SMEs should be made more competitive

Andi Muhammad Sadat, Contributor, Jakarta

The World Competitiveness Yearbook, in its 2001 edition, analyzed the capabilities of numerous countries in making available a conducive environment for a healthy competition among companies.

Based on 286 statistical components from 49 developed and developing countries, the report provides useful input on four basic elements: economic performance, government efficiency, business efficiency and infrastructure.

What was interesting about the report was Indonesia's dismal position, ranked at number 49, far below three other ASEAN countries, Malaysia, Thailand and the Philippines, which were graded as numbers 29, 38 and 40, respectively.

This report is frequently used by foreign and domestic companies for their business evaluations, as well as for feasibility studies pertaining to their investment locations. For governments, it is used to gauge their performance in comparison with the performances of other countries.

One irrefutable fact is that the competitiveness of a nation is mostly based on the success of its business world. And the majority of highly competitive companies comprise small and middle enterprises (SMEs).

The strategic role and position of SMEs, even in developed countries, are protected by a set of comprehensive regulations. Not only does the government protect them, but they are also indirectly protected by the country's other institutions, such as NGOs, banks, local administrations and so forth.

In Indonesia, the issue of SMEs has been around for quite some time, but became more important during the 1997 economic crisis. Despite the crisis, SMEs proved their resilience and made a major contribution toward the recovery of the national economy. Only then did everybody realize their vital role and the need to support these often marginalized players.

Consequently, in March 2000, the Indonesian government signed a memorandum of understanding (MoU) with the Asia Development Bank (ADB) to support the development and growth of the country's SMEs, and to treat them as one of the important elements of national reform.

To implement the MoU, the coordinating minister for the economy formed the Committee of Project Direction and two Interdepartmental Mission Units. Issues related to deregulation and competitiveness are coordinated directly by the secretary- general of Ministry of Industry and Trade, while other major issues regarding the development of SMEs are coordinated by the deputy director of financing from the Office of the State Minister of Cooperatives and SMEs.

Technical assistance is provided by the ADB to support the work of the Interdepartmental Mission Units in formulating policies and all other requirements for the enhancement of SMEs. Other activities include: analysis of the SMEs' economic environment, services for business development and various financial services.

The ADB and the Indonesian government have also designed a more conducive and systematic assistance in the area of funds or credits, as some banks are still reluctant to offer SMEs a helping hand on the assumption that returns are low. The cooperation between the ADB and the Indonesian government is also intended to change the attitude and mind-set of some local banks, and prove to them that with proper management SMEs are in fact potential and profitable customers.

It is only natural for banks to expect profits from the credits they provide. Some basic factors influence the decision of banks during their approval process.

First is the cost of funds, which is often reflected by, among other things, trends in the stock market and the demand for loans by companies or individual consumers.

The second factor is the cost of credit transactions, which includes, besides the current overhead, the cost of advertising and fees paid to appraisers, who are often international consultants with huge fees.

The third factor is the interest and administration fees paid by applicants. The last and most important factor is related to the risks involved in the credit. Late payments hurt, but nonpayment is certainly fatal.

The growth of Indonesian SMEs is not only influenced by economic conditions but also by the country's political policy. The SMEs also face other difficulties and huge costs besides their application fees. The notarial papers and all sorts of permits, plus illegal fees, are another burden.

In view of this situation, the ADB has recommended that the country's banking standards should conform with international standards, which means a new "culture" of finance and money management. Next, each element -- the government, banks and SMEs -- should become more transparent, take up more responsibility and commitment in relation to a more realistic self-evaluation.

This, for SMEs, will help them become more eligible for loans. In short, it basically concerns the pure and good intentions of every party involved.

To enhance the competitiveness and further develop their SMEs, a number of countries can be cited as examples that reflect the ideal combination and fusion of the above elements.

In Thailand, for instance, the government established a bank that specially caters to SME clients during the country's economic restructuring. This bank initially started to provide credits and assistance to about 2 percent of some 130,000 SMEs in the country, mostly in the industrial sector with lower-than- average performance, making it difficult for them to get help from other banks.

In Japan, meanwhile, the Japan Finance Corporation has done a great deal for Japanese SMEs. It provides loans for new businesses and long-term -- up to 20 years -- loans to some applicants whose collateral is below the credit value. To date, this institution is serving more than 50,000 SMEs.

The German development bank, Kreditanstalt fur Wiederaufbau (KfW), has done similar things with more than 30 kinds of credit programs. It provides long-term loans with a 20-year grace period and final settlement within 30 years at low interest rates. The KfW also provides assistance and funds for SMEs that have a deep concern about the environment.

These three examples illustrate each of these countries' commitment to developing their SMEs toward higher competitiveness and, one day soon, making them less dependent on the government. Similarly, for Indonesia, it is high time to treat our SMEs as a true national asset, nurture them as one of the nation's economic foundations and help them grow to compete globally, so that we no longer take a backseat to any other nation.