An Investigation into the Nature and Success of the Government’s Attempts to Support MSMEsPresented by: Fajardo, Sanchez, Sison, Sylva, and Torio

To POLSC14 WFY, facilitated by Prof. Jalton Taguibao

On Saturday, March 22, 2014

Introduction and Background

•The project takes a look into the different ways that the Philippine government attempts to support the MSME industry, and whether or not their efforts have made a significant impact.

•The group chose the topic for the broad range of factors the project would investigate.

Research Question

•How effective has the Philippine government been in fulfilling its duty to support, develop and protect the micro, small and medium enterprise sector of the economy?

Objectives of Study

The study aims to:▫Describe the current state of the sector▫Determine the state’s legal mandate to

support the sector, as well as its programs and plans to improve it

▫Evaluate the government’s performance in executing its programs and plans

▫Discuss the areas in which the government could improve its treatment of the sector

▫Inform the public of the means of assistance provided by the government

Significance of the Study• The micro, small and medium enterprise

(MSME) sector comprises the majority of the businesses in the Philippines.

• The influx of capital into the Philippine economy will trickle down more effectively with an empowered small business sector.

• If you were to start a business right now and run it successfully for a decade, odds are it would still count as an MSME.

Review of Related Literature

“Small and Medium Enterprises across the Globe”▫World Bank’s compilation of statistics on the

roles of SMEs in various economies from around the world.

▫Development of SMEs is a, “core element in its strategy to foster economic growth, employment and poverty alleviation.”

▫Little data regarding SME performance across the world at the time of writing (2003).

Review of Related Literature

“Trickle Down isn’t Good Enough”▫Article released in Philippine Star▫Cites large imbalance in the distribution of

Philippines’ new wealth (10% of population control 85% of wealth)

▫No trickle-down effect – high GDP not felt by lower sectors

Methodology

The group gathered data from the public records and documents of various state and international agencies in order to contextualize the value of the MSME sector, as well as the state’s mandate and plans to improve and assist it.

MethodologyAdapting from Sec. 2 of the Magna Carta for MSMEs, the group identified six basic support functions which the government must provide:

1. Training for MSME businesspeople and employees

2. Stable financial assistance

3. Government contracts and similar incentives/preferences

4. Minimization of bureaucratic requirements

5. Promotion of support from and connections to private partners

6. Feedback and evaluation mechanisms for the development of

MSMEs

MethodologyThe group investigated the government’s efforts to achieve each of the six functions by searching for evidence of assistance in each aspect, and comparing its accomplished reforms with pre-2011 (pre-MSMED plan 2011-2016) statistics.

Sources consulted include:• Data retrieved from various state agency websites• International assessment studies and reports• Interviews

▫ Gerardo Sicat, Professor Emeritus of the UPD School of Economics▫ Christopher Go, businessman

• Go Negosyo!

1. Training for MSME Businesspeople and Employees

Possible indicators for success:• Availability of training programs• Number of graduates• Rate of graduate output• Quality of service provided

Results and FindingsThe group investigated TESDA as a significant institution for the training and development of entrepreneurial and labor skills.

• TESDA and partners have produced▫ over 16 million program graduates from 1994-2011, with an average increase of 16.71% graduates per year over the period of time. 0.9% fewer graduates were produced in 2011, however.▫ 3,601,084 certification recipients from 1994-2011, average certification rate of 50.02%

TESDA has drawn criticism from both private and state observers.

PIDS EPM 2011• Huge gap between graduates and certification recipients• Structural advantages allowing for poor quality control and abuse of regulatory powers: TESDA is both a provider of training, and the governing authority for providers of training.

Results and FindingsInterview with Mr. Christopher Go

Mr. Go was the owner and operator of a small-medium call center in QC when he sought the assistance of TESDA in sourcing agents.

The agents hired as a result of the collaboration resigned or went AWOL after a month of in-house training with a stipend and a further two to three months of employment.

Based on his own investigations, Mr. Go learned that the deserting agents returned to their TESDA trainers who referred them to larger call centers for a commission.

Alternatives to TESDA

There are many alternatives to TESDA, such as those provided by the DTI which provide the public with mobile learning opportunities (ex. the SME Roving Academy) and open workshops and lecture programs for teaching various skills and techniques (ex. Philippine Trade Training Center).

2. Stable Financial Assistance

Possible indicators for success:• Consistent availability of financial assistance• Number of loans provided

Results and Findings

The World Bank PDR identifies access to finance as a, “key constraint to firm entry and expansion in the Philippines,” especially for small and medium enterprises.

RA 9501• Requires all lending institutions to allocate at least 8% for micro and small businesses and at least 2% for medium businesses.

Results and FindingsPhilippine Senate Economic Planning Office

• Published a report entitled “The MSME Sector at a Glance”• Reveals downward trend in MSME lending from 2008-2011 (0.90% average decline)• Significantly smaller rate of decline from 2010-2011 (0.046% drop)• Also reveals over-compliance rate of 11.84% or PHP117bn from 1991 to 2010

Go Negosyo!

• Majority of the cases found within the book involved small loans (microfinance).

3. Government Contracts

Possible indicators for success:• Availability of contracts• Number of contracts provided

Results and FindingsThe group’s investigation led to a number of sources confirming the government’s involvement with MSME contracts.

These include invitations to bids on various government agency websites:

▫NEDA website has 22 active bids as of 5am today

However, some bid-hosting pages are misleadingly out of date:▫Bureau of Plant Industry has 64 bids… All are dated older than July 2013, and some are as old as April, 2009

Go Negosyo - Case of Orlando Fabila• A key partner of the Department of Agriculture’s program to promote DA-certified seeds for better crop yields.• Produces and sells rice seeds to the DA

4. Minimization of Bureaucratic Requirements

Possible indicators for success:• Number of procedures compared to other countries• Experiences with procedure availability• Nature of required procedures

Results and FindingsMinimizing business regulation procedures is a key part of the World Bank’s Ease of Doing Business study.

The study ranks economies whose governments have constructed efficient regulatory systems which cause as few intrusions as possible.

Bureaucratic inefficiency adds to the challenges faced by the sector’s entrepreneurs such as the unavailability of capital or lack of experience in doing business, and the Philippine Development Report suggests that high restrictions such as tax rates and permits lead to high instances of informal businesses and business practices.

Results and Findings

The results for the Philippines are as follows, based on the procedures involved in starting a business in the country’s largest business city (Makati).

Type of Procedure Number of Procedures

Starting a business 16

Dealing with construction permits 29

Getting electricity 5

Registering property 8

Enforcing contracts 37

Ease of Doing Business in The Philippines (2013)

Results and Findings

Type of Procedure Number of Procedures

Starting a business 3

Dealing with construction permits 11

Getting electricity 4

Registering property 5

Enforcing contracts 21

Ease of Doing Business in Singapore (2013)

Results and FindingsInterview with Mr. Go

Mr. Go related his experience with starting small food businesses in Quezon City and Valenzuela City, and the wide variation in regulatory practices between the two.

Valenzuela• Processes were facilitated by technology (ex. ATM-like service for transactions)• Procedures ended at the municipal level

Quezon City• Outdated methods (ex. 50pg hardcopy paperwork forms)• Multiple added processes past municipal level (ex. added payments for signage and separate liquor permit from barangay)

Results and Findings

The Philippine Development Report also stresses the importance of an uncomplicated tax regime in ensuring higher instances of formality within the business sector.

The Philippines’ tax regime is as follows:Paying Taxes

Payments (per year) 47

Time (hours per year) 193

Total tax rate (% of profit) 46.6

5. Promotion of Private Partnerships and Connections

Possible indicators for success:• Availability of networking events• Frequency of events

Results and Findings

The Center for International Trade Expositions and Missions (CITEM), under the DTI, handles the international marketing of the Philippines’ trade sector.

• Mandated to manage and promote trade fairs for networking and marketing• Updated schedules for trade fairs can be found on various public and privately-operated websites

6. Feedback and Evaluation Mechanism

Possible indicators for success:• Availability of feedback and evaluation system• Number of factors considered• Accuracy of data

Results and Findings

No specific method for obtaining feedback from the MSME sector was detailed in RA 9501 or similar documents.

However, the providing feedback is an implicit function of the MSMED Council, which was created by mandate of RA 9501.

ConclusionThe quality of the government’s efforts to assist MSMEs has not been consistent. • The government has been successful in providing access to finance beyond its mandated quota, government contracts and prioritization, and promoting networking and marketing assistance.

• However, it has failed to minimize bureaucratic requirements and simplify its tax regime.

• Finally, management of its training institutions (TESDA most specifically) must be improved to exact greater quality and accountability, and the government must give focus to the specific function of creating a feedback and evaluation system, which would entail closer monitoring of the MSME sector.

Sources• Department of Trade and Industry. 2011. Republic Act No. 9501: Magna Carta for Micro, Small, and Medium

Enterprises [Online]. Available at: http://www.dti.gov.ph/uploads/DownloadableFiles/2010_RA_9501_Magna_Carta_for_MSMEs.pdf [Accessed: February 27, 2014].

• Department of Trade and Industry. Micro, Small and Medium Enterprises – Statistics [Online]. Available at: http://www.dti.gov.ph/dti/index.php?p=321 [Accessed: February 27, 2014].

• MSMED Council. 2010. Micro, Small, and Medium Enterprise Development Plan for 2011 to 2016 [Online]. Available at: http://dti.gov.ph/uploads/DownloadableFiles/2012_DTI_MSMEDPlan_2011-2016.pdf [Accessed: February 27, 2014].

• The World Bank. 2013. Doing Business 2013: Smarter Regulations for Small and Medium-Size Enterprises [Online]. 10th ed. Washington, DC: World Bank Group. Available at: http://www.doingbusiness.org/~/media/GIAWB/Doing%20Business/Documents/Annual-Reports/English/DB13-full-report.pdf [Accessed: February 27, 2014].

• The World Bank. 2013. Philippine Development Report: Creating More and Better Jobs [Online]. Available at: http://www.worldbank.org/content/dam/Worldbank/document/EAP/Philippines/PDRFullReport.pdf [Accessed: February 27, 2014].

• Arceo-Dumlao, T. (ed.). 2010. Go Negosyo! Joey Concepcion’s 100 Inspiring Stories of Small Entrepreneurs: Tagumpay Mula sa Kahirapan. Philippines: 2010.

• Technical Education and Skills Development Authority. 2012. Philippine TVET Statistics, 2005-2011 [Online]. Available at: http://www.cardiff.ac.uk/insrv/resources/guides/inf057.pdf [Accessed: March 10, 2014]

Sources• Philippine Institute for Development Studies. 2013. PIDS 2012 Economic Policy Monitor: Regional

Economic Integration and Inclusive Growth [Online]. Available at: http://dirp4.pids.gov.ph/ris/books/pidsbk13-epm2012.pdf [Accessed: March 10, 2014].

• Philippine Senate Economic Planning Office. 2012. The MSME Sector at a Glance [Online]. Available at: http://www.senate.gov.ph/publications/AG%202012-03%20-%20MSME.pdf [Accessed: March 10, 2014].

• National Economic and Development Authority. Bid Announcements [Online]. Available at: http://www.neda.gov.ph/?page_id=256 [Accessed: March 12, 2014].

• Bureau of Plant Industry. Invitation to Bids [Online]. Available at: http://www.neda.gov.ph/?page_id=256 [Accessed: March 12, 2014].

• Center for International Trade Expositions and Missions. Organization – CITEM [Online]. Available at: http://www.citem.gov.ph/main/organization.htm [Accessed: March 10, 2014].

• Ayyagari, M., Beck, T. and Demirgüç-Kunt, A. 2003. Small and Medium Enterprises across the Globe: A New Database [Online]. Available at: http://elibrary.worldbank.org/doi/pdf/10.1596/1813-9450-3127 [Accessed: March 22, 2014]

• Chanco, B. 2013. Trickle down isn’t good enough [Online]. Available at: http://www.philstar.com/business/2013/02/06/905277/trickle-down-isnt-good-enough [Accessed: March 22, 2014]