SOEs not well-served by existing markets, institutions

In conjunction with the launch of the 2005 International Year of Microcredit and the recent meeting on microfinance in Bali, The Jakarta Post's Rita A. Widiadana interviewed Carl Dagenhart and Feraldi W. Loeis from the International Finance Corporation's (IFC) Program for Eastern Indonesia Small Medium Enterprises Assistance (PENSA), a member of the World Bank Group, on the potential and handicaps faced by local SMEs. The following is an excerpt from the interview. ________________________________________________________________________

Question: What is the current situation of small and medium enterprises (SMEs) in Bali? Feraldi W.Loeis (FWL): Bali has been heavily relying on the tourism and hospitality industry for many years and has been neglecting its small, medium businesses. When the bomb tragedy occurred in 2002, it crippled the island's economy and it was also proven that tourism businesses are vulnerable due to internal and external factors. SMEs, on the other hand, were able to survive despite many weaknesses and handicaps. This group has the stability and the flexibility to adjust to the nation's volatile economic, political and business climate. However, they are not well-served by existing markets and institutions. So what's the most serious problems faced by SMEs in Bali?

FWL: In addition to tourism, Bali has an abundance of small and medium businesses producing good handicraft, furniture, garments and other products. The problem is that not many buyers have been coming to the island in the post-bombing era and thus Bali products have lost their easy access to international markets. Other problems include limited access to financial resources and market information, but these are quite typical problems faced by most SMEs world-wide, not only in Indonesia. Could you elaborate on the IFC-PENSA program to boost the island's economic condition?

Carl Dagenhart (CD): In Bali, Pensa's program focuses its effort on promoting handicraft exports. The approach is to assist local handicraft producers in establishing links to international buyers and developing skills and capacity necessary to satisfy buyers' requirements. For that latter purpose, the program will endeavor to provide accessible business development services to SMEs, mainly in the area of training and consulting..

We expect that once SMEs are provided with accessible and quality business development services, they will be able to run their businesses effectively and sustainably. We are not working alone. We've set up cooperation with local service providers, non-governmental organizations, the government, and other donor- funded programs.

Another complementary program run out of Bali supports and links forests, saw mills, furniture manufacturers and buyers to help them gain business advantage from using responsibly sourced timber. How competitive are Bali's products in the international market?

CD: Bali's products used to be well-known for their unique designs, good quality and competitive prices. But other countries such as Malaysia, the Philippines, Vietnam, Cambodia, Taiwan and China are also producing goods of similar quality. The last economic crisis, followed by the bombing, has prevented Balinese producers from expanding their businesses.

At the same time, competitors from other Asian countries have improved significantly. The handicraft sector in those countries is more diversified and comprises small, medium, and large enterprises, domestic private companies, foreign-investment companies, and sometimes-large state-owned companies.

In Indonesia, by contrast, the handicraft sector is still mainly a cottage industry, and as such does not have sufficient financial and human resources to be able to produce sufficient volume to attract larger buyers. High transportation costs are yet another handicap that the Bali producers have to face when competing with producers from other countries.

Finally, Balinese handicraft producers must understand the market trends and be able to improve the design of their products. Bali original designs may sell well to tourists however, international wholesale buyers are interested in buying not handicraft but home furnishings and therefore require more modern, contemporary designs.

After the bomb, the capability of Balinese producers to maintain their businesses has been diminishing. One producer said he never received any orders for the last two years. The other complained that he once had 1,300 artisans working to produce exported goods, now he has none to help him running the business. What are the urgent steps needed to help SMEs reoperate their dying businesses?

FWL: To give them more opportunity to learn about the market needs, to assist them in producing marketable goods, to improve their business skills. The most important point is to change their attitudes towards their businesses. It is urgent for them to reach out the market rather than wait for the orders to come. It is also significant to raise their sense of urgency.

It is expected that the program will help the handicraft producers become more sustainable and profitable. This, we hope, will make a significant contribution to revitalizing the island's economy, and it is also a way to gradually decrease the island's strong dependence on the fragile tourism industry.