important to ensure that their particular needs are properly addressed. In this regard the development vision of the SME policy for 2015 is that the share of women ownership in SMEs increases (from?) to 6 per cent.Consequently, the SME Policy Statementrecommends that ‘the government shall take measures for the promotion of women entrepreneurship’.

However, the policy implementation plan for 2007-2009 does not include initiatives that would target specific gender issues such as women’s access to collateral and property rights, education and training. There are no implementation plans for the periods 2010-2012 and 2013- 2015 so it is unknown if fostering women entrepreneurship was/is on the agenda.

18 The SME Act should provide for identification of fiscal, registration, labor and inspection laws that may be simplified for SMEs.

3.2.5. Monitoring and Evaluation

Do the established indicators correspond to the policy objectives?

Do the indicators allow for overall assessment of the SME sector?

To bridge the gap between well-articulated intentions and tangible actions, an effective mechanism of policy oversight is needed. AnM&E system measures the performance and impact (results) of SME policy and programs. Monitoring assesses implementation focusing on inputs, activities and outputs while evaluation measuresdevelopmental relevance, efficiency, effectiveness, impact and sustainability of interventions. Hence implementation monitoring tracks the means and strategies found in multi-year or annual work (implementation) plans, used to achieve the intended outcomes. They are supported by the use of management tools, including budgetary resources and staffing.Results monitoring(evaluation) then identifies how well outputs are achieved using available inputs and activities while aligning the outputs with the results the government hopes to accomplish in developing the SME sectorover time. The relationship between ‘M’ and ‘E’ is illustrated in Figure 2 below.

Figure 2:Results-based M&E

Both ‘M’ and ‘E’ have an integral role to play in the policy process(step 6 in Table 2). They cannot be left at the end of the line to be undertaken once policy has been in operation for many years. Institutions and organisations responsible for policy delivery have to monitor their performanceregularly and be aware that external evaluation is to take placefrom time to time to make them accountable. Once undertaken, results should be used as the basis for dialogue with policy makers, with the objective of delivering better policy.

Setting up an M&E system usually requires six steps:

1. Formulate goals, objectives and outcomes

2. Select output and outcome indicators to monitor

3. Gather baseline information on the current condition, i.e. when drafting the policy

4. Set specific targets (or KPIs) to reach and dates for reaching them

5. Regularly collect data to assess whether the targets are being met

6. Analyse and report the results.

R es ul ts

• Long-term, widespread improvement of SME sector

• Intermediate effects of outputs on client SMEs

Im pl em en ta tio n

• Products and services produced

• Tasks personnel undertakes to transform inputs to outputs

• Financial, human, and material resources

Outcomes

Goals

(I )

Outputs

Inputs

Activities

Step 1 to 4 would have been undertaken while drafting the SME policy(see chapter 3.2.3.);

steps 5 and 6 are explicitly related to M&E and based on the foundations laid during policy formulation. However, the way in which goal, objectives, KPIs, baselines and targets have been established in the policy document is not conducive for M&E.

The SME Policy 2007 entrusts SMEDA with the organisation of the monitoring system. It differentiates in Chapter V between

(i) monitoring and evaluating specific support programs and

(ii) monitoring the state of the SME sector.

All organizations at local, provincial and national levels which are involved in the administration of enterprise support measures are required to monitor the performance in terms of number of enterprises served, gender of owner, sectors, level of satisfaction, feedback received as well as costs and benefits per beneficiary. SMEDA has to consolidate the information and provide semi-annualreports to the NCSME.

Apart from this, SMEDA has to monitor the state of the SME sector with subsequent preparation of an Annual Report. This is common practice elsewhere and in the European Union (EU) known as the SME Observatory. The SME Policy 2007 recommends that surveys should be undertaken in a two year interval to assess the impact of interventions and target support mechanisms thus supporting the preparation of reports. These Annual Reports are aimed at providing feedback into policy making and help SMEDA to cope with its objective ‘to formulate policy to encourage the growth of SMEs and to advise the government on fiscal and monetary issues related to SMEs’.In fact, the mandate of SMEDA’s Policy and Planning Department is to carry out research, communicate with stakeholders and advocate policies with different tiers of the government with an ultimate objective of creating a conductive business environment for SMEs. It considers itself as ‘the hub of policy and regulatory research that provides SME specific policy input to all tiers of government, government agencies and institutions, SME associations, industrial clusters and individual entrepreneurs’.

Conclusion:

• The structure of the policy document in terms of the sequence of chapters is logical with the exception that the implementation plan should be an attachment…