SME Policy 2007 Promotes Economic Growth Through Jobs & Poverty Reduction

SME Policy 2007

SME Led Economic Growth - Creating
Jobs and Reducing Poverty
Ministry of Industries, Production & Special Initiatives
Gov ernment of Pakistan

Turn Potential into Profit
Small and Medium Enterprise Development Authority
Government of Pakistan
http://www.smeda.org.pk

SME Policy 2007 2

Table of Contents

Abbreviations
Executive Summary 5
Section I Introduction
Background 7
Economic Rati onale/P erspective 8
Small Business Promoti on: Historical Perspe ctive 9
SME Developm ent – Rece nt Ste ps by GoP 9
Section II SME Policy: Objectives, Scope & Principles
SME Policy – Objectives 11
SME Policy – Scope 11
SME Policy – Pri nciples 11
Section III SME Policy Recommendations
SME Developm ent Visi on 13
SME Policy S tatement 13
SME Defi niti on 14
Business Environment 14
Access to Finance & Related Services 16
Supporti ng Human Res ource Developme nt, Tech Up- gradation & Marketing 17
Entrepre neurshi p Devel opment 19
Section IV SME Policy Implementation & Resource Allocation
SME Policy – Ownership & Implementation 21
SME Policy – Investme nt & Ex pected I mpac t 21
Summary of R esource All ocation 21
SME Policy I mple mentati on Plan 22
Section V SME Policy Monitoring, Evaluation & Coordination
Moni tori ng & Evaluation 23
Coordi nation 24

SMEDA - Ministry of Industries, Production & Special Initiatives, Government of Pakistan

SME Policy 2007 3

Abbreviations

BMO Business Membershi p Organization
BDSPs Business Development Service Pr oviders
BIP Business Improve ment Prog ram
CBR Central Board of Reve nue
CCIs Chamber of Comme rce & Industries
CIB Credit I nforma tion Bur eau
CFC Common Facility Center
EPZs Export P roc essing Zones
EPZA Export P roc essing Zones Authority
EPB Export P romotion Bur eau
NCSMEs National Commi tte e on S mall & Medium Enter prises
FBS Federal Bureau of Statistics
FPCCI Federation of Pakistan Chambe r of Comme rce & Industry
FIs Financial Institutions
GoP Gover nment of Pakistan
GDP Gross Domestic Pr oduct
HEC Higher Education C ommission
HRD Human Resource Devel opment
ISIC Inter national Standard I ndustrial Classification
ILP Industrial Links Program
LUMS Lahore University of Ma nageme nt Scie nces
MEs Medium Enter prises
MTDF Medium Ter m Developme nt Fra mework
MoC Ministry of Comme rce
MoIP&SI Ministry of Industries, Produc tion & Special Initiatives
MoI TT Ministry of Inf orma tion Tec hnology & Telecom
MoST Ministry of Science & Tec hnology
PIM Pakistan Institute of Ma nageme nt
PRSP Poverty Reduction Stra tegy Paper
PAAPAM Pakistan Association of Automotive Parts & Accessories
Manufacture rs
PCSMEs Provincial Committees on S mall & Medium Enter prises
R&D Research & Developme nt


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SECP Securities & Exchange Commission of Pakistan
SMEDA Small & Medium Enterprises Developme nt Au thority
SMEs Small & Medium Enterprises
SEs Small Enter prises
SBP State Bank of Pakistan
TEVTA Technical Education & Vocati onal Training A uthority
TUSDEC Technol ogy Up-gradation & Skill Developme nt Compa ny
TDAP Trade Development Authority of Pakistan
TICs Technol ogy Innovation Ce nte rs
TAs Trade Associations
UN United Nations
VC Venture Capital
WTO World Trade Organization


SME Policy 2007 5

Executive Summary
SME sector is the backbone of Pakistan’s economy. The signi fica nce of their r ole is
clearly indicated by various statistics. According to more rec ent estimates there are
appr oximately 3.2 million business enter pris es in Pakistan. Enterprises employ ing up
to 99 persons constitute over 90% of all pr ivate enterprises in t he industrial sector
and employ nearly 78% of t he non-agri culture labour force. They contri bute over 30%
to t he GDP a nd acc ount 25% of exports of manufactured goods besides shari ng 35%
in manufacturi ng value added.

Prom otion of SMEs has therefore been t he center pi ece of G overnme nt’s strategy for
economic revival, poverty alleviation and e mployment ge neration. To this end, t he
logical first step was the formulation of a compr ehe nsive SME Policy reflec ting the
viewpoi nts of multi ple stakeholders.

The Governm ent of Pakistan thus constitut ed an SME Task Force, by Notifi cation
No.1(68)/2003-Inv-III of 29 January 2004 of t he Ministry of I ndustries and
Producti on. SME Task Force i ncluded bot h public & pr ivate sector mem bers.

In order t o enable t he SME Task Force to work effe ctively, four Working Committees
were setup to carry out tec hnical analyses, deliberate findings and address foll owi ng
core issues:

i. Business Environment - Creating a favorable business environme nt for S MEs in
Pakistan's economy and elimi nating unnece ssary obstacles, reducing c ost of
doing business

ii. Access to Finance - Increasing SMEs’ access to formal fi nance i ncludi ng equity
fina ncing w hile addressing the question of ‘ lacking d ocumentati on’ and banks'
technical capabilities and impr oving SMEs' c apacity to bec ome bankable.

iii. Access to R esources & Services - Improvi ng the delivery mec hanisms for assistance
and access to resources for SMEs in Pakist an, inter alia business development
services, qualified human resources, marketing and technol ogy, so as to
impr ove their com pet itiveness, productivi ty and capacity for em ployment
generation.

iv. SME Definition, feedback, Monitoring & Evaluation Mechanism - Establishing
appr opriate and harm onized defi niti ons for Pakistan of what are to be
categor ized micr o, small, medium, and large e nter prises. Furtherm ore, the
establishme nt of a s ound m echanism by whi ch devel opm ent of t he S ME sector
and effective ness of assistance pr ovided t o S MEs can be m onit ored.

The Worki ng Committ ees after due de libe ration, fi nalized t heir rec omme ndations. In
order t o ac hieve consensus, wide scale Nati onal, Pr ovincial & Regi onal consultations
were he ld. The partici pation of stakeholder s has been the refore, t he c or nerstone of
the pol icy devel opme nt pr ocess.


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The br oader object ives to be ac hieved by S ME Policy as contained i n t his docume nt
are; across the board r ecogniti on of SMEs as a sector requiring separate poli cy &
regulatory space, de fine SMEs that qualify for support, pr opose c ounter balanci ng
measures to eliminate d isadvantage of size, remove unnecessary regulatory burd en,
institute SME support m echanism in both public & private sectors, im prove suppor t
delivery mec hanisms and establis h polic y evaluation and review systems.

Speci fically t he P olicy envisions i ncreasing t he s hare of manu facturing small
enter prises from 5.5% to 7%, while de creasing the t hreshold and density of
regulations there by reduci ng t he c ost of d oing business. It also sets the target of
increasing the share of SMEs in value added pr oducti on t o 40%, and wome n
owne rshi p to incr ease to 6%. A number of measures are proposed to achieve these
obje ctives including setting up SME support fu nds and creating a mutually
cooperative & facilitative, hassle fre e busine ss environm ent.

The Policy also contains outli ne of a monit ori ng mechanism at the Federal &
Provinc ial levels to oversee and assess impact of SME development initiatives bei ng
impleme nted u nder t he P olicy.

The Federal Cabi net of Pakistan was pleased to appr ove SME P olicy on January 17,
2007. The appr oval of SME P olicy ushe rs in a new e ra of focused SME devel opment
initiatives necessary for this sector to realize its true potential and contri bute towards
economic developme nt.


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Section I Introduction

Background
According to the rece nt Ce nsus of Establishments conducted by the Fede ral Bureau
of S tatistics (FBS) there are a bout 3.2 milli on e conom ic establishments i n Pakistan.
Out of these small and medium size enterprises (with employment base up to 99)
constitute a bout 90% of all private enterprises employing appr oximately 78% of non-
agriculture labor force 1. SMEs contributed ov er 30% to GDP, 25% in export earni ngs
besides sharing 35% i n manu facturing value addition 2.

Economic indi cators clearly reveal the impor tance and pote ntial of the SME sector i n
the nati onal econom y. This realization led the Gover nme nt of Pakistan (GoP) t o
identi fy SMEs as one of the four pillars of economi c revival plan laid out in 1999-
2000.

In orde r to devise a basic framework for the growt h and devel opme nt of SMEs the
Governme nt of Pakistan constitute d a Task Force for SME Pol icy Devel opme nt i n
January 2004 under the chairma nshi p of Se c retary, Ministry of Industries, Producti on
and Special I nitiatives. The Task Force, c ompr ising of Gover nme nt officials and
major private sector stakeholders, was established wit h t he foll owi ng object ives:
 Achieve discrete policy and re gulatory space for SMEs along wit h
identi ficati on of key areas for re forms c once rni ng laws, regulations, and
programs.
 Develop SME Policy id enti fyi ng r oles of Fede ral, Provincial and Local
Governme nts and private & public sectors i n SME sector devel opm ent.
 Defi ne princ iples of SME support and set pr iorities.
 Institutionalize SME support t o ensure re gular informati on sharing among
Federal, Provincial, Local Gover nme nts and SMEs.
 Propose detailed pr ocesses and time bound action a nd resource requireme nt
for SME sector developme nt and support pr ograms.
 Propose separate ec onomic indi cators t o institute moni tori ng and evaluation
mechanisms for SME Polic y and P rograms.
 Propose a National level Authori ty to coor dinate activities for SME
developm ent.
The Task Force further constituted four Working Committe es to deli berate upon t he
areas of i) Business Environme nt ii) Access t o Fi nance & Related Services, iii) Access
to Resources & Services and iv) SME De fi nit ion, Fe edback & M oni tori ng Mec hanism.

The SME Policy has bee n devel oped as a result of the deli berati ons of the SME Task
Force and its four Working Committees. The SME Policy formulation was a
partici patory proc ess through which private sector bodies, chambers of c ommerc e
1
Census of Establishments-2005
2 Economic Survey of Pakistan 2003-04


SME Policy 2007 8

and industries, trade associations, publ ic sector organizations and more than 1000
SMEs were consulted across the country.

Economic Rationale / Perspective
Having reac hed macro ec onomic stabilit y in the first five years of the new mille nnium
the GoP is now looking at second- gene ration econom ic reforms to tri gge r economi c
grow th and reduce poverty. It is realized t hat t he pol icy i nterve nti ons i mple ment ed
during t he last five years, though essential, are not sufficie nt t o foster broad based
economic grow th. Nonet heless, the fiscal space created as a result of the strict
fina ncial disci pli ne e nforc ed i n past few yea rs pr ovides GoP wit h an opportu nity to
invest in supporti ng private sect or led economi c growt h i nitiatives. This gr owt h, if
well distributed amongst various ge ogra phi c al regions and social populati on gr oups,
may address the thr ee main economic c hallenges faced by Pakistan t oday, i.e.
 Poverty;
 Job creation; and
 Rural developme nt;
GoP has identifi ed SMEs as one of the four priority areas for ec onomi c gr owt h. The
Poverty Reduction Strategy Paper (PRSP) and the Medium Term Development
Framework (MTDF) clearly proposes SME developm ent as a key policy option for
poverty reducti on a nd private sector devel opment.

The Gover nme nt is taking a num ber of measures for private sect or d evelopment
includi ng li beralization of ec onomy, i nvestment pr om oti on; ex por t facilitati on,
fina ncial sect or re forms, capital market re forms and creati on of a c onducive business
environme nt. There is, however, a need t o c reate an SME focus amongst t hese polic y
initiatives to allow si gni fica nt accrual of economic gains for t he SME sector.
Interventions focused at SME led private sec tor devel opment will not only contri bute
to hi gher grow th rates but wi ll also e nsure that the i nequalities in i nc ome generati on
and accumulation of wealt h are addressed. Inclusion of mar gi nalized gr oups and
geographical areas are mandated by higher incide nce of poverty, e.g., 34.7% in rural
areas as compared to the 20.9% urban areas 1. Also an SME led strate gy will allow a
wide geographic and sect oral spread for inv estments and job creation includi ng rural
areas of the cou ntry.

An SME led private sector growt h strategy i s also in line with the lessons learned in
the 60s industrialization process during w hich although GDP growth rates of 6.0+
were achieved but the skewed income distri bution resulted in rising poverty. The 60s
strategy was primarily based on suppor t to large-scale manufacturi ng.

The SME Pol icy Task Force t hus recom mends t hat private sect or le d ec onomi c
grow th strate gy should be primarily based on SME devel opme nt. To achieve t his
obje ctive a cohere nt policy framework is pre sented i n t his SME Poli cy d ocument.

The Task Force feels t hat unleashi ng t he e ntre preneurial pote ntial of the people of
Pakistan is the basis on whic h fast and sustainable ec onomi c gr owt h can be ac hieved.
1
PRSP December 2003


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The Pol icy framework is expe cted t o c ontr ibute i n e nter prise growt h based on t he
human capacity a nd market opportu nities available i n t he c ountry.

Small Business Promotion - Historical Perspective
Whil e devel opi ng t he P olicy framew ork t he Task Force reviewed t he past initiatives i n
this area. The various levels of the Gov ernme nt in Pakistan have, in the past,
formulated and to an exte nt im plem ente d small-scale business pr om otion policies.
However, t hese policies we re lim ited in the ir scope, to be gi n wit h, and are not i n li ne
with t he dy namics of present time.

Governme nt of Pakistan, initiated small ind ustries prom otion t hr ough formation of
the West Pakistan Small I ndustries Cor porati on. Alt hough t he Corporati on created an
impact i n its early years yet its Pr ovi ncial successors could not sustain its
cont ributi on due t o various limitations. The foll owing features of the Provi ncial
Small Industries Cor porations make them i nappropriate and i nsuffic ient in prese nt
time:
 Over emphasis on i ndustrial and manufactu ring activities wit h little focus on
service sectors
 Over emphasis on ‘hardware’ support (la nd , electricity, machiner y, etc) wit h
little or no emphasis on ‘software’ support, i.e. informati on, business
developm ent services et c.
 Lack of cohere nt poli cy framework t hat d etermines t he r ole of all relevant
stakeholders ot her tha n the dedicated i ns titutions created for small scale
industry support
 Lack of com plime ntary skill devel opment ini tiatives
The Youth Investme nt, Yell ow Cabs and S elf-em pl oyme nt promoti on i nitiatives of
the 80s and 90s follow ed t he small-scale i ndustrial prom oti on policy of t he 60s and
70s. These schemes were limited in scope and designed as such that they did not
address the core issues of enterprise development and em pl oyment gr owt h and
suffered fr om political ma nipulati on accruing t o bad l oan portfoli os of banks and loss
of publ ic fu nds. These schemes c ont ri buted littl e in economic gr owth and
empl oyme nt creati on. I n some ways these initiatives created t he mindset of the
banking com munity t hat is to date, respons ible for a cautious stance towards SME
fina ncing i n Pakistan.

SME Development – Recent Steps by the Government
In the rece nt past SMEDA stands out as a significa nt step towards GoP commit ment
to SME devel opment. Created as an autonomous instituti on with pr ivate sector led
gover nance structure, SMEDA promises to bec ome an im portant i nstitution
spearheading Gover nme nt’s SME development efforts. However, i n abse nce of a
cohe rent SME devel opm ent policy framework it is u nrealistic t o e xpec t a singl e
orga nization such as SMEDA, to be able to impleme nt aggressive SME developme nt
initiatives because:
 Issues to be addressed for SME developme nt fall wit hi n the purview of a large
number of Mi nistries and Departm ents at the Federal, Provinc ial and Local


SME Policy 2007 10

gover nme nt levels. SMEDA has no i nstituti onal jurisdict ion or l inkage with such
institutions; and
 SMEDA has limited budget and manpowe r, posi ng restricti ons on its capacity to
launch capi tal inte nsive initiatives and exte nd its outreach
Creation of the SME Bank also marks the Governme nt’s commitme nt t owards SME
developm ent agenda. The Bank, however, is in its early days of a major restructuri ng
exercise and focuses on a single issue faced by SMEs, i.e., access to financ e, and that
too on a very limit ed scale.

Thus to provide a cohere nt policy mec hanism, there is a need to develop a
comprehe nsive SME Polic y for Pakistan that defines t he r ole of c onc erne d publ ic
sector instituti ons. Such a Policy framewor k will provide the required directi on and
focus for achieving SME led economic gr ow th resulting in j ob creati on and reduct ion
in poverty. Private sector gr owt h i n SME sector (as opposed to t he lar ge scale
manufacturing) wil l result i n lesser i nvestme nts pe r j ob created, wide r geographic and
social spread of i nvestments and be tter i nc ome distributi on.


SME Policy 2007 11

Section II SME Policy: Objectives, Scope and
Principles

Objective
The objective of S ME Policy is to provide a short and a medium to l ong- term poli cy
framework wit h an impleme ntati on mec hanis m for achievi ng higher ec onomic gr owt h
based on SME led private sector developme nt.

Scope
The SME Policy suggests concurre nt and spe cific poli cy measures in all possible areas
of S ME developme nt:
 Business environme nt
 Access to fi nance
 Human resource developme nt
 Support for tec hnology u p-gradation and ma rketing
A single SME de finition is rec omme nde d to be applicabl e t o all i nstituti ons
countryw ide to allow uni formity in desi gni ng support systems and incentives and also
to m onit or pr ogress.

The SME Policy also contains an implem e ntation and adjustment mechanism that
identi fies t he foll owi ng:
 Impleme ntati on a nd m onit ori ng mec hanism
 Capacity buildi ng r equirements of t he publi c institutions
 Resource allocati on and pot ential s ources of fundi ng
 Linkages wit h ot her i nitiatives and pu blic sector reform pr ocesses (Social
Sector R eforms)
 Self c ontained framew ork for ongoing feed back and adjustment
 Role of various public a nd private sector players at Federal, Provincial and
Local l evels
Principles
The Poli cy finds it a ppr opriate to hi ghlight the key principl es on whi ch i t is bei ng
based. They are:
 The recommendations pr oposed i n t he SM E Policy may be im pleme nted /
support ed t hrou gh a n SME Act 2006
 The SME P olicy covers measures for pr omotion of ‘Ent repr eneurshi p Culture’
and support for gr owt h of e xisting e nter pris es


SME Policy 2007 12

 The SME Policy realizes t he di ffere nt approac hes required for supporti ng
Small Enter prises as opposed to M edium Enterprises. Thus, wherever required,
separate policy measures are pr oposed for small and for medium ente rpr ise
grow th
 Wome n and othe r margi nalized gr oups are proposed to receive spec ial focus
withi n t he SME P olicy
 Rural based and agro processing ente rprise s are proposed t o receive special
attenti on w hile devising speci fic support mec hanisms
 SME developme nt offers most viable opti on for private sector led growt h t hat
reduces poverty and creates a large num ber of j obs all across Pakistan
 SME development must be at t he cent er sta ge of all ec onomi c grow th polici es
of Pakistan
 SME developm ent in Pakistan wil l require d ecisive and concurre nt measures in
a number of policy areas such as business regulations, fiscal, trade rules,
labour, ince ntives and support ( Human Resource Developme nt, Technol ogy,
Marketing, etc.) leadi ng to an ‘SME Space’ i n these d omains
 SMEs face inhere nt disadvantages (because of the ir size) vis-à-vis large firms,
whic h ne ed t o be offset by governme nt support mec hanisms and ince ntives
 Effective impl ementati on of the Pol icy fr amework will require ow nership,
commitme nt a nd m onit ori ng at hi ghest level of the G over nment
 SME developme nt requires pr ovision of l e vel playing fiel d for smaller firms
vis-à-vis large enterprises
 Private sector w ill be e nc ouraged t o play a key role in impleme ntation of the
SME Policy inc luding mobilization of capital and operati onal responsibili ty for
impleme nti ng policy measures suggested in t his docume nt
 Financial support t o enter prises will be, wherever possible, at a collective
level, and will essentially require resourc e commit ment on behal f of t he
bene ficiari es


SME Policy 2007 13

Section III SME Policy Recommendations

SME Development Vision
“SME led ec onomi c gr owt h resulti ng i n pove rty reducti on,
creation of j obs and unleashi ng the ent repr e neurial
pote ntial of the pe ople of Pakistan”

Threshold on taxation and density GoP - SMEs have Developed
of regulations rationalized mutual Cooperation & Trust

Manufacturing SEs increase their GoP Facilitates Access to
share from 5.5% to 7% sustainable BDS in all areas of
country
Share of Micro Enterprises in
employment decreases by 7% SMEs get access to qualified HR,
Markets & Technology
SMEs increase their share in
value added to 40% SMEs have access to Support
SME Vision 2015 Funds across Pakistan
Share of Women ownership in
SMEs increases to 6% GoP is continuously documenting
statistics on SME Development
and Int'l Benchmarks
No. of Start-up Enterprises by
University Graduates increases to
6% GoP is delivering reliable periodic
reports on SME development
including details on funding and
SMEs observing their basic efficiency of system
responsibilities for social &
corporate compliance

SME Policy Statement
“To create globally competitive SMEs by creating a hassle free business environment, ensuring
provision of modern infrastructure & institutional support structures for access to resources &
services. The Government shall take measures for promotion of women entrepreneurship, cluster
development and also focus on neglected/untapped sectors of the economy. Strengthening Industry-
Academia linkages shall also be a key feature of the Policy”

To achieve the object ives set-out in t he SME Policy S tatement, t he fol lowi ng
recomme ndati ons are put forward i n various areas affecting SMEs in Pakistan.


SME Policy 2007 14

SME Definition

Problem Statement
Pakistan does not have a single defi niti on of Small and Me dium Enter prises. Various
Governme nt age ncies, e.g., State Bank of Pakistan (SBP), Federal Bureau of Statistics
(FBS), Provincial Labour De pts., etc. use their own d efi niti on. Absence of a single
SME defi niti on makes it di fficult t o id enti fy target firms, align developme nt
programs, colle ct data and m oni tor pr ogress.

Policy Recommendation
GoP may adopt a single S ME Defi niti on t hat is accepted by all publ ic and private
agencies. However, various orga nizations m ay be allowed a tw o-year time frame t o
align t heir curre nt SME de fini tion i n line w ith t he SME Defi niti on pr oposed i n this
Policy.

SME defi niti on is as foll ows:

Enterprise Category Employment Size Paid Up Capital Annual Sales
(a) (b) (c)
Small & Medium Up to 250 Upto Rs. 25 Million Up to Rs. 250 Million
Enterprise (SME)

The Federal Gover nme nt, in li ne wit h t he economic developme nt of Pakistan may,
from time t o time m odify the el igi bilit y crite ria as it sees fit. All providers of services
receiving fu ndi ng fr om t he G overnme nt ma y defi ne m ore narrow scopes for specific
targeti ng purposes.

Detailed resource all ocation, princ ipal im pleme nti ng a genc ies & time- frame for
establishing a single S ME Defi niti on in Pakistan is anne xed.

Expected Impact
Single SME Defi niti on is expec ted to create focus in Gover nment policies (targete d
towards SME developme nt) and uni formity in com pilation and re porting of SME
related data.

Business Environment

Problem Statement
The fiscal, labour and ent erpr ise regul ations of the Fe deral and Provi ncial
Governme nts i n Pakistan do not provide for a focus on SMEs that is i n li ne wit h
their speci fic needs. Generally t he fiscal r egulations divide enter prises by inc ome
levels and labour re lated re gulations realize only tw o forms of ente rprises, small and


SME Policy 2007 15

large, thus, not pr ovidi ng laws and impleme ntation mec hanisms that are sensitive to
SME needs.

Largely, t he support and grievance r edressal regime of t he Gover nme nt d oes not
differe ntiate be tween ente rpr ises on t he basis of t heir size thus making i t difficult for
SMEs to access public support programs and attenti on of publ ic authori ties whe n
competing for i t wit h the large firms. This dilutes the abilit y of SMEs to e ffec tively
compete wit h lar ge firms.

Policy Recommendations
 The Task Force recomme nds promul gation of a n SME Act that (i n additi on t o
addressing ot her issues related to SMEs) pr ovides for identifi cation of fiscal,
registration, labour and inspe ction laws that may be simpli fied for Small
and/or M edium Enter prises.
 A business entity may be certi fied as an SME by a simple pr ocess to be
exercised by SMEDA i n partnershi p wi th ot her governme nt a gencies, cham bers
of c ommerce and industries, trade associations and other private sector
represe ntative orga nizations. The process of SME Certificati on is proposed to
be voluntary for those fir ms who choose t o do so, to benefi t fr om t he support
mechanism and simpli fie d re gulatory re gime proposed through t his P olicy.
 The Federal Gover nme nt may encourage pe riodic review of all fiscal laws in
for ce wit h a view to facilitate and i mpr ove gr owt h of the small & mediu m
enter prises
 Periodi c review of Labour Le gislation w ith a view of facilitating small
enter prise gr owt h may be under taken where by applicabili ty of certain laws may
be relaxed for SEs for a certain pe riod of time. However, pr ovision of
education/assistance t o SMEs t o ac hieve proper safet y at w ork and c omplianc e
with i nter national c onve ntions shall be essential.
 SME Desks may be established at the Fed eral, Provincial, Banking and Tax
Ombudsman Offi ces for hand ling a nd a ddressing SME grievances. The
Com plaint Ce ll establis hed at State Bank of Pakistan may also facilitate
redressal of SME c om plaints.
 A minimum quota is proposed t o be establ ished for SMEs for allocati on of
land in t he I ndustrial Estates and Export Pr ocessing Zones (EPZs). SMEs may
be char ged a concessional rate of land (at no pr ofit no l oss basis) as compared
to t he c ost offered t o large-scale ent erpr ises.
 All public sector procureme nt may enc ourage partici pation of SMEs with
certain products/contracts exclusively to be competed amongst the SMEs.
 GoP may consider t o support establis hme nt of an SME Pr omotion Counc il
(includi ng its l ocal c hapters) and SME speci fic Trade Associati ons for
orga nizing SMEs and providi ng the m wit h a platform t o l obby for favourable
gover nme nt polic ies.
 Governme nt t o ensure adequate provision of physical i nfrastructure (roads,
utilities etc.) in existing SME clusters.


SME Policy 2007 16

 Capacity buildi ng a nd stre ngt he ni ng of exis ting CCIs and TAs, may be u nder
taken, making t hem mor e e ffe ctive for supporti ng t heir m embe rs inc luding
SMEs, with special focus on WTO & its im pact on l ocal i ndustry. Moreover,
Governme nt functi onaries in tax, registrat ion, labour, etc. departme nts are
proposed to under go specialized trai ning for handli ng SME related issues.
 Genuine SME representatives are propose d to be i nducted in all fed eral
moni tori ng and d ispute resolution schem es with private sector partici pati on.
 Regulatory re gime for specialized sectors i n provi nces (such as mining) may be
develope d as per their speci fic requireme nts keeping i n view their re gi onal
dynamics.
 GoP may foll ow an effective strategy to reac h out and communicate wit h SMEs
using appr opr iate elec tronic and pri nt media. Re gulatory com plianc e
proc edures will be widely commu nicated to SMEs. Communication will
increasingly use Urdu & l ocal languages whe r e useful.
 Impr oving and e nforc ing I ntellec tual Propert y Rights for SMEs.
A vast pool of information, analyses and studies are available that may form the basis
for im pleme nti ng t he recommendations on Business Environme nt. Details of
additional resources required are annexed.
Expected Impact
Impleme ntati on of t he rec ommendations for creati ng c onducive ‘Business
Environm ent’ for SMEs will result in re ducing the num ber and simpl ifyi ng t he
compliance pr ocess of SME regulations. This is expected to trigger fast paced
creation and grow th of ent erpr ises resulting in ec onom ic developme nt and job
creation.

Access to Finance & Related Services

Problem Statement
According to t he Investment Climate Assessment 2003, banks provide for only 7-8%
of t he t otal fundi ng r equirement of SMEs. Also, as per a study by LUMS on ‘ Barriers
to SME Growth in Pakistan: An Analysis of Constraints’ , access to fi nance, was ide nti fied
by SMEs, as the single most im portant im pe diment t o growth. This problem incr eases
in magnitude wi th r eduction i n size and ex pe rience of t he firm.
With the pr omul gation of t he P rudential R e gulations for SME Fi nanci ng by SBP, the
basic regulatory framework for prom oti ng S MEs’ access to formal fi nanci ng has bee n
provided. However, inc reased SME access to fi nanci ng wi ll require interve ntions in
all three areas of SME fi nanci ng, i.e., dema nd side (SMEs), supply side (Banks) and
intermed iaries and re gulators (SBP, SMEDA, etc).

 Incorporation of SME fi nanci ng i n t he Annual Cred it Pla n of the SBP and
moni tori ng t o cater for underserved segment of the SMEs.


SME Policy 2007 17

 Review of Prude ntial R egulations, pe riod ic ally, in li ne with t he SME c redit
demand and supply data.
 Establishment of Cr edit Guarantee and Cr edit Insurance agencies, operati ng
inli ne with sou nd inter nati onal practi ces, to provide incent ives and risk cover
for banks, so as to provide them the relevant com fort in fi nanci ng SMEs.
 Support t o F Is in designi ng and launchi ng i ndustry based pr ogram-lend ing
schemes.
 Capacity buildi ng of the CIB t o re port posit ive and ne gative data & shari ng of
SME fina ncing data by the SBP.
 Impr ovement in t he re gulatory pr ocedures and fiscal i ncentives for Venture
Capital c ompa nies.
 Intr oduction of Bankruptcy Laws with ded ic ated and effect ive judicial pr ocess.
 Expansion i n t he rol e of Banking Ombudsm an to i nclude re dressal pr ocess for
SME complaints.
 Awareness and promot ion of options for for mal financi ng and good accou nting
practices amongst S MEs.
 Prom otion of Islamic mod e of fi nanci ng for SMEs.
The resource all ocation for im pleme nti ng t he recom mendati ons on im provi ng SMEs’
access to fina nce are annexed. These esti mates, however, may be mod ifi ed once
detailed studies are conducted on dema nd and viable size of the credit guarantee,
credit i nsurance and ve nture capital fund in Pakistan.

Expected Impact
It is expec ted t hat im proveme nt i n t he re gul atory framework, pr ovision of s pecialized
credit lines and risk sharing schemes for FIs will result in creating an environment
where banks will aggressively pursue the opportu nities offered by the SME fi nanci ng
market in Pakistan. Impr ovement in t he regulatory a nd fiscal environme nt and
provisi on of matc hi ng c ontri bution will resul t in establishment of new ve nture capital
compa nies. Both t hese measures will im prove accessibility of startups and existi ng
SMEs to formal sources of fina ncing, removing a major barrier t o their growth and
developm ent.
Supporting Human Resource Development
Technology Up-gradation and Marketing

Problem Statement
The poor nati onal per forma nce on t he Human Development Index of t he UN has its
consequences for S MEs in Pakistan. These i nclude i nadequate and ge neric education
and insuffi cient, poorly focused and und er-serving trai ning infrastructure. SMEs
mostly draw t heir human resource (i ncludi ng t he owners) fr om eit her t he hi ghe r
education i nstitutions or the tec hnical traini ng i nfrastructure, bot h of whi ch are not


SME Policy 2007 18

attuned to t he SME needs nor are t hey e quipped to addr ess them. This situation
limits the capacity and ca pability of S MEs to innovate, add value, upgrade te chnology
and devise new marketi ng strategies. Adding to these w oes are t he lim ited opt ions
available to SMEs to invest in HRD, technol ogy and ex ploration of new markets. As a
result, the SME sector i n Pakistan is usually engaged i n l ow value added
manufacturing using ine fficie nt labour, outd ated technol ogy and operating i n limi ted
and traditional markets. The SME sector neither possesses the financial strengt h nor
the c ollect ive wisdom t o cl imb its way out of t his ‘low equilibrium’ e nter prise
activity.

Public sector i nstituti ons alone can not a dequately provide HR D, technol ogy and
marketing support. However, currentl y, the re exists an insufficie nt capacity of t he
private sector Business Development Servi ce Provide rs (BDSPs) t o address SME
needs and limited demand for such services by SMEs (because of lack of awareness or
capacity to pay). Thus concrete and substantial Govt. commitme nt is needed t o
establish ‘Islands of Excellence’ in HRD, tec hnol ogy up-gradati on and marketing, wit h
strong and active partici pation fr om SME associations and private sector business
service providers. Once established, these ‘ Best Practice Models’ will be emulated by the
SMEs. Also, strong inc entives need to be provided t o both SMEs; for i nvestment i n
HRD, technology and marketing innovati on and to BDSPs to design and pr ovide
innovative business developme nt services to SMEs.

Human Resource Development
 Need Assessment Survey to identify major S ME needs in HRD, tec hnol ogy up-
gradation and marketi ng.
 Establishment of I nstitutes of S mall and Medium Enterpr ise &
Entrepre neurshi p Devel opment (INSMED) i n select business schools.
 Capacity buildi ng and up- gradation (cur riculum redesign, provision of
equipment, teachers traini ng, SME liaison, etc.) of sele cted sect or speci fi c
technical trai ning institutes serving in major SME clusters and establis hment of
such institutes whe re none exist.
 Encouragi ng use of the technical t raini ng i nfrastructure by t he private sector
BDSPs serving SME sector and incent ives for i nvestment i n setting up SME
training facilities
 Induction of ge nuine SME represe ntatives in private sector boards of t he
technical training i nstitutes.
Technology Up-gradation
 Intr oduction of SME specific research projects supporti ng R&D and
University-I ndustry liaison programs by M inistry of Scie nce & Technology
(MoST), Higher Education Commission ( HEC), Pakistan Software Export
Board (PSEB), Ministry of I nfor mation Technol ogy (M oIT) and ot hers.
 Establishment of Tec hnol ogy I nnovation Cent ers (TICs) offe ring c ommon
facility, tec hnol ogy up- gradation, R&D and d esign r elated services to SMEs.


SME Policy 2007 19

 Launchi ng of pilot technol ogy up-gradati on projects for major SME clusters on
cost sharing basis.
 Ince ntives for I nvestment i n new Emer ging Sectors and Skills upgrade.

Marketing
 Encourage establ ishme nt of SME sect or specific e xport marketi ng c om panies
by pr ovidi ng matc hi ng grants in c onducting inter national marketing research,
developi ng marketing strate gies, developing marketing material, packaging,
brandi ng, partici pating and c onducti ng trade fairs and undertaking pr om oti onal
and marketing activities.
 Matching grants for d eveloping ‘world-class’ trade and pr oduct dir ectories for
major SME clusters (e.g., Members directory by Pakistan Association of
Automotive Parts & Accessories Manu facturers )
 Establishment of SME quota in t rade dele gations suppor ted by EPB
 Com pilati on a nd disseminati on of data on l ocal markets using manufacturers,
distributors and retailers data
 Provision of support to SME associati ons i n expl oit ing l ocal market
opportunities by holding d omestic pr oduct e xhibiti ons
 Establishment of Annual SME Awards (on t he li nes of Annual FPPCI Export
Trophy Awards) for rec ognizing outstandi ng per formance i n d omestic a nd
inter national markets, technol ogy i nnovation, HRD pract ices, etc.
Resource allocation, time frame a nd im plem e nting age ncies for polic y rec omme ndati on
on supporting HRD, tec hnol ogy up gradation and marketi ng are annexed.

Expected Impact
It is ex pected that e ffective im plem entati on of Pol icy rec omme ndati ons i n supporting
HRD, tec hnol ogy up- gradation and marketi ng will create a human resource pool and
necessary infrastructure for addi ng value to SME businesses by tec hnol ogy up-
gradation and i nnovative marketing. It will a lso i ncrease r ole of private sector BDSPs
in serving t he SME sect or i n undertaking business development activities.

Entrepreneurship Development

Problem Statement
Pakistan is a society of ‘employ ees’. The education and social system does not
encourage entrepreneurship as a pre ferr ed career opti on am ongst t he yout h.
Entrepre neurshi p is usually undertaken by those bel onging t o the existing business
families. As a result t he ec onom y wit nesses a small number of ne w e nter prises being


SME Policy 2007 20

created and t hat too i n traditi onal areas of business overcrowdi ng the supply /pr oduct
base and their markets.

On the other ha nd, there are no limitati ons in the ent repreneurial capa bilities i n t he
populace. If, t his e ntre pre neurial pote ntial can be unl eashed, by pr ovidi ng level
playing field, information, awareness and support i n establis hing e nter prises, Pakistan
can wit ness fast paced gr owth i n establis hment of ne w e nter prises creati ng new
empl oyme nt opportuni ties, improvi ng dist ribution of wealth and ex pl oiti ng t he
opportunities offer ed by internati onal markets in t he li beralized WTO re gime.

The past Government programs to enc ourage entre pre neurshi p such as Self
Employme nt Sc heme, Youth I nvestment Pr omot ion Society and Yell ow Cab Sc heme
were limit ed and not too c omprehe nsivel y designed and t hus achieved lit tle i n
prom oti ng e ntre pre neurshi p amongst t he e d ucated Pakistani yout h. There is a need
for G ovt. to actively prom ote entr epre neurship thr ough changes in education
curricula, by creati ng awareness amongst y outh and by pr oviding e ffective support t o
those w ho wish t o establish new e nter prises.

 Revision i n pr imary and higher educ ation curricula for promoti ng
entre pre neurshi p amongst t he educated y out h
 Inclusion of ‘Entre pre neurshi p’ courses in (all pr ofessional de gree awardi ng)
higher education, t echnical and vocational tr aining i nstitutions in Pakistan
 Entrepre neurshi p Compe titi ons at university level t o culmi nate i n Annual
Entrepre neurshi p Com petiti on at National level for selecti ng best business
plans/models and pr oviding grant for pr ojec t implem entati on
 Establishment of tec hnol ogy and business incubators in selected u niversities in
Pakistan
 Identi ficati on of i nvestment opportuniti es offered by backward and forwar d
linkages of successful services/pr oducts

Expected Impact
Impleme ntati on of t he rec omme ndati ons on support ing e ntre pre neurship amongst t he
Pakistani youth will result in larger segments of the educated populati on taking
interest i n establ ishi ng t heir ow n businesses and some wi ll eventually i mplem ent the ir
ideas. As a result, a fast increase may be wit nessed in ente rpr ise creation t hus adding
jobs t o t he ec onomy a nd im pr oving income distributions.


SME Policy 2007 21

Section IV SME Policy – Implementation and
Resource Allocation

SME Policy – Ownership and Implementation
A large number of G overnme nt Ministr ies and orga nizations (in additi on to the
private sector) will have to play the ir role in removi ng im pedi ments and providi ng
support for SME growt h. There fore, it is im perative that t he SME P olicy is appr oved
by t he Prime Minister and end orsed by all Provi ncial G overnm ents. Such support
coupled with clear de fini tion of responsi bil ities of various Governm ent i nstituti ons
will pr ovide t he required pol icy vehic le for prom oti ng SME led ec onomic gr owt h in
Pakistan.

SME Policy – Investment and Expected Impact
The SME Policy also presents the estimates of pu blic and private sector i nvestments
for im pleme ntation of t he policy rec omme nd ations and e nvisages be ne fits i n te rms of
enter prise grow th, j ob creation and poverty r eduction.

Summary of Estimated Resource Allocation
The proposed resource allocation for impl e menti ng t he SME Policy is summarized as
below. However, the estimates may be revise d once detaile d im pleme ntation plans are
develope d and t he studies ( proposed in this document ) have been conducted:

E s ti mate d
Sr. No. The mati c A re a Re s ourc e
A lloc ati on
(Rs . Mi lli on)
1. SME De f i ni ti on, F ee dbac k , Moni tori ng & E v al u ati on 2 7 .6
Me c hani sm
2. Bu si ne ss E nv i ronme nt 355

3. Ac c e ss to F i nanc e & Se rv ic e s 7736

4. Su pporti ng Hu man Re sou rc e De v el opme nt, T e c hnol ogy U p 5010
gradati on Mark e ti ng & E ntre pre ne u rshi p De v el opme nt
Total 1 3 ,1 28 .6


SM E Polic y I mple me ntati on Plan
Propos e d Pri nc i pal i mple me nti ng E s ti mate d

Jan - Mar

Apr - Jun

Jul - Sep

Oct - Dec

Jan - Mar

Apr - Jun

July - Sep

Oct - Dec

Jan - Mar

Apr - Jun

July - Sep

Oct - Dec
I ns ti tutions /Tas ks A g e nc ie s Re s ourc e
Re qui re me nt
(PKR
M i lli on)
2007 2008 2009
SM E Polic y – A pproval Fe de ral Cabi ne t /
f rom Cabi ne t M oI P& SI
1 . SM E Fee dbac k, M oni tori ng & E valuati on 2 7 .6 0
1 .1 SME Database SME DA
De v e l opme nt
1 .2 SME Base l i ne Su rv e y SME DA
2 . Bus i ne ss E nvi ronme nt 3 5 5 .00
2 .1 Approv al & SME DA/MoIP & SI/Mo
P romu l gati on of SME Law, Ju sti c e & Hu man
Ac t 2 0 0 7 Ri ghts/P arl i ame nt
2 .2 E stabl i shme nt of SME DA/MoIP & SI / TAs /
SME P romoti on C ou nc i l C C Is
2 .3 E stabl i shme nt of SME DA/C C Is/TAs
SME Ce rti f ic ati on
P roc e ss
3 . Ac c es s to Fi nanc e & Re late d Se rvi c e s 7 ,7 3 6 .0 0
3 .1 E stabl i shme nt of SBP /SME DA/ MoF /
C re di t Gu arante e Fu nds MoIP & SI
3 .2 E stabl i shme nt of SBP /SME DA/ MoF /
C re di t Insu ranc e MoIP & SI
4 . Ac c es s to Re sourc e s & Se rvi c es 5 ,0 1 0 .0 0
4 .1 E stabl i sh Insti tu te s SME DA/HE C / MoIP& SI/
of Smal l & Me di u m NAVTE C /
E nte rpri se & TU SDE C /
E ntre pre ne u rshi p MoST/U ni v e rsi ti e s
De v e l opme nt (INSME D)
4 .2 SME Su bc ontrac ti ng SME DA/MoIP & SI
E xc hange
4 .3 Bu si ne ss Su pport MoF /
F u nd MoIP & SI
4 .4 C ompe ti ti v e ne ss MoF /MoIP & SI
Su pport F u nd
E s ti mate d Total 1 3 ,1 28 .6 0
The ti me li ne de ve lope d i s s ubje c t to the approval of G ove rnme nt of Paki s tan & avai lability of ade quate re s ourc e s f or
i mple me ntati on.

Section V - Monitoring, Evaluation, and Continuous
Improvement of Policy
Monitoring and Evaluation
In order to i ncrease t he quality and quantity of i nformati on available on the
developm ent of ent erpr ises in Pakistan id entical standards have t o be used for
classifying e nter prises. The size classification suggested in t his Policy d ocument
becomes a mi nimum standard for all organi zations i n Pakistan w hic h are monit ori ng
enter prise devel opment and/ or administering support to e nter prises. All
orga nizations need to be able t o aggregate and disaggre gate the ir data according t o
these size standards.

The appli cation of t he measures under t he Policy w hic h draw, direct ly or ind irectly,
on public funds, Fed eral, Provi ncial, and Local, will be conti nuously m onitor ed and
evaluated so as to permit conti nuous impr ovement. All orga nizations, at National,
Provinc ial, and Local levels, whic h are involved in the administrati on of suppor t
measures to enterprises, bot h facil itators and providers, will monit or the per forma nce
by c ollecti ng at least the foll owi ng infor mati on:

b.1 Number of mi cro, small, and med ium ent erprises served
b.2 Gender of ow ners
b.3 Major sectors of enterprise activity (ISI C)
b.4 Levels of satisfaction re corde d
b.5 Feedback received
b.6 Total cost of service (dir ect a nd i ndire c t) i n PKR per be ne ficiary
enter prise
b.7 Total be ne fit of service i n ter ms of em pl oyment, growth and i nc ome
(during service and after service) per be nefi c iary enter prise

The or ganization of t he monit ori ng and evaluation system, includi ng t he aggre gation
and analysis of the information will be unde rtaken by SMEDA. SMEDA will provide
cons olidated re ports on ent erpr ise development as well as on the impleme ntati on of
enter prise support u nder t his Pol icy on a semi-annual basis to the National
Comm ittee on Small and M edium Enter prise s (NCSME). SMEDA will also prepare an
Annual Report on SME Devel opm ent to be pr esented to t he Parliame nt by the
Minister for Industries, Production and Spec ial Initiatives.

Continuous Improvement of Policy
Moni tori ng and evaluation results will be used by all stakeholders t o conti nuously
impr ove the existing policy and the spec ifi c measures taken. Moreover SME Surveys
shall be und ertaken peri odically t o assess the impact of i nterve nti ons made and target
support mecha nisms wher e required.

SME Policy 2007 24

Coordination

National Committee on Small and Medium Enterprises (NCSMEs)
The Minister for I ndustries, Producti on & Special Ini tiatives shall chair the semi-
annual meetings of the Nati onal Commi t tee on Small and Me dium Enterprises
(NCSMEs). This Committee will review the implem entati on of Small and M edium
Enterprise Pol icy, and d ecide w hic h shape speci fic measures for ente rpris e
developm ent wil l take and how existing me asures need to be adjusted in line wit h
developm ents a nd i n the i nterest of c ontinuous impr ovement. T he Committee will
also serve as a mechanism to impr ove coordination be twee n differe nt stakeholde rs
and resolve differe nces whi ch may exist be t ween t hem. SMEDA will functi on as the
Secretariat to the Committ ee.

Members of NCSMEs
Members of t he Nati onal Comm ittee on Sm all and Medium Enter prises are; Minister
for I ndustries, Producti on and S pecial I ni tiatives, Minister of State for Fina nce,
Minister of State for Ec onomic Affairs, Deputy Chairman Planning Com mission,
Provinc ial Ministers for Industries, Governor of t he State Bank of Pakistan,
Chairman Ce ntral Board of Revenue, Chairm an Securities & Excha nge Commission of
Pakistan, Federal Secretary for Industries, Producti on & S pecial I nitiatives, Federal
Secretary Comme rce, Federal S ecretary for Labor, Manpow er and Overseas Pakistanis,
Federal Secretary for Statistics, Federal Secretary for Education, Federal Secre tary for
Science a nd Technol ogy, Federal Secretary for Wom en Devel opment, Preside nt of
FPCCI, Presidents of Karachi, Lahore, Sarhad & Quetta Chambers of Commer ce &
Industry and Presidents of small and medium enter prise Business Membership
Organizations (BMOs).

The Gover nme nt in consultation wit h FP CCI will appoi nt five r eprese ntatives of
Cham bers of Commerce a nd Industry re pres enti ng pred omi nantly SME sect or. Three
represe ntatives of small and medium e nter prise business membershi p or ganizations
shall also be m embe rs of the said Committe e .

The Commit tee may co- opt furthe r Mem ber s as it sees fit to address speci fic issues
and ensure r eprese ntation of small and me dium ente rprise int erests. Similarly, t he
Governme nt may add or re move mem bers of the Com mittee as it d eems fi t.

Provincial Committees on Small and Medium Enterprises
(PCSMEs)
The Chie f Executive of eac h Pr ovince wi ll chair t he m eeti ngs of the Provi ncial
Comm ittees for Small and Medium Ent erprises (PCSMEs) pe riod ically. These
Comm ittees will support t he National Com mittee on Small and Medium Enter prises
(NCSMEs) by assembli ng expertise fr om all fiel ds as necessary i n order to pr epare,
develop, and im pr ove Small and Medium Enterprise P olicy, i ncluding but not limite d
to speci fic support measures and impr ovem ents in t he e nabli ng envir onment. It will
prepare r ecomm endati ons for a ppr oval by N CSMEs as necessary. SMEDA Provincial
Offices wil l fu ncti on as t he Secr etariat to each of t he P rovi ncial Commit tees.


SME Policy 2007 25

Members of PCSMEs
Members of the Pr ovincial Committees of Small & Medium Enterprises shall be
decided by t he Chie f Executive of each Pr ovi nce.


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