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.