SMEs: Tapping manufacturing opportunities

The SME sector is set to grow in the years to come, with a number of measures announced and facilities offered by the government. With better access to finance and reduced paperwork through the MyBiz concept, SMEs can now look forward to a rosy future. In this report, News on Sunday looks at how to create opportunities in the manufacturing sector. Small and medium enterprises have a key role to play in the coming years. They will be the drivers of the economy and will contribute significantly to growth and employment. As far back as 2007, there were 91,000 SMEs in Mauritius with a workforce of 208,000. Today the figure exceeds 100,000. Most SMEs are either family-run business or are not even registered as companies. Furthermore, many people are reluctant to start small companies due to lack of funding, expertise, infrastructure and technology. Formalising the informal sector and encouraging entrepreneurship among people will create wealth and employment in the country. This year, the reduction in company licence fee from Rs 2,500 to Rs 500 has been welcomed by the small business segment as a major incentive. To empower people to start revenue generating activities, the Government of Mauritius needs to adopt and improve on the existing processes put in place. The sector in focus in this paper is the manufacturing and handicrafts sector for SMEs and starters. [[{"type":"media","view_mode":"media_large","fid":"13735","attributes":{"class":"media-image aligncenter size-full wp-image-22814","typeof":"foaf:Image","style":"","width":"640","height":"426","alt":"sme"}}]]

SME Finance Scheme

During the period 1 December 2011 to 29 February 2016, commercial banks have approved credit to SMEs to the tune of Rs 5,970,307,054. Out of 4,553 applications received, only 208 were rejected. The Mauritius Commercial Bank has approved the highest number of loan applications (2,061), followed by the SBM Bank (Mauritius) Ltd (1,273 applications), Maubank (338), Barclays (222) and Banque des Mascareignes (150). Under the Small and Micro Enterprise Financing Scheme, in force since 1 December 2012, a total of Rs 1.5 billion of credit has been approved up to 29 February 2016. Out of 1,615 applications received, 85 were rejected. (With inputs from AfriBrains)

OPPORTUNITIES FOR SMEs

MARKET STRATEGY SMEs often rely on referral clients to obtain orders. With all the above mentioned challenges, creating a guaranteed market for SMEs will ensure that the sector keeps running. The proposals listed below will ensure guaranteed markets for the SMEs. [[{"type":"media","view_mode":"media_large","fid":"13736","attributes":{"class":"media-image aligncenter size-full wp-image-22815","typeof":"foaf:Image","style":"","width":"640","height":"426","alt":"sme3"}}]]   To encourage low income people to start SMEs, Government tenders for chairs, furniture or any manufacturing activity, should contain a quantum of locally manufactured goods through SMEs. This can be done by introducing any of the following clauses in the tenders: (1) A private company which has obtained a tender from Government should sub contract part of its production to start up SMEs or SMEs which are not VAT registered. The SME should undertake production in an industrial zone (as identified by the Government). (2) A quantum of production should be undertaken by a group of unemployed people selected from the Labour Information System of the Ministry of Labour. Production should be undertaken in specific industrial location (as identified by the Government). These clauses have been mentioned in previous budget speech. However, tenders of Governments can only favour large SMEs. Government can launch special tenders for SMEs which are not VAT registered, that is, SMEs not generating a turnover below the VAT registration threshold. Protocol for tenders should be simplified for such SMEs. The real estate sector The property sector is witnessing a boom in Mauritius. In view of making SMEs and unemployed people benefit from these developments, suitable clauses should be added to any property development scheme (Hotels/ IRS/ RES/ Shopping Malls/ Office Development/ Marina Park/ Smart Cities). One plausible clause is that a quantum (for example, 30%) of manufactured goods should be ordered from SMEs for the real estate project. Apart from traditional manufactured goods like wood furniture, aluminium windows and metal welded products, SMEs can also produce decorations, curtains, stone carvings, wood carvings and other handicrafts. There should be more synergy between SMEs and the tourism sector. SMEs should be given stronger incentives to penetrate the tourism sector. The Tourism Fund which is available to diversify the tourism product portfolio can be used to finance SMEs in handicrafts in capacity building and showcasing the products of the SMEs in hotels and/or designated areas. A dedicated space for handicrafts and micro SMEs should be encouraged in shopping malls. Outsourcing The Government should encourage large firms to outsource part of their production to SMEs. A contract manufacturer is a firm that manufactures components or products for another “hiring” firm. It is a form of outsourcing. Contract Manufacturing enables firms to lower their costs of production and at the same time provide quality products to their clients. It also allows the hiring company to obtain the needed components or products without needing to own and operate a factory. Large companies should be encouraged to outsource some of its production to SMEs or housewives wishing to work. For instance, a company may outsource some minor works of assembly or simple packaging to housewives in the catchment area of the factory. Once the products have been assembled, they are delivered to the factory where a quality control is undertaken. CSR The CSR should not only give finance to NGOs but the concept should be reviewed as a whole. The project of unemployed housewives helping in assembly is one major case where companies can help in alleviating poverty and at the same time encouraging micro SMEs to flourish. NGOs should be given the necessary tools to evolve into social enterprises and benefit from CSR to fund revenue generating projects, so that they become financially independent in the long term. Thus, as one set of NGOS are put off the CSR programme, new NGOs join in and the cycle goes on until most NGOs become self financing. THREATS OF SMEs Two major threats SMEs face in Mauritius is lack of necessary infrastructure and funds to operate. This hinders their progress and autonomy. The Government previously announced the construction of SME parks and industrial zones. These should also include a component for micro enterprises. The industrial landscape of Mauritius can be altered with proper planning. SME parks housing different activities can be built in different regions of the island. Micro industrial zone with different activities should be built in several parts of the island. These industrial zones should contain all amenities and infrastructural facilities. The rental costs should be minimal for start up micro SMEs and amenities with water and electricity free or at reduced rates for the first 2 years. The Development Bank of Mauritius has already built an SME park at Terre Rouge which is at full capacity. This shows the enthusiasm of Mauritian entrepreneurs. Nevertheless, there is still more to be done. The idea of creating SME parks with all infrastructural facilities such as water, electricity and sewerage should be extended to different areas especially the South of the island where unemployment is high. There are many industrial buildings lying idle and these can be converted into SME parks. The authorities should also work out a pool of available privately owned land and buildings for lease. FINANCING STRATEGY Any new SME is likely to have financial difficulty to start its activities. In order to encourage entrepreneurship among low income earners and new SMEs, several fiscal incentives need to be provided to them. New SMEs are now exempted from income tax for up to 8 years, but only selected activities/sectors are eligible. SMEs registered prior to 2 June 2015 are excluded. This is unfair as existing SMEs with experience, know how, market and trained labour are in a better position to expand and create more jobs and the same incentives must be extended to them. Apart from loans, schemes should be devised to provide for Business Angel funding to micro SMEs for them to grow. In return, the Business Angel could be granted fiscal incentives as a reward. Administrative hassle SMEs need to concentrate on their core business. Thus, they should be spared complex administrative hassles. For example, the filing of tax and company returns should be simplified. Micro SMEs should simply be exempted from such filing since the process adds no value. A simple declaration should be sufficient, and that too should be done online. Currently, SMEs face huge penalties for late filing and this has an impact on their cash flow. Similarly, SMEs face surcharge for late payment of Trade Licence. Rather than being one-off payment to be done within limited time frame, such payments should be spread over a 12-months period, thus easing the cash flow of businesses, whilst ensuring a steady income flow to the authorities. STRENGTHS OF SMEs

• Micro SMEs essentially cater for the local market and there is high demand for these small SMEs
• Micro SMEs are versatile and adapt swiftly to market demand
• Micro SMEs are located around their market
• Government vision of strengthening the SME sector is there
• Institutional support is provided to SMEs

WEAKNESSES OF SMEs

• SMEs are unable to be part of the mainstream industrial development and benefit from business opportunities due to lack of contracts / works.
• The expansion of free trade is flooding the local market with cheap imported products detrimental for start up SMEs.
• Most SME workshops are located in residential zones due to high infrastructure costs. Around 51.3% of the small production units are located in urban areas and 48.7% in rural areas. A high labour turnover and lack of labour skills.
• The road to access finance for micro SMEs is cumbersome and lack of collateral is seen as high risk.
• Micro SMEs lack working capital.