Of the several streams of business manufacturing presents the greatest challenge

By Stabroek News On In Letters to the Editor |

Dear Editor,

 

I refer to the editorial of the December 9 issue of Stabroek News captioned ‘The manufacturing sector’ and must commend its keen observation of the plight facing the manufacturing sector in Guyana today. I wish to make a few observations and remarks of my own, writing from the standpoint of a micro-entrepreneur involved in agro-processing.

First, we should observe that of the several streams of business such as trading, manufacturing, services and production of raw materials, it is perhaps manufacturing that presents the greatest challenges. The main reason for this is that business is driven by market demand and while trading and the production of raw materials can select commodities from established markets, manufacturing and to some extent services, must generally create them whether through imitation or innovation. Of the several areas, it is innovative manufacturing that presents the greatest challenge, for here one must discern a need or demand in relation to available raw resources, create the value-added commodity to suit that need or demand, then commercialize it and remain in production against the vagaries of competition, both local and international.

This raises the question of the small manufacturer’s affordability of technology to improve efficiency of production and the economic feasibility of acquiring that technology given the current scale of operations. Questions of finance, marketing, and training arise. It may be argued that with a sound business plan doors to financing may be opened, provided markets are certain and training in areas of production, fiscal management and quality control are in order.

There is a hiatus, however, that is usually overlooked when assistance to small business development is considered. That gap often relates to the present position of the manufacturer and the prerequisites of lending and donor agencies before any meaningful aid is rendered.

Given that manufacturing in Guyana occurs on a scale ranging from micro to large, the majority of manufacturers operate at the micro to small end of the scale and fall in the category of those whom the editorial observes as “self starters … having begun their operations in a less than convivial production environment with no official outside support.” Some of them would have benefited from a generational progression of family businesses so that they might not have to face all of the challenges or issues associated with starting a business in today’s environment. These include:

In the area of agro-processing, those prerequisites are considered essential before any meaningful assistance can become possible. We are therefore faced with a paradox: put ourselves in order before we can be assisted, but in order to do that we need the assistance we are applying for. This dilemma can be more clearly understood if we consider the case of innovative micro-entrepreneurs whose products have found a market niche but are not equipped to expand to a commercial scale because they fail to meet even the application criteria of lending institutions. These prerequisites are fundamental and can be wide-ranging. They can include:

A perusal of the Small Business Bureau’s (SBB) pre-qualification check list to access assistance from the Guyana REDD Investment Fund (GRIF), for instance, lists 26 prerequisites plus ‘Others’ (listed as #27). Most businesses need the assistance being sought before they can meet those conditions.

Added to this, another irony facing the small manufacturer is the fact that economic sustainability of the enterprise is most likely dependent on access to foreign markets where traceability requires the condition of meeting foreign SPS factory regulations, which in turn require costly investments in infrastructure. The cost of credit required to establish that factory is not available on terms enjoyed by competitors on the international market (both regional and farther afield).

This leads us to consider the kind of credit facilities available in Guyana. Our banks are generally commercial where risk aversion is a fundamental practice, and this is understandable. As commercial bankers explain, they are managing the savings of their clients and must exercise due diligence – hence one reason for the comparatively high cost of credit. This practice, I suspect, is what underlies the 26 plus prerequisites of the SBB’s list, but given the very nature of entrepreneurship one can readily appreciate the need for an orientation towards risk management which, I understand, is the training given to development bankers. Guyana needs a careful re-appraisal of establishing a development bank to support the growth and development of a manufacturing sector – and we need a vibrant manufacturing sector operating on a micro-small-medium (MSME) scale.

The current lending conditions for accessing GRIF illustrate the difficulties faced by small manufacturers. While the Fund is being used to finance a programme for developing small businesses, it is funnelled through commercial lending institutions whose conditionality is reflected in the screening process of applicants through the SBB. Ostensibly, the programme appears helpful. For small business development it guarantees 40% of the credit being sought (with a maximum of G$30M per individual) while the borrower finds 60% fixed collateral required by the lending institution; the cost of credit through the bank is reduced to 6% but the Fund will subsidize 5% so that the client pays 1%; training is also offered to assist the client in successful implementation of their business plan. However, the payback period is restricted to a maximum of 4 years. With the kind of investment needed to build and equip a factory with required capacity, the level of monthly instalments required (which is a fraction of overhead costs) is extremely high for those who need to make a major shift in manufacturing from the micro end of the scale. That short payback period might be more suitable for a trading enterprise with a high mark-up on selected commodities, rather than a manufacturing enterprise whose mark-up must take into account the price structure from ex-factory to final market. These matters were raised at two meetings with the SBB and the IDB which manages the fund but have been so far inconclusive.

Reflecting on these difficulties, therefore, I wish to make the following suggestions as an interim mechanism for growth and development of small agro-processing businesses:

  1. Revise the concept of industrial estates to include model factories equipped for several kinds of agro-processing. These can be administered and managed by trained and experienced technical staff. The processing units can serve several purposes such as:

 

These centres might attract ancillary services such as accounting, packaging and labelling, and cold storage facilities. They might also create stable vertical linkages with producers of raw materials who will be held to high and specific standards required for agro-processing. In this way a culture of commodity chains can be developed also. Of course, the design and administration of these centres will need to consider issues related to intellectual property rights.

  1. Make land available for small manufacturers who demonstrate a strong potential for growth. These lands should be leased on reasonable terms with a moratorium on payments that would allow growth and expansion over at least a two to three-year period. The rationale is similar to tax breaks given to large-scale investors. The land would also help meet the fixed collateral requirement of lending institutions.
  2. Encourage a culture of venture capital investments between reputable lending institutions with excess liquidity that can share in the risk-taking of innovative entrepreneurs. These entrepreneurs should not be seen merely as ‘incubators’ for big businesses wishing to avoid taking entrepreneurial risks.
  3. Educate entrepreneurs on joint venturing to explore synergies and meaningful partnerships.
  4. Introduce a system of tax incentives for small businesses which includes incremental taxation as the business develops.
  5. Establish windows of the Caribbean Development Bank (CDB) in Caricom territories so that entrepreneurs across the region can enjoy the same lending conditions. This kind of initiative should be considered essential under the CSME agreement which allows freedom of production and manufacturing across Caricom territories.
  6. Initiate and encourage alternative energy solutions for manufacturing. The technology is already available in industrialised countries; what is needed here is the implementation using not only solar and wind energy but bio-mass generators. This should definitely be an inclusion in programmes designed to utilise GRIF.

These kinds of initiatives require the very courage you observed as characteristic of micro and small entrepreneurs, but on a higher level, and will definitely require a shared leadership with both our local and regional governments. I have no doubt that many surveys have been carried out but unless the entrepreneurial risk is shared with the small manufacturers, a significant developmental shift in the current growth curve in not likely to happen.

Yours faithfully,

Raymond F Trotz