Small Business Enterprises
by Paul J. Dejillas
The presence of small business enterprises (SBEs) in the market can be a strong guarantee to ensure healthy competition among firms. Their entry is generally expected to generate more income, more employment, greater stability, higher degree of social security, and greater equality in the distribution of income among the people. Indeed, the more business enterprises operate in the market, the more the economy becomes alive, vibrant, and dynamic. But this condition implies that the entry, existence, and growth of SBEs are protected and encouraged. Where market conditions are restrictive, SBEs are not expected to thrive for long, much less flourish. When this happens, market competition will be in the long run adversely affected.
I have two objectives in writing this paper: (1) to examine the country's policies, laws, and institutions affecting the operations of small business enterprises; and (2) to recommend measures to strengthen the influence of small business enterprises in the market economy.
1. Viewing Small Business Enterprises and the Market Economy
Since after World War II, the proliferation and growth of SBEs in developing economies has been observed to be rapid (Robinson, 1984). Many of these small enterprises started informally, i.e., unregistered with the government, but later joined the formal sector when the government extended liberal incentives to these enterprises as a recognition to their vital role in the national economy.
On the whole, the presence and activities of SBEs have been proven to contribute favorably to fair and perfect competition in the market. Several studies also show that small business enterprises contribute positively to economic growth (especially in the areas of employment, income, and gross national product), to economic stability (especially in the areas of prices and interest rates), as well as to poverty alleviation and income redistribution.
This is expected since, as Nelson observes, the goals and objectives of small business enterprises are precisely focused on problems like unemployment, inade-quate income, unequal distribution of wealth and income, and social insecurity (1986). This observation has been verified empirically to be true. Hooley and Ahmad (1989), for example, found out that in the developing economies, SBEs accounted for roughly between one-fifth and a quarter of the industrial output with a
much larger share of total employment. They also noted that these enterprises also directly address the problems of poverty alleviation and unequal distribution of income and wealth in these countries. In the Philippines, Canlas (1991:151) also observed that employment generation by small business enterprises outpaced that of
large enterprises. In fact, Zamora found out that “small businesses contribute substantially to the generation of employment opportunities” (1991:160). Another analyst also discovered that small and medium enterprises--enterprises with employment of less than 200 workers--comprised close to 99 percent of the total manufacturing establishments in 1983 (Tecson, 1991:13).
Barriers to the Growth of SBEs
But small business enterprises may also face formidable barriers that can hinder their full integration into the mainstream economy. These barriers can be either external or internal to SBEs themselves. Internal barriers may include inadequate entrepreneurial and management skills, lack of sufficient capital, poor research back-up to be able to speedily gather and exploit market information, as well as lack of effective and efficient systems for the production and marketing of their products or services.
On the other hand, external barriers may include those financial lending institutions that are biased in extending credit facilities towards large enterprises; high interest rates imposed on credits and loans; stiff and heavy legal requirements; long and tedious, at times complicated and confusing, processes in fulfilling these legal requirements; the presence of laws that avowedly seek to protect, extend incentives as well as privileges to small enterprises, but instead are biased in granting these to big enterprises and corporations; heavy taxation and regulatory fees; and, finally, the absence of infrastructural supports such as roads and transportation, electricity and energy, water and sewerage, market information and training facilities.
The extent to which these barriers exist will determine the degree to which SBEs are able to protect and enhance competition in the market. The more SBEs find it difficult to enter, much less remain profitably in the market, the less competitive the market becomes. Conversely, the reverse is also true: the more free it is for SBEs to enter, remain, or leave the market, the more competitive the market also becomes.
The Need to Establish Promotional Policies
The presence of restrictive barriers justifies the need to institute promotional policies and programs to help ensure the operation of free and perfect competition in the market, or minimize the monopolistic activities of cartels and a few dominant
and large enterprises.
Policies promoting the existence and growth of small business enterprises need to be grounded on a solid foundation, democratically and freely formulated or adopted by the people. This entails that such policies be enshrined and implemented
through the institutional framework, namely, the Constitution of the land, laws and legislations, executive policies, government, and administration (H. Albeck, 1982:388). They are not to be left to the discretion of the political leader or party, otherwise such policies, aside from becoming vulnerable to the whims and interests of the political leader or party, also change with the change in political leadership. Promotional policies need to remain and be implemented until their objectives are attained, regardless of the change in political leaders, parties or government administration.
2. Small Business Enterprises: the Philippine Experience
The Philippine Policy on Small Business Enterprises
The country’s policy towards SBEs still remains hazy, ambiguous, ambivalent, and at times confusing. The Philippine Constitution says almost nothing about these enterprises. Nonetheless, one could safely infer that their existence and development are encouraged and promoted, if one takes into account the following constitutional provisions:
1. The State “recognizes the indispensable role of the private sector, encourages private enterprise, and provides incentives to needed investments” (Art. II, Sec. 20).
2. The State expresses that “private enterprises, including corporations, cooperatives, and similar collective organizations, shall be encouraged to broaden the base of their ownership,” (Art. XII, Sec. 1) and shall have the right “to establish, and operate economic enterprises, subject to the duty of the State to promote distributive justice and to intervene when the common good so demands” (Art. XII, Sec. 6).
3 The Philippine Congress is mandated to “create an agency to promote the viability and growth of cooperatives as instruments of social justice and econo-economic development” (Art. XII, Sec. 15).
The above provisions form the basis for the explicit recognition given by the National Economic and Development Authority (NEDA), the countrys’ economic planning body, to the role of small business enterprises in the country. NEDA’s Medium-Term Philippine Development Plan (MTPDP) stresses the need to support these enterprises with special programs and projects. As it expresses this:
... development should proceed primarily from the economic initiatives of communities, households, firms, cooperatives, nongovernment organizations, as expressed in well-functioning markets. Decentralization, deregulation, reliance on the private sector, the encouragement of cooperatives, and the removal of bureaucratic hindrances and penalties to small enterprises are naturally included under empowerment. People empowerment implies a reliance on markets, entrepreneurship, innovation, and effort.
Definition of Small Business Enterprises
There is no standard or uniform definition for the term “small business enterprises.” Nelson noted that there are fifty different definitions of small business enterprises in 75 countries (1986:2). In the Philippines, the emerging definitions can be lifted from the country’s laws of the land. These laws define SBEs in terms of their asset or employment size or even both. For example, Republic Act (R.A.) 6810, more popularly known as Kalakalan 20, understands small enterprises to mean any business entity, association or cooperative with less than 20 employees and whose assets, at the time of registration, are below P500,000 (Sec. 2).
The term “cooperative” is defined under R.A. 6939 “as associations organized for the economic and social betterment of their members, operating business enterprises based on mutual aid ...” (Sec. 1). They are also, under the law, recognized as “instruments of equity, social justice and economic development.” The law does not define cooperative in terms of asset or employment size, but considering their resources many of them could fall below the P500,000 asset size limitation.
A more recent law, R.A. 6977, defines small enterprises in terms of asset size only and expanded their value to include those enterprises with a total assets of five million pesos and below (Sec. 3). It categorizes small enterprises into micro or those enterprises whose total assets is less than P50,000, cottage-sized or those businesses whose total assets is between P50,001 and P500,000, and small enterprises or those whose total assets is between P500,000 and P5,000,000. Those with total assets between P500,001 and P20,000,000 are referred to as medium enterprises. In all this, the value of total assets is computed to include those arising from loans, but excludes the land on which the particular business entity’s office, plant, and equipment are situated.
In the meantime, SBEs in the Philippines can also mean those activities performed in the “cottage industry.” R.A. 3470 defines cottage industry to mean an economic activity in a small scale and carried on mainly in the homes for profit and mainly done with the help of the members of the family (Sec. 11). It specifically includes fiber crafts, woodcraft, hat weaving, mat weaving, metal craft, ceramics, shell craft, bamboo and rattan crafts, small agricultural hand tools, toy craft, embroidery, needle craft, loom weaving, machine parts manufacture, poultry, piggery, home cigar making, food preservation, small mining operations, other related crafts, and such other industries done in the home with the aid of electrical gadgets and/or by hand manipulation.
The capitalization of cottage enterprises is limited by law not to exceed fifteen thousand pesos” (R.A. 5326), later amended by P.D. 817 to not more than P100,000 at the time of registration. The term “capitalization” is used to mean “the total current assets and fixed assets, excluding the value of the land and building if the same are the residence of the owner, but including machinery and equipment, land and building leased, rented and/or used at least six months of each year” (R.A. 5326, Sec. 11, as amended).
The definition of “cottage industry” was later expanded to include “economic activities carried on by students of public and private schools, within school premises, as a cooperative effort, under supervision of a teacher or other person approved by and acting under the supervision and control of school authorities, either as part of or in addition to ordinary vocational training, provided all profits shall accrue to the students working therein.”
SBEs may also be defined in terms of number of employees. Sometimes, this definition is used for two reasons: international comparison and as an alternative to asset size since its valuation is vulnerable to price fluctuations. Using employment size as the basis, Tecson and Canlas (1991) categorize firms into: small and medium, or those with between 10 to 99 employees; large, or those with beween 100 to 199 workers; and very large, or those with 200 or more workers.
Today, there are several business entities engaged in various aspects of small enterprise development. They include the self-employed operating in the formal sector, the itinerant or mobile vendors who are in the so-called informal or marginal sectors, family businesses like sari-sari (variety) stores; cooperatives, sectoral or people's organizations (POs), and even nongovernmental organizations (NGOs), if these organizations, which is normally the case, are "engaged in various aspects of small enterprise development."
Under the above definitions, SBEs are required to register with the government in order to avail of the various protections, assistance, and incentives extended by the latter to small enterprises. Registered enterprises can do so as a cooperative, micro-enterprise, cottage industry or as a single proprietorship, partnership or corporation engaged in specific activities in the services, agricultural, or industrial sector. But the Philippine market is also crowded with small enterprises that do not bother to register at all with the government. These unregistered enterprises operate and compete with their counterparts in the formal sector. They are seen in the streets as itinerant or mobile vendors or even housed in offices, but operating just the same outside the ambit, but not illegally, of the law. Our understanding of the term “small business enterprises” here will include those economic undertakings of family enterprises, cottage industries, micro-sized firms and independent workers and entrepreneurs in the informal sector of the economy, whether these enterprises are in the agriculture, services, or industry sectors.
Historical Review of Laws and Legislations Affecting SBEs
The absence of a specific constitutional provision on small business enterprises probably explains the government’s ambivalent, and at times inconsistent attitude towards the presence of these enterprises in the market. In general, the Philippine government has been exerting a lot of efforts to promote the growth of small enterprises in the country. But these efforts have not been consistently pursued, since the government continually shifts its attention to other programs and projects that it feels more important. Government priorities continually change, and the change usually involves relegating the concern towards small enterprises to the side. If at all, this attitude tends to strongly indicate the government’s lack of political will to encourage the development of these enterprises. This attitude is reflected very clearly in the laws that had been passed over the years.
The first law that tried to encourage the existence and growth of small business enterprises is R.A. 3470, approved on 16 June 1962. The law encouraged the growth of cottage industry as well as the organization and establishment of producers and marketing cooperatives (Sec. 14). An initial amount of P50,000,000.00 was allocated by the Development Bank of the Philippines (DBP) for loans to cottage enterprises (Sec. 10). To avail of this benefit and other assistance, any person or business enterprise may simply register with the National Cottage Industries Development Authority (NACIDA).
Starting from the second half of the 1960’s, landmark laws that affected the existence and growth of SBEs in the country began to appear. Many of these laws were enacted to encourage investments in general but, as it turned out, were greatly biased in favor of large enterprises. The first law that somehow encouraged investments in the Philippine market was R.A. 5186, or the Investment Incentives Act (IIA), approved on 16 September 1967. Its policy was to promote investments in agricuture, mining, and manufacturing industries that would help enhance opportunities for employment, raise the people’s standard of living, and provide for an equitable distribution of wealth (Sec. 2). While it encouraged both Filipino and foreign investments, its bias towards foreign investments was quite evident. The law created the Board of Investments (BOI) which extends a lot of incentives and privileges to enterprises duly registered with it but was highly restrictive, since it excludes practically all micro-enterprises, cottage-sized firms, cooperatives and credit unions. According to the law, the term registered enterprises does not include “consumers cooperatives and credit unions, and other business organizations whose principal purpose or principal source of income is to receive deposits, lend or borrow money, buy and sell ... (and) business organizations whose exclusive or principal purpose is to buy goods and merchandise and resell the same in substan- tially the same form in which bought” (Sec. 3-b).
Almost all the basic rights and guarantees as well as incentives extended to enterprises and investors are applicable to foreigners. These are in the areas of repatriation of investment, remittance of earnings, foreign loans and contracts, freedom from expropriation, non-requisition of investments (Sec. 4). Several incentives extended to investors include protection of patents and other proprietary rights, capital gains tax exemption (Sec. 5). For Filipino nationals, incentives include tax allowance, capital gains tax exemption, tax exemption on sale and stock dividends (Sec. 6). Several other incentives were extended to registered enterprises (Sec. 7) and to pioneer enterprises that have the potential to inject fresh and huge amount of capital into the market (Sec. 8). For loan assistance, the Government Insurance System Services (GSIS) and the Social Security System (SSS) were given power to extend to their respective members five-year loans (Sec. 12). The only incentive that would seem applicable to SBEs relates to tax exemption on imported capital equipment (Sec. 7-d). But this incentive was also subject to strict conditions.
To avail of the incentives, enterprises are required to register with the BOI. But registration requirements and availment procedures are too tedious and complex for small entrepreneurs to follow and comply. For example, these enterprises must, among others, satisfy that (see Section 19):
1. They are registered enterprises, i.e., a corporation (a) incorporated, organized and existing under Philippine laws; (b) of which at least 60 percent of the capital stock outstanding are held bu Filipinos; (c) engaged in a preferred area of investment; and (d) duly registered with the BOI;
2. They are capable of operating on a sound and efficient basis and of contributing to the national development of the preferred or pioneer area in particular and of the national economy in general;
3. They have installed an accounting system adequate to identify the investments, revenues, costs, and profits or losses of each preferred project.
The above requirements are hardly applicable at all to small enterprises operating below the P500,000 total capitalization limit. Moreover, following the above requirements and procedures is extremely difficult since many SBEs do not at all keep records of their transactions. Their only recourse is to hire outside experts to do these requirements for them. But this, of course, also involves a substantial amount of cost on the part of the already financially-strapped SBEs.
On the whole, while IIA intended to encourage investments in the Philippine market, the law reflected its bias towards foreign and large enterprises and did very little, or even nothing at all, to really promote the existence and growth of small business enterprises in the country.
Then, there is R.A. 6135, or the “Export Incentives Act of 1970,” approved on 31 August 1970 which encouraged exports in order to “attain a rising level of production and employment, increase foreign exchange earnings, hasten the economic development of the nation, and assure that the benefits of development accrue to the Filipino people” (Sec. 2). The law defines the terms “registered export producer,” “registered export trader,” “registered service exporter,” and “export products,” so broadly that small enterprises, as we understand the term here, could very well be covered by the many incentives and privileges extended by this law. Those registered under R.A. 5186 were also governed by this law.
Incentives extended are appropriate to large investors. These include, among other things, tax credit, reduced income tax, tax exemption on imported capital equipment, tax credit on domestic capital equipment, exemption from export tax (see also Secs. 7-8). Incentives granted to registered export traders are in the areas of export tax exemption, tax credit, liberal deductions for the first five years from registration, and several other additional incentives, including those extended to registered service exporters and export enterprises in foreign trade zones (Secs. 8-12).
SBEs could apply to avail of these incentives. But again enterprises have to comply with several conditions and requirements (see Sec. 6, and the Revised Rules and Regulations to Implement the Intent and Provisions of R.A. 6135 as Amended). The BOI requires several supporting documents to substantiate its application form. Producing these documents requires knowledge and skills which are not readily available to SBEs, while seeking the services of outside consultants and experts would entail added overhead cost. Several studies have already been done on the inability of SBEs to avail of the incentives and privileges extended by R.A. 5186 and R.A. 6135 (see Zamora, 1991 and Tecson, 1991).
Thus, like all former laws on investments, R.A. 6135 did very little to promote the growth of small business enterprises in the country. In fact, these incentives also served as disincentives for small enterprises to register their business with the government.
During the Martial Law regime, the government shifted its attention to small enterprises in the agriculture sector. On 29 May 1975, P.D. 717 was approved providing an agrarian reform credit and financing system for agrarian reform beneficiaries through banking institutions. The law required all banking institutions, government or private, to set aside at least 25 percent of their loanable funds for agricultural credit (Sec. 3). As stipulated, 10 percent of the total loanable funds shall be earmarked for agrarian reform credit to tillers, tenant-farmers, settlers, agricultural lessees, amortizing owners, owner-cultivators, farmers cooperatives and compact farms. But the total allowable funds available for loans to small farmers is in fact much lesser, since the law also allows banks to divert the 10 percent agrarian reform share and buy government securities, or government commercial papers, instead (Sec. 4).
This was reinforced on 5 June 1977 with the passage of P.D. 1159, or the Agricultural Investment Incentives Act, granting to registered agricultural enterprises substantially the same benefits extended by R.A. 5186 and R.A. 6135.
Then, on 16 January 1981, three investment laws, viz., R.A. 5186, R.A. 6135, and P.D. 1159, together with R.A 5455 (or Foreign Business Regulation Act), were integrated under P.D. 1789, otherwise known as the “Omnibus Investments Code.” For proper implementation, the rules and regulations implementing P.D. 1789 was approved on 1 April 1981 stipulating, among other things, varying, not mentioning complicated, requirements for registration depending on whether the applicant is: (1) an enterprise engaged in the production of products primarily geared for domestic market; (2) export producer; (3) export trader; or (4) service exporter (see Rule II, Secs. 1-3; Rule III, Secs. 1-5). Executive Order (E.O.) 676 was also signed on 10 April 1981 adopting the 1981 Investments Priorities Plan (IPP), which defined the preferred areas of economic activity that are entitled to investment incentives under P.D. 1789.
On 28 April 1983, Batas Pambansa (B.P.) 391, or the Investment Incentive Policy Act of 1983, was approved. The law grants substantially the same incentives to investors and enterprises registered with the BOI. But the strong bias of the government towards large and foreign enterprises is still quite evident. For example, it continues to extend fiscal incentives to registered enterprises for a period of not more than 10 years from registration. It continues to provide incentives to domestic producer like tax and duty exemptions on imported capital, tax credit on domestic capital equipment, tax credit on net value earned, net operating loss carry-over as deduction from taxable income, tax credit for withholding tax on interest, other special incentives for export, anti-dumping protection, protection from government competition, protection of patents and other proprietary rights, and post-operative tariff protection (Sec. 9). Incentives were likewise extended to registered enterprises and investors for energy-saving projects, industry rationalization program (Sec. 10), while other incentives were liberally provided for export producers (Secs. 11-12).
The Aquino administration continued to reflect the government’s ambivalent and inconsistent attitude towards SBEs. On 17 July 1987, B.P. 391 was repealed with the passage of E.O. 226, or the “Omnibus Investments Code” of 1987, approved 17 July 1987. The law reechoed the investment policy of the State to encourage competition and dismantle monopolies by promoting small and medium scale industries (Art. 2). But the law substantially extends the same basic rights and guarantees as well as incentives provided for in R.A. 5186. It also provides for the same requirements and procedures for registration and for availing the incentives guaranteed by the law. Thus, it suffers from the same inherent defects hurled against R.A. 5186, i.e., it is strongly biased towards large enterprises. According to one analyst, the incentives extended by the law tend to be more beneficial to large firms, and the same incentives even serve as disincentives to the growth of small business enterprises (Guevara, 1991:129). The reasons given are as follows:
1. The entitlement to fiscal incentives is based on an annual investment priorities plan, which is highly selective;
2. The documentation requirements for registration with the BOI are quite difficult to comply with on account of the costs and technical ramifications involved;
3. The BOI requirements for the availment of fiscal incentives are quite stringent for SMEs whose system of records may not be as complete and systematic as that of large enterprises; and
4. Some fiscal incentives are relatively responsive to the requirements of large-scale production. One example is the case of deductions for expenses on infrastructure and public facilities (ibid.).
Perhaps it is because of the above that a law was passed addressing the objective needs of small enterprises. This was R.A. 6810, also called the Magna Carta for Countryside and Barangay Business Enterprises (CBBE). Approved on 14 December 1989, the law extends to all CBBEs, i.e., enterprises with total capitalization of not more than P500,000.00, the following exemptions or privileges (Sec. 3):
1. All taxes, national or local, license and building permit fees and other business taxes, except real property and capital gains taxes, import duties and other taxes on imported articles;
2. Any and all income, receipts and proceeds derived from the business operations of the CBBE are excluded from the computation of gross income for purposes of computing the individual income tax of the owner(s); and
3. Any and all government rules and regulations in respect of assets, income, and other activities indispensably and directly utilized in, proceeding from or connected with the busienss of the enterprise.
The above privileges and exemptions apply for a period of up to five years from the registration date of the enterprise. But CBBEs are required to pay to the municipal treasurer where they are registered, starting on the second year of operations a fee ranging from P1,000 to P5,000 per year depending on the size of its net assets before financing (Sec. 3). There are only two paperwork requirements: the application form signed by the owner or manager and his/her picture. The law stipulates that an application for registration must be acted upon by the local government concerned within 24 hours of receipt of the complete registration requirements.
R.A. 6810 is already laudable in the sense that it seeks to directly address the needs of small enterprises. But it also suffers from serious defects. For example, it was observed that small enterprises find it not worthwhile and productive to register with the government in order to avail of these incentives, since, to them, these same incentives can only be enjoyed for a period of five years. In addition, the law has been poorly implemented.
To further encourage the growth of small enterprises, the Aquino administration also revived the government’s interest to promote cooperatives in the country by passing on 10 March 1990, R.A. 6939. The law created the Cooperatives Development Authority (CDA) to reinforce the constitutional mandate (see Const., Art. XII, Sec. 15) to promote the viability and growth of cooperatives as instruments of equity, social justice and economic development (Sec. 1).
Prior to the formation of CDA, cooperatives registered their organizations to the Department of Agriculture, the Bureau of Agricultural Cooperatives Development, the Department of Transportation and Communications, the Sugar Regulatory Administration, the National Electrification Administration, and other pertinent government agency. With the passage of the law, several programs and assistance given to cooperatives were transferred to the CDA. For example:
1. The Cooperative Development Loan Fund created under Presidential Decree 175, which used to be administered by the Department of Agriculture;
2. Fund for Management Training and Assistance Program granted to the DA by P.D. 175;
3. Cooperative Marketing Project as created under loan agreements which were then managed by the DA.
An added attraction of the law is its major concern to encourage the development of cooperative banks as part of the Philippine banking system. With this new mandate, the organization of cooperatives became more aggressive.
Not satisfied with the above laws, the Aquino administration passed on 24 January 1991, R.A 6977, also known as the Magna Carta for Small Enterprises. Considered to be the most comprehensive law on small enterprises so far, the law recognizes that small business enterprises have "the potential for more employment generation and economic growth" thus, declares its policy "to promote, support, strengthen and encourage the growth and development" of these enterprises "by assuring, through the establishment of adequate support structure, and the creation and promotion of an environment conducive to the viability of these enterprises, establishment of mechanisms, the access and transfer of appropriate technology needed by small and medium enterprises" (Sec. 2).
The law defines small enterprises to mean those with total assets of five million pesos and below, which are further subdivided into micro, cottage, and small enterprises. It talks also of medium-sized enterprises, or those whose total assets is between P5,000,001 and P20,000,000.
The law boasts of a financing program that exclusively addresses the needs of small, cottage, and micro-sized enterprises. This program is contained in the Small Business Guarantee and Finance Corporation (SBGFC), which the law created, to provide "various alternative modes of financing for small enterprises, including .. direct and indirect project lending, venture capital, financial leasing, secondary mortgage and/or rediscounting of loan papers to small businesses, secondary/ regional stock markets" (Sec. 11). SBGFC guarantees loans obtained by qualified small enterprises, private voluntary organizations, and cooperatives.”
SBGFC is attached to the DTI and its membership in the Board of Directors include three individuals coming from the private sector. It has an initial capitalization of one billion pesos contributed in the form of equity investment in common stocks by the Philippine National Bank (PNB), Development Bank of the Philippines (DBP), Land Bank of the Philippines (LBP), SSS, and the GSIS.
In addition, R. A. 6977 requires all lending institutions, whether public or private, to "set aside a portion of their total loan portfolio" and "make it available for small enterprises credit.” SBEs can, therefore, simply approach any funding institutions in the country and apply for loans. According to the law, the portion to be set aside for small enterprises shall be at least (Sec. 13):
- 5 percent by the end of the first year of the effectivity of R.A. 6977, which is 1991;
- 10 percent by the end of the second year through the end of the fifth year;
- 5 percent by the end of the sixth year; and
- 0 percent by the end of the seventh year.
But, the law also stipulates that financing from the PNB, DBP, the LBP and other financial institutions shall be made available mainly to medium enterprises.
To qualify for government assistance and incentives, small enterprises are required to comply the following conditions and requirements (Sec. 4):
1. They must be duly registered with the appropriate agencies as presently provided by law; Provided, That, in the case of micro enterprises as defined herein, registration with the office of the municipal or city treasurer shall be deemed sufficient compliance with this requirement;
2. The must be one hundred percent (100%) owned and capitalized by Filipino citizens if single proprietorship or partnership. If the enterprise is a juridical entity at least 60% of its capital or outstanding stocks must be owned by Filipino citizens;
3. They must be primarily engaged in manufacturing, processing, and for production excluding farm level agricultural/crop production; and
4. They must not be a branch, subsidiary or division of a large scale enterprise nor may its policies be determined by a large scale enterprise or by persons who are not owners or employees of the enterprise.
Another significant innovation of the law is the creation of the Small and Medium Enterprise Development (SMED) Council which is responsible for facilitating and coordinating national efforts “to promote the viability and growth of small and medium enterprises, including assisting relevant agencies in the tapping of local and foreign funds for small and medium enterprise development” (Sec. 6).
Thus, we can safey infer that with the enactment of R.A. 6977, small, micro, and cottage-sized enterprises have been given special attention by the creation of a financing program (SGBFC) that would exclusively address the needs of these enterprises and by establishing a body that would monitor the growth of SBEs and coordinate the activities of the government in this regard.
The intention of the law is indeed laudable. But latest reports also indicate that a large amount of money intended for small and medium enterprises, and handled by the SBGFC, have been invested in treasury bills, thus, decreasing the total amount of funds that could have been fanned out to assist SBEs (Phil. Star, 7 November 1995:19).
All of the above guarantees and incentives are by far comprehensive enough, but they are still observed by many sectors as limiting and restrictive. As one economist notes, SMEs need more other assistance, e.g., technical assistance in the areas of accounting, budgeting, inventory control, management, technology adaptation and development, and marketing (Tecson, 1991:34-35). A more important observation is that, in general, these regulations apply to all establishment sizes, and do not distinguish between large firms and small ones. Although there is no explicit disincentive to smaller firms, the policy environment created by such legal provisions is detrimental to the growth of small enterprises (Zamora, 1991:163).
There had been serious efforts in the past to promote the development of small business enterprises by providing a legal framework for the development of these enterprises in the country. To date, there are at least 175 laws and legislations (excluding labor laws) affecting SBEs. During the 9th Congress, there were at least 23 bills passed affecting small business enterprises appeared in both the Lower and Upper Houses. Their number alone tends to reinforce the many observations and findings that existing laws remain inadequate to directly address the needs and conditions of SBEs.
For the present 10th Congress, there is House Bill (H.B.) No. 9, which tries to inject aggressive funding to small entrepreneurs in the rural areas. The bill seeks to redirect a big portion (75 percent) of the Agri-Agra Fund for use by small entrepreneurs in the rural and agricultural sector, most especially the small farmers, fishermen and agricultural enterprises, whose capitalization does not exceed P500,000.00. Three big government financial institutions are designated to act as collecting agencies and lead lending bodies. Once enacted into law, it is projected that around P100 billion in loanable funds will be made available to small enterpreneurs.
Then, there is H.B. 1217 which grants additional incentives to countryside business enterprises especially in the areas of marketing, technology, and research. The bill also intends to exempt small rural enterprises from government regulations concerning assets, income, and other activities as well as exempt these enterprises from building permit fees, specific, value-added and income taxes including other fees being imposed by both the national local government units.
There is also H.B. No. 2737 which calls for the creation of another separate corporation in addition to the present SBGFC. To be called Guarantee Fund for Small and Medium Enterprises (GFSME), the law intends to provide additional credit assistance to small and medium enterprises by guaranteeing banks and other financial institutions the payment of loans extended to small and medium enterprises.
Other Credit Facilities for SBEs
There are several sources of funding available to business enteprises. These include existing funding institutions, the government, foreign donors, and foreign private financial institutions, as well as the informal financial markets. One study reveals that private banks were the principal source of external finance: 51 percent of total SME borrowing (Tecson, 1991:18). Informal sources provided about a third of borrowed funds, followed by non-bank institutions and lastly by government banks. Those who borrow from informal sources do so because of the "strict collateral requirements of banks, usually in the form of real estate, and high interest rates."
The funds provided by foreign donors and foreign private financial institutions are coursed through financial intermediaries, the Central Bank, or non-financial conduits such as NGOs with lending programs. But these government-owned banks mainly cater to large-sized firms. For example, DBP concentrates on financing long-gestating and special projects such as steel, cement, shipping, and mining, all of which require huge financial outlays. Meanwhile, LBP loan assistance concentrates on wholesale lending to financial and non-financial intermediaries operating in the rural areas (Lamberte, 1991:64).
In the case of Official Development Assistance (ODA), three modes of channelling its assistance to interest groups can be identified. One mode is where donor governments provide funds directly to local interest groups through their NGO facilities or windows (e.g., Philippine Australian Community Assistance
Program (PACAP) and the Philippine Development Assistance Program (PDAP). Another mode is where donors coursed their funds through the Philippine Government, which in turn avails these funds to NGOs. Finally, a third mode is where foreign NGOs provide funds directly to local NGOs (ANGOC, 1991:62).
Today, there are at least 16 direct lending programs and three credit guarantee programs for small and medium enterprises or SMEs (Lamberte, 1991:67-69). In the direct lending programs, special credit programs are created for SMEs intending to generate livelihood opportunities. Funds under these programs come from the national government, government-owned corporations like the SSS, multilateral donors, and foreign governments. These funds can be made available to NGOs or POs, since these organizations now serve as “credit conduits of financing facilities,” which in turn serve as moneylenders to their clients. While these programs course their funds through participating financial institutions and NGOs or POs, other special credit programs extend lending assistance directly to small business enterprises.
The three credit guarantee programs are: (1) the Guarantee Fund for Small and Medium Enterprises (GFSME); (2) the Philippine Export and Foreign Loan Guarantee Corporation (Philguarantee); and (3) the USAID-supported credit guarantee program. These programs are beyond the reach of small enterprises because of the conditions and requirement stipulated to avail of their assistance. GSFME operates through accredited commercial banks, development banks, rural banks, and thrift banks, and focuses its supports on projects engaged in food production, is oriented toward the enterprises with assets between P82,500 to P10 million after financing, and requires collateral to cover all of its loans (Lamberte, 1991:71). Philguarantee has two major facilities: a general guarantee facility for more than P5 million; and an export credit program for SME with guarantee of P5 million or less. It only provides a guarantee of up to 70 percent of the credit facility for export-oriented enterprises. Finally, the USAID-supported credit program allows four major banks to provide SBEs with export or agriculture loan guarantee of up to $2.4 million per bank. Eligible loans are provided with a 50 percent quarantee cover.
But access to credit by SBEs were observed to be extremely difficult, if not impossible, since, according to Zamora, SBEs are "continually confronted with transactions that involve legal considerations” (1991:160). Also, “the complexity and volume of these control devices make it impossible for an entrepreneur to know all of his rights, responsibilities and opportunities" (ibid.)
Government Institutions and Agencies Catering to SBEs
In order to ensure the realization of the government's policy as well as safeguard the implementation of the various laws affecting small business enterprises, several government agencies have been created. For the incentives extended by the Omnibus Investment Code of 1987, the BOI was created as the primary implementing and administering body. As envisioned by R.A. 5186, its major functions and responsibilities are, among others, to (Sec. 16):
1. Draw up annually an investment priorities plan;
2. Process and approve ... applications for registration under this Act and issue the proper certificate of registration;
3. Require registered enterprises to list their shares of stock in any accredited stock exchange;
4. Periodically check and verify ... the proportion of the participation of Philippine Nationals in a registered enterprise; and
5. Periodically chack and verify the compliance by registered enterprises with the provisions of this Act and with the terms and conditions of registration.
The administration of non-BOI incentives are vested on some government and related agencies. For example, the NACIDA is responsible for cottage enterprises, the Philippine Tourism Authority for tourism-oriented enterprises, the Export Processing Zone Authority (now Philippine Economic Zone Authority - PEZA) for export-oriented firms.
NACIDA was created under the then Department of Commerce and Industry with the following duties (Sec. 2):
1. To organize, revive, encourage, and promote the establishment of cottage industries;
2. To survey and evaluate existing skills, machinery, and equipment, and raw materials available in industrial quantities;
3. To promote the effective merchandising of cottage products in domestic and foreign market;
4. To grant small loans ... or arrange for necessary loans with public or private credit institutions and banks ..; and
5. To extend assistance to cottage industries producers in their problems relating to financing, production and marketing.
In the case of cooperatives, there is the CDA created by R.A. 6939 and vested with several powers, functions, and responsibilities to promote the growth of cooperatives in the country. The major ones are:
1. To develop and conduct management and training programs that will provide cooperative members with the entrepreneurial capabilities, managerial expertise, and technical skills;
2. To register all cooperatives and their federation and unions;
3. To assist cooperatives in arranging for financial and other forms of assistance; and
4. To administer all grants and donations coursed through the Government for cooperative development.
For manpower needs, the Department of Labor and Employment (DOLE) maintains a Human Resource Development Service, which provides the public with programs and projects relative to manpower training, education, and development. It has also the Bureau of Local Employment (BLE) which specializes in formulating employment programs designed to benefit disadvantaged groups and communities (E.O. 292, Title VII, Secs. 11, 17-7). The Bureau of Rural Workers (BRW) under the DOLE also serves as a parallel organization of the CDA where rural workers may register as an organization and thereafter function as a cooperative.
Other government agencies are also tasked with promoting the growth of small business enterprises. In the agricultural sector, for example, there is the Department of Agriculture which extends a lot of assistance and services to farmers (including settlers, tenants, fishermen, and rural workers) that include, among others, production, marketing, investment information, establishment of agricultural cooperatives, research and training, production, financial and management services (.E.O. 116, approved 30 January 1987).
In the industrial and service sectors, there is the Department of Trade and Industry (DTI) whose main power and function is “to accelerate the formation and growth of small and medium-scale enterprises” (E.O. 292, Title X, Sec. 3-5). Another government agency, the Department of Science and Technology (DOST), is tasked with promoting and assisting those involved in agriculture, industry, transport, and the general public in terms of technological services as well as main-taining an information system and data-bank on science and technology for use by the private sectors and the general public (E.O. 292, Title XVIII, Sec. 3-6/7).
There is also the Micro, Small and Medium Enterprise Council (MICSMEC) which was created in November 1987 to coordinate the development and promotion small and medium enterprises. MICSMEC is an "umbrella organization of 12 different agencies involved in SME promotion.” Each agency follows an independent track in promoting SMEs.
R.A. 6977 also established the (SMED) Council attached to the DTI to promote the development of SBEs (Sec. 6). Its membership includes three representatives from the private sector, and serves as the policy and planning body as well as the coordinating and monitoring center. The law provides for the establishment of a Council on Small Enterprises, which seeks to coordinate efforts of government to promote small enterprises as well as promulgate implementing guidelines, programs, and operating principles, in the light of government policies.
One of SMED's primary powers and functions is to direct and assist relevant government agencies and institutions at the national, regional and provincial levels towards the provision of the following (Sec. 8-i):
1. Business training courses, technical training for technicians and skilled laborers and continuing skills upgrading programs;
2. Labor-management guidance, assistance and improvement of the working conditions of employees in small and medium sized firms;
3. Guidance and assistance regarding product quality/product development and product diversification;
4. Guidance and assistance for the adoption of improved techniques and commercialization of appropriate technologies for the product development and for increased utilization of indigenous raw materials;
5. Assistance in marketing and distribution of products through local supply-demand information, industry and provincial profiles, overseas marketing promotion, domestic market linkaging and the establishment of common services such as common and/or cooperative bonded warehouse, grains, storage, agro-processing and drying facilities, ice plants, refrigerated storage, cooperative trucking facilities, etc.
6. Assistance and guidance to enable greater access to credit through a simplified multi-agency financing program; to encourage development of other modes of financing such as leasing and venture capital activities; to provide effective credit guarantee associations, including setting up of credit records and information systems and to decentralized loan approval mechanisms;
7. Concessional interest rates, lower financing fees, which may include incentives for prompt credit payments, arrangements tying amortizations to business cash flows, effective substitution of government guarantee cover on loans for the borrower's lack of collateral;
8. Bankruptcy preventive measures through the setting up of a mutual relief system for distressed enterprises, and the establishment of measures such as insurance against extraordinary disasters;
9. Information dissemination campaigns and entrepreneurship education activities;
10. Easier access to and availment of tax credits and other tax and duty incentives as provided by the Omnibus Investment Code and other laws;
11. Support for product experimentation and research and development activities as well as access to information on commercialized technologies; and
12. More infrastructure facilities and public utilities to support operations of small and medium enterprises.
The law expressly identifies at least 13 government agencies that affect the operations and growth of small enterprises (Sec. 5-c). These are the DTI, Finance (DoF), Budget and Management (DBM), Agriculture (DA), Agrarian Reform (DAR), Environment and Natural Resources (DENR), Labor and Employment (DOLE), Transportation and Communication (DOTC), Public Works and Highways (DPWH), DOST, Interior and Local Government (DILG) as well as the NEDA and the Bangko Sentral ng Pilipinas (BSP).
Notably, there are several government agencies that address the needs of SBEs, but the activities of these agencies are also not properly coordinated, since these agencies function independently of each other. The government itself acknowledges this. A study conducted by Tita Evasco of the National Tax Research Center (NTRC) reported that the major problem encountered in the grant of incentives lies in the area of administration. As she explains this (1986:5):
Due to the multiplicity of incentive measures and the number of administering agencies, monitoring of the whole system (BOI and non-BOI programmes) became rather difficult and posed a setback in the evaluation or appraisal of the effectiveness of incentives granted. Further, the poor compliance by registered enterprises with reporting requirements contributed to monitoring constraints in respect of their effectiveness in attracting investments in desired areas of activity.
SBEs are often aware of the many and complicated bureaucratic procedures they have to undergo to get started in business (Zamora, 1991). Such procedures discourage the potential entrants and would rather opt not to register and operate outside the organized or formal economy. Thus, it has been noted that there has been a virtual explosion of small business in the underground or informal economy.
The government is especially found to be ineffective, inefficient, plagued with bureaucracy and red tape, and too centralized in the exercise of power. Worse, there are too many agencies for small enterprises that applicants end up confused when they try to register their business organization. Researcher cited other equally serious problems. These include (1991:166; see also Viray et al., 1991:7-8):
(a) Abuse of discretion and power among low-level government officials is prevalent. A related problem is government bureaucracy or red tape.
(b) Excessive centralization of administration and control in Metro Manila.... There is often discrimination against enterprises in more distant regions, particularly small firms.
(c) Too many government agencies are charged with regulating business operations. The relative autonomy enjoyed by these institutions makes it possible for conflicting programs and policies to be formulated.
(d) Some legal provisions have been formulated without considering their possible consequences or the validity of assumjptions they are based on.
(e) Local governments are often perceived by small firms as inefficient institutions prone to red tape and bribery. Entrepreneurs would rather deal with national government agencies such as the DTI than local government." (Zamora, p. 166).
In addition, SBEs are subject to several regulatory fees which to small enterprises can be burdensome. For example, Guevara noted various fees and charges imposed by local governments like: (a) the mayor's permit fee; (b) fire inspection fee (c) health inspection fee; (d) sanitary inspection fee; (e) electrical inspection fee; and (f) garbage charges" (M. Guevara, 1991:128). On top of this, SBEs are subject to a tax rate ranging from zero to 35 percent of net income, if they are organized as single proprietorships and to 35 percent on their net income, if they are organized as corporations. Real property tax and local busines tax are likewise imposed by local governments on small firms (ibid., pp. 120-127).
This explains why there is a low registration rate of small firms. Guevara noted that of the 730 firms registered with the BOI in 1984, only about five percent were small firms, or about 0.05 percent of the 72,194 SMEs in 1986 (1991:128). Majority of the SBEs do not bother to register at all with the government preferring, in spite of the risks and hazards involved, to operate in the informal sector. Why SBEs flourish in the informal sector, despite the absence of incentives and privileges, is rather intriguing. It is high time for the government to look into their dynamics and conditions as well as to recognize or “legitimize” their presence so that can integrate properly into the formal sector economy.
The SBEs in the Informal Sector
Economists offer several theories why SBEs prefer to operate in the informal sector. These theories revolve around the following:
1. The inability to meet the entry requirements of the formal sector as a result of the dualist nature of the economy which discriminates against certain members of the population (Dolan, 1980:363);
2. The inability of the unemployed to find employment, much less generate income in the formal labor market as a result of the labor surplus condition created either because of the increase of the labor force or because of very limited job and income opportunities (Richardson, 1984; see also Harris and Todaro, 1970);
3. The attraction perceived by the individual that the informal sector offers highly attractive job-generating and income-enhancing activities with minimal skills involved (Reynolds, 1969);
4. The need to survive;
5. The tendency of entrepreneurs to evade government obligations--taxes, regulatory fees--and hide their income (Carion, 1990:30);
6. The desire of the low-income groups in the formal sector to look for additional sources of income elsewhere to meet their
growing needs; and
7. The inability to access to credit and capital in the formal sector.
Tita Branzuela, in her masteral thesis, identified obstacles, which she categorized into endogenous and exogenous, that discourage entrepreneurs from entering the formal market (1993:63-69). Endogenous factors include lack of education, lack of capital, poor management skills, limited technology, and lack of credit assistance, while exogenous factors include inadequate access to raw materials and markets, undefined or unclear government policies towards small enterprises, and weak linkages between the formal and informal sector. These obstructing factors are known to all today, yet they continue to remain.
In the Philippines, small businesses in the informal sector are highly vulnerable to hazards and risks. They situate themselves mostly in prohibited areas and in busy commercial centers, where pedestrian and vehicular movements are heaviest, thus, they become easily victims to apprehension by law enforcement agencies. This is compounded by the fact that they possess no permit or license to operate and engage their trade and commerce.
In the past, the attitude of the Philippine government towards these informal businesses ranged from tolerance to indifference and to total opposition dependingon the programs of local authorities. There were times that some local officials attempted to totally eliminate informal sector activities in their respective localities either by designating specific areas where these activities could be legitimately done, or by conducting massive drives against these activities. Today, the attitude seems to be one of indifference and tolerance.
Summary of Findings, Conclusions and Recommendations
This study indicates that in spite of all the promotional policies, funding services, and legal incentives extended by the government to business enterprises, the overall condition in the Philippine market is not at all conducive to the development of small enterprises. The following picture describes the environment within which SBEs in the country operate:
1. Requirements for registration and incentives availment are stiff and complicated;
2. There are too many government agencies exercising varied, at times overlapping, functions;
3. Existing laws are still greatly biased towards large, capital-intensive, foreign enterprises
4. Existing credit programs are too complicated to follow and area biased towards large enterprises;
5. Absence of a definite policy towards small enterprises in the informal sector;
6. Lack or inaccessibility of basic market information;
7. Limited access to credit due to high interest rates and since these credit assistance are often tied up to some collaterial requirements, asset size, or track record achievements.
8. Presence of taxes and regulatory fees imposed by both national and local governments on small enterprises
In view of the above, the following policy recommendations could be of greater help in making the existing environment conducive to the operation and growth of small enterprises in the country:
1. To create a one-stop processing center for both BOI and non-BOI incentive programs that will directly and speedily respond to the most basic needs of small business enterprises, for example, registration, availment of incentives and privileges, access to credit, market information, manpower training, research, assistance in market feasibility studies, technology transfer,
production and marketing assistance, etc. The creation of a one-stop shop will
reduce such transactions costs for SMEs.
2. To streamline and simplify registration and incentives availment procedures to minimize too many bureaucracies and red tapes.
3. To decentralize or devolve the functions of this one-shop processing center by establishing centers at the regional, provincial, district, city, and municipal levels.
4. To coordinate or simplify existing special credit programs;
5. To rationalize the level of interest rates for credit to make it more affordable to small business enterprises. One way is by instituting a two-step banking system, where credit is made directly available to small enterprises or target beneficiaries through one and only one intermediary financial institution. The proposal to establish a Central Bank for the Poor is strongly supported. Another way is to institute a collaterial-free credit assistance.
6. To legitimize the presence of small businesses in the informal sector by: (1) designating specific areas where they can operate and transact business; (2) issuing licenses to these businesses at a minimal fee right there in their respective places of operation; (3) exempting these businesses from income taxes, except for the daily or annual fees which they have to pay to continually operate their business; and (4) extending training and credit assistance on terms and conditions they can easily afford.
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