Promoting Entrepreneurship in Sri Lanka: Balancing the Government’s Role and Introducing an Entrepreneurship Climate Index

This article originally appears in the Daily Mirror Business of Thursday 9th July, under the weekly ‘Smart Future’ column.

Entrepreneurship is very much about ideas and efforts of individual (or a collective) of private actors, who start a business, hire employees, make profits, invest, expand, etc. – all through private initiative and risk-taking. So, to talk about a role for government in all this might seem unnecessary. At the same time, believing that there is no room for government and policy in fostering entrepreneurship is also a fallacy. There are two aspects to the government’s role in promoting entrepreneurship – the first is knowing when and how to get out of the way, and the second is knowing when and how to help create a way.

Where to Get Out and Where to Get In

Government policies can sometimes hurt and sometimes help entrepreneurs. In shaping a conducive climate for entrepreneurship, we need to look at what are the regulations, rules, government procedures, regulatory provisions, policy bottlenecks, etc., that get in the way of entrepreneurship and innovation. For instance, are the rules around starting up and running a business conducive for young entrepreneurs?; are government institutions geared to understand the needs of a new breed of young entrepreneurs?; are the fiscal and financial frameworks in place to support them? Then we must also look at what specific initiatives that must be in place to create a helpful path for entrepreneurs. For instance, can there be government support to encourage the setting up of affordable working spaces for new start-ups?; what can be done to increase the speed and coverage of broadband internet and telecoms infrastructure to help entrepreneurs leverage digital technologies?; are rules around land use and property development – the taxes and ownership rules for example – helping or hurting investment?; is the visa regime in place to attract good talent from abroad and cross-fertilize here in Sri Lanka?; to bring in mentorship and networks among Sri Lankans and others abroad?. These are some critical areas that the government can lend active support, to shape a better climate for entrepreneurship.

Sri Lanka Needs an ‘Entrepreneurship Climate Index’

Many of these questions need to be looked at not only at a national level but also at a sub-national level. This requires a rethinking of how we measure the entrepreneurship climate at the sub-national level, as existing indicators are inadequate. The Doing Business Index, for example, measures costs and delays in government procedures and regulations in the largest commercial city of the country, i.e., Colombo. Previously, the Asia Foundation’s Local Economic Governance Index has attempted to measure sub-national business climates but there was no continuity in the assessment and therefore planning and measuring change over time was not possible. Sri Lanka needs a new comprehensive assessment of entrepreneurship for the whole country – and I suggest an ‘Entrepreneurship Climate Index’. This ‘ECI’ can not only measure elements that traditionally form the basis of an entrepreneurship climate – like start-up regulations, access to infrastructure (like electricity, roads, water, etc.), but also elements like the availability of start-up financing and the entrepreneur-friendliness of local bank branches; the attitudes towards entrepreneurship of young people in different localities (rather than job seeking); the perceptions on constraints faced by young entrepreneurs in different regions; the availability of land, workspaces, and incubation facilities for new start-ups; the spread and quality of services by government agencies that support entrepreneurship (like the National Enterprise Development Authority, the Industrial Development Board, the Industrial Technology Institute, the Inventors Commission, the Registrar of Companies, etc.); the quality of networks between young or new entrepreneurs and the leading businesses, trader associations and chambers of commerce in a locality; and other measures to capture the quality of the entrepreneurship eco-system.

A Good SME Policy Can Help Entrepreneurship

Any policy framework that focuses on the overall small and medium enterprise sector – an SME policy – can help all entrepreneurs. It’s unfortunate that 13 years since Sri Lanka developed an SME White Paper, we are yet to see it become a full-fledged policy document. The latest effort at legislating a SME Policy Framework, which was near completion, has also stalled due to the dissolution of Parliament. Such a policy framework is important because it pushes all government agencies relevant to this area to align their work towards supporting entrepreneurship; to focus their efforts and make them coherent so that businesses truly benefit. It can help streamline the numerous ad hoc, overlapping, wasteful and ineffective entrepreneur development programmes currently being implemented, and focus efforts on where government support is truly needed. It brings a clear focus on what the government should do and should not do. It also helps those outside of government – private sector, chambers of commerce, development agencies, and universities – orient their work towards supporting this agenda. Overall, it gives a national push – from the local schools to the highest government agencies.

Renewed Focus

Once the latest round of elections are done with, we need to focus on gearing regulations and administrative procedures towards fostering entrepreneurship and innovation. We need tight rules for the right reasons, not long rules for the wrong reasons. Let’s look at the policies that are holding entrepreneurship back, and improve them; and let’s look at the policies and programmes that can help entrepreneurship and fine tune them and scale them up. Everyone can and should influence that process. Our goal should be to make Sri Lanka the “best place in Asia for a young entrepreneur to start and grow a business”.

This is the 18th article in the ‘Smart Future’ series that advances ideas on competitiveness, innovation, and economic reforms.

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Expanding Business Development Services to Tackle Inherent Weaknesses of SMEs

This article originally appears in the Daily Mirror Business of 10th June 2015, under the ‘Smart Future’ weekly series.

In developing the Small and Medium Enterprise (SME) sector, we often assume that the quick and easy fix is concessionary loan schemes. But there is a key issue which goes beyond access to finance, but is also intrinsically linked to the access to finance problem, and that is the inherent weaknesses of SMEs. In identifying factors that constrain SME growth, the inherent weaknesses of SMEs – weaknesses in their management and operations – frequently arise. These weaknesses often make them SMEs “unattractive” or more risky in the eyes of banks – a key bottleneck in SMEs access to finance.

What are these weaknesses?

The inherent weaknesses point to issues of management, professionalism, and operational expertise. Banks, for instance, complain that the quality of business plans, project proposals, loan applications, etc submitted by SMEs are weak. The standard of accounting and financial management and reporting is weak. The ability of SMEs to understand market conditions, conduct market research to identify existing gaps, and identify expansion opportunities, is often weak. There are also weaknesses in SMEs’ management capacity and overall professionalism in the running of the enterprise. To expand markets and become more competitive, SMEs need to continuously upgrade, but their access to technology and ability to absorb technology transfer is weak. Addressing these constraints would not only improve SMEs’ access to finance – and the catalytic results that follow – but improve overall performance and business success. This is where Business Development Services Providers (BDSP) can come in.

What is BDSP?

The Committee of Donor Agencies for Small Enterprise Development – a global forum of multilateral and bilateral cooperation agencies chaired by the World Bank, defines BDSP as any type of non-financial service that is aimed at improving the performance of an enterprise, access to markets, and ability to compete. The majority of BDSPs in Sri Lanka are based in the capital Colombo and in some major cities. A limited number are available outside these areas, but are reliant on donor-funded projects. As a 2014 IPS study found, many SMEs were not able to find BDSPs in their local area, or were not aware of the various BDS schemes on offer.

More BDS Needed

There is a strong case to be made for the government to support more BDS provision. It is a far more cost effective SME development strategy than employing hundreds of government officials (for example, Development Officers) to conduct SME development programmes. It is also far more sustainable than relying on successive rounds of concessionary credit lines. But encouraging both a greater provision of BDS (increasing the number and quality of BDSPs) and encouraging their use by SMEs could have a more catalytic impact on SME development than individual and ad hoc schemes that target just one aspect of SME development (e.g. finance).

Innovative Solutions – BDS ‘Vouchers’

Given the limited number of BDSPs out there, a key step would be to boost the availability of BDSPs around the country. Of course, supply follows demand, and such providers will only emerge if there is a demand for BDS from SMEs. Here is where a small push from government can help. Instead of expanding BDS provision by existing SME development institutions of the government (like IDB and NEDA), the government could introduce a voucher system where SMEs can avail themselves of business development services from registered private providers, and the cost is subsidized by the government. The registered BDSPs would have to of course be vetted by institutions like IDB and NEDA, for quality, reliability, and relevance. The voucher system can ensure that SMEs have the freedom of choosing which BDSP they can use, and the initial subsidy (which is based on usage) can help offset part of the costs borne by the SME. This could encourage more SMEs to adopt such services, and once they see results, they would be more willing to pay for it entirely on their own. The BDS voucher system (which offsets/subsidizes part of the costs) could be valid for a limited time period (2-3 years), after which the SME would need to pay for it entirely. Expanding the demand for BDS provision in this way would also help trigger a growth in the availability of quality BDSPs.

Through BDS, and the improvement of professionalism and competitiveness, SMEs can improve their overall performance, and begin to rely less on concessionary treatment. Government institutions must begin to look at innovative methods of delivering these services that SMEs need; methods that are not expensive publicly funded schemes with lots of staff, but yet get the job done in terms of strengthening the SME sector.

 

This is the 15th article in the ‘Smart Future’ column that advances ideas on competitiveness, innovation, and economic reforms.

A New Outlook for Provincial Economies: From ‘Lagging Regions’ to ‘Secondary Growth Hubs’

For too long now, regions outside Sri Lanka’s Western Province have been characterized as “lagging” and in need of a boost. But has the terminology itself contributed to the problem? The term “lagging regions” entered the lexicon of Sri Lankan development-speak in the early to mid-2000s as the idea of regionally balanced development came into prominence and gained further traction through a report titled ‘Reshaping Sri Lanka’s Economic Geography’ by the World Bank. Since then, the term “lagging regions” was heard used by nearly all development agencies, private sector chambers, government officials, and of course, academics and development experts.

 

Workers at a new factory in the revamped Atchuvely Industrial Zone, Jaffna, Northern Sri Lanka. The 25-acre facility, built with Indian aid, has slowly begun to attract new investors from the region.

Workers at a new factory in the revamped Atchuvely Industrial Zone, Jaffna, Northern Sri Lanka (March, 2015). The 25-acre facility, built with Indian aid, has slowly begun to attract new investors from the region. (Image by Author)

Changing Perspective

The GDP dominance of the Western Province has been steadily declining (from 50% less than a decade ago to around 43% today), giving way to several other provinces like Southern and North Western. While none of these other provincial economies are half as large as the Western Province (given the unparalleled connective infrastructure and industrial agglomeration that the capital Colombo offers), it is well recognised that they offer immense economic potential that needs to be cleverly harnessed. During a recent visit to the Northern Province as part of visioning a SME project, I travelled with an international expert, Thomas Finkel, who has vast experience with consulting on private sector development projects. Through his work in Asia and Latin America he had seen many efforts aimed at boosting growth in provincial economies. He and I began talking about this idea of “lagging regions” and why it is such a terrible name to give provinces that are eager to attract private sector investment, spur new business activity, generate new sources of growth, and provide new economic opportunities for the people living there. He suggested a new terminology was needed – ‘Secondary Growth Hubs’. Finkel argued, “Calling these regions ‘Secondary Growth Hubs’ instead of ‘lagging regions’ gives these regions an optimistic outlook, which is needed if you want to foster growth there. Which investor, be it local or international, feels attracted by a term like lagging regions. Who would want to go there?”

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Opening Up Opportunities for SMEs in the Government Supplies Market (‘Smart Future’ Article #7)

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.

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