THE SMALL AND MEDIUM ENIGMA

The symposium on the development of small and medium enterprises, which proved to be a landmark event, reviewed the success stories of entrepreneurs in different sectors, suggested legislations and revised policies to create an environment conducive for the growth of SMEs. But the announcement on the hike in minimum wages has left the private sector bewildered. Visvas Paul D Karra speaks to various industry captains to take stock of the current situation.

Bahla, known for its famous UNESCO-listed heritage fort, was in the days of yore also well known for its pottery, which was in great demand. It’s not a coincidence then that circa 2013 it goes down in the history of modern Oman as the place where the foundation was laid for the development of the micro, small and medium industries, commonly known as the SMEs.

In response to the Royal Directives of His Majesty Sultan Qaboos bin Said, the symposium on the development of small and medium enterprises (SMEs) was organised at Saih Al Shamikhat in the Wilayat of Bahla, Governorate of Al Dakhiliyah. It was a watershed event as the symposium sought to sort out the SME conundrum by bringing all the relevant stakeholders from the public and private sector under one common tent, literally and figuratively.

Issues such as instilling a culture of entrepreneurship in Omani youth, enhancing efforts to link education to the labour market requirements, studying obstacles facing the development of the SME sector and proposing solutions, empowerment of women by encouraging them to set up their own private businesses, developing skills of entrepreneurship and preparing them to become self-reliant were the myriad matters that were discussed threadbare. All the issues mentioned above fell into four broad themes:

• Entrepreneurship culture
• Available SME opportunities and support programmes
• Polices, laws and procedures for the sector
• Financing and investment of private ventures

The importance of this event underscored the growing interest in SMEs in the country as an important means for not just diversifying the economy but also viewing this much neglected industry as the next big economic growth engine for the Sultanate. The end result of these efforts would be new job opportunities, an increase in the spirit of innovation and the application of technology to business plans, which in turn would create products and services benefiting the country. A side benefit of this would be a reduced dependence on imported labour, reduction in the expatriate population and plugging the drain of rials as foreign exchange.

A set of recommendations (see box ‘Recommendations to be implemented’) were issued for immediate implementation in the wake of the conference, evoking a positive response from potential entrepreneurs. An SME support fund known as the Al Rafd Fund (see box ‘Al Rafd Fund’) was also established to provide much-needed finance to new SMEs. A number of companies expressed their interest to help SMEs with a flurry of public announcements, leading to all-round cheer. Bolstering the movement was His Majesty Sultan Qaboos bin Said’s speech affirming that the national economy of any country is built on SMEs, while adding that most industries started humble and then grew onto become major industries in various parts of the world.

Everyone was excited at the turn of events. And despite the clichéd development route being adopted, the story would have continued to play out, had it not been for a sudden twist in the tale. In less than a week following the symposium, the government announced a new regulation stipulating the minimum wages for existing Omani employees to be raised to RO325 while fresh recruits would have their paychecks written for RO350 straightaway, effective from the second half of this year.
Caught unawares

This new directive caught most of the private sector offguard and cautious reactions like ‘we are surprised but it is inevitable if you want to improve the quality of life of Omanis,’ etc began to do the rounds. On the other hand, corporate captains also spoke about the effect of the salary hikes on the cost of products and services, saying that the prices of commodities could go up, inflation would rise, FDI would slow down etc. Extreme scenarios like the economy taking a turn for the worse, also began to be floated. Some observers professed that that such a hike would create new social challenges, rather than solving old ones.

Reflecting on the minister’s statement, HE Abdullah Al This new directive caught most of the private sector offguard and cautious reactions like ‘we are surprised but it is inevitable if you want to improve the quality of life of Omanis,’ etc began to do the rounds. On the other hand, corporate captains also spoke about the effect of the salary hikes on the cost of products and services, saying that the prices of commodities could go up, inflation would rise, FDI would slow down etc. Extreme scenarios like the economy taking a turn for the worse, also began to be floated. Some observers professed that that such a hike would create new social challenges, rather than solving old ones.

Talking about the timing of the decision to hike the minimum wages, Dr Salah bin Hilal al Maawali, director general, SME Department, Ministry of Commerce and Industry, says that many studies were conducted and meetings with relevant stakeholders were held before taking the decision to hike minimum wages. He believes that the grace period (till July 2013) is enough for the enterprises to settle their conditions and acclimatise themselves to the effects of the decision. (See full interview: ‘Benefits for all from raising minimum wages’).

HE Maawali also says that a number of sops are being offered to soften the impact of the salary hike on SMEs. Dedication of 10 per cent of the projects offered by the Tender Board to SMES and making it mandatory for major companies to grant 10 per cent of their contracts to SMEs are just few examples of the support provided to this sector.

 

Too complex a topic

The SME topic is much more complex than it was previously thought of, says Khalid M Al Zubair, managing director, The Zubair Corporation and chairman of the SME Committee of the Oman Chamber of Commerce and Industry – one of the organisations which helped turn the spotlight on SMEs. The challenges for SMEs were summarised as – the lack of finance and stifling government regulations. But actually there are four different pillars that need to be addressed. Apart from the two mentioned above, the other two are as important and one of them is cultural in nature. Oman has become a risk-averse society enfeebling entrepreneurship. The fourth one is building capacity. To bring about a seminal change in attitude and skills would require community involvement and going down to schools and imparting the necessary skills. Doing this, would help in building a strong SME base and equip Omanis to join the private sector.

In addition, there is a need to educate government representatives about SMEs who come about seeking loans. Does the government representative realise that if he/she delays the disbursement of the funds to the SME entrepreneur by one month, the overhead costs for that person will increase and his business will fail and consequently his family and he will suffer?

As far as capacity building is concerned, it was realised that just getting a loan is not enough, as without an SME incubator or mentor, 80 per cent of start-ups were destined to fail. These mentors are people from society who devote their time and effort to helping start-ups, by adopting them.

Overall, the symposium has been a success, says Khalid. One of the objectives of the symposium was to highlight the importance of SMEs as a topic of national importance. Secondly, it also ameliorated concerns about a conflict between SMEs and large companies. “We want the large companies to contribute to the SMEs and not just as part of their CSR. The big companies should focus on their competencies and create an ecosystem for the development of SMEs,” Khalid adds.

 

There is a link

So is there a link between minimum wage hike, SME development and the large corporates? According to Khalid, the link exists between the two when you look at it from a holistic point of view, although the minimum wage hike was not part of the SME symposium.

First of all, there has to be a differentiation between an entrepreneur who is following the rules and regulations and a businessman who is doing things like hidden trading. Says Khalid, “If my business were an SME, I will suffer from the increase in minimum wages. But as the government has committed to give out projects worth millions of rials to SMEs, as a part of its new directives to distribute 10 per cent of projects for SMEs and if these are given to genuine SME entrepreneurs, then paying RO350 salary should not be an issue. The government must identify genuine entrepreneurs by asking – is he an owner whose bread and butter comes from being an SME? Is it a company which employs Omanis? Is he a committed entrepreneur? Having done their due diligence, projects should be handed to committed start-ups. What happens then is that the difference in wage becomes a positive action.”

According to Khalid, the economy needs to grow to create new jobs for Omanis and to give them higher salaries. You need to link all the incentives to law abiding businesses. “If we talk about making regulations easier, we should make it easier for those who are following regulations. That way we can bring about healthy solutions. It keeps the money in the country and creates purchasing power. There also needs to be a labour law that applies to the workers as well, saying that if you are not productive, then the law will be fair. This is an integrated package which will make the raise in salaries feasible,” adds Khalid. Khalid says that we should stress on in-country value. “How many projects does the large contractor give to SMEs? Why should we import when we can source them locally?” he asks. So the government is obliged to make this plan collectively work better for the private sector, otherwise we will not be a competitive market and economy and whatever jobs we have today will be gradually lost because at the end of the day, we don’t decide the salaries but it is the market.

Explaining this, Khalid says, “We don’t decide the production levels in our company but it depends upon market demands. So, it’s the market that gives us work through which we generate income and pay our employees. Tomorrow, if prices go up and I cannot sell my product, first I will trim down and then finally close down.”

 

Salary hike is fine but…

There are others who feel that a mere hike in salaries is not good enough to weed out deep-rooted problems. Moreover, it should not be misused as a bargaining tool by society or the authorities.

Hussain Salman, Al Lawati, vice chairman and managing director, Oman Cables Industry says that first of all the terminology for a minimum salary should be established cautiously as Oman is a free market economy and random changes will have far reaching consequences on the entire investment environment. “I don’t think there is anybody in Oman who doesn’t want a salary rise for his own people,” states Hussain emphatically. But we are a part of the global economic map, wherein every country is trying to market its potential to future investors. So there are four aspects to attracting investments: The first is market potential or advantage, second is skilled manpower, third political stability and fourth is the cost of operations. If we look at the second aspect namely manpower, do we have skilled manpower? Can we create a base of skilled manpower by paying someone RO325 or 525 or even 1,025 rials. Skills come from the eagerness of a society and individual to learn, and from thethe quality of schools and training institutes. It is the combination of a series of factors, which create a generation of people who understand the seriousness of work and know that nothing comes for free in life. One has to work hard to aspire to a better quality of life.”

Talking about the availability of skilled manpower at a seminar on – ‘Uplifting Local Workforce Skills,’ – organised by the Public Establishment for Industrial Estates (PEIE), Mohammed al Kharusi, director, corporate operations, MB Holding, says, “we do face a problem of skilled manpower. When we get some people and train them, somebody poaches on him immediately. The industry is suffering because of the lack of supply. It’s a big problem, especially in the oil and gas industry. You pay for the training but the other entity is not paying, however, they will grab a trained person. If the company is really large then it is fine, but what about SMEs? It is very difficult for them.”

Spiralling effect

About the repercussions of the hike in minimum wages, HE Tawfeeq Abdulhussain Juma al Lawati, representative of Muttrah at Majlis A’Shura, says that the other thing which he has heard is that the new recruits will start from RO350. If the senior people who have been working in an organisation, get a hike to RO325, but a new appointee gets RO350, then the existing ones will resign and get a new job or demand parity. According to him, there are different segments in the economy while some companies are more mature and can easily absorb the hike in minimum wages, SMEs are the ones which are going to be hit badly and they might not be able to afford this kind of salary and may eventually run out of business. There is a standing Shura Council formula to hike the minimum wages, which would minimise the impact on the private sector (see box ‘The Majlis A’Shura formula for private sector’).

“With the cost of manpower going up, it is only natural that there will be a cascading effect on the price of goods, but the consumer protection authority will not allow this. I agree that there should not be a price increase across the board, but there are segments which are technology-intensive and others which are labour-intensive like the services sector. We need to review and see what is the impact or the authority should do a product-by-product research and see where the prices can be increased,” adds HE Tawfeeq.

Hassan Mohammed Juma, managing director, Mohammed Juma Sultan Company says that as a company, they suffer only on the construction side due to the recent hike. “I can recruit Omanis but they are not willing to work, so the government has to waive off certain things taking into consideration the cultural mores of the country. We are paying above the minimum wages in the rest of the group. But in construction we are hit because expatriates are coming in for lesser wages, so the cost parameters are not right. Moreover, it’s all about inflation. If I am going to get a better rate for my contract, it is fine. Construction should not be put in the same bracket as other industries because of the unwillingness of Omanis to take up jobs in this sector. I am willing to take, even if they do 40 per cent of the job, but we struggle to get enough people. In construction, a RO325-350 salary is not feasible at all.”

 

Live with it

The impact of the hike in minimum wages would be very high unless the salary hike is really subsidised by the government, says Bhaskar Dutta, CEO, Al Jazeera Steel. Continuing further, he says that without any vocational training, a school leaving pupil from class 10-12 with no job knowledge, getting this high a salary is not appropriate. When asked if the new wage structure is a reality with which companies will have to live with, Dutta says, if the SMEs are not subsidised, this wage burden in the competitive market condition will push a lot of SMEs to close down in the near future.

Hilal bin Hamad al Ahsani, CEO, PEIE, counters by saying that in any industrial development, there are positive and negative impacts. What do we have to do? In America, Europe and Far East markets, wages are always fluctuating; but here at least the minimum wage is fixed. We need to apply efficiency and also cost reductions.

One has to analyse each of the elements contributing to production cost in the industry and you can see that not many of these industries will be affected. Only the really small industries will be impacted in the short run, but in the long run, they can revisit and shift their cost analysis and strategy. Yes, there will be some sort of decline, but this will be limited to the short term.

 

Real issues untouched
Most of the industrialists are of the opinion that the authorities are penalising everyone for the mistakes of errant companies by generalising the rules across the economic sectors. Moreover, by increasing minimum wages to a higher level compared to other countries, the country is encouraging the rise of an uneducated class in society. Says Hussain, “We have to understand that various people from different backgrounds, and in some segments education may not be a priority. A minimum salary assurance may deter certain parents from imparting education to their children for 18 years to get paid RO600, compared to a choice of earning RO350 from day one.”

“We are not touching the major critical issues. Why are Omanis reluctant to work for Omani companies? Can we place our finger on what is a motivating salary for an Omani? If yes, can the private sector companies pay this and survive? What is the output of the Omani individual as compared to an expatriate? All these issues need to be discussed and documented and a decision should be taken based on these conclusions,” Tawfeeq points out. “There is a need for a coordinated approach as most government agencies like the OCCI, PEIE, Ministry of Manpower and the Ministry of Commerce and Industry are all working in silos presently,” adds Tawfeeq.

Continuing further, he observes that there is no taskforce to oversee the consequential effects of government decisions, as the overriding objective seems to be to hire Omanis and to pay them more, without looking at the ramifications. As a result there will be companies which will close down, because of their inability to pay more, which in turn will lead to more Omanis looking for jobs. Everyone knows the government risks courting a social problem if there are thousands of unemployed and dissatisfied youth, but hiking minimum salaries to unaffordable levels is not a panacea for socio-economic problems. Amidst all this, it seems that it is better to agree that the glass is both half full and half empty and it is better to ensure that the glass gets topped up without breaking it!


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