Memorandum submitted by Alaric
Fairbanks, Policy and International Development Team, Durham Business
School, Durham University
1. Introduction
1.1 This evidence is submitted in response
to an invitation by e-mail on 19th December 2005. Durham
Business School is part of Durham University and has been active
in research, teaching and consultancy in the area of private sector
development, particularly Small and Medium Enterprises, since
1971. The School has been involved in applied research and consultancy
projects in developing and transition economies around policy
advice and support services for Small and Medium Enterprises (SMEs).
1.2 Alaric Fairbanks is International
Projects Director in the Policy and international Development
Team. His main areas of interest are Business Development Services
and support institutions, particularly in China.
1.3 This memorandum responds to some
of the specific points raised by the committee in its call for
evidence, with particular reference to what the private sector
development can do to alleviate poverty; the constraints on the
private sector in developing countries, particularly at the level
of the enterprise itself; the provision of business services,
mainly advice and training, as a donor intervention towards PSD
and pro-poor growth; and the encouragement of corporate social
responsibility among enterprises in developing countries. This
is not intended as exhaustive coverage, but rather how one facet
of private sector development, services to SMEs can contribute
to PSD and Pro-Poor Growth.
2.
What can the private sector do to alleviate poverty?
At a simplistic level private sector
growth contributes to a rise in national income and a growth in
wage earning opportunities. The development of SMEs can offer
employment opportunities for surplus labour, and in the case of
transition economies such as China and the former Soviet Union,
employment opportunities for retrenched workers from State Owned
Enterprises. SMEs can provide the opportunity to gain and use
new skills, contributing to economic productivity. In many rural
areas where SMEs are based around processing or marketing local
agricultural products there can be immediate effects on poverty
reduction both through increased non-agricultural employment and
an expanded market for local products. At a government level growth
in the private sector can result in the strengthening and broadening
of the tax base, with a potential impact on the welfare of the
poor. For example, in 2006 in China the national threshold for
income tax has been raised and direct agricultural tax on peasants
removed. There are, however, potential dangers in private sector
growth, for example, environmental degradation can have a negative
impact on the living conditions of the poor, and working conditions
in the worst cases may have a negative impact on the health of
workers.
3. Constraints on the private
sector in developing countries at the level of the enterprise
The challenges faced at the level of
the enterprise itself in terms of its day to day operations and
long term survival are taken here as a starting point. In many
cases access to finance is often taken as the main constraint
facing small businesses, but it is only one of a number of important
issues. Analyses of the challenges faced by SMEs in China, for
example, have tended to focus on 'credit constraints.' These mainly
refer to the low level of finance provided by the banking sector
to the non-state and especially private sector. SMEs in particular
in less developed areas, face additional challenges, including:
(1) difficulties in recruiting and retaining appropriate staff,
and in particular managers; (2) logistical and distribution constraints
and 'bottlenecks', related both to infrastructure and to distribution
systems; (3) the availability and quality of market and customer
intelligence and data; (4) the overall management quality and
capability within the business, (5) access to appropriate premises;
(6) under-developed local economic and business environments,
particularly in less developed areas; (7) a lack of business development
services and related inputs to enhance SME performance.
4. Donor interventions - Business
Services
4.1 Business Development services in
the form of advice, consultancy, training, provision of information,
development of business linkages and networks are one aspect of
improving private sector performance. A major donor rationale
behind the development and provision of such services is to improve
the performance of SMEs in order to contribute to economic growth
and employment. Quality services can have a positive impact towards
overcoming some of the constraints outlined above, for example
in staff recruitment and retention, management capacity, market
and customer intelligence.
4.2 Aspects of support to Business
Development Services. These can be divided into seven complementary
types:
- Demand Side Interventions:
this can include awareness-raising of benefits of services, particularly
among selected target groups; incentives to enterprises to try
services.
- Supply Side Interventions:
this includes training, capacity building and service development
of BDS providers;
- Delivery mechanisms:
development of delivery mechanisms to reach enterprises, particularly
the smallest and those in vulnerable groups can significantly
increase the impacts of BDS;
- Payment mechanisms:
approaches to reducing the immediate costs and risks can be developed
where appropriate, for example indirect payment risk sharing with
the provider;
- Dealing with Market Failures:
possibilities and precedents exist in the provision of services
directly to SMEs but funded wholly or partly by local government
where enterprises are unable to pay rates needed by providers;
- Selection of partner institutions:
building on existing or potential providers; and
- BDS Facilitation: the
role of government bodies and self-regulating organisations.
4.3 Specific donor interventions
in provision of services for business As mentioned above,
services can be developed that are saleable within local markets,
and these can have an impact on business performance, services
(and their providers) that are not perceived as having positive
business impact fail. Donor interventions in this area on the
supply side to promote private sector development include
- Technical assistance to providers
in developing services.
- Technical assistance to develop
capacity of the staff of providers to deliver services to local
businesses
- Technical assistance to providers
on their management, marketing and business development of services.
This can also have an impact on the demand side through awareness
raising among businesses.
- Funding to support "down-time"
of providers whilst new services are developed and gain acceptance
in the market.
- Promotion of linkages between providers
themselves and between providers and stakeholders including government,
businesses and trade and community organisations.
On the demand side specific interventions
can include
- Awareness raising activities
- Support or funding to incentives
for use of services, for example payment or part payment for acquisition
of services
4.4 Conflicts between sustainability
of service provision and pro-poor growth. Integration and
co-ordination between these seven areas (see paragraph 7 above)
are essential in maximising the input of any intervention and
all have a bearing on the sustainability of interventions. Sustainability
can be defined as the capacity to ensure that benefits continue
after donor intervention has ceased. In financial terms sustainability
is dependent on the market, i.e. SMEs being willing and able to
pay for services. There is strong evidence, for example from DFID's
China State Owned Enterprise Restructuring and Enterprise Development
Project (SOERED) that this is possible where enterprises feel
a direct business benefit from services. This, however, can lead
to a potential conflict with poverty alleviation objectives in
that BDS providers will seek to deliver services to those enterprises
willing to pay rather than targeting the most vulnerable groups.
There are a number of approaches to this issue of the tension
between sustainability and pro-poor growth.
4.5 In the case of enterprises that
may have a significant benefit to society, such as through employment
creation, but are not able to pay market rates of providers there
is the possibility of third party funding from local government
or donors for provision of services. This situation particularly
applies in the area of start-up support to members of vulnerable
groups. Drawbacks to this approach are that it potentially crowds
out other suppliers and that there are often very limited funding
opportunities. Another approach here is for providers to offer
such services free with the aim of raising awareness for commercial
services and with the prospect of continuing provision of services
to new enterprises when they are in the position to pay for services
in the future.
4.6 Another issue is around targeting
vulnerable groups for the direct receipt of services. This means
that, for example, start-up support, is targeted directly at the
most vulnerable groups. This raises transaction costs for the
provider (or donor) above those of a more general offer, thus
having an impact on cost effectiveness. Additionally there is
insufficient evidence as to whether such targeting of groups has
a greater impact on those groups than service provision to the
more general business population in the area. Experience from
SOERED in China suggests that employment creation among laid-off
workers was greater in businesses started by self-selected entrepreneurs
in receipt of services rather than from businesses started by
the disadvantaged group. This was probably due in some respects
to other factors including access to finance and level of education.
At present it is difficult to say whether maximum benefits in
terms of employment creation and economic growth are generated
through interventions in private sector development support directly
to the most vulnerable (i.e. as recipients) or to the general
business population through self-selection by the market.
4.7 Enterprises are naturally usually
only willing to pay for services that will have an easily identifiable
impact on their business performance. This can lead to a conflict
between the needs of the poor and the provision of services. An
example here is in the areas of health safety and environment,
where it could be perceived that following advice on compliance
or best practice can actually lead to increased costs for the
business in the short term. Thus while there may be benefits for
society or the workforce it is difficult provide this type of
service to many enterprises. Two Durham University projects in
China have approached this by offering free HSE checks bundled
with commercially provided services, raising awareness amongst
client customers. A similar approach was taken with services to
develop Corporate Responsibility.
4.8 Corporate Social Responsibility
and Private Sector Development in general is still widely
seen as a large business issue. In terms of International Development
there is an increasing emphasis on the role of the corporate sector
in implementing CSR through its supply chain in developing countries.
So far less emphasis has been placed on the development of CSR
in indigenous enterprises, particularly SMEs that are not part
of these linkages. Similarly support services in the form of consultancy
and training, where available, are largely focussed on such businesses
with little emphasis on business services to SMEs. This is increasingly
marked in developing and transition economies where there is little
history of SME support services and generally less public funding
of services. A key challenge is to resolve the tension between
sustainability of service providers whilst delivering CSR compatible
services to SMEs.
4.9 There are a number of challenges
in promoting CSR through business services to the private sector
in developing countries. The first of these is what constitutes
a CSR related service to SMEs? This has implications where there
is little awareness, or possibly interest, from the target market
and where businesses often have little awareness of the benefits
of obtaining business advice in general. Linked to this is whether
CSR services can be offered as a discreet service in the same
way as, for example, business planning, or whether elements of
CSR can be bundled with other services. Experience gathered by
Durham Business School suggests the latter may be more appropriate
in the conditions that prevail in this context.
4.10 The issue of whether provision
of CSR linked services to SMEs is compatible with institutional
sustainability is of prime importance to providers of BDS. This
hinges on whether businesses are willing to take up and are prepared
to pay for such services. Approaches adopted here have included
seeking external funding or subsidy from government to fund service
provision and providing elements of CSR in the commercial service
offering.
4.11 Overcoming the tension between
the commercial provision of BDS and poverty alleviation objectives.
Provision of services developed or promoted through donor
intervention has a positive impact on private sector development
through by contributing to the performance of businesses in receipt
of these services, and thus contributing to overall private sector
development, with the impacts on overall economic growth and enlarged
employment opportunities. Maximising leverage from inputs is dependent
on the sustainability of services and providers after donor intervention
ceases, which is dependent on take up in the market. This situation
is fine if one takes private sector, growth per se, as a desirable
objective. This, though may lead to conflicts with donor objectives,
for example, if there is a clash with environmental results having
an impact on the poor. A solution is to develop services that
address these issues and can be bundled with fee earning services
or over time be developed as fee earning services.
February 2006
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