Starting small: New support for SMEs could lead to large-scale expansion

The great majority of economic activity in Papua New Guinea takes place outside the formal economic system. Indeed, according to AusAID, the Australian government’s international aid entity, some 85% of PNG’s economy is informal, primarily consisting of semi-subsistence agricultural activities. A substantial percentage of the informal businesses in PNG are generally thought to be small scale, employing anywhere from one to five employees at subsistence-level wages or lower. Almost all of these are only nominally “businesses” at all, as they remain unincorporated and do not participate in formal tax and financial systems. In an effort to bring more people into the formal economy, the government and several international organisations have made an effort in recent years to identify, support and develop PNG-owned and operated small and medium-sized enterprises (SMEs).

COMPARE & CONTRAST: Boosting SME activity in the formal economy has been a government priority since the early 1990s, though progress was minimal until PNG’s economy picked up in the mid-2000s. Since then the segment has expanded slowly but steadily. As the government moves forward with several long-term economic development and diversification projects in the coming years, SMEs are expected to continue to attract attention as major potential contributors. Indeed, based on the prevalence of SMEs in major economies around the world, PNG has quite a lot of room for improvement. According to the European Commission, for example, SMEs account for 99% of all businesses in the EU, the great majority of them with fewer than 10 employees. PNG’s economy, meanwhile, currently benefits very little from SME activity. “There really is no formal SME sector at all in the country right now,” said Carolyn Blacklock, the International Finance Corporation’s (IFC) resident representative in PNG. “Or if there is one, it is very, very small.” Indeed, according to data from the IFC, PNG has one of the lowest SME densities in emerging markets around the world. While around 80,000 small firms are registered with the Investment Promotion Authority, only one-third to one-half of those are active. SMEs face a number of challenges in PNG, including a lack of easily accessible financing, a dearth of basic market information, poor transport and logistics infrastructure, and a lack of access to IT and training.

ATTRACTING INTERNATIONAL ATTENTION: Boosting SME participation in the formal economy is considered to be a prerequisite to bringing about sustained, longterm economic expansion (not to mention job creation). The government’s primary SME support organisation is the Small Business Development Corporation (SBDC), which was launched in 1990 and currently maintains loan facilities with a handful of local financial institutions, including the National Development Bank and Australia and New Zealand Bank (ANZ) PNG. In general, the SBDC is a relatively small-scale operation. Between 2007 and 2011 the corporation invested around PGK3m ($1.4m) in credit facilities for SMEs.

INITIATIVES: In late-2011 the government partnered with IFC and the World Bank’s International Development Association to launch a PGK330m ($157m) SME risk-sharing facility. The initiative aims to provide funding, training and support to existing SMEs, with the goal of encouraging growth in the sector. Private, independent, domestically owned SMEs are eligible to apply to the programme if they are formally registered under PNG’s Companies Act; employ between three and 150 people; and do not generate more than PGK15m ($7.1m) in annual turnover. Qualifying firms are supplied with guaranteed credit facilities from the Bank of South Pacific (BSP). The risk-sharing facility guarantees 50% of loans granted by BSP under the initiative.

Additionally, participating companies are expected to benefit from training on expanding a business and courses on financial education and IT. The facility is especially targeting female entrepreneurs and small business owners. By 2016 the programme is expected to have benefitted 300 small businesses and 150 business owners, as well as 300 female entrepreneurs.