Small And Medium-Sized Enterprises – An Engine For Growth In Trinidad And Tobago?
In developed and developing countries worldwide, small and medium-sized enterprises (SMEs) are making their mark on the economic landscape due to their strategic importance in reengineering the industrial sector. Indeed, SMEs are being viewed in many quarters as a vital engine for growth. This is no less evident in Trinidad and Tobago where SMEs have mushroomed over the last decade numbering some 18,000 by the end of 2010, employing 200,000 persons and contributing nearly 28% to GDP. This compares favourably with India where SME contribution to GDP is expected to rise from 17% in 2009 to 22% by 2012. In developed countries like the USA, Japan, South Korea and Germany the contribution to GDP exceeds 50%.
It is instructive to note that this comparison of SMEs is not on similar parameters, as small and medium enterprises are not uniform, both in size and shape, across the globe. A World Bank study which surveyed 75 countries found that there were more than 60 definitions of small and medium enterprises. However, the most commonly used definitions relate to either size of employment and /or quantum of capital investment/fixed assets.
In the local context, a small enterprise is defined as having 6-25 employees, assets of TT$250,000 – TT$1.5 million and annual sales between TT $250,0000-$5 million. A medium enterprise, is one with 26-50 employees, assets of TT $1.5–$5 million and annual sales of TT $5-$10 million. Based on these criteria, the CSO estimates that SMEs constitute over 85% of all registered businesses in T&T.
SMEs have unique advantages over larger businesses: they are substantial generators of employment, and can act as shock-absorbers during a crisis, responding more readily to vagaries in the market. With the absence of layers of authority, decisions can be taken pretty quickly and so the market expectations can be fulfilled. They also can provide a wide range of products often at affordable prices.
However, SMEs have faced several constraints, the most persistent of which have been non-availability of loan finance, low levels of technology and research and development, and inadequate physical infrastructure. Despite the high liquidity in T&T’s commercial banking system and the availability of a small-business window at certain banks, , the CSO found that only about 11% of SME start-up funding comes from the banking fraternity with 70% coming from personal savings.
While this disparity could be attributable to the perceived riskiness of SMEs and the associated high cost of borrowing, research conducted by CariCRIS – the regional credit rating agency – has revealed that the “SMEs inability to communicate business models and plans to bankers as well as the inability of commercial banks to engage in a structured methodology to evaluate and price credit risk” are among the primary mitigating factors.
Raymond Smith, of Scotiabank, speaking at a recent ACCA SME 2011 Conference echoed similar sentiments. He indicated that when evaluating proposals from SMEs, financiers will consider, inter alia, who the owners of the business are; their financing skills and competencies; strengths and weaknesses of competitors and whether the customer base is well diversified and growing. The absence of these elements in a professionally crafted business model can lead to their rejection. One has to assume also that the banks have the relevant qualified staff dedicated to this process.
Be that as it may, and given current circumstances where SMEs experience significant difficulties in accessing bank financing, the burning question is, where can they source this much needed capital? In response to this, the Minister of Finance in his 2011/2012 Budget Statement delineates Government’s plans for the establishment of an SME Market on the T&T Stock Exchange with the creation of a “third tier…to provide Small and Medium Enterprises with access to the capital market”.
The Minister has proposed that “for the first 5 years, SMEs whose capital is greater than $5 million but less than $50 million and listed on the SME Market for trading purposes, would be allowed a 10 percent corporation tax rate”. However, “the SMEs would be required to raise capital on the stock exchange through an initial public offering with a minimum of 25 shareholders holding at least 30 percent of the company’s share capital” up to a maximum of TT$50 million. A similar approach has proven to be quite successful in Jamaica and the expectations are that similar results can be achieved here in Trinidad and Tobago.
Ernst and Young, in its review of the 2011/2012 Budget noted that there were two significant gaps in the Minister’s presentation on the SME Market. Firstly, there was no indication as to whether a company would be obligated to conduct operations in Trinidad and Tobago in order to qualify for listing or if operating in CARICOM would be sufficient. Secondly, it can be implied that such listing would be subject to the approval of the Trinidad and Tobago Stock Exchange and thus companies would have to comply with all the requirements of the SEC and the Companies Act. These requirements may prove to be onerous to SMEs and discourage listing. The Chamber expects that these matters would be clarified during the budget debate.
By comparison, the Junior Market in Jamaica provides SMEs with a 10 year tax incentive, in addition to the equity financing to fund expansion and growth. During the first five years of listing, the companies pay zero corporate tax, while half of the current tax rate is charged for the last five years. It is interesting to note that from its opening on April 2, 2009 to the end of December 2010, there were eight companies listed, raising just under $1 billion combined and the shares of all eight companies were oversubscribed during the initial public offering (IPO). It is anticipated that at least 10 more companies would list on the Junior Market during 2011.
The Chamber is hopeful that prospective shareholders will indeed come forward and support the SME sector so that issues of unemployment, poverty, economic diversification and crime can be addressed frontally. The Chamber is also heartened to learn from the Minister of Labour and Small and Micro Enterprise Development that the Government, in its thrust to develop the SME sector, will use women and youth entrepreneurs, who are among the most vulnerable groups in society, as the main drivers. The entire process will be executed by four agencies, namely, the Ministry of Labour and Small and Micro Enterprise Development, the Business Development Company , the National Entrepreneurship Development Company , and the Tobago House of Assembly . The relevant legislative framework is expected to be in place by June 2012.
Weare confident that SME sector development will continue to be an integral part of the development thrust in T&T given its potential as a vehicle for employment generation, poverty eradication and promoting an entrepreneurial culture. With approximately half of the Chamber’s membership comprised of SMEs, we have made SME development a priority and will be hosting our 3rd Biennial SME conference: Make it Happen – success in any environment, a one-day conference taking place on November 4, 2011. SMEs will be given important tools to assist them in further development. Interested persons may contact the Chamber for information.