National and local reforms toward a better investment climates for micro, small and medium enterprises in the Philippines

Transcription

1 National and local reforms toward a better investment climates for micro, small and medium enterprises in the Philippines Small and Medium Enterprise Development for Sustainable Employment Program (SMEDSEP) support for reforms of the investment climate Options Paper Simon White, Consultant October This report has been prepared following a brief mission to the Philippines, October The purpose of the report is to present a range of options that can contribute to the design of Component 1 of the Small and Medium Enterprise Development for Sustainable Employment Program (SMEDSEP). I Background 2. The overall goal of SMEDSEP is for state and private institutions to shape the investment climate in the Philippines, and particularly in the Visayas, in a way that enables the development and use of entrepreneurial potential and stimulates competition. 3. This will be achieved through the actions of four components of the program: 1 Enhancement of SME policies, laws, and regulations, 2 Market development for services relevant to micro, small and medium-sized enterprises (MSMEs) 3 Improvement of access to middle and long-term financial credit, and 4 Market development for demand-driven technical vocational education and training programs 4. The objective of Component 1 the component that deals with the policy, legal and regulatory framework is as follows: Policy proposals for the improvement of the

2 business climate at national and local and regional level exist and have been implemented in the Visayas on a pilot basis. 5. The current indicators that have been designed to demonstrate the achievement of this objective are: The local investment climate has improved (in selected LGUs in the Visayas) compared with other regions in the Philippines (e.g., higher ranking in the Competitiveness of Cities list drawn up by the Asian Institute of Management) Representatives of the SME sector are regularly and effectively integrated into the decision-making processes by relevant promotion institutions (e.g., frequency of consultations, results achieved) SMEs confirm the approval and licensing procedures have been shortened, simplified and are better publicised Seventy per cent (70%) of the entrepreneurs say that the framework conditions have improved since the beginning of the phase (based on a random survey) 6. This report is divided as follows: 7. Section II: Critical challenges: This section deals with a number of critical challenges that SMEDSEP should consider in its design of Component1 activities for the coming two years. 8. Section III: Actors in the process of reforming the investment climate: This section lists some of the main actors SMEDSEP should engage with in its Component 1 activities. 9. Section IV: Proposals on program dynamics: This section identifies program elements and dynamics that should be considered in the design of the Component 1 activities for the next two years. 10. Section V: Possible areas of focus and activities: This section identifies some options for Component 1 to focus on, providing a range of possible actions and foreseen outcomes that can be achieved by the end of Simon White, Consultant 2

3 II Critical challenges 11. There are a number of challenges Component 1 SMEDSEP must address if it is to effectively achieve its desired outcomes. In September 2004, Christof Gross (GTZ) suggested that SMEDSEP faced the following challenges in its work to support improvements of the investment climate: Defining the respective roles for the public and private sector in creating a business environment that is more conducive to MSME development. Building stable, long-term alliances with relevant reform agents or stakeholders in order to influence the demand for reform Addressing the problems that prevent the effective implementation of policies and laws 12. These issues are extremely relevant and are fully supported. However, in addition to the above, the following additional challenges also appear relevant: Policy challenges 13. The policy arena for MSME development sets the framework within which all other challenges are faced. It is here that issues such as the role of government and the role of the private sector are clarified, as are issues such as the importance and influence of the investment climate, the role of regulation, the relevance of private sector development and competition, etc. 14. There are a number of issues that create policy challenges for SMEDSEP s work in supporting reforms of the investment climate in the Philippines. These include the following: 15. Terminology: SMEDSEP documentation uses a number of terms to refer to similar issues. The terms investment climate, business climate, business environment, and enabling environment have all been used to when describing the work of SMEDSEP. Unless these terms have been specifically used to refer to different issues (in which case this should be clearly described), it is recommended that SMEDSEP decide on the consistent use of one of these terms. From a headquarters perspective, it appears that GTZ prefers the term investment climate. However, it should be noted that this topic is much broader than the policy, legal and regulatory focus of Component 1 and care should be taken no to over-burden the program with too many fields of interest. 16. Enterprise target groups and the relevance of firm size: current SMEDSEP documentation refers to both SMEs and MSMEs. In some cases it has been suggested that the primary target group are SMEs and micro-enterprises with growth potential. In this case, it would be important to clarify the ways in which Simon White, Consultant 3

4 micro-enterprises with growth potential can be identified and how this will affect the operations of Component The Government of the Philippines appears to be taking steps to broaden its focus on SMEs to include micro-enterprises (with or without potential it would seem). 1 Thus, it would appear appropriate that Component 1 SMEDSEP accommodate the concerns of MSMEs The Department of Trade and Industry s (DTI s) Long-Term Plan to Institutionalise SME Development ( ) has a number of points that are directly relevant to Component 1 SMEDSEP. Its goals are to increase the contribution of SMEs as a primary engine of growth and spur the Philippine SMEs to be at par or better than the performance level of comparable Asean enterprises in terms of value added, employment, number of establishments, and export volume. To this end, there are a number of strategies contained in its threepronged that are relevant, especially the so-called broad-based strategies including: Strategy 6: Strengthen the systems that provide support programs and incentives for SMEs and Strategy 7: Streamline the implementation of SME policies and regulations. SMEDSEP is, therefore, well placed to contribute to the implementation of the DTI strategies. 19. Another aspect of this challenge is the location of MSME development within the broader field of private sector development. While SMEDSEP is clearly targeting the SME sector, with an interest in certain kinds of micro enterprises, it should consider this target group as a route to those issues affecting the private sector in general. Thus, the experiences of MSMEs in the investment climate could be seen as a kind of litmus test that shows the effect the investment climate has on the private sector. SMEDSEP s work with this target group would complement the work of other agencies (e.g., World Bank, Asian Development Bank) that are more concerned with larger, formal firms (e.g., through investment climate surveys and assessments). Thus, SMEDSEP could provide a sharper focus on specific issues by highlighting the investment climate constraints that affect MSME development. 20. The development functions of the private sector: MSMEs have been recognised as a valuable mechanism for job creation. This function of MSME development has been cited in the initial SME Agenda of President Arroyo when she first came to Amendments to the Magna Carta For Small Enterprises are currently under consideration by the Congress of the Philippines to include micro-enterprises; House Bill No. 180 of the 13 th Congress of the Philippines entitled: An Act To Further Promote Entrepreneurship And Support The Development Of Micro, Small And Medium Enterprises, Amending For The Purpose Of Republic Act No. 6977, As Amended, Otherwise Known As The Magna Carta For Small Enterprises. It has been suggested that MSMEs combined account for some 97 per cent of all private sector activities in the Philippines. Simon White, Consultant 4

5 power, as well as in her recently released Ten-Point Agenda. The policy challenge that emerges concerns the way Government sees its role in promoting job creation through MSME development and the relative importance of the investment climate within this context. Thus, SMEDSEP should promote policy proposals that demonstrate how the Government can achieve its development goals by reforming the investment climate. 21. A common understanding across government: The Philippines government lacks a unified stand on a number of issues concerning MSME development. Each government office appears to be pushing its own goals and demands, which in some cases are contradictory. The BMBE Act is a good example (as described further below). Thus, SMEDSEP could work with a number of government departments to facilitate dialogue toward a more common understanding of the role that government can play in MSME development. 22. Competitiveness: The relevance of international competitiveness is also a major policy challenge SMEDSEP faces. Here again, the challenge for SMEDSEP is to present policy instruments and options that show how reforming the investment climate will improve the competitiveness of the Philippines in the global economy. Legislative and regulatory challenges 23. There are a number of challenges that emerge out of the legal and regulatory framework for MSMEs in the Philippines. These issues provide potential focal points for SMEDSEP. They include the following: 24. Barangay Micro Business Enterprises (BMBE) Act: The BMBE Act (2002) was specifically designed to support the development of the micro enterprise sector through the provision of a number of exemptions. However, its implementation has been poor and there are many areas where SMEDSEP could contribute to both a review of the BMBE Act to assess its impact on the micro enterprise sector and support at the local level for better implementation. 25. The challenge to improve business registration: The BMBE Act makes specific provisions for the registration of micro enterprises. However, these have been poorly implemented and do not address the problems in business registration that affect the broader MSME sector. The strong decentralisation program of the Philippines has given local government units (LGUs) greater powers in the registration of businesses, but here again, there has been mixed success in achieving reform in this field. Thus, SMEDSEP is well placed to work with selected LGUs in the Visayas to help in the simplification of business registration procedures. 26. The challenges faced by local government: As mentioned above, LGUs now have greater responsibilities with regard to business registration and a whole range of other functions concerning MSME development. SMEDSEP should work with selected LGUs in the Visayas to help them in the design and delivery of programs Simon White, Consultant 5

6 that reform the local investment climate and promote the strategic development of the local business sector. This would include helping LGUs to initiate and sustain dialogue with the local private sector (including the local micro enterprise sector). 27. Taxation challenges: The Department of Finance as well as the Department of Labor and Employment have resisted quite successfully the implementation of the BMBE Act by issuing Implementation Rules that undermine the purpose of the act. The Department of Finance does not want to decrease Government revenue by exempting micro enterprises from their taxation obligations, while the Department of Trade and Industry fear the affects this might have on stifling employment growth in the MSME sector and forcing more enterprises into the informal economy. This is an unresolved issue and underlying conflict that has never been openly debated. Component 1 SMEDSEP could add-value to this challenge by stimulating this debate, through the presentation of reform options for government and improving the understanding within government concerning the impact of laws and regulations on the MSME sector. 28. The challenge of MSME employment: Because the MSME sector creates many jobs, increasing attention has been given to the quantity and quality of MSME employment. Organizations such as the PCCI and ECOP have proposed a reduction of the Minimum Wage and the deregulation of the labour market, while others have been concerned for the quality of employment in the MSME sector. While this is a large and controversial field, SMEDSEP is well placed to promote further discussion on this issue and to present options for reform. These options could be piloted at the local level in the Visayas with experiences being communicated to national tripartite partners. 29. The challenge of financial services: A high level of attention is given to the provision of financial services to the MSME sector in the Philippines. This has led to the introduction of a number of new finance programs as well as regulations (e.g., amendments in the Magna Charta forcing banks to allocate six percent of their portfolio to SMEs). Component 1 SMEDSEP could support this interest and complement other program components by examining the financial services sector in the Philippines with an investment climate perspective. Such an examination would focus on the policy, legal and regulatory framework for financial services to the MSME sector and present options for reform. Challenges of change/weak role or the private sector 30. There are broader issues that affect the role of Component 1 SMEDSEP. One of the most relevant to the Philippines is the limited demand for reform. While reform of the investment climate has been cited by many agencies (domestic and international) as a critical issue, there appear to be very few calls for reform. The status quo appears to suit many people, including established businesses that have learnt to survive in the current investment climate. Simon White, Consultant 6

7 31. Reform changes the distribution of winners and losers; those who do well in the current system, may not fare so well in a changed investment climate. Thus, there can be resistance to reform. 32. SMEDSEP should pay attention to the demand for reform and, where it is found wanting, consider program interventions that highlight the importance of reform and promote greater public debate on this issue. Challenges for GTZ/SMEDSEP 33. There are a number of challenges that SMEDSEP Component 1 project will bring to GTZ. These include: 34. Supporting and strengthening current reform efforts: International experience (including GTZ experience) has shown that donor agencies wishing to improve the investment climate cannot take the lead in these processes. The key lead agencies are domestic agencies: government mainly, but also the private sector. Thus, SMEDSEP is required to work with these agencies to support their reform efforts. Rather than identify reform priorities in an isolated manner, SMEDSEP should identify key reform efforts currently made by Government and the private sector and, where possible, support these. 35. There will be occasions where SMEDSEP identifies reforms that domestic agencies haven t seen or believe are less relevant. In such cases SMEDSEP should continue its dialogue with domestic partners on these issues. Without agreement with domestic partners, investment climate reforms will fail. 36. Focusing on those reforms that are possible within the financial and time constraints of SMEDSEP. There are many elements of the investment climate that require reform. SMEDSEP should not attempt to address all these. Instead, the program should focus on those elements of the investment climate that it can support. While very important, it would appear that SMEDSEP cannot contribute much to reform in the following fields: governance, commercial dispute resolution, corruption in general, customs, infrastructure and utilities, and competition policy and law. 37. Working with all relevant partners: Supporting reforms in the investment climate for MSME development often involves working with different partners. In many cases, Component 1 will have less direct involvement with the MSME sector than other components of the program. Some of the most relevant actors that should be involved in Component 1 are listed further below (Section III). 38. Building a vision, while focussing on specific aspects of the investment climate: A critical challenge for SMEDSEP is to keep a broader vision of its work to improve the investment climate while focussing on specific reform issues. It is easy, for example, to focus on the simplification of business registration procedures and to lose track of broader investment climate issues. Thus, SMEDSEP should Simon White, Consultant 7

8 continue to promote discussion on the purpose of the investment climate reform and the benefit of private sector development in general and MSME development in particular. 39. Part of the vision-building project should be to highlight the relevance of MSMEs in broader private sector development. Currently, firms in this category are seen either as a poverty-stricken group of enterprises that need constant handouts (especially financial handouts) or as major employers that deserve special support. The likely truth is that MSMEs contain both kinds of enterprises and many more. The diversity of this very large sector should not be underestimated. Thus, SMEDSEP should promote concepts and models that display the link between firm size and the investment climate. It should highlight those elements of the investment climate that keep small firms small, while helping policy-makers to recognise that the achievement of national development goals (as well as the Millennium Development Goals) through enterprise development requires a specific role for government in concert with other actors in the investment climate. Simon White, Consultant 8

9 III Actors in the process of reforming the investment climate 40. SMEDSEP should recognise that supporting reform of the investment climate in the Philippines will require it to work with a wide range of public and private actors. These include the following: The legislature: Congressional and Senate Trade and Industry Committees National government: Department for Trade and Industry (DTI), Bureau for Small and Medium Enterprise Development Small and Medium Enterprise Development Council (national and provincial) Department for the Interior and Local Government Other relevant national departments (e.g., Department for Science and Technology, Department for Tourism, Department for Finance) National Economic Development Authority Technical Education and Skills Development Authority (TESDA) Philippines Special Economic Zones Authority Regional and provincial government offices Private sector representatives: Media Philippines Chamber of Commerce and Industry Employers Confederation of the Philippines Various sector associations (e.g., tourism, IT) Foreign chambers (e.g., European Chamber of Commerce, American Chamber of Commerce) Commercial banks Technical support agencies: Simon White, Consultant 9

10 Asia Institute of Management (AIM) University of the Philippines (including the Institute for Small-Scale Industries and the Small Enterprises Research and Development Foundation, Inc.) Training agencies (e.g., Local Government Academy) Donor agencies: Asia Foundation Asia Development Bank International Labour Organization World Bank Simon White, Consultant 10

11 IV Proposals on program dynamics 41. This section of the report focuses on a number of specific elements and dynamics of the Component 1 SMEDSEP that should be considered in the design of activities for the coming two years. Levels of program activity 42. Initially, it was proposed that SMEDSEP operates at three main levels: local, regional and national. 3 Occasionally, reference has also been made to SMEDSEP s work at the provincial level. However, at the beginning of program implementation, three pilot provinces were selected (one per region) to focus program implementation in the first phase. 43. The recognition of the role and influence different levels of government have on the investment climate is fully supported. However, care must be taken to ensure that the program is not over-extended across three and possibly four levels of government. Thus, it is proposed that Component 1 SMEDSEP focus primarily on local and national levels. 44. While important, regional and provincial governments with some exceptions have less influence on the investment climate. In the first two years of the program it is therefore proposed that the LGU become the primary target for intervention by Component National counter-parts are essential in a program such as this. The program should pursue both top-down and bottom-up strategies. It should promote national dialogue and support national reform activities, but it should test out new approaches on the ground within selected LGUs. Component objectives 46. The current objective of Component 1 SMEDSEP focuses only on SMEDSEP s role in producing policy proposals. While this is relevant, it appears to be too narrow a focus. Moreover, this appears incongruous with the proposed indicators of achievement that have been proposed, which go beyond the development of policy proposals. The objective also cites regional and provincial levels of program activity, which may not be achievable in the two year program phase. 47. Thus, it is proposed that the Component 1 objective of SMEDSEP be altered slightly to include a broader range of issues. To this end, the following objective is proposed: 1. 3 Prey, J., P. Hartig, P. Rana, U. Gaertner and U. Toemroos (2002) Private Sector Development Program; Summary Report; Findings of the Appraisal Mission, April. Simon White, Consultant 11

12 48. Component 1 SMEDSEP objective: Policy, legal and regulatory proposals for the improvement of the investment at national and local levels exist and have been tested in the Visayas. Component indicators 49. The current proposed indicators of achievement are very broad and may be too ambitious for the coming two years. 50. Original indicator 1: The local investment climate has improved (in selected LGUs in the Visayas) compared with other regions in the Philippines (e.g., higher ranking in the Competitiveness of Cities list drawn up by the Asian Institute of Management). 51. Although ambitious, this indicator is well focussed and provides and objective means of assessment (i.e., the AIM Competitiveness of Cities Index). The main concern is that reforms to the investment climate take time to be designed and implemented. In two years, it may not be possible to see this process completed to the point that such improvements are measurable. 52. Original indicator 2: Representatives of the SME sector are regularly and effectively integrated into the decision-making processes by relevant promotion institutions (e.g., frequency of consultations, results achieved). 53. This is a good indicator, but excludes micro enterprises. This is important since it is likely that a high number of enterprises in the Visayas will be micro enterprises. It is proposed that the representation of the entire MSME sector is considered. 54. Original indicator 3: SMEs confirm the approval and licensing procedures have been shortened, simplified and are better publicised 55. This is a clear indicator, but again, the timeframe may be a little short. The feasibility of this indicator is dependent on how quickly the program establishes its relationship with selected LGUs, identifies areas and proposals for reform, and works with the LGU and the local private sector to implement these reforms. 56. Original indicator 4: Seventy per cent (70%) of the entrepreneurs say that the framework conditions have improved since the beginning of the phase (based on a random survey) 57. This indicator is also good, but also possibly too ambitious within a two-year timeframe. There is no guidance given to the location or gender of the entrepreneurs referred to, or to the size of the enterprises they own and manage. 58. None of the above indicators appear to address the Component activities at the national level. Thus, it is proposed that addition national-level indicators are Simon White, Consultant 12

13 designed. This will be dependent on the national level activities undertaken by the Component and various options are presented in Section V of this report. Simon White, Consultant 13

14 V Possible areas of focus and activities 59. Based on the abovementioned challenges, the following possible areas of focus for SMEDSEP Component 1 are presented. These areas of focus attempt to highlight those challenges that the project can begin to address in the short-term. Redefining the role of MSME development Strengthening public-private dialogue Strengthening analysis and the design of reform programs Building a demand for reform Simplifying business registration and reporting regimes Improving the policy and legal framework for MSE employment 60. The activities that each of these areas of focus could contain are described below. Two levels of program activity are presented: local and national Special consideration has been given to the possible outcome the project could achieve in its first two years (i.e., by end-2006). Redefining the role of MSME development 61. Possible local actions that SMEDSEP could undertake within this area of focus are: Seminar series on MSME development Supporting the formation and strengthening of local and provincial SMED Councils 62. Possible national actions that SMEDSEP could undertake within this area of focus are: Preparation of Policy Briefs : these would offer policy perspectives on key issues facing the Government, such as: Achieving the President s 10-Point Agenda by reforming the investment climate Promoting micro-enterprises as a productive sector Policy options for stimulating more and better jobs through MSME promotion Investment climate reforms that improve the competitiveness of MSMEs in world markets Simon White, Consultant 14

15 Policy reform for infrastructure improvements Promoting international and domestic investment through MSME promotion Seminar series on MSME development and the investment climate 63. Relevant program partners: DTI, National SMED Council, Congressional Committee on Trade and Industry, and DILG 64. Possible outcomes these actions could achieve by end-2006: MSMEs are more frequently referred to as mechanisms for local and national economic and social development Business models for micro enterprise development presented Micro enterprise sector recognised as diverse and dynamic, containing survivalists AND enterprises with a potential for growth Strengthening public-private dialogue 65. Possible local actions that SMEDSEP could undertake within this area of focus are: Supporting a series of local and provincial Business Forums Working with local chambers and other small business associations to build an advocacy agenda 66. Possible national actions that SMEDSEP could undertake within this area of focus are: Documentation of local experiences Developing an advocacy agenda for investment climate reform among PCCI and ECOP 67. Relevant program partners: DILG; PCCI; ECOP 68. Possible outcomes these actions could achieve by end-2006: Dialogue between LGUs and private sector representatives occurs more often Agreements for action between LGUs and private sector representatives Simon White, Consultant 15

16 Participation by MSEs in private sector organizations and dialogue broadened Models for improving LGU and private sector dialogue documented and distributed Strengthening analysis and the design of reform programs 69. Possible local actions that SMEDSEP could undertake within this area of focus are: Technical assistance in the assessment of local investment climate; this could be combined with LED and BDS market assessments of SMEDSEP 70. Possible national actions that SMEDSEP could undertake within this area of focus are: Regulatory Impact Assessments Guide for investment climate assessments Turin training program: Reforming the investment climate 71. Relevant program partners: DTI, DILG, National SMED Council, Congressional Committee on Trade and Industry 72. Possible outcomes these actions could achieve by end-2006: Improvement in the identification and prioritisation of investment climate bottlenecks Greater awareness of best practices in investment climate reform programs in Asia and worldwide Action-oriented taskforces formed to address specific reform agendas Building a demand for reform 73. Possible local actions that SMEDSEP could undertake within this area of focus are: Local public forums organised on issues concerning the investment climate and the need for reform at the local level 74. Possible national actions that SMEDSEP could undertake within this area of focus are: Simon White, Consultant 16

17 Media campaign Commissioning articles Press kits Journalist briefing seminars 75. Relevant program partners: PCCI, ECOP, DILG, DTI 76. Possible outcomes these actions could achieve by end-2006: Greater public debate on the need for policy, legal and regulatory reform More newspaper and radio stories on the investment climate and the need for reform More press releases issued by Government and MSME representative agencies on issues concerning the investment climate for MSME development Simplifying business registration and reporting regimes 77. Possible local actions that SMEDSEP could undertake within this area of focus are: Review of local business registration and reporting procedures Local MSME dialogue to discuss findings Design of local reform strategies in consultation with one-stop-shops and local SME Centres (where they exist) Technical assistance to support local reform measures Documentation of local experiences (successes/problems) 78. Government has already taken steps to simplify the procedures for business registration and licensing (e.g., DILG Memorandum to establish one-stop business licensing procedures, decreasing the number of processing days and signatories). However, LGUs can only do so much in this regard before the come up against major legislative obstacles. Significant gains can be achieved through the amendment of relevant legislation. Thus, at the national level, the participation of the legislature is valuable. Possible national actions that SMEDSEP could undertake within this area of focus are: Simon White, Consultant 17

18 Preparation of a discussion paper on the purpose of business registration with options for legislative amendments to improve business registration and licensing Preparation of a guide business registration and reporting reform options (to be translated into all relevant languages) 79. Relevant program partners: DILG, DTI, SMED Councils (national and provincial) 80. Possible outcomes these actions could achieve by end-2006: Practical experience gained by LGUs on the simplification of business registration and reporting regimes (What works and what doesn t) Local pilot areas demonstrate improvements Fewer days required to register Less steps required to register Fewer direct and indirect costs to register and report Improving the policy and legal framework for MSE employment 81. Possible local actions that SMEDSEP could undertake within this area of focus are: Dialogue with local employers and workers organizations 82. Possible national actions that SMEDSEP could undertake within this area of focus are: Dialogue on findings (with the ILO) Publication of report presented at public forum with option for reform 83. Relevant program partners: DOLE, DTI, ECOP, ILO 84. Possible outcomes these actions could achieve by end-2006: Greater awareness of the impact of labour policies and laws on employment creation and job quality in MSEs Greater awareness of the possible options for reform General agreement on key principles for reform shared by: Government Simon White, Consultant 18

19 Worker Organizations Employer Organizations MSE representative organizations Simon White, Consultant 19