National Strategy for Small and Medium Enterprise Sector Development in Sri Lanka White Paper




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1.Small and medium enterprises (SMEs) have been identified as an important strategic sector for promoting growth and social development of Sri Lanka . Over the years, SMEs have gained wide recognition as a major source of employment, income generation, poverty alleviation and regional development. The SMEs cover broad areas of economic activity such as agriculture, mining, manufacturing, construction and service sector industries. Although SMEs encompass agriculture, manufacturing and service sector establishments, reliable data are available only for the manufacturing sector. Within the manufacturing sector, small and medium scale industries (SMI) account for about 96 per cent of industrial units, 36 per cent of industrial employment and 20 per cent of value added. However, the total contribution of SMEs to the national economy cannot be estimated due to paucity of information.

2.In spite of various policy reforms and incentives offered by successive governments with the assistance of various donor agencies during the post liberalization period, the SME sector enterprises are less dynamic and underdeveloped as against large-scale enterprises in the national economy. The growth and expansion of SMEs are constrained by problems relating to both product and factor markets. Lack of institutional support and policy inertia have further reduced the potential contribution of SMEs to the national economy. This White Paper attempts to address these issues within the current context of policy framework in Sri Lanka.

3.As a response to the above, a Task Force comprising of business people, members of Chambers and Industry, members of the academia, bankers and government officials was set up by the Ministry of Industry and Trade in order to develop a policy framework for SME development in Sri Lanka. The Task Force consulted widely with SME entrepreneurs, Chambers of Commerce and Industry, academia, policy makers, administrators and other stakeholders to ensure that the White Paper meets the current requirements of the SME sector and development challenges of the national economy. As a part of this process, the Task Force also conducted a series of public hearings in Colombo, Kandy, Matara, and Trincomalee with a view to incorporate the suggestions of entrepreneurs, NGOs, Chambers and public sector institutions engaged in SME development, especially at the district level. In addition, the evidence from both published and unpublished work on SME development was examined as a major part of the exercise. The Task Force has also taken maximum efforts to take into account the recommendations given in recent policy documents such as the Draft National Employment Policy for Sri Lanka (2002), Business Incubators Programme (2002), Poverty Reduction Strategy Paper (2002), The Future – Regaining Sri Lanka (2002) and Budget Proposals (2002 and 2003).

4.The White Paper’s vision and strategies explicitly address the concerns of entrepreneurs representing the small and medium enterprise sector within a national economy framework. That is, all initiatives for the SME sector set out in this White Paper are consistent with policy initiatives by other key Ministries such as Finance, Employment and Labour, Trade and Commerce, Lands, Education and Tertiary Education.

5.The economy-wide policy reforms initiated by the government clearly indicate its commitment towards an internationally competitive economy, combining growth and equity. Its long-term development objective is to achieve high level of economic growth implemented through an open economic system. Within this broad policy framework, the Task Force vision for SMEs is to be globally competitive through an entrepreneurial culture committed to sustainable growth. This requires the SME sector to be dynamic, robust, innovative and technologically-driven. The vision, strategies and objectives of the White Paper are aimed at overall socio-economic development and reduction of poverty.

6.The term ‘enterprise’ is defined to include any business activity or enterprise engaged in industry, agri-business and/ or services whether single proprietorship, partnership, or corporate venture. Having considered various definitional options, the Task Force agreed to define SME sector enterprises with assets values not exceeding Rs. 50 Million per enterprise excluding land and buildings . This value is to be adjusted for inflation once in five years based on the implicit GDP deflator. Using the same criteria, the Task Force also agreed to give a demarcation between Small and Medium Scale enterprises; a) small scale enterprises – asset values not exceeding Rs. 20 Million excluding land and buildings and, b) medium scale enterprises – asset values not exceeding Rs. 50 Million excluding land and buildings.

7.The most important objective of the national strategy is to create an enabling business environment for SMEs in Sri Lanka . The White Paper provides the requirements for this enabling environment for the achievement of a broad based, resilient and internationally competitive SME sector. It has also set in place policies and programmes to further develop and integrate SMEs with various sub-sectors of the national economy and global markets.

8.The objective of creating an enabling business environment is achieved by focussing on key strategic elements considered necessary for a balanced and integrated national strategy. This broadly covers access to finance, physical infrastructure, technology, regulatory framework, access to information and advice, access to markets, business development services, industrial relations and labour, linkage formation and environmental issues.

9.The institutional support required for creating an enabling environment covers four strategic elements; a) establishing an SME Authority (SMEA), b) reform of existing institutions, c) inter-institutional co-ordination and, d) developing staff and institutional capacity. The SMEA is a supreme body recommended by the Task Force to cut across administrative and financial barriers and deliver national strategies for SME development. As spelt out in the White Paper, the SMEA is the focal point for institutional support and mainly responsible for the implementation of short-term, medium-term and long-term strategies for SME development.

10.The key recommendations of the White Paper developed along these lines are summarized below:
• The government adopts the vision for the SME sector as set out in the White Paper in order to provide policy direction for future overall strategy and plans for implementation

• The definition recommended by the Task Force is to be used as a standard for data collection, policy analysis and implementation of SME sector development programmes

• Establish a high powered SME Policy Unit (SMEPU) at the Ministry of Enterprise Development, Industrial Policy & Investment Promotion

• Establish an SME Authority (SMEA) – A full-fledged autonomous institution for SME development

• Facilitate on going restructuring activities of the IDB with necessary funding and administrative support

• Improve and consolidate financial assistance available for SMEs

• Implement low cost credit negotiation and project monitoring activities initiated by the IDB

• Encourage active participation of Venture Capital Companies and Leasing Companies to provide credit support for SMEs

• Disburse loan and allied facilities with the assistance of BDS providers

• Amend the Loan Recoveries Act and Provide opportunities for sick industries to reconstruct

• Install financial discipline in SMEs

• Establish ‘Technical Service Centres’ at District level

• Establish a ‘Technology Development Fund’

• Introduce a voucher scheme for SMEs to engage in R&D work

• Create an SME Web Site

• Initiate low cost advertising and sales promotion programmes for SMEs

• Commission an annual survey and a Magazine on SMEs

• Maintain a comprehensive and up-to-date business development services (BDS) data base

• Introduce a voucher scheme for SMEs to use BDSs

• Introduce a simplified tax system for the SMEs

• Obtain WTO concessions for SME development

• Organize productivity enhancement programmes for SMEs

• Creation of industrial parks for SMEs in rural areas

• Form industry clusters on sub-sector basis

• Promote sub-contracting with proper targeting for improving the technological capabilities of SMEs

• Launch an awareness programmes on cleaner production (CP) targeted at SMEs focusing on cost savings and efficiency benefits of CP

• Enhance the capability of government and private BDSs to assist SMEs in CP and environmental management.

11.The Ministry of Enterprise Development, Industrial Policy & Investment Promotion (MEDIPIP) is recommended as the implementing agent for the National SME vision and strategy. It is also recommended that the Ministry create and fund a specialised SME Policy Unit (SMEPU) as an interim administrative measure for effective co-ordination and implementation of Action Programmes recommended by the Task Force. The SMEPU is expected to carry out these activities until the proposed SMEA is established under a separate Act of Parliament. During this interim period, the SMEPU should function under the direction of a Governing Council which should consist of SME Task Force members. The Secretary to the MEDIPIP should be the Chairman of the Governing Council.

12.The proposals made with respect to each of the strategic elements are summarized in the Action Plan. These proposals need to be implemented with immediate effect to achieve the vision and objectives set out by the Task Force for SME development in Sri Lanka . This is an aspect which deserves special emphasis in view of wide diversity of institutions involved in SME development. It also requires overall political direction for the proposed strategies to achieve national goals. Hence, strong commitment and support from all stakeholders led by the Ministry of Enterprise Development, Industrial Policy & Investment Promotion is a precondition for realizing the vision and objectives.

by Task Force for Small & Medium Enterprise Sector Development Program