Small and medium enterprise development authority of mauritius

1.1 Introduction

SMEs play an important role in all economies and are the key generators of employment and income.

1.2Definitions of SMEs

These days, SMEs has become the buzzword in nearly every corner of the world. But, there exists no single definition of SMEs that is used either nationally or internationally. In fact, each country as well as each organization has its own way of defining SMEs for convenience in their work. Definitions in use today define thresholds in terms of employment, turnover and assets. Nowadays, it has become very important to many countries to have a proper definition of SMEs, in order to ensure that support measures are granted only to those enterprises which genuinely need them.

As said by Erkki Liikanen (2003), enterprise commissioner of the EC,

“A proper definition of which enterprises are SMEs makes it easier to identify their needs and to develop efficient policies to compensate for the specific problems linked to their small size. This is vital for the competitiveness of an Enlarged European Union, its growth and employment”.

1.2.1 In different countries

The definition of what constitutes a SME varies widely among different countries. The OECD notes, “The characteristics of a SME reflect not only the economic, but also the cultural and social dimensions of a country and not surprisingly, very different patterns are used across countries and over time”. Some countries, such as the UK, use a legal definition whereas other countries, such as New Zealand, use a statistical definition to define a SME. For instance, the OECD countries use the number of employees as a main criterion. In most EU countries there is a distinction between the legal definition and the statistical definition.

The EU has adopted a new definition of SMEs which came into effect as from 1st January 2005, which is summarized as follows:

For legal and administrative purposes:

For statistical purposes:

The main criteria of SME statistics for SME statistical purposes is the number of persons employed.

In the United States, small business is defined as one having fewer than 100 employees, while a medium-sixed enterprise refers to those with fewer than 500 employees.

In Mauritius, the definition of SMEs varies across different acts and organizations. Previously under the SEHDA Act 2005, only a “small” enterprise has been defined as an enterprise:

i) engaged in any activity excluding activities relating to Information and Communication Technology or financial Services, for gain or profit, (An enterprise does not include an office or employment).

ii) having a workforce less than 10 employees; and

iii) has an annual turnover not exceeding 10 million rupees.

Any form of trade, commerce or manufacture, craftsmanship, calling, profession, vocation, occupation or support service constitutes an enterprise as per the Act; however it does not take into account an office or employment, a religious or charitable institution, or a person engaged in the cultivation of land.

Now, the Government has adopted a new piece of legislation, named the SMEDA Act. This Act has replaced the SEHDA Act 2005 and has thus taken over the activities of the SEHDA. This Act provides the definition of a small enterprise as well as a medium enterprise, which is as follows:

· A small enterprise is defined as an enterprise which has an annual turnover of not more than 10 million rupees

· A medium enterprise is defined as an enterprise which has an annual turnover of more than 10 million rupees but not more than 50 million rupees

Furthermore, the Act has redefined an enterprise as:

i) any form of trade or manufacture, craft by hand or foot, cultivation of fruits, vegetables or flowers, livestock breeding, or any other activity approved as such by the SMEDA; and

ii) includes a co-operative society but does not include an office or employment, or a religious or charitable institution.

Central Statistics Office

The CSO is the official organization responsible for the collection, compilation, analysis and dissemination of the official statistical data relating to the economic and social activities of the country. The CSO refers to small enterprises as small establishments. “A small establishment is defined as a production unit engaged in one kind or predominantly one kind of economic activity at a fixed physical location and in which less than 10 persons, including the working proprietors are engaged”.

Industrial Expansion Act (IEA)

Under the IEA, a number of provisions have been made,

“Small and medium enterprise means an enterprise:

(a) engaged in manufacturing;

(b) using production equipment the aggregate CIF value of which does not exceed five million rupees or such other sum as may be prescribed;

Manufacturing means the transformation, for commercial purposes, of raw materials or semi processed materials into finished or semi-finished goods and includes the repair, packing and assembly of inputs into finished or semi finished goods.

1.2 Brief overview of SMEs in Mauritius

1.3What is the economic crisis?

BusinessDictionary.com defines economic crisis as,

“a situation in which the economy of a country experiences a sudden downturn brought on by a financial crisis. An economy facing an economic crisis will most likely experience a falling GDP, a drying up of liquidity and rising/falling prices due to inflation/deflation. An economic crisis can take the form of a recession or a depression”.

Mauritius was affected by the following external shocks that hit the main activities in the country;

1) The surging oil prices

2) The global food crisis

3) The cut of 36 percent in the price of sugar

4) The sub-prime crisis

1.3.1 Surging of Oil prices

1.3.2Global Food crisis

Many countries, whether developed or developing, were affected by the global increase in the prices of food. This has caused economic instability and social unrest in both the poor and developed nations. There are several factors that have contributed to the rising food prices1.

According to Fritschel and Shah (2008), poor consumers across the globe are protesting about their rising food bills and in some countries this had resulted in food riots1.

Holt-Giménez and Peabody2, summarize the increase of the food prices as:

“The World Bank reports that global food prices rose 83% over the last three years and the FAO cites a 45% increase in the world food price index during just the past nine months. The Economist’s comparable index stands at its highest point since it was originally formulated in 1845. As of March 2008, average world wheat prices were 130% above their level a year earlier, soy prices were 87% higher, rice had climbed 74% and maize was up 31%.”

Below is a graph that illustrates the Food price index data from the UN’s FAO that shows the sharp jump in the some months for some food types:

The Economist reported that in 1974-2005, real food prices declined by 75% but in 2005-2008, they have risen by 75% 3. Moreover, the price of nearly every food commodity has increased. For example, the prices of wheat, butter and milk have tripled since 2000; those of maize, rice and poultry have nearly doubled; those of meat, palm oil and cassava have also increased. Overall the food price-index of the UN’s FAO rose by nearly 40% in 2007, compared with a 9% increase in 2006 as depicted by the graph below:

3- See “The end of cheap food” 6 December 2007

1.3.3The cut of 36 percent of the price of sugar

Sugarcane is vital to the economy of Mauritius. It occupies 90 % of the cultivated land surface and 45% of the total area of the island. In 2004, it accounted for 19 % of the value of exports and 5% of GDP. It provides employment for about 60,000 workers and small planters.

1.3.4Sub-prime crisis

The severity of the current global financial crisis, which started in the US markets in 2007, the worst in 60 years, was largely unpredicted by governments across the world and by agencies that routinely produce global and regional forecasts. This has caused a spill-over effect on European banks and other global major banks and economies.

As Mauritius is largely dependent on the world economy, it is bound to be affected by the crisis. As said by Naseem Ackbarally, “Mauritius is severely hit by the financial crisis that had already taken several thousands jobs since the beginning of the year. With the domino effect, all economic activities in the country are affected, paving the way to a social crisis.”

1.4 Economic crisis and SMEs: the case of Romania

During the past years, Romania achieved a cycle of high economic growth, with a growth rate of about 7.8% in 2008. But the recent economic crisis had adversely affected its economy. SMEs contribute about 80 % of the GDP and were considered to be the most sensitive and the most affected by the economic crisis and is said to be the first hit by the financial crisis. The challenges that were faced by the SMEs during the economic-financial crisis are:

* Sudden increase in the price of raw materials, energy and food and liquidity problems;

* Credit related problems- Liquidity blockage;

* Fall in the demand for its products and services;

* Variations in Exchange rate and inflation;

* Reduction in their development rate;

* Many SMEs have gone bankrupt;

* New start-up SMEs are lacking resources to survive

It has been noted that more than 600,000 SMEs were affected by the above mentioned affects. According to studies conducted by the NARE, 25% of SMEs will close down and 90% of SMEs managers planned to layoff 10% of their employees. Moreover, in 2008 the number of bankruptcies has doubled compared to the previous year during the same period.

Furthermore, the findings obtained following a survey done on SMEs owners, it was concluded that 83% of the SMEs owners have negative expectations about their 2009 profits; 76% of the SMEs intend to downsize their business; 16 % are looking for investors to capitalize their business; more than 60 % of the SMEs hold that relaxation of credit would help their business to work better and 34% hold that tax burden will have to be eased.

Economic crisis and SMEs: the case of Venezuela

Different strategies/schemes adopted by different jurisdictions

SMEs are the ones that were the most affected by the economic crisis in various countries. Since SMEs’ contribution helps a lot to the development of a country, many measures were adopted by many countries to help SMEs during the economic downturn. As seen below, is a summary of the different measures adopted by different jurisdictions to assist SMEs during the global financial-economic crisis:

Ø Australia

A package launched by the Australian Prime Minister and the Minister for Small Business on 24 October 2008 includes:

Direct lending through government funds

· Building on the Australian government’s measures to strengthen the financial system, the government announced that it will provide small business support and advice during the financial crisis from Business Enterprise Centers and other registered business organizations, through a A$4 million Government investment over 2008-09 and 2009-10.

· Operational assistance by the government

The Australian government:

i) Introduced a guarantee of on-time payment for new small business contracts with Commonwealth Government Departments- up to A$1 million, from 1 December, within 30 days- otherwise small business will have the right to charge penalty interest;

ii) Made a commitment to developing standard procurement documents for co-ordinated procurement and standard approaches to make it cheaper and easier for small business to sell to the Government.

Ø China

Liquidity provision

* On 29 August, the China Banking Regulatory Commission issued a notice to encourage banking financial institutions to increase credit support to small enterprises. The notice includes six guidelines:

i) The new credit lines recently approved by People’s Bank of China to Banking institutions should be reserved to for lending to small enterprises;

ii) Banking institutions should improve financial services to meet the demand for credit of small enterprises;

iii) Banks should allow greater flexibility for financial innovation;

iv) Banking institutions should measure non-performing loans accurately and prevent moral hazard and uphold to the sustainable business development principle;

v) Commercial banks should realize synergy effects with other favourable policies and seize the opportunity of the current tax breaks for small enterprises to combine debt with equity and work out different solutions for businesses in different areas and different stages of development; and

vi) Commercial banks should reach out to small business and better understand the needs of small entrepreneur.

On 9 November, the Chinese government introduced a 4 trillion yuan stimulus package which includes:

i) A comprehensive reform in value-added taxes, which would cut industry costs by 120 billion yuan; and

ii) The abolishment of commercial banks’ credit ceilings in order to channel more lending to priority projects, rural areas, small enterprises, technical innovation and industry rationalization through mergers and acquisitions.

Credit guarantee

* On 29 October, the Ministry of finance announced that the Chinese governments has allocated one billion yuan in credit guarantee for SMEs(totaling 1,8 billion yuan so far in 2008)

Moral suasion

* Banks were asked to:

i) Improve financial service system for SMEs;

ii) Promote financial innovation to develop trade financing facilities and credit products for SMEs; and

iii) Step up the development of customized credit reference, credit rating and information release systems for SMEs.

Operational assistance by the government

* On 21 October, the Ministry of Finance announced the increase in export rebates for some export products which would take effect on 1 November 2008.

Ø Japan

As part of its economic stimulus package announcement on 29 August:

Operational assistance by the government

* The Japanese government announced plans to:

i) Strengthen protection for sub-contractors;

ii) Strengthen support for industries with heavy outlays on fuel ; and

iii) Boost growth potential by raising productivity.

As part of its economic stimulus package announced on 30 October:

Direct lending through government funds

* The Japanese government will raise the emergency lending limit of the government-affiliated financial institutions form 3 trillion yen to 10 trillion yen.

Credit guarantee

* The 6 trillion yen allocated in the first supplementary budget as the maximum level of emergency credit guarantee for SMEs will be raised to 20 trillion yen.

Operational assistance by the government

* Tax for medium and small-sized companies in Japan would be reduced.

Ø United Kingdom

Direct lending through external funds

* A GBP 4 billion (EUR 5.1 billion) credit line was secured from the EIB for SMEs. Businesses will be able to tap into the credit through designated banks over the next four years. EIB has been making loans to SMEs in EU, and because of the financial crisis, devoted EUR 30 billion of new loans to help SMEs in early October. UK’s credit line is part of the new loans provided by EIB.

As a condition for bank recapitalization or other assistances

* As part of the rescue package of the UK government announded on 8 Ocyober, the government will use GBP 50 billion for recapitalization of eight major lenders. It was by then reported that upon capital inkection, the government could influence certain policies of the banks, including their commitment to lend to SMEs. Media quoted an official UK Treasury statement as saying that any capital investment in banks “will require a full commitment to support lending to small businesses and home buyers”.

Moral suasion

* UK Prime Minister, Gordon Brown, on a recent occasion in late October, urged banks not to change the terms and charges for existing lending to the SMEs.

Ø United States

Direct lending through government funds

* New Jersey will set up a US$ 50 million fund to provide loans to SMEs. The measure will appropriate money from the state’s fund to establish the Main Street Business Association Programme.

Liquidity provision

* The Fed, via its Asset-backed commercial paper (ABCP) Liquidity Facility (which was announced on 19 September), extends non-recourse loans at the primary credit rate to US depository institutions and bank holding companies to finance their purchases of high quality ABCP from money market funds.

Strategies adopted in Mauritius to assist SMEs

The budget was passed on 22 May 2009. This budget was made for a six months period ending December 2009. The Budget revolves around saving jobs, protecting people and preparing for recovery. The budget launched an eighteen-month action plan for Mauritius to face the global economic crisis that has affected the country.

As said by Mr. Sithanen, the Mauritian Ministry of Finance and The Deputy Prime Minister, in his budgetary speech 2008/2009 “the vulnerable enterprises and those already afflicted by the crisis, most of them SMEs, need wide-ranging support to stay afloat until things improve”, a number of economic measures to offer financial support to SMEs in distress and, at the same time, those measures aim to strengthen SMEs capabilities and resources to take advantage of the future economic recovery was announced in the budget speech 2008-2009.

The measures in the budget speech relating to SMEs are as follows:

* Restructuring of the MASMED Fund into the SJR Fund with a budget of Rs 3.5Bn which will be available on a temporary and targeted basis until December 2010 to extend financial assistance to a wider range of industries and sectors.

The SJR Fund was allocated as follows:

– Support SMEs in saving jobs Rs.500m

– Textile, clothing and manufacturing industries Rs.500m

– Equipment modernization for SMEs Rs.500m

– Modernisation of larger enterprises Rs.500m

– Enabling firms to raise liquidity by selling assets Rs.500m

– Setting up of an Export Credit Insurance Scheme Rs. 1bn

* An extensive communication campaign to make all micro enterprises as well as SMEs aware of the support mechanisms available.

* Recruitment of consultants to assist SMEs prepare and submit financial plans to enable them from the Mechanism for Transitional Support.

* Encourage micro-enterprises and SMEs to become corporate bodies to benefit from the various schemes formulated to assist SMEs.

* Greater emphasis through capacity building to address the lack of skills in the printing sector.

* Training will be organized under the second chance programme, to equip young people with the skills to take up employment in printing.

* Setting up of the MBGS to promote business growth in SMEs. Eligible firms will receive financing to support their business growth on a cost sharing basis.

* Establishment of a scheme to provide mentoring and advice on business planning to enable SMEs benefit from the MBGS.

* An additional Rs.300m will be made available by banks to support SMEs. The loans will be made at the key repo rate and 50% will be guaranteed by the government on a cost sharing basis.

* Set up of a joint SME/Customs committee to crack down on undervaluation of imports to protect local SMEs.

* A committee will act on the recommendation of the Industrial Development Task Force on norms and standards to ensure that controls on imports are as rigorous as on domestic products.

* Development of the label “Genuine Mauritian Handicraft” to authentify local made products.

* Amendment of the Legal Metrology Act, the M.S.B Act, the Animal Feed Control Act and the Food Regulation 2004.

* Introduction of a mentoring service by NEF to be delivered by NGOs and private consultants on a cost-sharing, performance based arrangement to assist SMEs in setting up and developing their marketing capabilities and competencies in managing their businesses.

* The SJR fund will provide for a scheme for women to finance micro enterprises up to Rs 40,000 per beneficiary and Rs 400,000 for women regrouped into a societe.

* SMEs with existing loans prior to September 2008 and currently facing cash flow problems due to the economic crisis will have their loans rescheduled by the DBM.

* Development of a life skill training program for supervisors and coachers of trainees to help workers improve their productivity and earning capacity.

* Setting up of a Rs 300mn Work-cum Training Scheme to enable enterprises facing reduction in their turnover to send employees on training instead of laying them off.

* Scheme to finance purchase of equipments by SMES to undertake derocking and farm machinery logistics for harvest and transport of cane.

* Pilot projects in a selected number of crafts through technical and financial assistance to craftsman to upgrade their workshops and provide training to apprentices.

* The One Off scheme to facilitate settlement of arrears for furniture makers, small traders and other micro-businesses, etc is extended to 30th June 2010. It is limited to those who have contracted loans with DBM of up to Rs 200,000 before April 2003 and whose accounts have been in arrears for at least five years. The DBM is providing full waiver of the penalty and the interest accumulated. For loans of less than Rs50, 000, 50% of the capital is being written off during the settlement.

Supporting institutions in Mauritius

A range of laws, projects and programmes are being implemented to help for the development of SMEs. The Government is taking useful measures to make the SME sector to flourish as the SME sector represents one of the new pillars of the economy. Various schemes are being put into action to place SMEs at the centre of development. Following the budget speech 2008/2009, each of the institutions operating at the national level is providing their assistance to the SMEs.