1. Creating an Enabling Environment for SMEs in Sri Lanka: The Role of the Public Sector Saman Kelegama Institute of Policy Studies of Sri Lanka

2. 1. Quick Take + Policy Framework 2. Key Issues 3. Role of the Public Sector 5. Way Forward 4. Key Action Areas

3. SMEs in Sri Lanka: quick take How many SMEs in Sri Lanka? – difficult to quantify, no survey  Approx 70% of all enterprises are SMEs (MoFP)  91% of industrial establishments are SMEs (ASI 2008)  Contributes to around 26% of employment in industries  Of 4,700 exporters, nearly 80% are SME suppliers (EDB)

4. Current framework for the development of SMEs in Sri Lanka… GOSL Vision for the Future (2010)  Implement a process to upgrade 5000 small-scale enterprises to medium-level and 200 medium-scale enterprises to large-level every year  Establishment of entrepreneurial centers to encourage small and medium scale entrepreneurs  National Strategy for SME Sector Development - White Paper – December 2002  Issues highlighted in 2002 SME White Paper are still relevant today  Draft SME Policy 2010 – with JICA Consultant attached to NEDA

5. SMEs in Sri Lanka: Key Issues  Lack of widespread Business Development Services (BDS) providers  Constraints in access to finance (both demand and supply- side issues)  SME owners need better managerial capability, strengthen entrepreneurial potential  Productivity improvement and access to technology  Improved access to markets (better linkages in with local and foreign value chains – subcontracting, etc.)

6. Rationale for Public Sector Support Lack of economies of scale High cost of information Small size Lack of collective voice Lack of influence on policies Widely dispersed Limited in management capability Limited resources

7. Role of the Public Sector Address market failures to open market access Improve transaction efficiency & reduce risks Reduce fixed costs Regulatory environment Increase competitive pressure in financial markets Reduce risks & transaction costs Strengthen financial institutions’ capacity to serve small clients Access to finance Provide market support structure to help build SME competitiveness Foster markets for services fit for & demanded by SMEs Develop low-cost service “products” and delivery mechanisms needed by SMEs Business Development Services Public SupportObjectives

8. Regulatory Environment Tax/labour legislation, competition policy Registration/licensing/administrative fees Commercial law/intellectual property rights Infrastructure connectivity – roads, transport, communication, IT, etc. Regulatory compliance should be SME friendly

9. Access to Finance  Banks strong focus on collateral/security-based lending. (Need to move to risk/cashflow-based lending)  Risk averse in lending to SMEs, particularly long-term capital. Working capital is less of an issue  Branch officers unable to evaluate loan applications with an SME-lens  Lack of SME-friendly credit rating/scoring scheme  Previous evidence of concessionary loan schemes low disbursement rates – banks keen to promote their own products?

10. Business Development Services Information services Management training/Entrepreneurship Subcontracting activities Standards Project preparation Incubators Markets Private-public partnerships Technology/machinery

11. SME Policy formulation– looking East  Countries in the Asian region have been found to share similar constraints in the SME sector as Sri Lanka  But they have far more robust SME development policies whereas Sri Lanka does not:  Thailand  SMEs Promotion Plan (2007-2011)  Philippines  National SME Development Plan, ‘Magna Carta’ for SMEs  ASEAN  Policy Blueprint for the ASEAN SME Development Decade 2002-2012  Need to learn from the best practices in these countries in developing a robust and comprehensive SME plan for Sri Lanka

12. Access to Finance: Examples Planters Bank Experience (Philippines) Commitment to and focus on its defined market – SMEs Profit consciousness to ensure sustainability in its operations Innovative approaches in credit risk management Simplification of operations, while remaining focused on what it does best Credit Guarantee Fund (Korea) All banks pay an annual 0.225% of total outstanding loans into the fund Staffed by qualified graduates from a business administration/ management background Following a credit rating exercise, provide between 75-90% of loan coverage for an SME seeking a loan Loans to SMEs rose from 35% of all loans in 1975, to 77% by 2013

13. Key action areas…  Expansion of BDS providers across the country, training in business facilitation, building SME management skills, accounting/finance skills, etc.  Improving SMEs access to and utilization of technology (leverage on the Vidatha centres across the country?)  SME access to financing survey/study  Move forward faster on a National SME Policy with an apex body that brings all stakeholders on board

14. Way Forward Need coherent policy direction – strengthen apex institutions SL needs strong, capable national institutions that can play an effective role in SME development Currently SME-mandated government institutions are scattered, measures are often taken on an ad-hoc basis and too many government institutions are involved Need for better coordination to effectively and holistically support the sector/address the core constraints inhibiting SME growth While the NEDA was originally envisioned as the apex SME ‘one stop’ body to cater to these needs the current status of NEDA falls short of this objective If NEDA is to become the apex ‘one stop’ body there is streamlining to be done and more funds made available to NEDA

15. Way Forward Public procurement and linkages with larger firms Government agencies can be directed to increase the amount of procurement made from SMEs, track this and report on progress to the Ministry of Finance and Planning They could also be required to demonstrate annual incremental increases in this Encourage inter-enterprise cooperation and sub-contracting Larger enterprises could be given incentives for incorporating domestic SMEs more in their supply chains Direct: tax concessions based on some formula of the value of inputs procured from SMEs Indirect: national recognition scheme (awards) for large enterprises that demonstrate the best supply chain linkages with SMEs

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