Unlocking the Potential of Micro, Small and Medium Enterprises Essential to Sri Lanka’s Post Covid Economic Recovery (Part 2)

Originally appeared on Colombo Telegraph, Daily News and Daily FT

By Ayesha Zainudeen

Small and medium-sized businesses (SMEs) represent over half of the businesses in Sri Lanka. They also provide an important source of employment for a large part of the labour force. They have been dubbed the ‘backbone’ of the economy in national policy frameworks. Supporting this sector and helping small businesses to grow should be an important part of the national strategy for post-COVID economic recovery. 

This article is the second in a multi-part series by the Advocata Institute and LIRNEasia on what needs to be done to empower Sri Lanka’s micro, small-medium businesses for post-COVID economic recovery. In Part 1, the Advocata Institute examined the barriers faced by small businesses to formalization and what needs to be done to lower them. In this part, LIRNEasia looks at what is holding SMEs back, through the lens of digital exclusion.

Connectivity is related to better business performance

 A 2019 LIRNEasia survey of SMEs across Sri Lanka showed that businesses classified as ‘high’ ICT users performed considerably better on a number of indicators such as revenues, profits, number of customers, etc. (Figure 1).  Perhaps most interestingly, they were also connected to a global value chain in some way. 

Figure 1: How SMEs classified as high ICT users are different to those classified as low ICT users (Source: LIRNEasia AfterAccess SME survey, 2019)

Unlocking Potential of Micro and Small businesses Essential for Post-COVID Economic Recover

Originally appeared on Ceylon Today, Economy Next, Colombo Telegraph, The Island and Daily FT

By K.D.D.B. Vimanga

Sole proprietorships account for 63.1% of businesses in the country and account for 27.1% of national employment (Annual Survey of Industries, Department of Census and Statistics). Their contribution to the local economy is significant and lockdowns due to the COVID-19 pandemic have had an adverse impact on these small businesses.

At present, it is difficult to estimate how many small businesses would be out of business, but given that the department of labour has estimated (from a survey of 2,764 establishments) that 52.15% or 764 of firms, employing under 1 to 15 employees have closed down, it is likely that small businesses have also been hit hard.  

However successive Sri Lankan governments have failed to strategise on the potential of these enterprises to Sri Lanka’s economic development. Emerging markets such as Vietnam on the other hand have been able to capitalise on the potential of these businesses to accelerate economic growth.  

Any hope of inclusive economic growth for Sri Lanka’s post-COVID recovery can only then be achieved if we utilise this sector, unlock their potential and empower them to grow, compete and thrive. While there is a lot of work to be done in terms of policy reform in this area, there are a few low hanging fruits, namely re-hauling the business registration process, and bridging the digital divide. 

In the form of a multi-part series, the Advocata Institute in partnership with LIRNEasia will provide an in-depth analysis of these two vital policy tools to empower Sri Lanka’s small businesses. 

Sri Lanka’s business ecosystem:

According to the listing operation of Economic Census conducted in 2013/ 2014 the number of SMEs in Sri Lanka, most of which are categorized as sole ownerships, account for 1,019,681 of which 71,126 are small enterprises and 10,405 are medium scale enterprises.  This number only represents enterprises that have registered under the above criteria. However, according to the same survey, there are 3 million people who engage in a similar SME related industry, trade or services. 45% of the micro-enterprises and 10% of small enterprises remain unregistered. Overall, 42% of business establishments remain unregistered while 25% of these establishments are run by women entrepreneurs. In other words, informality is still high. 

According to a survey done by LIRNEasia, 40% of SMEs reported using the internet or social media for business; much of this use was limited to information seeking, rather than transactional use. Those who used the internet for business thought that access to the internet is either important or very important, while those who did not use the internet remained unconvinced of its benefits: most said there was ‘no need’ to use the internet. Few SMEs were capable of taking any form of card payment at the time of the survey, and the majority of SMEs did not use mobile money services. This research points to a serious digital divide restricting the potential of Sri Lanka’s small businesses. This would be tackled comprehensively during next week’s Op-Ed outlining the serious implications of the digital divide.  

So what is the problem?

Let’s look at it through the experience of a micro-entrepreneur. Chitra. She runs a string hopper stall opposite her village fish market and her story is similar to that of three million people who engage in an SME related industry, trade or service. Her business remains unregistered. She does not use any digital technology. Because she is unregistered, she cannot go to a bank and get a low-interest SME loan or even apply for the recently introduced Saubagya COVID-19 renaissance facility.

Reforming the Business Registration Process

So what must be done urgently is to simplify our business registration process. At present, the business registration process is implemented by the Divisional Secretariats. In contrast, the Business Registration process for companies under the Companies Act No. 7 of 2007 are streamlined through an online registration system called the e-ROC. However, this does not benefit small businesses who classify as sole proprietors and partnerships and is therefore regulated at the Divisional Secretariat.  At best we have about nine different regulatory processors for the registration of sole enterprises and partnerships. Typically, an entrepreneur like Chitra would have to visit the Divisional Secretariat, collect and fill forms, provide documentation such as proof of premises ownership such as deeds, or rent agreements, tax assessments etc. Then she would have to visit the Grama Niladhari and get the documents validated. She might need other approvals as per the request of the Grama Niladhari before she hands over the final forms to the Divisional Secretariat. A more effective method would be to have an online system. As implemented by New Zealand and Hong Kong, the applicant must be able to submit the form (available in all three languages) online on the Divisional Secretariat website, pay the business registration fee online or at a bank and receive the business registration the next day without the requirement for numerous signatures or documentation of ownership (the company registration process does not call for the original deed or proof of ownership, so why should a small business?). Then an entrepreneur such as Chitra can easily go to the nearest communication fill the forms, upload the deposit slip and get her business registration done with ease. 

Therefore, in practice, what has to be done is establishing an e-registration system which can be availed of by small businesses. The Ministry of Industries must play an active role in setting up the online platform in partnership with Provincial Councils. Secondly, the requirement for unnecessary documentation (proof of ownership, grama niladhari approval, etc.) has to be amended at the provincial council level.  Implementation of these two policy recommendations would significantly empower small businesses to get registered. 

Conclusion

Sri Lanka needs to urgently capitalise on the potential of MSMEs. Creating growth and productivity in the small business sector is an investment on our wider economy. This is not an easy task; however, mobilising synergies and bringing in much needed regulatory reforms such as making the business registration process simpler and secondly bridging the digital divide.

K.D.D.B. Vimanga is a Policy Analyst at the Advocata Institute. He can be contacted at kdvimanga@advocata.org. The Advocata Institute is an Independent Public Policy Think Tank. Learn more about Advocata’s work at www.advocata.org. LIRNEasia is a regional digital policy and regulation think tank active across Asia. The opinions expressed are the author’s own views. They may not necessarily reflect the views of the Advocata Institute or LIRNEasia.

Can industry-specific ministers fix this issue?

In this weekly column on The Sunday Morning Business titled “The Coordination Problem”, the scholars and fellows associated with Advocata attempt to explore issues around economics, public policy, the institutions that govern them and their impact on our lives and society.

Originally appeared on The Morning

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By Dhananath Fernando

The appointment of cabinet ministers and state ministers is still a topic at dinner tables, especially on the state ministerial portfolios. This is mostly because specific industries or fields have been provided for state ministers. There is general criticism surrounding ministers being appointed to micro sectors of the industries while the general expectation from a minister is to serve a broader mandate, and do justice to taxpayers’ money by formulating and implementing policies.

Many critics question the role a minister could play in a comparatively small industry where the designing, production, marketing, and distribution are mainly done by the micro-entrepreneurs themselves. For example, the state ministerial portfolio for Batik, Handloom Fabrics, and Local Apparel Products has been a topic of discussion since the appointments. Another state ministry that is being widely discussed is that of Cane, Brass, Clay Furniture, and Rural Industry Promotion.

The counterargument is that previous state minister portfolios were just token positions with no decision-making power. It is argued that in this case, ministers have been provided a specific role, scope, and focus, and people can directly hold them accountable for their industries and industry-related concerns. At the same time, a measurable key performance indicator (KPI) can be easily implemented and the respective and relevant institutions can be assigned to each minister. According to a recent TV interview by President’s Secretary Dr. P.B. Jayasundera, state ministers and their teams led by the ministry secretary have been given the decision-making power in that respective industry. According to Dr. Jayasundera, it is a scientific way of structuring and utilising taxpayer money without just appointing state ministers for the sake of doing so.

I believe there is truth to both arguments on the method of assigning the ministerial portfolio. The ground-level reality is that most of these assigned domestic industries are run by micro, small, and medium entrepreneurs (MSMEs) or businessmen who represent the private sector. It is important to remember that these small businesses are still part of the private sector and not the Government. The Government’s role is more to regulate some industries and facilitate the business processes because micro and small enterprises have industry-specific challenges as well as common challenges in running their daily operations. The minister’s role is to work with these sectors and assist them with reducing regulatory barriers for the sector to perform to its full potential.

Common challenges

According to the Advocata Institute’s report “Barriers to Micro and Small Enterprises” in Sri Lanka, one main bottleneck across all industries is access to finance. Access to finance has multiple dimensions extending to the banking and financing sector, but it starts from the fundamental point of business registration.

Over the years, we have underestimated the potential of micro and small enterprises (leaving the medium enterprises aside). We have provided step-motherly treatment to the MSME industry to the extent of not even focusing on their ability to register their businesses.

According to the Advocata report, sole proprietorships comprise about 61% of total businesses in Sri Lanka and provide 27% of national employment. Interestingly, about 25% of the establishments are run by women and contribution from women-led enterprises increases up to 35% in rural areas.

While the whole country focuses on the big picture of revamping the entire domestic and specialised sectors such as batik, local apparels, handlooms, pottery, rattan, etc., our research has revealed that about 45% of micro-enterprises and 10% of small enterprises have not even obtained a basic business registration. The meaning of not having a business registration is that they do not have access to finance or any Government-sponsored programme or project.

Poor enthusiasm for business registration is mainly a result of the horrendous process of registering a proprietorship or partnership. A proprietorship or a partnership can be registered under the Business Names Ordinance Act No. 7 of 1987, which is under the authority of each provincial council and provides room for each provincial council to run their own procedure on registration of a proprietorship or partnership.

So even though a specific minister may have been given scope and specific task of revamping micro, small, and local enterprises, the minister may still face challenges due to common regulatory barriers starting from the business registration process, which is the entry ticket, to finance and markets, and even for relief schemes during Covid-19 brought in by the Government.

The good news is the Government and Department of Census and Statistics (DCS) have initiated an e- registry platform for registering micro and small enterprises. According to Advocata statistics, 97% of micro-businesses and 85% of small businesses are registered as sole proprietorships. This e-registration system is indeed a move in the right direction. Then, the authorities must also ensure that the e-registration process will be simple and not a replication where the same documents are just submitted online. A system of just submitting documents such as deeds, rent agreements, etc. online would add an additional burden for budding entrepreneurs; to scan and submit documents online in addition to the time they spend getting grama sevaka certificates, rent agreements, and a list of other documentation. Advocata has recommended the New Zealand model and a South Korean model where there is a three-step business registration process, while in Sri Lanka the current process has seven steps.

Daily survivors vs. entrepreneurs

Having a simplified business registration process is the first step of addressing the problem of access to finance and providing government assistance and accessing markets. Having a simple business registration process will ensure an effective tax collection system where businesses can grow and expand.

One other reason for the poor enthusiasm pertaining to registering a business is in the fear of paying taxes. As a result, most of these micro-businesses limit themselves to being “daily survivors” as opposed to them becoming real micro and small “entrepreneurs’’.

There is a significant difference between someone who just runs a small business for daily survival and someone who takes a risk in the form of money, property, time, or any form for entrepreneurship.

What Sri Lanka requires is for micro and small entrepreneurs to migrate from “daily survivors” to micro-entrepreneurs. The Government can facilitate the process by having a conducive environment for businesses, and the new state ministers can take this lead.

Industry-specific challenges

While the micro and small enterprises have been oppressed at the registration level, at the same time, there are industry-specific regulatory issues.

Most of these industries require a license for their sourcing and a license or a government authorisation that has to be taken at each touchpoint. In most industries, sourcing of raw material and transportation of raw materials both require licences. Some of the regulations are placed with good intentions, but most of it has ended up with extra bureaucracy burdening the industry and opening doors to corruption. All licences have just ended up being another hurdle for these entrepreneurs to cross. Additionally, these licences are also an opportunity for regulatory officials to earn extra money in the way of corruption and by providing preferential treatment to the affluent and higher classes of business that have networked with local political power centres.

The new industry-specific ministers’ primary mandate when developing these industries has to be a facilitatory role and not an interventionist role. The prosperity of micro and small enterprises will depend on this. The new ministers have to ensure that they do not apply the “brakes” by introducing more regulatory barriers; rather, they should remove those barriers in each sector for sustainable growth.

At the same time, they should not push the accelerator in the wrong direction to create market distortions which will impact other more productive sectors while bureaucratic powers work only thinking about their sector at the expense of others.

Sri Lankans are more than capable of competing at the global level and “daily surviving micro and small businesses” will jump to the seat of “micro and small entrepreneurs” if we facilitate and provide a more simple regulatory scheme.

We should never underestimate the common man’s skill and the ability of micro and small enterprises, which at present are already contributing more than 30% of our national employment.

The opinions expressed are the author’s own views. They may not necessarily reflect the views of the Advocata Institute or anyone affiliated with the institute.