This article originally appears in the ‘Smart Future’ column of Daily Mirror Business on Wednesday 25th March
During the half way mark on a recent flight from Colombo to Jaffna on Helitours, the passengers were given a packet of wet wipes (refresher tissues) along with the snack box. I flipped the back to see who had produced the tissues and I was disappointed to see that they were imported from a Chinese wet wipes manufacturer. While I’m sure the supplier offers an attractive price point, I couldn’t help but wonder why a government operation couldn’t support a Sri Lankan small enterprise to supply this item, despite continued rhetoric by successive governments on the desire to support the Small and Medium Enterprise (SME) sector. For the longest time, the support to SMEs by the government and donors writ large has been focussed too narrowly on the issue of access to finance. While this is a critical aspect of SME growth, too much of a focus on it overlooks other paths to SME development, including opportunities in the government supplies market.
Every year, governments spend billions in issuing contracts to companies to provide them with goods and services—a process known as public procurement. But, the proportion of this spending that goes to SMEs is likely to be relatively small (although specific data is now available). Increasing it could become an important source of new revenue for SMEs. As the ADB (2012) has noted, “Increasing involvement of SMEs in public procurement schemes can, if properly designed, result in higher competition for public contracts, leading to better value for money and efficiencies for contracting authorities”.
Pro-Active Policy Approaches in Asia
Government policy can play a key role in encouraging this. In Sri Lanka, the SME White Paper (2002) briefly touched on this in one of its recommendations – “Request government organisations that in following established administrative procedures to provide maximum benefits to SMEs”. However, many Asian countries have taken a far more pro-active approach. For instance, the Korean government pushed for prioritizing SME suppliers in public procurement. All government agencies and state corporations were encouraged to increase their purchases from SMEs, and this was mandated in the Small and Medium Enterprises Products Procurement Act of 1981. In-keeping with the strong state-led strategy, such purchases by public entities had to be reported to the government periodically, including how much this has increased, as well as plans to increase it further in the following year. To avoid multinational or foreign enterprises taking undue advantage of this, in recent years the government introduced a disqualification for small and medium-sized subsidiaries of overseas companies from participating in the local public market. However, such bans may violate the World Trade Organization (WTO) regime dealing with government procurement, as framed in the General Procurement Agreement (GPA). Yet, developing countries like Sri Lanka could argue on the basis of special and differential treatment.
Some Asian countries have mandated ‘set-asides’ for SMEs. In China, policy measures introduced in 2012 require government departments to set aside at least 30% of their annual budgets for procurement from SMEs, with not less than 60% of this amount reserved for small and micro enterprises; to apply SME price preferences of between 6%–10% in particular instances; and to encourage larger businesses not only to subcontract but also form consortiums with SMEs and, in those latter cases, to provide price preferences of 2%–3%. In India, in 2012 the Government approved the Public Procurement Bill, which set an annual goal of procuring a minimum of 20% of goods and services from SMEs in India.
In devising policy strategies in the Sri Lanka context, there must be a careful selection of tools, to avoid distorting the market as well as creating opportunities for discretion and rent seeking. Policy options range from very intrusive measures to least-intrusive measures, and policymakers must be careful in their selection.
Gearing SMEs to Win Public Contracts
Mandating a ratio of public procurement from SMEs is a good way of triggering greater SME linkages in government contracts. But this must be accompanied by tackling two challenges that make it difficult for SMEs to win such contracts. Firstly, public procurement systems are often not designed to accommodate contracting to SMEs. As a World Bank project in the Middle East did, small reforms to these systems can help SMEs overcome this – reducing the cost of preparing and submitting a bid for a government contract; making the requirements more realistic for small companies; and paying them quickly to avoid cash flow challenges. Secondly, SMEs themselves need to be better geared towards taking up public procurement opportunities – making them more aware that opportunities for doing business with their governments exist, and improving their technical know-how to create good bids. It would also help to recognise and raise the profile of successful SME suppliers, to not only encourage more SMEs to enter this arena, but also demonstrate to more government agencies that reliable SMEs do exist for public procurement. For instance, there could be a scheme similar to that of the Korean Public Procurement Service Authority, which holds the annual ‘Excellent Government Supply Products’ awards to increase SME product visibility among all government suppliers, contractors and consultants.
Sri Lanka must continue to look at SME development through more diverse policy lenses – beyond the typical ‘access to finance’ one. By encouraging greater public procurement from SMEs on one hand, and improving the capacity and ability of SMEs to tap into such procurement on the other, new sources of revenue can be generated for SMEs around the country, in a bid to further promote inclusive growth. The next time you fly on Helitours, and you open up a refreshing wet wipe, let’s hope it has opened up a new opportunity for a Sri Lankan SME!
This is the 7th article in the ‘Smart Future’ column that advances ideas on economic reforms, innovation, and competitiveness.