More funds needed for SMEs

Editorial, Normal

The National, Thursday June 25th, 2015

 IN light of the recent Asian Development Bank report on small to medium enterprises in the country, we hope that Richard Maru does not relent or lose sight of the vision with which he hit the ground running.

For a first time MP in 2012 Maru was handed a very critical ministry in a critical period of the country’s history. 

The economy was buoyant and there was a general sense of optimism.  

PNG was heading into a period of plenty.  

What better reason to prop up the small businessman and woman to take a bite of the fortunes?

The Trade Commerce and Industry minister and Yangorru-Sausia MP set out with a dream to transform the SME sector by a big leap. Arguably no other politician before the former National Development Bank had voiced such passion, with a somewhat discriminatory tone, about Papua 

New Guineans starting, acquiring and succeeding with SMEs.

The minister initiated the Madang SME forum which penned a forward looking and ambitious communiqué to further the development of the sector and place ownership firmly in indigenous hands.

The ADB report on the PNG financial sector referred to above states that many small and medium enterprises fail in the first five years of operation and that could be addressed through accessibility to financing.

The bank’s Pacific Private Sector Development lead economist Paul Holden says SMEs are critical for generating jobs and promoting geographically balanced growth in the economy.

“About 80-90 per cent of SMEs fail in the first five years of operation, one way to promoting private sector development is if finance is available to support growth.”

His next observation is merely an echo of what many Papua New Guinean SME operators or those planning a business with assistance from banks have stated on many occasions.

“Commercial banks in the Pacific region, including Papua New Guinea, often are reluctant to lend.  

“Without that business cannot flourish.”

The reason?  

The business environment in the Pacific region is quite risky which means lending is risky.

What the ADB report may or may not have answered is why?  

What are the regional or peculiarly Papua New Guinean reasons why lending to an existing business or a startup is a gamble requiring seconds thoughts if not avoided – if profit can be made at lesser risk elsewhere.

In PNG there are a number of obstacles in successful profitable SMEs. 

The list is long but among them are high real estate costs (land and buildings), high or unreliable utility services, security concerns and cumbersome regulatory or legislative systems and procedures. 

Add to that the general reluctance by banks to lend and we complete an unbroken cycle of struggling and failing SMEs in the country.

The PNG government’s vision for development relies on the private sector as the engine for accelerated growth, the ADB report points out.  

“However, translating that vision into policy reforms was proving difficult.”

One of the key recommendations ADB put forward for PNG was to reform the financial and banking sector.

Minister Maru has the backing of his colleague Cabinet ministers, some key big businesses, overseas partners and a very receptive PNG population to reform the financial sector to be more SME-friendly, as recommended by the ADB.  

As a major and prudent lender to PNG, the ABD should know how and where to invest in resources and policy to trigger economic growth in the SME sector, hence its recommendations.

What interesting to note that while the same major commercial banks operating in the Pacific region are reluctant to lend to SMEs, they continue to make not so modest profit yearly from their existing well-established large business clients and personal banking. 

More of that money needs to trickle down into the SME sector.  

For that to happen in PNG, the banking and finance sector would have to be reformed as a first step.

We would then have to address in a practical way the long-standing risk factors facing banks. 

Perhaps only then can they be convinced that the government and citizens are hungry enough for success in the SME sector.