Development of Small and Medium Enterprises is the key for the economic revival and sustainable growth of the country, said Hashim Raza, chief executive officer of Small and Medium Enterprises Development Authority (Smeda).

“The SME sector is considered as the backbone of any economy. There is a need to give due attention to the SMEs having potential of improving the GDP growth and creating employment opportunities. Around 5.2 million SMEs are employing 72 per cent of the non-agriculture labour force in Pakistan, contributing around 40 per cent to GDP and 25 per cent to the exports,” he added.

“The SME sector has the potential to create 10 times more jobs than the big enterprises with the same investment. As such, supporting the SMEs sector is vital for sustainable economic growth and creation of job opportunities in the country, where 65 per cent of the population is below 30 years of age,” Raza said, while talking to BOL News.

“Unlike the SMEs, large-scale businesses can influence public policy due to easy access to official policy debate forums and contacts and proper networking with key decision makers. Another key issue is the access to finance, credit or equity.”

“The SME lending and equity investment propositions are often characterised with higher acquisition cost, greater risk and dependency on larger volumes for realising a unit of capital and this is often a less attractive option for the private sector banks and venture capital firms, compared with the lending or investing in larger businesses, the Smeda CEO said.

In some ways, the governments also find it less attractive to focus on the SMEs, despite proven jobs creation and wealth distribution advantages, the same way as the banks and venture capitalists do,” said Raza, who is a graduate in mechanical engineering from the University of Engineering and Technology (UET), Lahore and also part of the founding team of Smeda, where he served as its general manager for around six years.

Before starting his professional career, Raza completed his Masters’ degree in industrial and management engineering from Rensselaer Polytechnic Institute, Troy, New York (US) in 1993.

He has diverse experience of around 27 years in the development sector, especially the SMEs development in various countries, including Pakistan, the US, Qatar, Bangladesh, Thailand, Turkey, the UAE and Mozambique.

Much of his recent works involve research, economic sector development, project design, public policy development, micro, small and medium enterprises development, training, institutional development, public sector reforms, sector research and development, strategic management and business process re-engineering.

He is also a member of the National Coordination Committee on SMEs, International Network of Small and Medium Enterprises (INSME), OIC Task Force on SMEs and Pakistan Engineering Council.

Besides, he is serving on the board of directors of various government organisations, including SME Bank Limited, Pakistan Industrial Development Corporation, TUSDEC, STEDEC and PASDEC.

Before joining SMEDA as CEO in 2020, he was the senior partner at Raza and Associates, a consultancy firm providing services in the areas of business development, project management and administration.

The following are the excerpts of a rendezvous with him.

What are the challenges for SME development?

The SMEs development can be painstaking, as it involves reformation of a larger landscape of regulations, fiscal and monetary regimes and taking a number of policy measures concurrently across the government functionaries. It is challenging to meet as opposed to the case of supporting large businesses. A few in the government want to meet dozens of SMEs, who are barely organised in any formal groups, often lack specific proposals and are weak in articulating their support needs.

It’s always easier to talk to a highly educated and well-informed business executive from a large-scale firm and quickly put together a favourable support regime accordingly, the outcome of which can be controlled through changes in a handful of policies. Yet, another factor is the inherent weakness of the SMEs to benefit and effectively participate in the global trading systems.

For example, in the Organisation for Economic Cooperation and Development (OECD) economies, more than 95 per cent of enterprises are SMEs, while they contribute more than 60 per cent to the total employment and over half of business sector value-addition. However, the SMEs contribution to the overall exports is significantly lower in the range of 20 per cent to 40 per cent.

The reason being, the SMEs often have limited outreach to their international counterparts and have a shortage of resources to travel and participate in business fares or invest in creating business networks across the globe.

The trade negotiations, whether bilateral or multilateral, often ignore the interests of the SMEs in the negotiating countries. An overall outcome being a global trading system that is heavily biased against the SMEs.

The public policy continues to support structural advantage for larger businesses vis-à-vis smaller firms. During the Covid-19 lockdown in the US, the Washington Post reported that more than half of the emergency small-business funds went to larger businesses. If this is the case in the US, one can imagine what will be the scenario in a country like Pakistan.

How can these issues be addressed? Possible benefits?

The challenges in the SME development can be addressed only through a change in the mindset that is easy to articulate and difficult to bring about.

The point being that investment in the SMEs can bring higher public good and profitability returns, provided the governments and the private sector develop systems to reach out, create cost-effective service delivery mechanisms and remain sensitive to the needs of the SMEs. This does not need to be for a social cause of supporting the small business but is the right thing to do as a matter of business strategy and prudent economic policy.

Flourishing the SME landscape increases the size of the pie for private investment and can create new avenues for economic growth.

Your take on the interest rate hike?

Revising upward the interest rate is not a good move. An increase in the markup rate has enhanced the cost of borrowing for the businesses. Now, it is more difficult for the cash-strapped SMEs and the cottage industry to manage their businesses. The State Bank of Pakistan (SBP) should reduce the interest rate and bring it at par with the regional countries to provide some breathing space to small businesses.

How has global inflation affected local businesses?

Inflation has badly affected all the businesses across the world. The situation is really alarming in Pakistan, as our economy is import-based. We import oil and gas for fulfilling our energy needs and even agro-based products such as oilseeds. High energy costs and freight charges have badly affected the businesses.

How can we bridge the trade gap?

There is a need to devise and implement doable short- and long-term plans to reduce the ever-increasing trade deficit.

There is a need to discourage unnecessary imports, import substitution through local manufacturing, reduce the input cost of export-oriented industries, diversify products, value addition and explore new export destinations.

What is the reason for the smaller share of SMEs in total borrowings?

The annual borrowings of the SMEs stood at Rs450 billion, which is 6.5 per cent of the total loans. The government borrowing is 55 per cent to 65 per cent and the remaining share is captured by the corporate, auto and housing sectors.

During the tenure of Dr Ishrat Husain as the SBP governor the SMEs share in borrowing was 18 per cent. History shows that the SMEs can get another Rs900 billion from the credit market on the provision of conducive atmosphere and favourable policy. There is a need to give the SMEs easy access to the finance so that they can avoid loans from friends, relatives and the informal sector.

Your take on the SME Policy? Will it be implemented?

The SME Policy is the starting point. I am optimistic about its implementation, as the SME-led sustainable development is the only viable option. We are running out of time, and as such, cannot afford any delay. Fortunately, the political leadership has realised the importance of the SME sector for sustainable economic growth.

How will the Smeda One Window facility help?

The Smeda One Window facility provides solutions to startups and SMEs through a single platform. It provides hassle-free services from business idea validation to business registration so as to enable the SMEs to fully focus on their business operations.

How Smeda is helping the SMEs in exploring equity financing?

Smeda has signed a memorandum of understanding (MoU) with the Pakistan Stock Exchange (PSX) to facilitate the SMEs through capacity-building and provide awareness to explore means for equity financing.

The PSX has set up a Growth Enterprise Market (GEM) Board to facilitate the SMEs in enlisting and raising capital for their business expansion and growth initiatives.

How Smeda can help the SMEs in tackling high energy tariffs and losses?

Most of the industrial sectors are energy intensive and vulnerable to high rates of losses. The energy expenditures range from 20 per cent to 50 per cent of production cost in different industrial sectors. Good practices can help reduce the energy cost in the marble sector by 5 per cent to 8 per cent; power looms, up to 10 per cent; furniture, 15 per cent to 20 per cent; auto parts and jute, 10 per cent to 15 per cent; and textiles 10 per cent to 30 per cent.

In collaboration with the partners like German International Cooperation (GIZ) and Training and Development Centres of Bavarian Employers’ Association (bfz- Germany), Smeda is providing assistance to the industries on efficient use of energy. It is conducting energy audits in different industrial sectors such as textiles, jute, automotive, furniture and marble.

The experts have proposed remedial measures, prepared feasibility and implementation plans. Smeda also helps the organisations in establishing systems to improve energy efficiency. This leads to reduction in the cost and greenhouse gas emissions through systematic energy management.

What is the status of the World Bank-funded project launched in Khyber-Pakhtunkhwa in 2011? Role of Smeda in this project?

The Economic Revitalisation of Khyber-Pakhtunkhwa Project (ERKP) has supported revival of the private sector enterprises in the crisis-affected regions through direct support for the SMEs, investment promotion and institutional capacity-building.

The project intervention results in increasing the SMEs income and also boost employment opportunities by addressing the potential demand for the matching grants from the private sector.’

The project’s Round-1 was from October 2011 to March 2017 and Round-2 from April 2017 to June 2020. The Round-2 of the project is being extended for another two years; July 2020 to June 2022. Smeda is implementing the SME development component of the project to revive and upgrade the SMEs.

How many PSDP-funded projects Smeda is executing in Punjab?

Smeda is executing five Public Sector Development Programme (PSDP)-funded projects in Punjab. It is executing phase one of the establishment of 150 industrial stitching units at a cost of Rs350.545 million. So far 32 such units have been set up. This project is aimed at promoting public-private partnership to boost value addition in garments.

The SME Business Facilitation Centre (SMEBFC), Multan will act as a one-stop facility to provide information, products and services related to marketing, technology, support in access to finance, regulatory compliance, business registration, corporatisation, taxation and capacity-building and services to the SMEs.

A project titled, the Product Development Centre (PDC) for Composite-based Sports Goods, Sialkot, costing Rs487.97 million, will provide common facility services to the sports sector in the manufacturing of composite-based sports goods.

The Sialkot Business and Commerce Centre will provide infrastructure facilities to the exporters, especially the SMEs and One-Stop-Shop for foreign buyers. It will offer exhibition halls, auditorium and meeting rooms, business incubation offices, residential facilities and a business facilitation centre.

The Sports Industries Development Centre (SIDC), Sialkot has been completed at a cost of Rs435.637 million. It is helping the sports goods sector to adopt new technology of mechanised thermo laminated balls, providing technical advisory, mold making machinery services and training to manpower.

Smeda’s PSDP projects in KP?

The Honey Processing and Packaging Common Facility Centre, Mingora is aimed at providing honey extracting, processing, cleaning and packing facilities to the farmers, traders and exporters at their doorsteps.

The Dyeing, Washing and Pressing CFC for Silk Cluster, Mingora is aimed at improving the quality of silk cloth by the provision of a dyeing, washing and pressing plant as a common facility in the cluster.

The establishment of Spinning CFC, Islampur, Swat, will provide support to the cluster activities in the shape of technical knowhow to improve product quality, innovative methods for cost reduction and time saving, market linkages locally and for exports.

The Women Business Development Centre (WBDC), Mingora will provide a secure business environment to women entrepreneurs. They will be provided a place to trade and exhibit the products and would be imparted training in skill-oriented businesses such as beauticians, boutiques, etc.