Invigorating the SMEs sector

At its meeting last Wednesday, the federal cabinet approved the draft of the first ever small and medium enterprises (SMEs) policy to improve the efficiency of the sector that, as Prime Minister Shaukat Aziz averred, is a major source of employment generation in this country.
Earlier, a report in this paper had unveiled important features of the draft policy - prepared by a task force comprising stakeholders from the public as well as private sectors - which include mechanisms to increase access to finance, some unspecified measures to reduce the regulatory burden on SMEs, and adoption of a single definition of SMEs by all the stakeholders. Being the life and blood of industrial activity, access to finance gets a lot of emphasis in the draft policy.
The government is to establish credit guarantee and credit insurance agencies to provide, in line with international practices, for incentives and risk cover for the banks. It is also to introduce bankruptcy laws. Regulatory procedures and fiscal incentives for venture capital companies are to be made better, Banking Ombudsman's role is to be expanded to cover the SMEs, while financials institutions are to be encouraged to design and launch industry-based lending schemes. Periodic review of all fiscal laws in force is also to be undertaken with a view to facilitating the SMEs' growth and expansion.
The government deserves to be applauded for striving to offer this sector liberal access to finance through all these measures. Nonetheless, a large section of it functions in the informal sector, and hence is ineligible to benefit from the proposed facility. It is hardly a secret that a number of SMEs, especially small ones, feel compelled to remain in the informal sector in order to avoid a plethora of laws that threaten to hamper their functioning and consequently restrain their growth. There are over twenty different laws, such as the Industrial Relations Ordinance, Employees Old-age Benefits Institution, Worker Welfare Fund, Social Security, Factories Act, etc that become effective as soon as an industry employing merely ten workers becomes operational.
Which places an additional burden on the small enterprises' expenses, forcing some to go out of business and others to stay outside the fold of formal economic activity. Either way the workers do not get the intended benefits and the entrepreneurs fail to realise their productivity potential. It would serve the interests of both parties if the government raised the threshold of the applicability of these laws from 10 to over 100 employees. When such industries join the formal sector they would be able to benefit from easy accessibility of finance, and expand their operations to create more and more jobs that are badly needed to address the pervasive poverty.
Notably, the draft policy suggests periodic review of labour legislation with a view to encouraging small enterprises' development, whereby applicability of certain laws may be relaxed for them. It needs to be more specific than that. The government is expected to show sensitivity to the worker welfare for its own sake as also to comply with international labour conventions. At the same time, it has to ensure increased productivity and job creation. It would be helpful, therefore, if while defining the SMEs, companies having under 100 employees are declared small enterprises and required to observe only those laws that seek to regulate work hours and conditions pertaining to health and hygiene. It is hoped that this aspect of the applicability of the labour laws has been given due consideration. Otherwise, proposals that amount to mere window dressing will not yield the desired results.