WHAT ARE SMEs?
It is usually very difficult to give a universal definition for SMEs. This is because various authors and institutions give definitions of SMEs based on different criteria. Some authors define SMEs based on the number of employees while others define based on the value of assets. There are some others who define SMEs using their turnover. The European Union (EU) defines SMEs as enterprises which have a maximum of 250 workers and an annual turnover of not more than fifty million euros. Small enterprises have fewer than 50 staff and less than ten million US dollars and micro enterprises have less than ten (10) employees and one hundred thousand US dollars as turnover (K. Ahmed & Chowdhury, 2009). The UK Department for Trade and Industry (DTI) defines SMEs as enterprises having fewer than 200 employees. On the other hand, the European Foundation for Quality Management gives the definition of SMEs as firms having fewer than 250 employees Goh, (2000). It can be observed that the two definitions by the DTI and EFQM emphasis the number of employees in the firm but not the turnover or the value of assets in the enterprise. The National Council of Industries(NCI) in the Federal Republic of Nigeria also defines SMEs as business entities with total costs with land excluded as not more than two hundred million naira only (Onugu, (2005). The focus of the Nigeria’s NCI definition of SMEs is the cost as opposed to the turnover, value of assets and number of employees involved in the enterprise.
In Ghana the apex body charged with the development of SMEs is the National Board for Small Scale Industries and they define SMEs as an enterprise with turnover greater than US$200,000.00 and not exceeding US$5 million equivalent (Hayford, 2012).
It is worth noting that usually in Ghana the term “SMEs” is loosely used to describe Micro Small and Medium Enterprises (MSME), Micro and Small Enterprises (MSE) and Small and Medium Enterprises (SME).
The SME sector in Ghana has evolved over the years from the pre-colonial era till date. During the colonial era, the focus of the government was to discourage the SME sector particularly industry in order to promote the consumption of foreign imported products (Ana Paula et al, 2014). The trend changed upon Ghana gaining her independence in 1957 and the years leading to the 1970s was characterized by gradual liberalization of trade and opening of the economy to free market forces of demand and supply.
PUBLIC PROCUREMENT CONTEXT
It is estimated that countries spend on public procurement run into USD trillions yearly on a various items from the acquisition of goods, services and works. In some countries, this expenditure accounts for close to 30% of their Gross Domestic Product (GDP) (DCED, 2017). This means that the impact of public procurement is very significant in shaping budgeting and public expenditure management as well as regulating economic activities in every country.
Public Procurement refers to the acquisition of goods, services and works by a government entity serving as the procuring entity (DCED, 2017). Due to the enormous impact of public procurement, countries are beginning to use state spending on procurement to formulate policies geared towards creating new market opportunities for the advancement of small and medium enterprises (SMEs). Despite these efforts aimed at advancing the course of SMEs through public spending, it has emerged that these SMEs still are unable to compete and win government contracts in many countries especially in developing countries. This phenomenon appears to be strange because of two reasons. First because SMEs account for about 92 percent of registered businesses in Ghana (Asare, 2014). And second because these public contracts come in various sizes some of which are obviously within the capabilities of these SMEs (Nkonge, 2013).
FACTORS HINDERING SMES FROM PUBLIC PROCUREMENT
There are many factors accounting for the low involvement of SMEs in public procurement in developing countries especially in Ghana. These factors can be categorized according to the stages of the bidding processes.
This is the first stage of the bidding process. The challenges SMEs face include inadequate access to information about public procurement. Most procurement advertisements are posted on the national dailies and these newspapers cost an average of 2.50 Ghana cedis per newspaper. If an entity has to buy four newspapers a day in search of contract opportunities, it means spending GHC10.00 a day. Cumulatively, it means GHC300.00 a month and over GHC3,600.00 annually. Another challenge at the pre-bidding stage is the stringent pre-qualification criteria most public procuring entities adopt. Conditions such as too much focus on past experiences of the SMEs. Other factors are the quality and ability of the SMEs to clearly understand the information provided (remember that most of these SMEs are managed by illiterates and semi-literates).
The Bidding Stage
Challenges at this stage include too much bureaucracies and documentation requirements requested from the bidders which hinders most SMEs from participating in the processes. Lack of capacity of the SMEs to write good and competitive business/ project proposal, requirement from the procuring entities of high financial guarantees in the form of bid securities and unclear selection criteria as to how these SMEs can satisfactorily meet government needs and requirements.
In most public procuring entities, preference is usually given to large bidders who have very long track records and experience in supplying or executing similar projects. This means that most SMEs are likely to drop out since a lot of the SMEs are not exposed to so many opportunities to enable them build such reputation and track records. Another militating factor at this stage is the too much emphasis placed on price and not on value for money. At the selection stage, bribery and corruption is also a major factor that hinders SMEs in participating in public procurement processes. These small firms do not have the power to dig deep into their coffers to offer fat bribes to public servants as compared to the big multinationals.
At this stage, the pertinent factors that prevent or discourage SMEs from public procurement include unclear criteria for award of contracts, non-compliance with agreed payment schedules which leads to unnecessary delays in payments for work done or items supplied. Unsuitable payment terms is another factor. Lack of feedback from public organizations is also another challenge. Feedback is critical because it provides opportunity for the stakeholders to learn useful lessons in order to make the process better and more responsive. Dispute resolution and complaints addressing are the other factors that act to discourage or prevent SMEs from participating in public procurement in Ghana.
HOW TO IMPROVE SMES INVOLVEMENT
In helping SMEs to take opportunities in the public procurement space, several governments have introduced and implemented has come to be known as preferential procurement policies in their public procurement regimes. In fact, a 2017 World Bank Benchmarking Public Procurement report identified that out of 180 economies surveyed, 47 percent of these countries indicated that they provide SME targeted public procurement initiatives to encourage SMEs participation in public procurement (DCED, 2017). It is worthy of note to point out that in doing public procurement, procuring entities have to make a delicate balance among a wide array of factors. Some of these include the cost effectiveness of the process, how competitive the process is, how transparent the tendering processes are, national procurement laws, local market conditions, particular social issues and environmental considerations. All the above are summarized into three broad categories namely regulatory, commercial and socio-economic factors. The various preferential procurement policies which can promote high incidence of SMEs participation in public procurement are summarized below:
Subcontracting Requirement for SMEs
In cases where the whole contract is deemed to be large and beyond the capacity of the SMEs, it is suggested that main contractors be required to subcontract certain portions of the contract to the SMEs. This will promote involvement of SMEs in the procurement processes. In addition to subcontracting to SMEs, these entities could also be encouraged to form consortiums with larger firms in order partnerships and joint ventures to have access to some of these government contracts.
Government can formulate deliberate policies setting aside certain government contracts exclusively for SMEs. Also, certain portions of large government contracts could also be reserved for SMEs. This will appear to be discriminatory against certain large firms. However, it will be an avenue for capacity development of these SMEs and also serve as a quota system for these SMEs.
Contract Thresholds and Reserved Products
The procurement authorities should reserve certain thresholds of government projects solely for SMEs. At the threshold or below it, those projects will be available for only SMEs to bid and execute. For instance, projects at and below hundred thousand Ghana cedis (GHC100,000.00) could be reserved solely for SMEs. Beyond this amount, it will be available for all other firms interested. Likewise, certain categories of products demanded by government agencies could be made the preserve of SMEs. For instance, procurement for stationery could be reserved only for SMEs to compete among themselves.
Performance Guarantees Flexibility
There should be a reduction of performance guarantee requirements in certain categories of government contracts. Such guarantee requirements from SMEs is one of the main factors hindering SMEs participation in the public procurement processes. If there is flexibility in this requirement, it will serve as a major incentive for their involvement in the bidding process.
Breaking Bulk and Limiting Turnover
There is a strong requirement in most government bidding requirement insisting that potential bidders must have a number of years’ experience in executing similar projects. This condition limits the potential of SMEs to succeed in the bidding process. In oreder to promote SMEs participation in the public procurement process, this condition must be removed to provide a level playing ground for businesses whether large, medium, small or micro enterprises. Again, large projects can also be broken into smaller lots. It will enable SMEs to successfully bid for relatively smaller projects than larger ones.
Training and Technical Support
Training and technical support is especially pertinent during the preparation stage and eligibility of suppliers, during the bidding processes and bid submission. By providing a wide range of services to the SMEs, it will enable these SMEs to better position them to participate in the public procurement processes. Training will build their capacities to properly prepare bid forms, properly execute contracts and other stages of the bidding processes.
Prompt Payments and Penalties in delayed Payments
In a lot of cases, delay in the payment of executed government contracts is a disincentive to SMEs. In situations where SMEs obtain finance from financial institutions at very huge interest rates and at the end of the project the project sponsor delays payment, it serves as a great disincentive. There should be penalties in public procurement regulations requiring project sponsors to pay various penalties for delay in payments to SMEs for projects executed.
Advance payments to SMEs that qualify under an established scheme
As much as possible public procuring entities should endeavor to pay SMEs an advanced mobilization fund to start executing projects these SMEs have won. This scheme should however be very well regulated by modalities in order to ensure that such advanced payments are used in the specific projects for which they are paid in order to prevent diversion of funds into other projects.
Establishment of an SME network Loan Scheme
Such a scheme should be established and made accessible to SMEs which win government procurement bids. This will give some security to the public entities that these SMEs will have a dedicated source of funding to efficiently carry out contracts awarded to them. The interest rate should be relatively lower than the rates charged by commercial banks in Ghana.
Setting Up an SME Excellent Public Supply Scheme
Under such a scheme, a group of public procuring entities will be assessed SMEs based on their innovation, quality of goods, services and works supplied. A “League Table” would then be drawn ranking participating from the best to the last. This scheme will increase SME product visibility among public procuring entities and encourage such entities to engage more SMEs in the procurement processes.
WHY INVOLVE SMEs
Their involvement will strengthen the economy
Will lead improvement in stakeholder’s goodwill
Will regenerate local economies
Lead to more innovation at the local level
Will offer higher customer satisfaction
Encourages more competition leading to price reductions and value for money
It is widely believed that the success of every economy depends on the number and quantum of economic activities that take place in it. The backbone of the most advanced countries is their SMEs. In this light, for Ghana to develop, the state must critically examine the role of SMEs in the economy, the avenues to promote SME developments and incentives to motivate these SMEs to play more commanding roles in spearheading the value creation and wealth creation in the economy. Ghana being a developing country means that the government is still the major spender in the economy. Admittedly, since procurement represents the major component of government expenditure, it means the surest way to develop the SME sector is by the government involving SMEs more in the public procurement processes since it will have great multiplier effect on all sectors of the economy which will significantly translate into the overall development of the country.
About the writer
The writer is an accountant with the National Board for Small Scale Industries and holds a Master of commerce in Procurement and Supply Chain Management, UDS, Bachelor of Commerce in Accounting UCC, HND in Accountancy Kumasi Polytechnic : 0207712343