Aurora Magazine

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Facilitate, Encourage and Motivate

Published in Mar-Apr 2020

President, UNISAME, speaks about the realities that prevent Pakistan’s SMEs from reaching their potential.

AURORA: In what ways do the roles of the Small & Medium Enterprises Authority (SMEDA) and UNISAME differ?

ZULFIKAR THAVER: When I started UNISAME in 1998, we had three goals; create awareness; identify the impediments; propose remedial measures and after that, apply pressure on the government. SMEDA is a consultative body to the Government of Pakistan. They receive feedback from us and make recommendations to the government. They conduct excellent training programmes on topics such as filing income tax returns, writing complaints, management, accounting and supervisory training. Anyone who wants to establish a business will approach SMEDA.

A: What is the definition of an SME?

ZT: The SME policy formulated in 2007 defined the parameters in terms of employment, size, turnover and productive assets. We set employment at up to 250 employees, because we wanted to include those schools and hospitals managed by SMEs. We originally set the turnover at Rs 100 million in order to include the upper medium enterprises, which were on the borderline of being corporations. We then gradually increased the turnover, and it is now Rs 800 million, and recently, I recommended to the Ministry of Industry to take it to one billion rupees, because the rupee has depreciated. We set the productive assets at Rs 100 million – by productive assets we do not mean land or fixed assets. Productive assets include running finance, raw materials and machinery – all of which are used for income generation purposes.

A: Are SMEs involved in particular types of businesses?

ZT: Anyone who is into income generation – from a hawker right up to an industry – can be an SME. They are SME farmers, traders, manufacturing units and service providers (business management consultants, doctors, lawyers and IT experts). If you further subdivide the categories, there are manufacturing units in textiles, rice, agro-based industries, surgical, sports and leather goods, and light engineering. We have micro entrepreneurs as well. Initially, I had advised the government to separate micro entrepreneurs from SMEs. However, given the number of microfinance banks that were subsequently established, we merged them again to enable them to go mainstream. We now have Micro, Small and Medium Enterprise (MSME) banks to prevent smaller enterprises from losing out simply because the big commercial banks are not willing to provide finance.

A: Is the new SME policy ready?

ZT: It is waiting the Prime Minister’s and the Cabinet’s approval.

A: Who put together this policy?

ZT: All the stakeholders. SMEDA, State Bank of Pakistan (SBP) and UNISAME. The Ministries of Commerce, Industry and Finance were also present. USAID contributed towards the expenses.

A: To what extent does the new policy differ from the one drafted in 2007?

ZT: I told them not to waste time, money and energy and just revalidate and update the previous policy. UNISAME played a very important role in formulating the 2007 policy. I was on the task committee and the chairman of the definition, valuation and feedback committees. It is a perfect policy because it covers every aspect. However, others felt the need for a new policy. They involved me again and everything that was already in the policy was refreshed with a few amendments. The old policy was perfect; we even recommended the establishment of SME federal and provincial ombudsmen to deal with insurance, banking and taxation matters

A: Was the 2007 policy implemented?

ZT: It was implemented in bits and pieces. The problem is that policies are made but they are not implemented.

A: What are the highlights of the new policy?

ZT: Firstly, they will be working from the grass-root level. Secondly, finance will be made affordable and accessible. The purpose of the national financial inclusion strategy is to ensure that anyone who wants finance gets it. Of course, risk management is the business of the banks and it is their job to seek guarantees and collateral. Thirdly, training and education and fourthly, the creation of industrial estates. To make a policy, it is very important to see what the actual requirements are and as an SME myself, I know where the shoe pinches. My advice was that the policy should focus on the requirements, which are finance, uninterrupted energy, land, raw materials, training and marketing support (domestic and overseas) and technology modernisation. You provide an SME with all this and I see no reason why it would fail.


A: In any country, SMEs are considered the backbone of an economy. What is preventing Pakistani SMEs from assuming that role?

ZT: Medium-sized enterprises are in a position to stimulate the economy, which is why I suggested that the turnover be increased from Rs 800 million to one billion. If they have access to technology, the right facilities to promote modernisation and benefit from the transfer of technologies, they will grow at an unprecedented pace. Larger enterprises have collateral and can borrow huge amounts from banks, which they then use to buy property. When the value of the property appreciates, they sell one or two and invest the money in the business. They are also able to obtain credit from their suppliers and financing from several banks. SMEs have no collateral. They do not own immovable property which is what the banks want. SMEs have to go step by step; increase their productivity, maintain their quality, improve their goods and then deal with competitors and many other challenges. In spite of these challenges, they are doing well – maybe not so well now because of the economic situation.

A: Could you give a few examples of successful SMEs?

ZT: There are many success stories and many SMEs have turned into large entities. Take rice as an example; they started small and today they are billionaires. There are so many rice mills today and they started from nowhere. Zulfikar Ali Bhutto nationalised the rice industry in the seventies and when it returned to the private sector, they did a marvellous job. Pick any big name in the textile sector and they will tell you that they started as an SME. Let me add that overall, the medium sector was doing fine. Then, the rupee depreciated and the import of raw materials and packing material became prohibitive; the exchange rate used to be Rs 80 to a dollar, today, it is Rs 155 or more. Before that the medium sector was growing and was prepared to put up industries one by one.

A: By how much was the medium sector growing?

ZT: SMEs are part of what is considered to be the undocumented or unorganised sector, which is why banks keep claiming that they are unable to finance SMEs. But the whole country is undocumented! Ninety-eight percent of enterprises in Pakistan are SMEs. Buy anything at any shop and are you given a receipt? The medium-sized ones have become very rich; I am not talking about the small ones.

A: Why are SMEs so dependant on government support, and is this support forthcoming?

ZT: Developing and promoting SMEs is the responsibility of the government. SMEs require facilities, encouragement, motivation and support. Money and finance is just one aspect of it. Energy is extremely important. Large companies can afford to run generators or invest in alternative sources of energy.

I have advised the government to subsidise alternate energy and remove duties on solar panels – which, by the way, they have done. SMEs also need skill development and the government has opened various skill development centres. The government is taking initiatives, but the pace is very slow and they need to move faster and maintain their focus. Another issue is that government officials prefer to get involved in big projects, where they can benefit from kickbacks. This is why governments go for roads, motorways, bus and metro lines. If they do something for SMEs, what will they get back? They pay lip service to SMEs. They acknowledge that they are the backbone of the economy and so on and promise to focus on them, but then a big project comes along and the SMEs are put on the back burner.

A: What is the solution to this issue?

ZT: It is our duty to highlight these issues and I have been doing so since 1998.

A: In which areas has government support proved beneficial?

ZT: At first, the government was putting a lot of emphasis on training business managers. I told them that training is required at three levels; operative, supervisory and managerial and the government has taken initiatives in this direction. They have also established training institutes and skill centres. They have established marble cities and set up the Textile Institute of Pakistan. Things are happening; it is the pace that I am not satisfied with. I believe in jump-starts. The government needs to fast-track things and look at high impact projects; e-commerce is growing and they should look at establishing a portal like Alibaba. Alibaba charge a lot and SMEs cannot afford it. The government needs to facilitate the opening of merchant accounts. To open a merchant account, people have to pay Rs 40,000 a year just to maintain it and SMEs cannot afford to pay these rates. They need to be able to open merchant accounts for free and have the credit come directly to the account rather than coming in stages (and with five percent deducted). SME promotion has to be done with passion. If you don’t have love for the sector, you will never be able to do anything. The approach should be scientific as well as strategic; otherwise we will keep going in circles.

A: Is it true that most SMEs are export-oriented?

ZT: They do value addition. The big guys export in bulk and do not bother with value addition. In the rice category, SMEs will sort, clean, grade and polish the rice and then pack it into one, five and 10 kilo bags ready for shelving. Agriculture (which constitutes the bulk of the primary sector) is from where the raw materials come, be it rice, cotton, wheat, maize, vegetables or fruit. The secondary sector takes care of the value addition, which is where SMEs come in and there is a lot of scope here. Rather than just exporting peanuts, we can make peanut butter. We export maize but we don’t export corn. From rice, we can make milk, noodles and powder – but we don’t. Value-addition is very important. Name a commodity and there is potential for value addition. Rather than just exporting strawberries, we should be making jam and other value-added items from strawberries and then export them. If you want to export goods without value addition, China is always ready to buy the raw material – they have well-established industries to turn that raw material into value-added goods. China will import your best leather and produce the best shoes. Switzerland does not grow cocoa but it is one of the best chocolate producers in the world.

A: To what extent does CPEC represent an opportunity for SMEs?

ZT: I have my reservations. The government has to assert itself otherwise China will take all our raw materials, dump the finished goods here and make us uncompetitive. As CPEC partners, we need to be looking at technology transfer, collaboration, joint ventures and setting up industries in Pakistan. We need to do the value addition in Pakistan. An opportunity has to be well managed. If you don’t manage an opportunity, that opportunity will become a liability.

A: Are SMEs doing enough to help themselves other than relying on government support?

ZT: SMEs can help themselves within a certain radius but beyond that, they cannot. They have to improve their productivity and decrease their cost of production. We conducted an energy audit at a factory and realised they could save 40% of their electricity costs. As a country, we waste a lot. We leave taps running, we use too many bulbs. SMEs have to learn simple living with no wastage. Farms should adopt drip irrigation; sprinkle the water and do it at night so that the sun will not consume water. But SMEs don’t want to go all out because the culture is like that. The arthis (agricultural agents) have spoiled SME farmers, who keep borrowing from them and when the harvest comes in, the arthis take away all the produce due to the loans they have provided. And if any money is made, the farmers would rather buy a Prado rather than reinvest and buy a tractor. We have a show-off culture. Why have China and India progressed? The Indians do not care about showing off. They wear simple clothes no matter how rich they are. Our farmers want a lavish lifestyle. Having said this, SMEs must be given a level playing field; they need to be facilitated, encouraged and motivated. All surgical, cutlery and sports goods are made by SMEs. The fan industry is also propelled by SMEs. Today, imported Chinese fans come with LED bulbs. Why can’t our fan industry do the same thing?

A: Would you say these SMEs are guilty of a level of apathy?

ZT: Yes. They are afraid of taxes; they believe that if they declare Rs 100, the government will say they have earned Rs 200 and charge accordingly. The fear is that if they declare what they are genuinely earning, the government will just double it.

A: So there is a trust deficit?

ZT: There is. Restaurants charge 13% sales tax. The owner will ask his regular customers whether they require a bill. If they don’t, the 13% sales tax will not be charged. Also, when the tax official comes to the restaurant with his family, he will not be expected to pay for his meal, but every month he will come and collect the sum amount. At the end of the day, the restaurant will be classified as below a certain turnover and exempted from the sales tax.

A: Don’t you think both UNISAME and SMEDA should be more proactive in solving this taxation issue?

ZT: SMEDA’s voice is not acknowledged. They did not have a CEO for a long time and only recently appointed one. Furthermore, their staff has been reduced significantly. How will they work? The SME policy has been under discussion for the last two years but we still do not have a new policy and they are still in the process of finalising it. I say just finish it.

A: What about UNISAME?

ZT: We keep trying. But the SMEs ask what guarantees are there that they will not be over taxed.

A: Should this not be communicated to the government?

ZT: The government knows about this. The income tax officer first wants money on the table. God forbid if an income tax officer comes after you and puts you through an audit.

Zulfikar Thaver was in conversation with Mariam Ali Baig. For feedback: