Small and Medium Enterprises in Pakistan

Atif S. Malik

Presentation Contents

Concept and Importance of SME Development Situational Analysis of SMEs in Pakistan Importance and Core Problems

Institutional Support and General Policy

Direction

Specific Issues Based on Functional Split

Globalisation

Concept of SME Development

In 1958 the Ford Foundation made a five-year grant to the Stanford Research Institute to analyze programmes and policies that would be suitable in Latin America and Asian countries for promoting small

enterprise development.
The major Stanford recommendation was the adoption of the so-called Indian model - the recommended government programme for supporting small enterprise development in India.

Indian Model
The Indian model concentrated on the creation of special public institutions and directed programmes for assisting the small enterprise sector. The government offered assistance in all fields and directly implemented the programmes - in the identification of opportunities for small enterprise development, in the provision of factory space on industrial estates, in direct financial assistance and in obtaining government orders as well as advice and training for small enterprises. All these services and inputs were to be offered on a subsidised basis (usually given free), since the small enterprise sector was regarded as needing special help to overcome its weaknesses.

SME DEVELOPMENT EXPERIENCES FROM OTHER COUNTRIES

% age Share of Enterprise on Employment

United States of America
100 - 499 Employees 8.00% More than 500 Emp 4.00%

European Union
Less than 10 Emp 50.00%

10 - 99 Employees 38.00%

10 - 50 Employees 5.90%

50 - 249 Employees More than 249 0.90% Emp 0.20%

Less than 10 Emp 93.00%

 UNITED KINGDOM:
SMEs constitute about 99% of businesses Account for 57% of employment Account for about 38% of total exports Main source of new employment

GERMANY:
SMEs constitute about 99% of businesses Account for about 58% of employment Account for about 35% of total exports

 ITALY:
SMEs constitute about 99% of businesses Account for 77% of employment Account for about 40% of total exports

USA
SMEs constitute about 96% of businesses Account for about 60% of employment Account for about 35% of total exports

 SOUTH KOREA: SMEs constitute about 98% of businesses Account for 75% of employment of the total national workforce SMEs represent about 92% of all manufacturing companies SMEs represent 69.3%,46.3% and 46.5%, respectively, of the employees, production and value-added activities

Economic Profile of Pakistan

GDP Population Per Capita Income Exports US$ 62 Billion 137 Million US$ 446 US$ 9.2Billion
T r anspor t , St or age & M i ni ng, Const r uct i on & Ut i l i t y Di st r i but i on 8% M anuf act ur i ng 17% Ser vi ces 50% P ubl i c A dmn. & Fi nance 6% Communi act i on 10% Owner shi p of Dwel l i ngs 6% Fi nance & I nsur ance 3%

A gr i cul t ur e 25% Whol e Sal e & Ret ai l T r ade 15%

Ser vi ces 10%

Employment Tree
Labour Force in Pakistan (Millions)
Labor Force35.9

Agriculture 16.96 -Rural 16.4 -Urban 0.6

Non-Agriculture18.94 -Rural 8.8 -Urban 10.2

Formal 6.1 -Rural 2.4 -Urban 3.7

Informal 12.8 -Rural 6.4 -Urban 6.4

Non-Manufacturing 5.5

Manufacturing 0.6

Non-Manufacturing 9.8

Manufacturing 3

Survey of Small & Household Manufacturing Industries (SHMI)

Work Force: 1,258,546

Average Asset Size by Units

Rs. 76,775 per unit Small Establishments: 920,139 Average Asset Size by Employment Household Units: 338,407 Rs. 26,096 per person Urban: 572,170 Rural: 686,376 Average Employment Size 3 person per unit Male: 1,038,000 Female: 221,000 Contribution to GDP

Establishments: 427,784
Small Establishments: 266,686 Household Units: 161,098 Urban: 175,078 Rural: 252,706

Rs. 34,303 million

Units and Persons Engaged

Split of Units

15,215

10 and Above

Upto 9 Persons 0

412,515

Persons Engaged
100,000 200,000 300,000 400,000
261,349 10 and Above

Upto 9 Persons 0

997,201

100,000 200,000 300,000 400,000

Sectoral Shares
Sectoral Share by Units
Other Indus. 18% Metal & Metal Products 11% Mineral Products 4% Petro/Chem. Products 1% Paper Products & Print. 1% Wood & Wood Products 12% Leather & Leather Products 6% Food, Bevg Etc 20%

Sectoral Share by Employment

Textile & Textile Products 27%

Other Indus. 13% Metal & Metal Products 11%

Food, Bevg Etc 23%

Mineral Products 8% Petro/Chem. Products 2% Paper Products & Print. 1% Wood & Wood Products 10%

Textile & Textile Products 27% Leather & Leather Products 5%

Distribution on Employment and Units

Number of Persons Engaged - 1996-97
8-9 Persons 6% 6-7 Persons 8% 10 & Above Persons 21% 1 Person 10% 2 Persons 23%

Number of Units - 1996-97

6-7 Persons 4% 5 Persons 4% 4 Persons 8% 8-9 Persons 10 & Above Persons 2% 4%

5 Persons 6%

4 Persons 11%

3 Persons 15%

1 Person 30%

3 Persons 15% 2 Persons 33%

Assets, Employment and Financing

Assets and Employment

Over 2 mill 500k to 2 mill 100k to 500k

1% 7% 19% 34%

10k to 50k Upto 10K

39%
10% 20% 30% 40%

Sources of Financing
Friends & Relatives 6% Financial Inst 4%

0%

Own Resources 90%

Census of Manufacturing Industries

Work Force: 561,921
1 to 9 Persons: 4,073 10 to 49 Persons: 53,367 50 to 99 Persons: 35,589 100 & Above Persons: 468,892

Establishments:4,474

1 to 9 Persons: 671 10 to 49 Persons: 2,291 50 to 99 Persons: 511 100 & Above Persons: 1,001
1 to 9 Persons: 423 10 to 49 Persons: 6,200 50 to 99 Persons: 4,673 100 & Above Persons: 81,749

GDP Contribution - Rs. Million

Census of Manufacturing Industries

Reporting Establishments
100 & Above Persons 22% Upto 9 Persons 15%

Employment
50 to 99 Persons 11% 10 to 49 Persons 52%

Upto 9 Persons 1%

10 to 49 Persons 9%

50 to 99 Persons 6%

100 & Above Persons 84%

Census of Establishment
Persons Engaged: 5,766,583
Employed: 3,485,596
Self Employed: 2,280,987

Establishments: 2,018,986
Urban: 1,202,159 Rural: 816,827

Establishment & Employment

Split of Units on Employment Size
200 & above 100 to 199 50 to 99 10 to 49 1 to 9

0.08% 0.09% 0.20% 2.50% 97%

0%

20%

40%

60%

80%

100%

Employment by Unit Size

200 & above 100 to 199 50 to 99 10 to 49 1 to 9

16% 4% 5% 15% 60%

0%

10%

20%

30%

40%

50%

60%

Status in Establishments
stnemhsilbatsE
laruR %04

nabrU %06
No of Self Employed 40%

Employed & Self Employed

No of Employees 60%

Sectoral Split of Units

Sectoral Split of Units
Community Services 33.06% Mining & Quarrying 0.01% Manufacturing 14.37% Construction 0.04% Electricity/Water 0.18% Finance & Insurance 1.74%

Transport 0.94%

Trade, Hotels 49.67%

Employment in Sectors
Employment Split of Manufacturing Sector
Less than 10 39% 100 or more 35%

50 to 99 5%

20 to 49 9%

10 to 19 12%

Employment Split of Community Services

Employment Split of Hotel & Trade Sector

20 to 49 1% 10 to 19 2% 50 to 99 0% 100 or more 1%

100 or more 24%

50 to 99 7% 20 to 49 11% 10 to 19 9%

Less than 10 49%

Less than 10 96%

SME Development Downward Spiral

Informal SMEs Adverse Govt Policy Lack of Formal Credit Lack of Investment Low Technology Base

Low Quality Standardisation

Extent of Formal Economy

Share of Unregistered Firms in Manufacturing Sector

100 & Above 50 to 99 10 to 49 1 to 9

27% 47% 77% 99%

0%

20%

40%

60%

80%

100%

Structure of Establishments
Govt/Corporat Companies ion/Local-GEst (Public/Privat 6.71% e ltd) 0.50% Partnerships 2.50% Others 7.58%

Individual Proprietorship 82.72%

Importance for Pakistan

Enterprises Based on Employment Size

200 & above 100 to 199 50 to 99

0.09% 0.1% 0.23% 2.50%

10 to 49 1 to 9

97%

0%

20%

40%

60%

80%

100%

Slightly above 2 million enterprises out of which the share of MSMEs is 99%

Estimated Employment Size

2,014,489

2,065,208 2,298,303
1,508,796

1,426,710
875,449
Trade Services Manufactu 2,014,489 1,508,796 875,449 45,664 584,124 439,044 5,056 205,383 112,217

584,124 439,044 205,383

45,664 5,056

112,217

Trade Micro

Services Small Medium

Manufacturing

The MSMEs generate 78% of the non-agri sector employment

SME Contribution to GDP

Estimated GDP Contribution is 8% It is underestimated due to unavailability of data on services and trade sector in medium sized enterprises Total contribution to GDP can be safely estimated at 20% to 25% 20%-25% of total GDP equals 35%-40% of the non-agri GDP

Definitions of MSMEs in Pakistan

Definitions of MSMEs
No single definition of MSMEs at a country level Results in absence of MSMEs in the policy formulation process Definitions currently recognized, formulated to cater to the needs of manufacturing sector small firms Definitions formulated to meet credit requirements of the small manufacturing concerns Need to regularly compile statistics to build a profile of the MSME sector in Pakistan

Non-uniform definition of MSMEs

Institutions State Bank of Pakistan Federal Bureau of Statistics Small Business Finance Corporation Punjab Small Industries Corporation Small & Medium Enterprise Development Authority Micro Small
Capital assets up to Rs. 20 million (excl. l & b) Less than 10 employees Prod. Assets of Rs. 20 million Fixed inv. upto Rs. 20 million (excl. l & b)

Medium
N/A

N/A N/A

N/A

N/A

Prod. Assets of Rs. 100 million N/A 36-99 employees Prod. Assets Rs. 20 40 million

N/A

Less than 10 10-35 employees employees Prod. Assets Prod. assets upto Rs. 2 20 million Rs. 2 million

Nature of SME Incentives

JAPAN
MALAYSIA SINGAPORE THAILAND PHILIPPINES

Reduced corporation tax rate Special 14% depreciation rate of the initial acquired machinery Deduction of charges from the members incomes as expenses Special initial depreciation on 29% of the amount drawn from reserves Special deduction for retained profits of co-operatives Reduction or exemption of certain local taxes

Tax exemption for

5 year period Reinvestment allowance of 50% 5% abatement to large industries on

30% tax abatement on approved investment in machinery Grants for developing Exemption from Corporate Income tax Exemptions from Tax exemption for a 5 year period

purchasing from
small industries Full exemption from import duties on machinery & raw materials

business
opportunities in all markets Grants upto 50% of direct development

withholding tax on
foreign loans Tax exemption on pre- operation & organization expenses technology & Other benefits according to the

Preferential treatment
in govt. purchases Soft loan scheme with priority given to loans less than $5 million

cost for product

improvement Soft loans for upgrading & business expansion

Extension periods
to avail export incentives

production used by
the enterprises

Source: Kim Seung Jin and Suh Jang-Won : Cooperation in SMI Industries in ASEAN (1993; 117-118)

THE JAPANESE EXPERIENCE

1. SME DEVELOPMENT : STRATEGIC PRIORITY SINCE '60s 2. JOINT RESPONSIBILITY OF GOVERNMENT AND PRIVATE SECTOR

3. PRIVATE SECTOR IDENTIFIES OPPORTUNITIES AND THREATS

4. THE GOVERNMENT RESPONDS BY :

--

PROVIDING FINANCIAL, TECHNICAL AND MARKETING ASSISTANCE

INVESTING AGGRESSIVELY IN HUMAN RESOURCE DEVELOPMENT CREATING A NETWORK OF SUPPORT INSTITUTIONS

---

RESULTS (1994)
SME Share No. of Firms No. of Employees Mfg Output 99 % 78 % 51 % SMEs Large Companies 0.06 11.89
million

6.47 42.27

million

million

million

$ 1.13 trillion

$ 1.07 trillion

In 1996 alone, the Japanese Government spent

$6 Billion
to support SMEs

Objectives of SME policy in JAPAN

Policy Target Article 1 of SME Basic Law (Law No; 154, July 20, 1963)
To promote the growth and development of SMEs and at the same time to contribute to the elevation of the economic and social status of employees of SMEs by aiming at the improvement of productivity and trading conditions, to meet with the growth and development of the national economy and to correct disadvantages due to economic and social condition of SMEs as well as to encourage voluntary effort of SMEs and to correct disparities of productivity among enterprises.

JAPAN : SME Support Network

SME Agency
Bureau of International Trade & Industry
Japan Finance Co. for Small Business (59 Branches) People Finance Corporation (152 Branches) The Shoko Chukin Bank (107 Branches) Prefecture & City Government

Finance

Credit Insurance Investment

Small Business Credit Insurance Corporation

Prefectural Credit Insurance Associations (52)

Small and Medium Enterprise Cooperatives

Small & Medium Business Investment & consultation Co.

Subcontracting

National Association for Sub-contracting Enterprise Promotion

Prefectural Fed. Of Sub.contracting Entrepreneurial Promotion

About 241 Consultants

HR Development Information

Institute for Small Business Management & Technology Japan Small Business Co. Human Resource Development

National Center for Promotion of Information of Small & Medium Enterprise

Regional Information Centers (47)

Guidance

Japan Chambers of Commerce & Industry / National Federation of Commerce Industry Trade Associations

Chamber of Commerce (513) Commerce-Industry Trade Asc. (2822) Prefectural Federation of Commerce-Industry Trade Associations (47) Prefectural Fed. Of Small Business Association Prefectural Federation of Shopping Districts Promotion Associations 52

About 9,000 Consultants

Organization

National Federation of Small Business Association

About 982 Consultants

National Federation of Shopping Districts Promotion Association

Pakistan - SME Support Network

Agencies & Programs

Provincial Agencies

Financial Agencies, NGOs & Programs

Federal Agencies

Training Institutions

Punjab Small Industries Corporation Sindh Small Industries Corporation Sarhad Small Industries Development Board Directorate of Small Industries, Baluchistan - Establishment of industrial estates for small scale industries - Provision of credit for SMEs

Small Business Finance Corporation (SBFC)- SME Bank financial assistance on soft terms for small/ cottage industries Self Employment Scheme (SES) loans granted to unemployed youth/skilled professionals for small businesses and small industries

SMEDA - Apex policy advisory making body for SMEs - Provide and facilitate support services generate employment opportunities - Revitalize small business through aggressive support programs

Pakistan Industrial Technical Assistance Corporation (PITAC) provides advanced training to industrial personnel in metal trade, tool engineering designs and in production of tools, moulds and fixtures

Skill Development Councils Assess training needs, facilitate training of workers through training providers in the public and private sector

- Marketing of SME produce

- Training programs for artisans - Setting up of Local Technology Service Centers (LTSCs) Industrial Estates Punjab;14, NWFP; 9, Sindh; 15, Baluchistan; 1

SBFC and 7 participating banks

Khushali Bank First Womens Bank NRSP / PRSP / AKRSP Rural support programs Kashf Foundation

Technical Education & Vocational Training Auth. Facilitation of technical & vocational training in Pakistan

Aurat Foundation

Summary of Issues
General findings:
Absence of a uniform MSME definition Lack of awareness of policy formulation and its impact Centralisation in policy making Non recognition of impact on employment generation Generally MSMEs are considered to comprise only manufacturing sectors Short term nature of policies Survival strategies reforms opposed to long-term market demands Extremely low awareness of all industrial laws Large number of laws resulting in greater complexity Lack of availability of laws in national or regional language Gap between design of policies and laws and their subsequent implementation Inconsistencies in policy direction Lack of SME representation in industry and trade associations

SMEs Origin of Problems

Absence of SME Definition Centralisation in Policy Making Inconsistent Policies

Complex Regulations Numbers and Content

Extremely Low Awareness Levels

Lack of Compliance Capacity in SMEs

Absence of Redress

Discretionary Powers

Negative Impact on SME Growth

Structure of Regulatory Framework How this becomes the core?

Policy Level: Where the Government realises the importance of an issue and lays down the strategy framework

Regulations: Where Government formulates laws in the shape of Acts, Ordinances and Statutory Regulatory Orders (SROs) Execution: Where the regulatory framework is implemented through the Governments administrative setup

SME Development Integrated Model

Macro Level Facilitation

Trade Services Manufactu 2,014,489 1,508,796 875,449 45,664 584,124 439,044 5,056 205,383 112,217

Federal & Provincial Governments Institutions: departments/agencie s, industry/trade assoc. NGOs MSMEs: actual performers

Meso Level

Micro Level
Focussed Awareness MSME Policy Making

Networking & Coordination

Business Development Services

Impacts of Regulations on Business Entry

UK USA Singapore Thailand Pakistan India
Trade Services Manufactu 2,014,489 1,508,796 875,449 45,664 584,124 439,044 5,056 205,383 112,217

8
Screening

10

No of Procedures

80 60 40 20

77 50

Business Days required to receive operational legal status

35 22 4 4
UK

Source: World Bank The Regulation of Entry 2001

0
India Pakistan Thailand Singapore USA

SME Perception of Government Policies

Based on a Latest survey of 500 SMEs conducted by World Bank

The small entrepreneurs spend, on the average, over Rs. 15,000 per year and 12% of their entrepreneurial time in coping with government regulations, mostly on top of or around the legitimate government demands.

More than 90% of the respondents highlighted one or another hurdle posed by the government in their smooth functioning. The principal focus was on the rising cost of business due to government taxes (56%), corruption (39%), enhanced utility charges (30%) and oppressive role of local officials (26%).

Key Indicators of Regulatory Environment -Problems

71% 70% 65% 56% 52%

Sales Tax / Excise Tax

Income Tax

Government Government Non interference laws and availability of Regulations finance

Based on a Latest survey of 500 SMEs conducted by World Bank

SME Perception of Government Policies

Based on a Latest survey of 500 SMEs conducted by World Bank

Registerations & Assoc Costs

42%

Labour Regulations Govt Tax Structure

45%

67%
20% 40% 60% 80%

0%

Business Operations

Key Observations
Business Structures lack of awareness regarding Impact of business structures on operations Business decision making rarely effected in micro & small firms by structures 80% of MSMEs exist as Sole proprietorship and Partnerships

Regulations biased in favour of medium and large firms

Intellectual Property Laws Low awareness level in respect to intellectual property rights Under utilization of Intellectual property laws benefits due to time consuming procedures Different ministries govern different intellectual property laws Poor monitoring and enforcement Pakistan still not a signatory of the Patent Cooperation Treaty (PCT)

Adverse impact on international sub contracting & export marketing

Administrative Setup

Provincial Department of Industries

Securities & Exchange Commission of Pakistan

Registrar of Firms

Registrar of Companies

Partnerships

Private / Public Companies

Management of Regulations
Intellectual Property Laws

Copyrights

Trade Marks

Patents

Ministry of Education

Ministry of Commerce

Ministry of Industries and Production

SMEs Opportunity for Equity Financing

USA
Under federal securities law, companies that seek to raise less than USD 1 million within 12 months are excused from registration requirements A specialised method known as SCOR (small company offering registration) can be used by entrepreneurs seeking capital of less than USD 1 million through public sale of stocks

Turkey
Plans to establish new stock market for small start-ups with growth potential

Finance

Statistics
According to a study conducted by SMEDA in collaboration with ILO:
78% of SMEs do not access credit from any source Out of the remaining 22%, less than half ever approached the formal lending sector Success rate among those who approached the formal lending sector lies between 20% & 66%

Key features
Sectors relating finance are governed under
State Bank of Pakistan Act, 1956, State Bank of Pakistans Prudential regulations State Bank of Pakistans rules and circulars.

SBP acts as a custodian over the local commercial banks Various targeted schemes
Micro credit scheme Self Employment Scheme Export Finance Scheme Locally Manufactured Machinery Scheme Foreign Currency Export Finance Facility Pakistan Export Finance Guarantee Scheme

Key Observations
Low awareness level amongst micro & small enterprises as compared to medium & large scale enterprises Due to lack of access to formal credit, 90% of MSEs are equity financed

Lack of familiarity with accounting systems within micro and small sized
firms Similar credit evaluation system used by financial institutions for all types and size of businesses Approximately 80% MSMEs have loose structures in place such as proprietorships and unregistered partnerships Time consuming credit evaluation procedures of financial institutions SMEs unable to meet high collateral requirements of financial institutions Limited financing options available in the country Difficulty to benefit from schemes like Export Refinance, etc

Prevailing Disbursement Patterns A Comparison

High High Affordability of Loans Affordability of Loans

Low

Access to loans
High

Timeliness of loans High

High Affordability of Loans

Access to loans
High

Low

Timeliness of loans

High

India
Low Access to loans High Timeliness of loans High

Indonesia

Pakistan

Source: The SMEs and the Global Market Place, ITC publication

Time Frame
Months

4 2

2 5 2 Indonesia Bangladesh Pakistan India Average 6 6 4

Approval
Source: The SMEs and the Global Market Place, ITC publication

Disbursement

Awareness & Self Employment Scheme

686,160

82,119

75,159

Application Forms Issued

Applications Received Applications Processed

SME Credit Guarantee

% age of Loan Guaranteed
France United Kingdom Canada 65% 85%

90%

Interest Rate Premium

France United Kingdom Canada

0.60%

1.50%

1.75%

Labour

Key features
Promulgation & implementation of labour laws
At Federal level At Provincial level Derived from Federal laws Factories act, 1934 (Federal Law), Punjab Factories Rules, 1975 (Provincial Law) ESSI applicability limit (Punjab 10 workers, Other provinces 5 workers)

Formulation of provincial rules

Few provincial variations Approximately more than 100 Labour Laws in force Role of Directorate of Labour Welfare
Responsible for maintenance of industrial peace Directorate of Labour Welfare governs on average 12 to 15 laws It also acts as a registering authority

Key Observations
Lack of awareness about laws & policies amongst small & medium scale enterprises Due to low literacy level Due to non-availability of laws in simplified Urdu or regional languages Lack of awareness plays a catalytic role in enhancing inspectors discretionary powers Lack of proper mechanism and implementation machinery

Large number of overlapping laws

Inefficient labour judicial system Negative perception regarding Social Welfare Schemes Size of enterprise as a condition for compliance serves as as incentive for non-

compliance
Minimum wages are not aligned with the inflation rates Laws not run in consonance with latest developments in industries

Factories Act 1934 - Example

Regulates the working conditions in factories

Summary of the Law (incl. of steps for compliance)

63 main steps of compliance under Factories Act 1934. This varies provincially. Notice of commencing of work Appointment of inspectors. Health & Safety conditions Powers of inspections Accidents Workers definition & working hours (incl. of contractual) Workers Holidays Child workers Medical Check-ups Display of rules & regulations

Administrative setup
(Factories act, 1934)
Regulatory Agency - Directorate of Labour Welfare Recognition of Enterprise size - Yes Applicable on 10 or more workers Variation by Region - Yes provincially Powers & Penalties
Power to exempt any factory from the provisions of the Factory Act 1934 Inspectors discretionary powers To enter without warrant To inspect documents Instruct to adopt any measures The penalties range upto Rs. 2,500

Findings and Observations

(Factories act, 1934)
Grey Areas
Complex act
Covers a vast range of specification for compliance

Inspectors discretionary powers The fines are not deterrent Discretionary power of granting festival holidays
Sindh & N.W.F.P has discretionary power

No welfare officer requirement for SMEs

As applicable on the limit of 500 or more workers

Impact on MSMEs
High cost of compliance Considerable pressure due to inspector`s discretionary powers Lack of awareness in respect to health & safety provisions Lack of awareness due to non-requisite of welfare officer
Duty of welfare officer to make the factory comply with law

Labour Levies contribution by an establishment

Industrial establishment No. of workers Employees earning > Rs. 3000 Employees earning Rs. 1500 Annual turnover Gross profit (20% of T.O) Income tax (35% of G.P) Profit Total contributions paid Contribution as % of annual turnover Manufacturing Concern 49 29 20 Rs. 15 million Rs. 3 million Rs. 1.05 million Rs. 1.95 million Rs. 278,605 1.86%

CONTRIBUTION BY AN INDIVIDUAL ESTABLISHMENT CONTRIBUTIONS: Employees Social Security 98,280 Ordinance, 1965 Workers Children (education) 4,900 Ordinance Employees Old Age Benefits 70,200 Act, 1973 (in Rupees) Employees Cost of Living 61,225 (relief) Act, 1973 (in Rupees) Professional Tax (in Rupees) 5000 Workers Welfare Fund 39,000 Ordinance, 1971 Total Contributions to be paid 278,605 annually (in Rupees)

Labour Judicial System

Appeal to Supreme Court

Labour Judicial System comprises of

Labour Courts Labour Appellate Tribunals Function as Civil Courts Labour Appellate Court is the final Adjudicating authority Appeal can be made to High Court if a point of law is involved

Appeal to be filed with in 60 days Appeal to High Court under article 199 constitution of Pakistan In reasonable time as decided by the High Court

Flow of adjudication in labour laws:

Non-observance of time limits to decide a case The existing Labour Judicial setup is inadequate for timely disposal of cases which is evident form the number of pending cases in Labour Courts and Appellate Tribunals

Labour appellate tribunal (Judgement to be given in 60 days)

Appeal to be filed with in 30 days Labour court (Judgement to be given in 7 days) Application to be filed with in 30 days After challan or fine

Performance of Labour courts

16000 14000 12000 10000 8000 6000 4000 2000 0 1995 1996 1997 1998 no of cases pending no of cases instituted cases diposed off balance

Taxation

Key features
No specific tax policy with in Pakistans policy framework Taxation reforms are made through tax measures mentioned in the yearly fiscal policy SRO system is common making the reforms inconsistent The aim of the tax measures primarily is to increase the tax-to-GDP ratio The present governments tax strategy is of two-fold. One is to address the problems of a weak tax administration, and on the other to ensure that the process of collection is with out loopholes Overall tax rate and structure is uniform across the country due to centralization of decision making

Regulatory Agency: Central Board of Revenue

Recognition of enterprise size: No (but varies with different business structures)

Variation by region: No

Key Observations
Negative perception of the tax agencies Lack of awareness about the taxation system

No MSME recognition in tax system

Complexity in procedures results in high cost of compliance for micro and small sized firms Tax policy is biased in favour of large-scale enterprises (Additional sales tax for sourcing from informal sector) Timeframes for various procedures are neither followed nor implemented Informal enterprises are not given incentives to become a part of the formal economy

Tax Policy Shift

Change in policy direction from revenues earned through Indirect to Direct Taxation (excluding Sales Tax)
140 120 100 80 60 40 20 0 1990-91 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 19992000* In Billions
D ire c t T a xe s C us t o m s S a le s C e nt ra l E xc is e

Tax Revenue 1990-2000

Change in Policy

Procedure for filing returns for sole proprietorships & Partnerships

Books Records

Maintenance of books of accounts for financial/income year

Preparation of accounts for financial year

Profit and Loss Account Balance Sheet

Calculation of total taxable income Tax deductions Calculation of tax at applicable slab rate Application of surcharge Deduction of tax credit Deduction of advance taxes Total tax payable with return (Total income deductions) * slab rate + Surcharge tax credit- Advance taxes = final tax payable.

Computation of income tax

Filing of Income Tax returns for Firms/Partnership & Partner

Form of income tax returns IT 11A 4 Tax payment Challan IT 31 (A,B,C,D)

Assessment by Tax Department

Sale Tax Act 1990 - Example

Sale Tax Officer Sales Tax Refund Rules SRO 417(1) 2000 - Refunding criteria : Scrutiny Gold category - 72 working hours (9 days) Report Silver category - 15 days Others category - 30 days 7 days - The categorisation is based on the credit Senior Auditor or superintendent capability, history and track record of businesses - The requirement for the gold category of audited 3 days accounts again restricts the small exporters Sale Tax Officer - Process of sales tax refund is defined with in the law to take place in a max. 30 days - This does not take place on a practical level
Scrutiny

RELEASE OF REFUND

Impact of Sales Tax act on MSMEs

Categorization based on credit capability, track record and history severely restricts small & medium enterprises from. New exporter are also detrimentally effected. The time period defined for the refund does not take place on a practical level, resulting in shortage in working capital. This seriously hampers the growth of small and medium scale enterprises

Trade

Key features
Trade policy is formulated by the Ministry of Commerce It shows the drift of country towards its economic approach Becomes inconsistent due to rapid amendments Due to non-existence of any uniform definition of MSMEs, the policy formation has to a certain degree been sector specific and at times inharmonious The laws covered under trade sector are: Import & export control act Exports quality control order Import and export procedures Anti dumping laws Trade organisation ordinance The registration of export houses order Various Statutory regulatory orders Customs Act

Key Observations
Short-term nature of trade policies Lack of planning to deal with international issues like WTO (case in point Auto-ind) Lack of proper monitoring to protect local industry against dumping and international subsidies Under utilization of schemes and incentives by MSMEs due to low awareness levels Generally schemes are only meant to facilitate the large-scale sector

Rapid induction of SROs nullifies the effect of trade policy

Complexity of procedures, cumbersome trade procedures and delays in adjudication results in low utilization of incentives Cash flow problems particularly for the SMEs in refunds of rebates and tax Incentives available to direct exporters are not available to indirect exporters comprising the MSME sector Minimal representation of MSMEs in policy making

Textile Quota Management policy

BACKGROUND
Attributes Defined Time Period 1992-93 1994 1995 1996 1997-98 1999-2000
For the year 1999 & Year 2000 separately.

Jan.92Dec.96

1994-Dec.96

1995-Dec.96

Jan.96-Dec.96

Jan.97-Dec.99

-10% of -10% of growth growth quota quota for new for new units units No -25% of -25% of growth Newcomer provision growth quota quota for rural for rural areas areas and and transferable transferable Performa nce Holders: Allocation 50% Basis Q:50% V

-10% of growth quota for new units -25% of growth quota for rural areas and transferable

All discretionary quotas No Provision abolished including new units and rural areas.

Only on Quantity based

Only on Quantity based

1st Year: 75%Q:25%V 2nd Only on Year:65%Q:35 Quantity based %V rd 3 Year onward: 50%Q:50%V

Based on Quantity

Textile Quota Management policy

BACKGROUND
Attributes Defined Time Period 1992-93 1994 1995 1996 1997-98 1999-2000
For the year 1999 & Year 2000 separately. Growth and residual quota both through auction and nontransferable

Jan.92Dec.96

1994-Dec.96

1995-Dec.96 Jan.96-Dec.96 Jan.97-Dec.99 Growth and residual quota both through auction and nontransferable

Residual Quota

Through auction

Through auction and nontransferable

Through auction and transferable

Through auction and nontransferable

Quota Transfer

Transfera ble

-performance and -For -performance -performance open market transfer performance and open and open able holders -For market market -auction quota nontransferable performanc transfer able transfer able transferable e holders -non -New passbook -auction -auction performance transferable quota nonquota nonholders have to ship holders, not transferable transferable 90% of quota transferable allocated.

Globalisation

Globalisation
The idea of a global economy key image is that of a borderless world. i.e. stress on increasing transnational macroeconomic links

Many organisations adopting a Global Rationale in management and marketing Stress on strategic networking where coordination of a Single Face is achieved by independent companies working together

Facts Regarding Globalisation

In 1998, General Motors had sales of $178 billion. That figure is greater than the Gross Domestic Product of 108 countries The world's top 25 industrial companies each have annual revenues greater than $60 billion. There are 86 countries whose GDP is smaller. Seventy percent of all international trade is controlled by transnational corporations . Now nearly one half of all international trade consists of transfers of goods or services between different branches of the same company operating in different countries.

Globalisation: Impact on SMEs in Pak.

Declining trend of tariff barriers New era of Non-Tariff Barriers; quality & process standards and systems Formulation of trade blocs across the globe Increasing role of transnational companies Implications of IPR non-compliance Phasing out of TRIMs

Elimination of direct subsidies

Enhanced usage of anti-dumping and countervailing duties and safeguard measures

Financial Sector of Pakistan

Financial Sector in Pakistan

Million Rupees
As on 30-06-2002 Non Performing Loans Category
A: All Commercial Banks Domestic Banks Nationalized Commercial Banks Privatised Banks Private Banks Foreign Banks B: Specialised Banks and DFIs Specialised Banks DFIs

Advances
876,514 421,933 138,490 187,656 128,435 163,893 121,943 41,950

Principal
129,127 84,501 22,704 16,854 5,068 56,393 42,698 13,695

Markup
38,595 28,870 3,741 3,232 2,752 35,168 24,243 10,925

Total
167,722 113,371 26,445 20,086 7,820 91,561 66,941 24,620

NPLs as a %age of Adv.

19.14 26.87 19.10 10.70 6.09 55.87 54.90 58.69

Banking Sector Deposit & Lending Rates %

Recent Developments in the Financial Sector

Exposure to a limited set of products and sectors SBP undergoing restructuring, NBFIs management with SEC. SBP will have two divisions; one dealing with monetary policy and one with financial sector and banking policy Appointment criteria for Board Members and CEOs of Banks, family representation on BOD limited to 25% Rapid privatisation of nationalised commercial banks resultantly limiting their dominance to 20%from 100% in 1991 Consolidation in the financial sector. Banks required to increase the paid-up capital to Rs. 1 billion from existing limit of Rs. 500 m

Development of new prudential regulations for the SME sector

Establishment of SME Bank and Micro credit bank, etc Establishment of CIRC for revival of sick units Credit Rating system for the financial sector

Thank You