Photo: Doris Ninco Pacz serving a customer in the shop supported by CAFOD partner Pastoral Social. Central Neiva, Colombia. Copyright Paul Smith / CAFOD
“Engaging the private sector is not about how we feel about business; it’s about how high our aspirations are for poor people. If we rely only upon foreign aid, then our aspirations are far too low.”
Private Sector Development is a key feature of many current discussions around international development. The UK Government, amongst many other donors, is prioritising the role of the private sector in development. Often within this there is a strong focus on FDI by multinationals in economic development, job creation and poverty alleviation. With this in mind, DFID has released a strategic framework for economic development at the request of the Secretary of State, which consolidates some of their thinking and work in this area. The World Bank and other donors around the world are also prioritising the private sector within development.
Within this context we’d like to hear your thoughts...
Given that most poor people are employed in the micro and small enterprise sector, what type of support do they say they need in order to step up and out of poverty? Is this the same as the support needed larger domestic businesses and multinationals?
What have we learnt from previous experiences in supporting this sector (good and bad) and what does this mean for donor policy (in terms of private sector and / or economic development)
What would a pro-poor framework within private sector development look like?
Editor's Note:
This discussion is part of a series with CAFOD. To post comments you will need to sign in / sign up to Business Fights Poverty. A list of recent comments is shown in the right-hand side bar and will refresh every 5 minutes. To refresh more often, please click on the refresh icon in your browser. *The views expressed by the authors are representative of the author's own and do not necessarily reflect those of the organisation.
Micro, Small and Medium Enterprises (MSMEs)are mostly constrained by limited financial capital; such financial resources to meet daily business operational costs and to sustain the business as a going concern. Commercial banks offer loans at high interest rates against a background of macro-economic factors' volatility in form of high inflation rates and fluctuation of power of the local currency (Malawian Kwacha) against other major currencies like the United States Dollars further exacerbates the interest rates spread pushing the burden on a borrower MSME. There is a need therefore for government to intervene and cushion the external shocks in an economy like Malawi and bring about programmes that would enhance MSME growth and development in terms of provision of matching grants and soft loans to MSMEs through a development finance institution. In essence, the private sector alone, cannot provide the required financial products and services to the MSMEs without taking advantage of the enterprises for the commercial banks are primarily there to make profits out of the depositors' savings.Thus there is a need to bring a balance between commercial banks' profit orientation and the government's public interest in order to bring sustainable concerted solution to financial access constraints.
I strongly believe in the importance of supporting social entrepreneurs at the initial stages of their development – and providing them with financial and non-financial support (mentoring, technical assistance, networking opportunities etc.) that are tailored to their needs. We need to move away from top down grantmaking and focus on smaller scale individualised support if we want these social entrepreneurs to build sustainable businesses that will impact positively on their communities.
With this in mind, we launched the Global Social Entrepreneurship Network (which is being incubated by UnLtd in the UK). It’s a global network for organisations supporting early stage social entrepreneurs, offering them peer-to-peer support and shared learning opportunities. We believe there is immense potential and benefit in creating a global network of support organisations, to share, broaden and strengthen their knowledge and skills. These organisations are led by individuals that understand the specific context and the needs and challenges of the social entrepreneurs they are supporting. By partnering with both the private and public sectors, these support organisations are helping to build and strengthen the ecosystem of support.
individualised social entrepreneurship would be the best alternative to over dependence on governments’ already tight budgets. The complementary role of the private sector coupled with little government intervention would address the minimalist approach to private sector development while enhancing the private public partnerships to bring about concerted efforts and resultant synergistic impact to sme growth and sustainable private sector development.
Understanding why most poor people are employed in micro and small enterprises is critical to understanding the type of support that may be offered. The poor people who perceive their business engagements as a sole means of survival have a different attitude to those that have alternative means of livelihood. The poorest tends to sustain the same line of business for a longer time without growth while other entrepreneurs that have other sources of income tend to venture into new paths and grow.
Most support interventions focus on supporting the creation of an enabling environment for SMEs including capacity building of entrepreneurs,while direct support (production capacity, finance, product quality) to SME is limited. Even when direct support is delivered, the mode is inappropriate. For example the critical constraint of limited direct finance is often delivered through the commercial banks where most SMEs fail to meet the criteria for accessing such finance. It is also a common phenomena that donor programs tend to support poor people through community or business groups such as cooperatives. But there seems to be a gap beyond a successful cooperatives when Individuals (usually the cooperatives champions) step out to pursue personal development enterprises resulting in collapse of groups with ramifications for the welfare of other members.
Government private-sector-support institutions responsible for promoting SMEs often face budgetary constraints and begin to offer business advisory and capacity building services at cost sharing basis. This can limit the level of outreach and prevent more SMEs accessing the services. There is a need to harness technology and revolutionize how private sector support institutions offer services.
The ways in which the SMEs and large enterprises survive in the market place are different hence Micro and Small enterprises must be assisted step by step. Sometimes simple interventions like making information readily available to SMEs is all that is required to stimulate demand for the kind of support that they require.
It is important to effectively engaged small-scale, local enterprises in Private Sector Development, basically they are the sources of (origin of) the supply chain and end market for the private sectors, If there are some breakdowns on the supply side like (local small scale (SMEs) level the whole chain will suffers, therefore the small scale, local enterprise should be part of the bigger value chain/ supply chain. In short they are the source of ( engine of ) the economic growth .
Welcome to this online discussion about the importance of small-scale, local enterprises. We're joined by a great panel to explore the issues set out above.
Let's kick off by looking at the first question:
Given that most poor people are employed in the micro and small enterprise sector, what type of support do they say they need in order to step up and out of poverty? Is this the same as the support needed larger domestic businesses and multinationals?
Hi Zahid, I think I would classify the support into two separate groups - support for the owners of the MSMEs and support for the employees working in those MSMEs. Since helping the poor people, who are usually the employees of the MSMEs, is the main target, and support is usually being provided to the MSMEs directly and indirectly, we must ensure that the benefit trickles down to the poor because many of times, it was found out that the increase in the income of the MSMEs not necessarily increased the income of the poor people working there.
For those small and micro enterprises that are looking to grow - one constraint can be access to finance, another can be a lack of access to business advice. Indeed the two are often interlinked. Getting a loan is made all the more difficult for a small business if they have no one to turn to - to help with the application and present a convincing business plan.
Government funded MSME support agencies are one solution. But have a very mixed record. Public officials tend to make poor business advisers. And outreach can be low. Another option, which is full of promise, is where small businesses are able to link up with mentors from more established companies. The UK's Department for International Development is supporting a mentoring initiative in North Africa called "Forsa" (arabic for opportunity) which supports linkages between start ups and experienced businessmen and women in larger companies.
The role od SMEs in poverty reduction in general is well document, hence the question should not be why we should consider them. The more pertinent question is how to support SMEs so that they can effectively and sustainably generate local economic development (job creation, income generation) as part of the wider private sector.
SMEs are key links in the value chain hence they can be a critical chain through which poor people access goods and services in communities. To this end, any strategy aimed at developing private sector should consider this critical role.
The support needed by small business is definitely different from the support needed by big corporations because their challenges are different. They want financial support for example and not just credit. They want to learn skills on how to manage their businesses, cash flows and how to become profitable where as big business may just need credit. Small businesses also want infrastructure that supports their businesses needs. Infrastructure that will connect them to markets. Further more, they want market for their commodities. Many small producers/ businesses have it hard to find market for their products and so they need support that will link them to markets. Many small businesses in Zambia for example produce fresh vegetable, fruits, chickens and yet the Supermarkets are filled with imported products. The suport therefore that small busniesses need to move out of poverty might not be generic but specific top their needs.
Yes, generally local SMEs employ poor and unskilled people; to make the chain competitive, local SMEs needed capacity building support (training relevant to the chain/ products – not a general training), proper use of technology, quality control and safety net and reliable and affordable financing for their enterprises.
No, the lager domestic and multinational needed the skill of inclusive business; skills of developing outreach locally ( basically innovative BOP markets), regionally and internationally, they might need more supports of technological innovations, security on their investment and policy support
One important way to support domestic micro and small enterprise sector is through pro-poor procurement practices. A report we did in 2011 found that about 20% of bilateral aid was still formally tied and a majority of formally untied aid contracts from bilateral agencies were going to donor country firms.
A long-term and predictable commitment to purchase from governments and donors can boost investment in productive capacities of SMEs. Most common targeted procurement practices are:
- granting price preferences to local bidders,
- setting aside a share of contracts in particular for SMEs
- debarring firms involved in fraud or corruption cases, and firms registered in tax havens or involved in human rights violations.
Promoting SME development is usual practice in most developed countries and targeted procurement practices should also be applied in developing countries. Coordination between SMEs and the public sector is crucial in order to assess existing constraints and determine sustainable and effective strategies that enhance capacities and promote practices aligned to development objectives.
I agree with Alexander and Antonia, as access to capital is a key element in growing MSME's and also the Global Social Entrepreneurship Network is an example of how to support these businesses beyond capital.
Helping people and communities out of poverty is not about hand out's, its about empowering them whilst ensuring effective social protection systems are in place to help the poorest and most vulnerable in society. Social Mobility is also about Social Inclusion and both governments and the Private Sector are the enablers in creating a sustainable framework, though the responsibility is firmly with government to ensure social policies are in place and met, which can be supported by the Private Sector but not replaced by the Private Sector.
Rightly said Geoffrey. In Bangladesh, small growers find it difficult to work with large supermarkets, and one of the key constraints is their lack of understanding on the market demand, in terms of quality of the product and the size of each order. But in their defense, working with large supermarkets, following contracts ...these are all new to them. There should be a mechanism through farmers' groups or local cooperatives to walk them through the process.
Hi Ekanath, thanks for this point, I think you raise some valuable points. I would also emphasise that small businesses play a crucial part in local supply chains and local markets - over and above global value chains. This is becuase most small businesses operate in domestic markets, buying, selling and investing locally.
Collins, I totally agree with you, the local SMEs should be part of the bigger chain, however there are some chain related critical issues like trust, consistency of supply chain, frequency of business diversifications and many more growth related issues are the biggest challenges, so the PS engagement framework in to local economic development should look in to these issues critically .
Another constraint for Small businesses is tax regime. Most multinational businesses have managed to flourish in developing countries becasue they have managed to negotiate for lower tax rates. Tax regimes for small businesses in most developing countries are very punitive. In Zambia for example, small businesses with annual turnover of less than US$140,000 are expected to pay 3% on their monthly turnover where as big businesses earning more than US$140,000 per annum are expected to pay 35% on their profit. In an event that a big corporation does not make profit, they are not expected to pay while a small business is expected to pay. Small businesses need more tax breaks than big businesses
Thanks for this comment Chris. I agree with those three points you raise. Interestingly our research showed that it wasn't just access to capital that was so important to small businesses - it was acess to a broad range of financial services. Donors and governments tend to focus exclusively on access to credit or capital and we'd really encourage a more compreheive approach to financial services (you can access our research here http://www.cafod.org.uk/Media/Files/Resources/Policy/Thinking-small - Think Small 2 is the one you're after)
