Why are small firms important?
Why are small firms important?
By Philippe Lyssens
JAKARTA (JP): Why are small and medium-scale enterprises
(SMEs) important for Indonesia? SMEs are said to be the backbone
of the national economy, and even more so in times of crisis.
With the dominance of Chinese businesses in the Soeharto era and
the present high demand for foreign investment, there will be
strong pressure on the government to support the pribumi
(indigenous) entrepreneur.
To support SMEs means to create a "conducive environment" for
SMEs. This encompasses a comprehensive strategy; i.e. well-
defined projects targeted to specific beneficiaries. These
projects should have spin-off effects and should contain
quantifiable parameters when implemented for better control and
evaluation.
In Indonesia today, the private sector, particularly the
banks, have displayed little interest in SME programs. It is most
likely that, if anybody, it is the government that will take the
initiative.
Taking the lead in this venture -- that is setting up the
programs and providing the finance -- the government will
encounter common traps. These traps take the shape of:
* choosing beneficiaries not for their technical capacities or
their business acumen, but on their basis of their loyalty to the
new party.
* redirecting the program to other fields of priority, for
example poverty alleviation programs, or as indirect subsidies to
large corporations starved of cheap credit.
We think poverty alleviation programs have to be developed and
implemented, that large estates with cash crops generating
foreign exchange should be emphasized, but also that when you
promote SMEs you must not confuse the programs.
Besides the aforementioned traps, there are a series of
typical problems encountered by SME programs. The government must
systematically apply principles and techniques that have already
been developed successfully in the SME field. The first priority
of the government should be to look at activities where:
* the entrepreneur is most likely to become quickly self-
sufficient and
* once self-sufficient will be very much tempted to expand by
creating more jobs. The most probable scenario is still in
agriculture, more than in trade or high-tech ventures.
Projects leading to this self-sufficiency will:
* contain high enough cash generation (and/or high returns on
investment) for government and banks to support and
* be implemented on a scale big enough or multiply at a pace
that makes it cost efficient for the government or banks to
intervene. (Laboratory type projects should only be applicable
for individual cases in restricted areas. At present, these types
of projects are useful but not essential).
Indonesia is still very much an agricultural-based economy.
There are still plenty of natural resources to develop. Land is
plentiful and fit for commercial exploitation. One should
emphasize projects that give farmers an opportunity to escape the
poverty trap. We have seen too many projects set up with the best
intention and financed by the World Bank or other financiers
taking a wrong turn.
* Survival versus viable enterprises. Usually, the government
provides one hectare (ha) of land for cash crops to farmers. On
one ha, plus a vegetable garden, farmers can only survive, i.e.
be subsistence farmers. On four ha of land, farmers will repay
their loans faster and quickly become independent from the state
and the estate. With one ha, farmers remain extremely vulnerable
and can be easily coerced to vote for the party in power or work
on the estate that processes the cash crop. With four ha, farmers
can become small entrepreneurs, save money, buy more land and
employ more people.
* Survival versus subsistence wages. Very often farmers are
attracted with promises of land ownership (of one ha) but end up
working as unskilled laborers on their land. There are still too
many cases of government-sponsored projects containing long lists
of petani dasi, that is where city dwellers own the land and the
farmers work for a pittance as laborers.
An issue of more importance than credit facilities is the
allocation by the government of sufficient land for farmers to
live on. Again, instead of giving credit, the government should
introduce farmers to new cash crops through agricultural
facilitators.
We like to believe that there is lot of potential in
manufacturing or information science. But it is much more
difficult to support large-scale industrial or technology-based
entrepreneurs. One can set up an industrial estate or a training
center and program, but the problem is to identify the individual
achiever. In this sector, besides the actual activity, one must
pay attention to the individual.
To start a business one needs to have guts, and to find the
money from family and friends. One must obtain trust from people
one knows, and prove that one can start and run a venture. The
entrepreneur has to prove that s/he has more ambition than just
surviving from the activity. There are many "self-employed"
people who run a shop, produce an item and are happy with the
money they make.
But real "entrepreneurs" move gradually into the unknown and
increase their production (create more than is required for their
daily needs), create employment, learn to manage people and take
on new production techniques. They are the ones who will propel
the country. They are the ones that the government has to
identify, and the ones who deserve the most help. They are the
ones the banks should be chasing. They can be traced, but this
requires close collaboration between the government and the
private sector. They should not be harassed.
As occurs in many situations in Indonesia, companies and
people are asked to pay fees and red tape for services they do
not receive. On the other hand, the fees and red tape for SMEs
(not the large government contracts), are relatively small; these
(in)direct taxes are not more cumbersome than official taxes
payable in other countries. In agriculture, where small farmers
are weak when they are alone, cooperatives and traders too often
play a central role in setting prices and quotas. Increased
transparency within cooperatives and increased competition among
traders is necessary.
Farmers have very sound common sense. Once they see the price
is right for a certain crop, they start developing it. Most of
the time they find the cash to start these schemes. What they
need is technical guidance. Credit is a facilitating and
accelerating element, but it is not the main developmental
factor.
Anywhere in the world you will hear that it is difficult, if
not impossible, for small companies to start a business and
obtain credit on the basis of feasibility studies only. (Only
Soeharto's cronies could overcome this obstacle). Banks
everywhere ask for collateral. The feasibility study is, in the
best circumstance, an additional incentive for the bank to give
credit. Bankers, however, are very risk-conscious. And
feasibility studies sometimes appear as just more cumbersome
paperwork to process, rather than the dreamed of support (smooth
repayments of the loan).
Before the krismon (monetary crisis), all Indonesian banks
were obliged to allocate 20 percent of their credit portfolio to
small credit projects. This proved wasteful. Many banks were, if
not unwilling, certainly unprepared for this task. The government
seems to have changed its policy and returned this task to one
specialized state Bank Rakyat Indonesia.
Banks have also always been used to providing only very short-
term commercial credits. Long term investment credit of more than
three years is nearly unheard of. Presently, all banks are cash-
strapped.
For agricultural cash crops there is no way banks will find
funds (savings) from the public for long-term lending to farmers.
If farmers need long-term credit, it is the government that will
have to supply the liquidity. This would imply that BRI would
become (or rather continue being) a channeling bank for liquidity
provided by the government.
Very small traders are living at the expense of renteniers,
also known as loan sharks. These renteniers charge more than 60
percent annual interest for renewable loans of up to one month.
Many small traders indeed work with very short-term credit (a few
days, a few weeks), and realize comparatively high profits. They
pay more for the service and the risk factor than for the actual
money in the first place.
Paying such interest rates before the krismon, these people
should not have suffered as much as they have since then.
Small enterprises and farmers needing long-term credit have
always been left out, because they could not afford these sky-
high interest rates.
There is still too great a miss-match between risk capital
companies, and other instruments of the capital market, and small
enterprises. As mentioned above, the biggest opportunities are in
the agricultural sector where the returns are high enough for
classic SMEs to develop, but not yet high or large enough for
risk capital companies to get involved.
At present, the only area available for them in industry would
be in importing substitute products, making spare parts for
imported machines and equipment, or supplying services or
maintenance for these machines. But to be effective in this
field, risk capital companies will need to be much more
professional, persistent and creative than they are now.
SMEs are a backbone of the Indonesian economy, and the
Indonesian entrepreneur (whether pribumi or not) has proven that
he or she can see an opportunity when it arises. With a crushed
financial sector, we cannot expect the new private banks to pay
much attention to the SMEs.
It is expected that the government will put the pieces
together. In this context, a well-balanced program geared toward
the SMEs would not only be a social program helping people out of
the poverty trap, but, more importantly, an additional motor and
incentive for the economy.
It is most important, however, not to fall in the traps (the
misdirected programs), and to avoid problems linked to these
programs. Basically, the government should help Indonesians
develop what they do best.
In agriculture, the government should support the more
promising commodities, manage the programs and the links to
downstream activities in a professional way, and finance projects
in a transparent way.
Focussing on projects which have a proven track record and
moving only gradually into more sophisticated industrial projects
will prove the safest course. Rather than playing Santa Claus and
distributing one ha survival kits, the government should try to
help people to become self-sufficient.
The government should turn the red tape impediment into a
supportive administration. Many farmers truly appreciate and need
advice from the too often underpaid but qualified field
representatives.
We should stop considering financial shortfalls as the only
stumbling block for the country's development. Existing human
resources, with small financial incentives, could on their own
create wonders.
The writer is a technical advisor in a successful SME start-up
in the bakery sector in Jakarta.