Document of

The Wo:!d Basnk

FOR OMCIAL USE ONLY W tMu Lg U

Report No. 1543

EMPLOYMENT CREATION AND SMALL SCALE

ENTERPRISE DEVELOPMENT

March 22, 1977

Industrial Development & Finance Department

This document has a restricted distribution and may be used by recipients only in the performance| of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.

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FOR OFFICIAL USE ONLY

EMPLOYMENT CREATION AND SMALL SCALE

ENTERPRISE DEVELOPMENT

TABLE OF CONTENTS

Page

SUMMARY . . . . . . . . . . . . . . . .(i)

I. INTRODUCTION . . . . . . . . . . . . . .1

II. EFFICIENT RESOURCE MOBILIZATION FORCREATING EMPLOYMENT . . . . . . . . . . . 3

A. Manufacturing Sector . . . . . . . . . 3

B. Non-Manufacturing Sectors . . . . . . . 5

III. SMALL SCALE ENTERPRISE DEVELOPMENT:ADVANTAGES AND PROBLEMS . . . . . . . 6

A. Efficiency of SSE in Capital andLabor Utilization . . .. . . . . . . 7

B. Other SSE Attributes . . . . . . . . . . 8

C. Problems of SSE Development . . . . . . . 8

D. Inter-Sectoral Linkages . . . . . . . . 11

TV, TNSTTTTJTTONAT. SUPPORT FOR APPROPRIATETECHNOLOGY AND SSE . . . . . . . . . . . 12

A. Governmental Policy and Preferences . . . . 12

B. Instituticnal Lending Policies . . . . . . 14

(i) Broadening Sector Coverage . . . . . 14(ii) Const-riletion and Holising . . . . . 16

(iii) Working Capital . . . . . . . . . 17(ifv) Gollateral Requiirements . ... ,18

C.- Pntentinl Tnstitultionnl Ghannels . . . 18

(i) rnmrentina1 DFGs 1.9

(ii) Other Intermediaries . . . . . . . 20(iii) Informal Sector Channels .3

This document has a restricted distribution and may be used by recipients only in the performanceof ineir om ciai duties. Its contents may noi otherwise be disclosed without Worfd Bank autnonzauion.

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Page

D. 1- Savng acret-on and Moilizto ..... 2

V. ~ 1CVL, COOPIATIO ND DEIVR OF L. FINCIAL

IT ( rnflThTTXJM A Tn(V1 AlTTh r-n TtTfl7TX rvI7 T'IYT A1~TA 1f A~

TECHNICAL ASSISTANCE TO SSE .. . . . . . . ..26

A. Needs of Modern Enterprises . . . . . . . . . . 26

(i) Organizational Alternatives . . . . . . . . 23(ii) Meeting Non-Financial Costs . . . . . . . . 28

(iii) Financial Charges . . . . . . . . . . . 31

B. Needs of Artisans and Informal Activities. . . . . . 32

(i) Technical Assistance . . . . . . . . . . 32(ii) Finance . . . . . . . .. 3 . . . . . . . 3

(iii) Alternative to the Jfiddleman System . . . . . 36(iv) Meeting the Costs . . . . . . . . . . . 37

VI. ACTION BY iHL WORLD BAUiK. . . . . . . . . . . . . .. 39

A. General Orientation . . . . . . . . . . . . 39

B. Tentative Lending Operations. . . . . . . . 42

C. Lending Policies . . . . .. . . . . . . 46

(i) Local Currency Financing . . . . . . . . 46(ii) Other Lending Policies . . . . . . . . . 46

(iii) New Intermediaries . . . . . . . . . . . 46

D. Staffing Implications . . . . . . . . . . . 46

ANNEXES

1. The Potential Contribution of Small Industries to Economic Development

2. Employment Characteristics of Recent DFC Sub-Projects

3. Internationally-Oriented Technical Assistance Agencies

4. Experimental SSE Projects Under Consideration

5. Selected Bank-Assisted Small/Medium Enterprise Projects

SUMMARY

1. In most developing countries only a fraction of the annual addi-tions to the labor force can be employed productively in agriculture, andthe meager availability of capital severely limits the number of new non-farmjobs that can be created so long as investments costs per job continue atlevels typically associated with modern industry. An effective developmentpolicy should therefore seek to increase the demand for labor as an inputin production processes, relative to capital, to the extent compatible withoverall economic efficiency.

2. A number of general studies, supplemented by specific case studies,suggests that the efficient subsitution of labor for capital is possible overa broad spectrum of manufacturing activities. In many LDCs, unfortunately,the tendency has been to prefer capital-intensive procedures as a result ofthe prestige and promotion of advanced-country technologies, ignorance ofalternatives. high-income-consumer preferences for imnort-equivalent goodsdifficulties in dealing with large numbers of inexperienced workers, andgovernment nolicies that tend to favor ranital use. These same inf luencesaffect non-manufacturing activities as well.

3. Small-scale enterprises (SSE), comprising (a) small but relativelymodern manufacturing industry, (h) organized noa-manufacturina actiiftiessuch as construction, transportation, and trading, and (c) traditional or"informal" act-ivities, iQ agnerally laor-intensive compared to largor

organizations. Small manufacturing firms clearly generate more direct andnrnhobably generateg monre inAreoot j1obs per unit of invocsted capitanl on ther- - - - J 0r1- -- z--- j - - - _ - - ~-~ -- - - - - - -kaverage, and service activities usually exhibit even lower capital costs.Such generalities cannot be pushed too far, since reliable data for makingrigorous comparisons at the enterprise level and for identical products areverxy sc'arce. Small firms t-end to-n produce goods and services that are phys-

ically and/or qualitatively different from those produced by larger firms.The observation that SSE is generally labor-intensive is nonetheless wellgrounded in fact, and in many activities where the optimal size of produc-tion uni-it or. sales outlet- is smal the most efficiert form of business

organization is the small firm.

4. SSE provides productive outlets for the talents and energies ofeterprisin g, i-ndependent people, many of whom Ao not fulfill t-haei- potentialin large organizations. Small firms often flourish by serving limited orspecialized markets that are not attractive to large companies. They providea seedbed for entrepreneurial talent and a testing-place for new industries,therebly supp'lying Udynamism an' contributing to competition wlithn Ile economy.i..U1 any op9L LuU'iOI±U EU L L. .LU UL .LI U L LU L. LLU.L WIL. LLILI L-A L L'Il

They enhance community stability, have less adverse impact on the physical~iIV L. UILIUI~iL Lilil UULdL LI. ~ L ULkIUiLZ IJ JLULLI.L CLIV ±LLrZ, 9JJLUWIJLUenviLro.-,men;t thar. do 'large f'actoriLes, st'mlt perona -- ins ----- omote - ---

agro-industrial linkages and improve rural welfare, and generally raise thelevel OI popular participation in economic activitly. In many countrie sllfirms furnish parts and sub-assemblies to large firms at considerably lowerunit costs than wou'a prevail if the 'atter were to a'sor' Ltle uuncLtUn. 11

things considered, there is definitely a role for SSE in most economic sys-tems, just as there is for medium- and iarge-scale business organizations.

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5. Small enternrises have weaknesses; of course, some of which can beovercome by the intense personal commitment of their owner-managers but othersof whirh are hard to cnrrprt without n,itRidp hpln Snpcializpd management is

rare in SSE, and one person is usually responsible for production, administra-tion, finanrnc Tmarkptina, and nimprnoiu nt-hpr fiinctjinnq whirh wuiild nnrmallv

be distributed over several persons in a large firm. Apart from inherentweaknesses, moreover, small firms face a number of artifirinl disadvantages,relative to larger firms, in most countries. The better managed firms findmarkert nicrhes and generate impresiv ac mouints of i nvcestment reourllrc forthemselves, but often lack access to institutional credit and governmentfacilities. The numerous artisan and informal activities depend on middlemenand moneylenders for supply and marketing services as well as for credit;these services --are very ,oly and often restr,ctlve. Tnfrfrastructure facil-

ities are often deficient, and public programs for the provision of technicalandu marke t4ing asslstance rarely reach the small f_i_.

6. Tt follows fromr the precedi4ng discussion that 4n additi4on loU. L L -L -LL W .L £ U LO I Li~L 6 ii~L L 'L L L L .. wi a.u .LL J'Jk L

"tgetting the prices right," by removing or reducing pervasive factor-pricedistortions whicLi caus e U usi nes in gLLenerl t Lo fav VorLJ- L .apit LaLDLt V sv

products and processes, special efforts are in order to help small firmsovercome their weanesses and exploiLt their natural advantages. Su efrts

include, inter alia,

(a) directing institutional procurement to SSE, or at leastmakilng it easier to compete th1erefore;

(b) encouraging sub-contracting uy large firms to sma'lld irLLm1s;

(c) developing industrial estates, especially those whichstress linkages among large and small firms, and providingjoint services and technical assistance to homogeneousSSEs;

(d) broadening the lending coverage of conventional Develop-ment Finance Companies (DFCs) to include construction,transportation, trade, repair facilities, personal ser-vices, and other activities;

(e) providing working capital, which often is needed as muchor more than fixed-asset financing;

(f) devising alternative means of loan security that areacceptable to lenders and feasible for borrowers; and

(g) developing simplified lending criteria and procedures thatpermit rational allocation of funds, and loan supervision,without undue red tape and delays.

7. The ability of most DFCs to influence client firms' choice of tech-nology is limited, but they may usefully attempt to

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(a) identify, and assist clients to exploit, opportunities forsubcontracting;

(b) give explicit weight to labor intensity in subprojectappraisals, and discourage unnecessary capital intensity:

(c) facilitate access to knowledge of alternative technologies;and

(d) finance the adaptation of technology to local conditions.

8. Despite increasing interest and investigation in many countries,solid i ndr uin-to-date infnrmatinn on technology alternatives is not alwaysreadily accessible. The Bank should actively explore, with other interestedagenipcis, nc me nsof improvring the exchan and appliration of "appropriate"technological information that is becoming available. National agencies fortechnology informatiorn and development also deserve support.

9. Art From usse other enti which may be used to assi CCF

include:

(a) commercial banks, which normally have wide contacts andfrairly s4ml loa 1 roceAures b-ut which- also ter,d to b-every cautious and conventional in outlook;

(b) investment companies, which can provide essential seedcapiLtaLl;,

(c) u,ass-oriLentedu intermediaries such as workers' bank^s,credit unions, etc., savings and loan institutions, etc.;

(d) cooperatives, which are hard to organize and maintainbut wnich offer great potential as channels for credits,guarantees, collections, delivery of technical assistance,joint procurement and marketing, etc.;

(e) middlemen and moneylenders, pending the evolution of ef-fective institutional alternatives; and

(f) institutions involved in integrated programs of urban orrural development, incorporating SSE credit ana tecnnicalassistance.

10. The savings potential of SSE deserves special emphasis, and shouldbe encouraged in all programs affecting this sector. Attractive deposit in-terest rates and other incentives to save should be featured in popular creditprograms.

ii. Delivery of finance to SSE needs to be coordinated with the provi-sion of technical assistance, and in view of the diversity of SSE needs, thedesign of delivery systems should vary according to circumstances. Artisans

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and informal sector people are especially hard to service, unless there is aconcentration of vprv similar actiuitie-s Tn many situatinns thp need is todevise institutional delivery systems which simulate the positive aspects ofthe m.iddlem.an/moneylender system, while avoiding more exploitative features.

12. It generally costs more per unit of assistance delivered and creditextended to SSE than is the case with larger businesses. The credit risk

ma ncoAingl1- have to be underwritten, at least for a time, by partial gov-ernment guarantees. The cost of such guarantees, and of general technicalassistane., ought t )o be Adis-ingu4shed from the cost of mor,ey, anA eithercounted as promotional expense to be paid by government or passed on to theSS- U benefiCi.ari.£es . The interest rat£e to SSEE clients shLould -o-mll not be

less than that charged to larger clients, and should be significantly positiverea __ ,__Termu. In _e _l t.e reatv lac ol so_s-cto _ ,_C_4Alout su.c A in reoj J Lt:L * . l1 V LtW UL L C.LL £L I. LU v LLL O U IID L L UUUL

matters, SSE clients should be permitted to pay a fee and let governmentcarry L OL eign-exchLnge risks.

;3. Bank/I L.L L,-ID' couutue-as "or DFG projects uuriLng FY19772 -7 totaLLJedabout $2200 million; only about $100 million of this amount was explicitlyfor SSE, almost all since 1973, but othLer DFC and some industrial estateprojects also assisted small firms to an amount estimated at $80 millionmore. For Lhe future, it is recoimmended that substantially greater emphasibbe given to SSE, and that appropriate technology choices be encouraged forevery scale of operation.

14. The Bank's country economic and industrial sector work shouldstress the importance of correcting policies which tend to encourage unduecapital intensity in investment and to inhibit SSE development. Regionsshould explicitly convey to DFC managers and their governments the Bank'sconcern for empinyment/appropriate technology/SSE development, solicitconstructive suggestions, and emphasize the importance of a favorable policyenvironment.

15. Tentative lending projections for FYi977-81 are suggested whichwould

(a) boost the dollar value of SSE lending (defined as lendingto firms classified as "small" in their respective country,subject to a maximum fixed asset limitation of $250,000in 1976 prices) from an estimated $115 million in 1977 to$330 million in 1981, an increase from 15 to 30 percent oftotal DFC commitments;

(b) initiate at least ten experimental projects in the informalsector, for at least $50 million, involving new types ofintermediaries or approaches and an average cost per jobbelow $1,000.

(c) initiate at least eight industrial estate projects withprovision for SSE, lending at least $60 million; and

(d) seek to direct at least a third of total DFC lending intosuthnrcnipct for whirh thp avorag rcapital -ct would be

within the country-specific guidelines agreed for theUrban Pouvrty Prnorn

16. Assistance to SSE may require some adjustments in Bank len.dngpolicies, including:

(a) greater flexibility in financing local currency costs;

(b) more liberal financing of working capital;

(c) drastically simplified criteria and procedures for sub-proJect appraisal; ar.d

kUJ seek- LU UdirlctL da 'Leas d LItlrd oL toLta. LDFC 'ending into sub-

projects for which the average capital cost would be withinthe country-specific guidelines agreed for the Urban PovertyProgram.

New types of intermediaries (some already being explored) will be used; andappropriate criteria for monitoring tnese programs are Deing aevisea.

17. Greater emphasis on SSE lending will entail administrative costsfor the Bank substantially higher per project (and still more per milliondollars lent) than those encountered with conventional DFC operations.

18. Although increased Bank assistance to SSE is expected to lead tosignificant benefits in terms of broadening employment and income opportun-ities among the urban poor, the magnitude of the problem is such that ourdirect financial impact will be quite modest. The Bank's ability to givetimely and penetrating policy advice may well be of greater importance.The conclusion of this paper, therefore, is that the Bank can and shouldproceed to give support to SSE in the developing member countries. The basicrationale behind this conclusion is that SSE plays a major role in providingemployment and income to the urban poor, and that past neglect and policybias need to be corrected in order to give small enterprises greater oppor-tunity vis-a-vis large firms. The paper provides some evidence that thissupport for SSE, involving the provision of credit and technical assistance,need not entail unacceptable costs in terms of overall factor efficiencyprovided that reasonable care is taken in the selection of activities.Although this evidence cannot be described as conclusive, it is adequateto warrant moving ahead with an active "learning-by-doing" SSE program.

T T DrlnnTTTr'1TInXr.L. .L I'.LaVUUU ILVlI

1.01 Most developing countries are characterized by a rapidly growingpopulation and labor *Lorce. while much of this labor force will continueto be absorbed in traditional agricultural pursuits, it is clear that anincreasing amount of labor will have to be employed in non-farm occupations--roughly two out of every three job seekers over the next twenty-five years.Some of these jobs may be found in villages and small townis, closely linkedto developments in agriculture. A growing number, however, will have to befound in the larger towns and cities.

1.02 Absorption of this inevitable labor force growth into productiveemployment is one of the principal challenges of development in the remain-ing decades of this century. Most new entrants into the iabor force wiii bepower and unskilled, coming from rural areas and city slums. Their numberand lack of skills mean that in all but a few countries the process ofabsorption will take place under conditions in which real urban wage ratesfor the great majority are unlikely to show substantial increases until thepressures of population growth and migration on the supply of labor subside.

1.03 The prospect of stable real wage rates does not necessarily implystagnant real incomes; the transfer of labor from agricultural activitiesto higher-productivity non-farm activities, together with opportunitiesfor increased participation of the population in the labor force, willresult in some increases in average income per head. The lot of the poorin both rural urban areas who have only unskilled labor to offer, however,can only improve substantially when the demand for labor, relative tosupply, begins to exert upward pressure on wages. In some countries thisis probably a decade or so away; for others it could be a much longerprocess.

1.04 This paper examines the potential role of the Bank Group inassisting LDCs to expand the demand for urban labor. In most LDCs scarcityof capital is a major constraint, so that in varying degrees, dependingon specific factor endowments, emphasis should be placed on using capitalas widely and efficiently as possible so as to expand the demand for labor 1/.It appears that small-scale enterprises (SSEs) often generate more jobsper unit of investment than do larger firms, which suggests that SSEdevelopment can be an important component of the attack on poverty. Thesmall entrepreneurs themselves may not be-poor, 2/ although their prosperityis often precarious, but they provide livelihoods for many others in need.

1.05 These considerations have led the Bank (a) to investigate thepotential for job creation and other benefits from enterprises of differentsizes and degrees of capital intensity; and (b) to seek means to assist,

1/ All subsequent discussion relates to LDCs in which capital andforeign exchange are scarce, and unskilled labor is in ample supply.

2/ In the informal sector (see naras. 3.01 and 3.02), however, entre-preneurs are usually workers and often are poor.

financially and otherwise, those at the lower end of both scales. Thelatter purpose cannot be accomplished by direct loans from the Bank,given the smallness and dispersion of the targeted beneficiaries, soit is necessary to work through appropriately organized and orientedintermediary institutions in the LDCs. Thus th nrinrinpal focus of thispaper is on the use of intermediaries.

1.06 References in this paper to broad tendencies and characteristicsare not mpent to hp taken as neP.cesrilv annlircabl to every specific

urban activity. Thus the observation that SSEs use less capital perworkpr than do large enterprises, on the average, is not offered as auniversal truth; some SSEs are doubtless more capital intensive thant-hpir larger cousins. Some SSEs may also use capital less efficien--1.

But after allowing for data problems and the fact that small firms are1ikelyx to produce goods and services that are physically and/or qualita=tively different from those produced by larger firms, it still seems clearthat SSEs generally tend to create more jobs per unit of capital investment.They also get less output per worker, pay lower wage rates, have more intimatecontact with. th.e urban poor, anA seem to get more output per unit of capital.

I ~~~~~~vL LJLO L L La L JJL.

1.07 The conclusion to be drawn from thesse ob-servat-ions .s r.ot th-at SSEusought to be promoted indiscriminately throughout the developing world. Thepo4int 4is rather than emuployment andA inc-ome oprunte fr_ the- urbnooLint ~. t autit Lau OUp.LJ,WLQ CiIA .iit.J UC tJ p Lit L.ULL).. L.L b L_ l LLIL U U dlia jOU L

can be improved, through the provision of coordinated credit and technicalassistance, w4ithout fcin ncepal ossi emso vralfcoL. LL JL Ld.L.J..LLL ULLatLCLL.pLLJ.IJ± t-OLD CLIL L%-Lrms ofi overa..L fa-Ctor

efficiency. Some activities are natural candidates for assistance, inth,at they serve lImited 1 4 mk (c e _prdc perishAbilit 1___ h i gL.XCL t- t= 1-1 L L.C L LCU IUCL beLbO kUCGU LUat V. PLUUUG L ,tUr^l.3ldU 1 .L_LLY Ligll

unit transportation costs, custom design, etc.) and/or are not subject tosignificant economies of scale in production. Our knowledge is not ade-quate to permit an enumeration of such lines of endeavor, but in time itshould be possible to identify a growing number wnicn, Decause of country-specific circumstances have exceptional promise in terms of ability toproduce desired goods or services at competitive unit cost, to createuseful job opportunities, and to survive.

1.08 The provision of assistance to selected SSEs is merely the meansto an end, since the goal is the creation of greater demand for human labor.In most of the developing countries the indispensable "ticket" needed toshare in the national income, for the vast majority of persons, is a job.And in view of the enormous existing and future supply of raw urban laborin those countries, simple arithmetic shows clearly that unless the supplyof investment capital can be spread more widely than in the past, unemploy-ment and underemployment will persist or worsen. Hence, the Bank shouldencourage and assist developing member countries to change national policiesand procedures which discriminate against labor and favor excessive use ofcapital in productive activities. Helping to deliver credit and technicalassistance to small firms is one approach to the problem; others, includingthe provision of timely and penetrating policy advice, may well be ofgreater importance.

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II. EFFICIENT RESOURCE UTILIZATION FOR CREATING EMPLOYMENT

2.01 In LDC urban areas, manufacturing employment is generally growingmuch more slowly than m ctu ut. Capital/labor ratios for newindustrial projects in LDCs frequently involve capital costs per iob of$15,000 or more, and entail high foreign exchange requirements. In veryfew DCw the availability of capital suffice, at such cost, to absorbmore than a fraction of the increment to the labor force. 1/ Public policymust, therefore, aim at stimulating the creation of new jobs at much loweraverage capital cost, both in manufacturing and in other urban occupations.

A. Manufacturing Sector

2.02 This low-cost job creation need not imply a reduction of overalleconomic efficiency -- i.e., lower total output relative to the combinedcapital and labor inputs, appropriately valued. Econometric studies fora wide range of countries indicate, with few exceptions, "that efficientfactor substitutability is possible". 2/ From engineering and processanalysis studies, available for a limited number of industries, "factorsubstitutability does seem to be quite possible, and the differences infactor ratios can be quite substantial" -- e.g., efficient alternatives inrice milling/marketing ranging from $65,000 to $700 investment per worker,and in cotton textiles from $21,500 to $6,600 (even much lower in othercalculations. 3/ Labor-intensive alternatives are not invariably to bepreferred -- quality standards, economies of scale, and management or skilledlabor requirements may sometimes tilt the balance toward more capital-intensive options -- but "in virtually all cases, at realistic opportunity-cost wage and interest rates for LDCs, labor intensive or intermediatealternatives are economically sensible." 4/

1/ The Urban Projects Department has estimated roughly, for a number ofcountries, what average cost ner iob is imnlied by the country's capitalconstraints and t'h sze of tsempOymetprolbTem. Examples, basedon nreliminary; unadiusted data for a iob defined as fifteen consecutiveyears of employment, are: India $450 Brazil $4950 and Indonesia $1150.(For onerational nurnoses the criterion adonted to distein odiiurbanpoverty lending from other Bank lending would double the foregoingfigures=)

2,/ LT_tare-nce J Uhit-p Anronnrint-e Fact-r Prnnortins fnr Mqnitfqrt-iirino in

Less Developed Countries: A Survey of the Evidence. (Discussion paperNo 64, Princeton, 1Q76), p. 13. See~ also Davxid Mnrwawtz, "ERmplo,_emn t

Implications of Industrialization in Developing Countries", Economicjournal, Vol 84, pp. 499-500.

nJ/ Tk4 p .- 1a

'4/ / U U, Up. 22.

2.03 Supplementing country- or industry-wide analyses, there isextensive documentation of specific examples of efficient substitution oflabor for caoital, such as the imnortation of used enuiinment at a frArti7nof original cost; running machines at faster speeds or for longer hoursthan is normal in advanced countries; the more freqnient- hrPqkr-1,wnqs nffsetby low wages for repair crews; intensive manning of machines to compensatefor ~ ~uw~r Tel ~lV! UT~;( rontinhlnilS natching and improvised rannirs,notably evident in vehicles as well as industrial equipment in ma Ts;etc- Surh exnpdients not nnlv economi7p rcpital but over time act to expandthe pool of mechanical skills. Often a mix of advanced and simpler inter-medi.te technologies is appropriate -- some production processes requiringa high level of mechanization and quality control, other peripheral aspects(e.g., materials handling) remaining labor-intensive, so long as the latterdo not constrain output or capacity utilization in the former. The conceiv-able adaptations and innovations are as varied as the range of industrialproducts, processes, market segments and consumer demands, and theirV,i h;1; ,4;rFA n14..y 4S s>F7>tr.onl afece 1-y speifi conFr circumstnces an

v _ V v v v L,6

.J J. I. CL LC'U L6) 1 jJ a X L L V}.L 1a V L. L J X XL CtyU L.LJ. e. C O aii upolicies. 1/ Adjustments need to be worked out on the ground, insofar aspossil 4 ==-- by '--a' tehicl financial or cour,m~erc`al entities, or inudi-_-1- -- Y L~L.~ L~.LL.L , LLILL._J. SL L~UL L L~ I. L .1.L J_ L 1 U

vidual entrepreneurs and mechanics -- but such local initiatives couldbenefit from more efficient international interchan- e of technologicalinformation (see paras. 4.24-4.25).

2.04 Despite the widespread evidence that efficient technologicaloptions ex4st, their documented Jimportance In the econo-mic o OJapan, Korea, Taiwan, and elsewhere, and the many specific examples ofsuccessful application, a coUlbination of mutually reinforcing influences,often leads industrialists in LDCs to make choices that are more capital-intensive than is appropriate to their countries' factor endowments. Amongthe reasons for this misdirection are (a) the prestige of Western technologyand the hesitancy of LDC entrepreneurs, officials and financial institutionsto take chances on "inferior" or untried alternatives; (b) lack of knowledgeof such alternatives; (c) the selling, by expatriate consultants and sup-pliers, of technologies and equipment that they know; (d) the tying of mostaid to imported capital goods; (e) favorable tariff and tax treatment,exchange rates and credit conditions accorded to imported capital goods inmany countries; (f) low-interest credit and fiscal incentives provided for

1/ A systematic effort to develop, and apply commercially, appropriatetechnologies in the electronics industry is conducted in the PilotPlant of N.V. Philips at Utrecht. The components and productionprocesses of various electronic goods are analyzed in relation todiffering country factor proportions, component producing potentialsand markets, to find the optimal technological mix. Based on thesefindings, overseas plants have been set up in some 20 countries,and their techniques, local content, product mix, etc., can beprogressively upgraded. The Pilot Plant's original purpose wasnot to create more jobs in LDCs, but to devise commercially viablepatterns of local production, replacing imports, despite the smallproduction runs anticipated.

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industrial investment in general; (g) high levels of protection for theproduicts of "modern" industry in the domestlc market; (h) the desireto minimize problems of labor management; (i) unduly high wage differentialsf-or proteC;ted w,o in tf--o -4n -- n --- t- A I F A-n- 4 n -vr aa 1- , mo

laws and prohibition of lay-offs) relative to the rest of the labor force;and (J) consum.Ler preferences among hLi.ghneer in.ome gu i L DCs (who dis=proportionately influence the market) for import-equivalent goods.

D. No-anfctrn 0-cto-

2.05 The discussion so far has been mainly of manufacturing industry.But appLopriate technology is no less signi1icant in other sectors --

in civil works and building construction, transport and other services,agricultural processing and cultivation. Tne range of difierences incapital intensity in some of these activities is comparable to that inmanufacturing, and they account in the aggregate for a much greatershare of jobs in most LDCs.

2.06 The indirect effects of industrial investment and output on employ-ment may often be more signiticant than the direct ones (see Annex I, para. 14).In Mainland Chipa_ it is reported, "despite the relatively labor-intensivecharacter of the small rural industries [as compared with modern urban plants],their direct labor-absorbing impact has been small." Their main employmentcontribution is to permit the iFE silcation of agriculture "by releasingcountless individuals (mostly women) from the arduous tasks of hand grindingand milling", and to counteract the diminishing returns to labor-intensivecultivation by providing modern types of inputs complementary with labor. 1/

2.07 One means of fostering the crjobs per unit of capital ivnested is encoment of smallscale enterprise (SSE)which is genera .lv runits. This is the topic of Chapter III.

1/ Carl Riskin, Intermediate Technology in China's Rural Industries (mimeo,1976), pp. 9 and 10.

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III. SMALL SCALE ENTERPRISE DEVELOPMENT: ADVANTAGES AND PROBLEMS 1/

3.01 SSEs comprise a wide variety of undertakings, which may becategorized in diverse ways in light of different countries' pattern andstage of development, and their governments' policy aims and administrativeset-up. The Georgia Institute of Technology 2/ has found at least 50different definitions used in 75 countries. Definitions may related tocapital (with top limits ranging from about $25,000 to $2 million) oremployment (maxima from 15 to 500) or both, or to other criteria. Somecountries have no official SSE definition; others use two or more fordifferent purposes. As a working defiin dsenterprises classed ircountriesr

c img ,,, 0 -si.x,,-.ic e s ) .--. ____f,i______________________ _3before any proDosed exDansion. Droject. No lower limit is set: SSE in thispier~ encompasses sole proprietorships, family businesses, small shops witha handful of workers, cottage industries, artisans, etc.

3.02 Within this mixed bag it will be useful to distinguish three SSEcategories, which themselves comprise varied elements:

(a) small man of relatively modern character (SSE);

(b) organized non-manufacturing firm engaged in construction,repair, transnorion, trading etc.; and

(c) enternr.ises .not oroanized or conducted in a "modern"manner--traditional artisans, petty traders and trans-porters, et-c--essenitanly corresponding to the "inform-alsector.

While the subsequent discussion and proposals related mainly to SSE inurban areas, they also apply in substantial part to rural non=farmactivities.

/ A more detailed generall discussion of the issues is presented in Ainex I,and relevant data derived from the Bank's DFC operations are analyzed inA_.nex TT

21 An International Compilation of Small Scale Industry Definitions,Atlanta, 1975.

3/ In practice, well over three-fourths of the "small" enterprises soUefined woulu have fixed assets below , 0 and empioyment below25Q-We have chosen the fixed-asset limit to underscore the scarcity ofcapital relative to labor. "Land" is excluded because its valuationis even more difficult than that of other fixed assets.

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A. Efficiency of SSE in Capital and Labor Utilization

3.03 A meaningful comparison of the capital/labor ratios of small andlarge enterprises can be made only for the first (manufacturing) categoryabove. Although the data are incomplete and not always comparable, they

strongly suggest that investment cost per job tends to increase with in-creasing scale, whee-tre neer ~or number f workers.(,, 2

3.04 If it is correct that SSEs tend to employ more direct labor perunit of capital invested, is there ground for assuming that their total(direct and indirect) effect on the demand for labor is greater? Largeenterprises often have far-reaching linkages, on both input and outputsides, with other producers and service enterprises, giving rise to employ-ment opportunities far exceeding their direct job creation (see Annex I,para 14). There is some basis, nevertheless, for assuming that SSIs gen-erally have greater indirect domestic employment effects also, due in partto the greater propensity of large firms to import both capital goods andraw materials. Small firms generally require a much lower proportion ofimports than large firms, and the substitution propensity of larger com-panies -- through imports, replacing traditional products or driving out

smaller firms -- is evident in the economic history of many countries.

3.05 A basic question is whether this SSI characteristic of lower capital

cost Der lob carries over into other measures of factor use. Although fullyreliable data are hard to come by, the available statistics seem to indicatethat generallv as firm size increases: (a). canitaLinvestment Der workerrises, (b) (c) g ra ri a74elu added ner unit of al falls. (See Annex 1.) 1/ Evidence from

umber of developing countries reinforces this point, viz., that "...small~enternr-ises with a lnwer level of investment ner worker tend to achieve a

t1.higher productivity cita r-intensiventernrfses~2

Wh '= 06 This observation calls for investiantinn- nt the level of the firm

_FM ' and across different industries, to throw light on elements such as managementspecialization and production economies of scale and relate them to total

factor efficiency. There are great differences in technological requirementsfor the production of goods, and the range of choice with resnect to nlant

scale and capital intensity is very wide. Total f aductivit is a

1/ Table 3 in Annex 1 shows a break in the trend for the very smallest

Japanese firms, possibly reflecting capityal inLiviSsibi.At- and - ec

its underutilization below a certain minimum scale of operation.

2/ Small Scale Industry in Latin America, United Nations (1969), p. 56.

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function of labor, capital, scale, and management skill. Some goods canLuuuL_U at reasonable unot cost on Overy smal quit,

while others require sizeable production runs. Characteristics such as size,we-Light, h-andlr. reurmns n eihblt a onstrainmrktnWeJ4,LI L L Lidii LLlr, LI -4UiLL t-LUt_LLL.,- , ILU jJJ~L OLI,% U.LL.LL LUy M L Aj Lia.I u.aL C LJ_ .~L1Lr

possibilities to a limited area, moreover, and prevent high-volume productionevetL when scaLe ecU iesi- mght b fCeasible. R esearch --- help to iden'ify

industrial activities that are natural candidates for SSEs. 1/

3.07 More important than manufacturing industry, as esoc f baneEu , are a wide range of service oCCUPations. Tt isLest a aservices enge i)roa.&W4ing. 2/ Many of them serve industry directly; aimost aii depend uitimatelyon industrial (or other) goods production to sustain them. It appears thatthe ratio between manufacturing and service jobs is relatively constant, overa wide range of urban economies and variations in the level of capital intensityof industrialization (see Annex 1, paras. 18 and 19). The creation of addi-tional jobs in manufacturing at low capital cost per worker may therefore beexpected to have a multiplier effect, creating further service jobs at evenlower cost.

1/ For example, a recent series of monographs analyzes a number of sub-sectors -- textiles, garments, wood and leather products, ceramics,optics, toys and electrical goods, each broken down by major productcategories -- to assess their potential for development in Africa,to be exported mainly to European markets. for each product category,investment requirements (physical and human), costs, value added,profitability and markets are compared under European and Africanconditions, respectively. (Societe d'Etudes et de DeveloppementIndustriel, Activities de Main d'Oeuvre: Transferts Industrielsvers les Pays en Voie de Developpement. Geneva, 1976.) J. Stern,The Employment Impact of Industrial Investment: A Preliminary Report(mimeo, 1977) ranks a large number of industrial subsectors in threecountries (Korea, Malaysia and Yugoslavia) by various indices oflabor intensity, and also makes cross-country comparisons of laborand capital intensity on some 30 subsectors for different levels ofincome per head. The subsector categories are highly aggregated,however, comprising quite disparate products and processes, and donot distinguish between large and small production units.

2/ Calculations presented in Stern, op cit., p. 29, show theTransporation, Communications and Services n.e.s. categories ashaving total labor coefficients (man/years of employment per$'000 output) higher than any manufacturing subsector in countrieshaving incomes per head of $750 and below; for higher incomelevels the relationship changes. with service occupations becomingless labor-intensive relative to output.

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V/ B. Other SSE Attributes

3.08 Finally, there are other well-known arguments, difficult toquantify, favoring the support of small enterprises (see Annex I, paras. 20and 27). They include the role of SSE in nurturing entrepreneurship, intraining and improvement of technical skills, as generators of savings, assources of stability and coherence to communities, as means for reducinginequalities of income distribution between regions and economic groups andas production systems generally involving less adverse environmental impact.Other advantages cited are SSEs' potential to help stem migration to metro-politan areas, to utilize agriculture/agribusiness/industrial linkages toincrease rural labor productivity and income, and to involve people at thelowest income scale in employment, ownership, and decision-making throughcooperative and other community-based projects. Establishment of outlyingsmall-scale production units, to serve markets of limited radius or as sub-contractors to larger industry, may also help significantly to reduce indus-trial concentration, and correspondingly the mounting cost of municipalservices. These attributes, together with the employment creation objective,add up to a powerful case for making major efforts, through appropriate publicpolicies and institutional measures, to enable SSEs to realize their fullpotential.

C. Problems of SSE Development

3.09 In practice, however, they are often handicapped.

"While small enterprises pay lower wages, they face verymuch higher prices for capital than large modern units. It alsoseems that the small scale sector has been neglected by governmentpolicy in most countries. It is typically the characteristic pro-ducts of large scale industry which have had very high protection,and it is partly this which has enabled them to pay higher wages(also, higher wages enable them to have a more skilled labor forcewith lower turnover -- so that higher wages do not always implyhigher labor costs in terms of efficiency units of labor). Thesmall scale sector's frequent lack of access to subsidized credit,the extremely high interest rates prevailing in 'curb' markets, andgreater difficulty of access to licenses and consequent resort toblack or grey markets, has probably outweighted the fact that theycould evade some taxes and nay lower wages for a labor force whichis often of lower quality. Small units operate largely beyond thethrpshnld of gnvernmtent regulation" I/

-- and fte.n nf gonvernment-t asQs-fisJtanrc.

1/ Urban Poverty and Employment (IBRD draft, 1976), p. 50.

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3.10 The specific problems of SSE development must be distinguishedas between modern, organized small industries and services (the first twocategories in para 3.01 above) and the informal sector. The former typicallyfit into market niches and channels, and have a fairly solid internal manage-ment and levels of technology and organization well-adapted to their clien-tele. Their needs for investment and working capital are met largely frominternal cash generation and personal savings rather than institutionalsources; their savings propensity is high, but lack of technical know-howand access to supply and credit facilities inhibits their obtaining a widermarket.

3.11 The major share of existing and potential non-agricultural employ-ment in most developing countries, however, is outside the modern industrysector -- in repair work, artisan production, market vending, local trans-portation, handicrafts, custom jobbing, construction, and small-scale process-ing of primary products. Such SSEs generally suffer from a small productionbase and poor purchasing, production and marketing organization. Individuallythey cannot afford the chunks of capital and specialized personnel neededfor design, sales promotion, bulk raw material purchase, etc. Their inabilityto develop products, expand markets or reap benefits from scale economies ininfrastructure keeps them small.

3.12 In the informal sector (and sometimes at the modern sector margin)most SSEs depend on middlemen/moneylenders for working capital and personalemergencies. These ubiquitous informal intermediaries also help fill certainof the marketing and supply gaps that trouble SSE, but at high cost and some-times in a manner that restricts upgrading of products or outlets. Themiddleman offers the needed finance, but only in small amounts and on shortterm, and locks the SSE into a marketing arrangement by which repayment isdeducted from the selling price. If output is unsatisfactory or paymentslapse, the middleman can sever the relationship without having made a majorfinancial commitment. While middlemen generally have good market links andinformation, and are responsive to market trends -- often more so thangovernment agencies -- they tend to take a short-term view. They are seldomaggressive marketers, but cater to known outlets and are slow to suggestdesign changes. They rarely lend for fixed investment needs.

3.13 For many small producers obtaining material inputs poses majorproblems: poor access to imported and domestic materials; inadequate cashor credit for economical and timely purchases; inferior quality of rawmaterials and intermediate nrocessing; which reduces the value of finishedproducts; remoteness, which (combined with cash deficiencies) forces artisansto snend disnronortionate time fetching small ntqantities! and great vulner-

ability to absolute shortages. The middleman is often an unreliable supplier.

3.14 SSEs, especially informal or marginal ones, generally lack accessto improved prodcion technologies. For a ctrn to almited

neighborhood market, this may not be important. Their skills and general-purpose machines (4f i n, r:y n rynd 4 1 -i nA ant tn rhnnhaoc wanto-l ¾,, -ho4 r ,ndle-

manding clientele. If, however, they wish to widen their markets a modest

- 11 -

technological breakthrough may be necessary -- e.g., small cobblers mightproduce for the general market, even for export, if provided with simpleciirtino skiving nnd stitching machinpR. The more stringent qnul it-v stand-ardization, price and minimum contract requirements of new markets oftenfnrce small prnducers tn ungrade thpir skills and/oir use more speciali7Pdmachinery.

3.15 Infrastructure and services available to SSE -- power supply,water and sewerage, access roads -- often are inferior= For many, especiallyin the informal sector, this is not a serious present problem. Indeed, theirability to function without such services may help to protect their m.arketniche from more powerful competitors. But again, these deficiencies willobstruct their growth and transition to a "formal" mode of operation.

Inter-.s.eactora1 TLnka-g-

they can be mutually supportive, as in Japanese economic development and inthe Chinese strategy of "walkinrg on. two legs" (Lhne 1, pa .a.).0 -The LJJc

is to enhance the efficiency of use of both capital and labor in the indus-trial econory as a whole. Cap4ita saving technologies --- be ---d, ainu Aould

be favored in the conditions we are discussing, at all levels of the enter-prise scale. But to take full advantage of complementarities and linkages itis desirable to mitigate the special handicaps to which SSEs are subject, so,hat they lave reasonalle opportunity to fur.ctior, (ar.d 'for thle marlk-et to tlestLiLaL LiLJiv .CUuU CUjUL LLLLs LU L ULI L.LLII~ LUL EClcA iaLL C

their efficiency) in those sub-sectors or niches of the economy where theycould compete effectively on an equal footing.

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IV. INSTITUTIONAL SUPPORT FOR APPROPRIATE TECHNOLOGY AND SSE

A. Governmental Policy and Preferences

4.01 A first, and major, requirement is to remedy the price and incentivedistortions cited in para. 2.04 above, which tend to favor capital-intensivetechnology. The existence and weight of these biases are amply documented inWorld Bank reports and in the literature of economic development. They stemlargely from Western technological concepts, widely advocated and acceptedboth by development "experts" and by the governmental and business elites inthe LDCs during the first two postwar decades. They have come under increas-ing political and intellectual criticism, but they are deeply ingrainedand, moreover, correspond to powerful interests. To redress the balance willrequire vigorous, sustained efforts to inform and persuade opinion leaders,administrators and businessmen in the LDCs and to undertake and disseminatesolid research on technological alternatives.

4.02 Public policies in many countries give the larger enterprises inmanufacturing or other sectors still other advantages over SSEs. The mostcommon is the supply of institutional credit at artifically low interestrates. Public services -- power, transport, water supply -- that are usedmuch more by large than by small firms also are freauentlv subsidized: somay be the cost of premises in industrial estates. Skilled workers trainedin vocational schools at public expense generally gravitate to largee modernestablishments, whereas the artisan usually bears apprentice training costshimself -- nerhans; however; obtaining a superior result. Some elempnt nf

the advantage for large firms will persist, even if governments try to avoiddisrrirmin2tnig, becuhp sp SSEs will seldom bep a c2nAhle of denling with govern-mental or institutional procedures, gaining access to scarce supplies, devel-oping marketing contrActs, etc. So "gptting the prices rilght" is not suffi-cient in itself -- but it is a major first step toward rationality in invest-ment decisions, by financial intermediaries and even more by private orpublic sector entrepreneurs.

4.03 Typical industrial development incentives -- customs exemptions,tax holidays, subsidized credit ==- prin.cipally ai the Iarge -o at ---s.h.L. LJOL J a -L CA -aL 5C. k L CIL.t a

modern) industries, not the generality of SSEs. Promotional efforts for thelatter r.eed to bDe pinpointed more specifically towarA ovrercomlng thei ha.di~a C ~. *tLtLt C' A~ ~ CLt mtL ~ oJ~....L.L.LLO..Ly LJWO L U IVt _Lk ULL) iL6 LILt-i.L iLICIUJ...

caps and enhancing their advantages.

4.04 Procurement. SSEs can often compete effectively in supplyingjU L L. ULWL PL.VaLL 0Lri_ L It LauaU LL=U. -- U . .U IIUb,U Ldi v-UUbs, oLfLfCefurniture, school equipment, uniforms and tools. A number of countriessystematically direct part of government procurement o[L such goods to SSE. In

India for instance, 192 product-types are reserved for exclusive purchase fromsma'Ll enterprises; iin 1973,2 L,000 DarEs were participating in the "Government

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Stores Purchase Program" (but total procurement from SSE amounted to only 6%of total purchase value). In Botswana and Lesotho thriving exporters ofgarments, sponsored by the lcoal SSE intermediary, got their start throughdomestic contracts for police and school uniforms. But for SSEs to benefitfrom such contracts, some entity needs systematically to call their atten-tion to tender notices, to help them fill out the forms and provide othertechnirnl necict:r,rr, perhaps to intercede with the aultharitioc: :againstunduly restrictive specifications or contract conditions, and to providefinance (including working capital) when needed.

4.05 Subcontracting. In most countries the tendency has been for large,integrated industries to displace small fabricators. However, thelatter, w`ie perhaps not firancially capable ofL manufacturing complex final.L 4 L J. W LL~ p Li~J LL I L Ldk .L Lc-ULk O. L~ .~. UL LL_Lj4~ ~LA.LLL~products, could often supply components and intermediate goods to large firms,if permitted and assisted to Uo so. TLat thLey do riot is thLe resuLt o severalfactors: primitive techniques, low quality and lack of capital in the SSEsector; the desire, on the part of larger firms, to control quaiitv, deliver-ies and prices; advantageous rates of interest and foreign exchange for thelarge enterprises; and the absence of effective measures to remedy SSE defi-ciencies and encourage their use. Some countries have avoided or overcomethese distortions. In Japan a symbiotic relaticnship has developed, by whichsome 60% of the small- and medium-size manufacturing firms are engaged insubcontracting for larger corporate customers. i! Korea has had more recentsuccess.

4.06 Promotion of subcontracting is a practical and cost effectivemeans of delivering technical assistance to SSEs, as well as assuring marketsfor their output. Examples in Japan, India, and Latin America are exten-sively documented -- ranging from provision of blueprints (or models for thosewho cannot read drawings), to design and fabrication of suitable machine fix-tures, to advice on appropriate machinery, raw materials, and the applicationof new processes, to intensive help in technical and managerial problems.Institutional support for subcontracting can provide brokerage services to tryto match needs and skills of large and small producers, staff or facilitiesfor quality control and design work, and specific technical training toupgrade the skills of SSEs to make them attractive partners to larger enter-prises. DFCs could explicitly encourage their larger clients to consider suchcollaboration with smaller firms in lieu of developing in-house capacity toproduce intermediate inputs. Policy support may be needed in the form ofprotective legislation for the subcontractors (model enforceable contracts andrequirements for timely payments), uniform technical standards, incentivesencouraging dRcenPrA1i7Pd pansion etc.

/ Cee A- nex I, laUle I an' Chart.

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4.07 Industrial Estates projects usually do not cater specifically tosmall industries. i/ In many countries the mixed estate, providing spaceand facilities for a wide range of sizes, is likely to be the best model.It may facilitate subcontracting, or transport or maintenance service re-lationships, between small and large units. It may also be financiallymore viable, with more stable occupants having greater rent-paying capacity.However, mini-industrial estates can be helpful in the transition of SSEfrom the informal sector to more solid commercial status. In Botswana,numerous very small (formerly household) enterprises are grouped by productcategories in several zones -- textiles and clothing, leather goods, metalfabricating, building contractors -- each with specialized technical assist-ance, joint procurement and equipment for common use. However, industrialestates are not essential for this purpose. Often coordination and commonservices may be provided at less cost by establishing the services in acentral nlace; leaving producers at their existing sites if these do notseriously inhibit growth. Industrial estates sometimes prove ineffectiveinstrulmontQ fc.r dRF oeuolpenTnt hobecaus thoe aro lrontol rt.taidn tho 0 n

cut off from general urban services and remote from their workers or theircustomers.

B. Institutional Lending Policies

(i) BroadeningL Sector Coverage

4.u8 The foregolng discussion relaLed maillly to the modern manufacturingsector, which has been the principal object of lending by DFCs (not only thoseassisted by the Bank). Other kinds of productive activity, however, may offerequal or greater job creation relative to investment cost, and could benefitfrom institutional finance. For example,

(a) construction, especially financing of contractors'equipment and supplies;

(b) transportation -- bus and trucking services, taxis andjitneys;

(c) warehousing and distribution -- regional and local depotsfor grain collection and storage, and fertilizer andbuilding materials distribution;

(d) retail trade of all kinds, down to the corner kiosk;

1! Of four so far financed by the Bank only one (in Yemen) is for SSI:those in Pakistan and Mauritius are designed for medium-cum-smalleruini ts =

ke L-L LI : J C-I-- V C~~.b ,CLL , J tC JJ.LdtLLLO , LL.

(eL f Lrsheriy -- extrassesi, ar,iu triplants, e tcj.Lpment, well

as sawmills and processing of forest extracts;

(g) maintenace and repair facilities -- garages, machine

(h) organized services -- e.g., garbage and trash collec-tion or building maintenance in the cities, and con-tract plowing, spraying or well-drilling for commerciaiagriculture;

(i) personal services -- restaurants, barber shops, laundries;

(j) tourism activities -- not only hotels but travel andguide services, tour buses, folklore exhibits, etc.; and

(k) arts and crafts, including wholesale handicrafts produc-tion.

4.09 Some recent Bank projects deal with sectors outside the manufactur-ing mainstream, generally through a sector-focused project and specializedinstitution. Such an approach may be necessary or prudent, given specialsector characteristics and conditions with which a general-purpose DFC maynot be familiar. Nonetheless, it may be preferable to encourage an estab-lished DFC, once it becomes aware of opportunities and needs in a r.ew func-tional area, to employ the requisite expertise and develop appropriate lendingcriteria, rather than to build up a new institution from scratch; and for theBank dealing with a known institution may also be easier than working out awholly new relationship. Finally, there may be administrative economies andintersectoral linkages which a DFC interest and active in several fieldscould exploit more effectively than a single-purpose institution. 1/

4.10 Agribusiness is a case in point. Modernizing, increasingly com-mercial agriculture requires more sophisticated processing, storage anddistribution networks to handle both inputs and output. These facilities,especially when tied into effective cooperatives can help to reinforce andguarantee agricultural credits to the producer as well as financing for themiddleman/cooperative. Possibilities for such interlocking systems arebeing actively explored in several countries -- Mexico, India, Indonesia,Philippines, Tanzania, etc.

1/ The SSE operations in Cameroon and Ivory Coast assist a broad spectrumof enterprises, including bakeries, metal workshops, woodworking andautomobile repair facilities. The BHC in Ghana finances equipment forcivil works contractors.

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(ii) Construction and Housing

4.11 Repeatedly the Bank has emphasized the importance of this sectorfor economic development; and in some developing countries constructioncapabilities have become internationally competitive. For most civil works,locally-based contractors should normally have comparative advantage andproduce a good return to the national economy. Expansion of constructionactivity, using domestic inputs to the maximum is probably the surest meansof creating additional employment quickly and consistently, given effectivemarket demand.

4.12 In urban areas, on average, six to eight percent of the Jaborforce is employed in construction of residential, commercial and industrialbuildings. Most are unskilled and come from lower income strata. Largeand small firms exist side by side, and the industry is an important sourceof entrepreneurial talent. Construction techniques are generally labor in-tensive, and local materials are used. The industry frequently suffers,however, from inadequate supply of materials, partly the result of pricecontrols and other administrative measures. These supply problems, combinedwith minimal financing of working capital for small firms, favors largerfirms using more capital-intensive techniques and imported materials.

4.13 The Bank and DFCs could help to remedy these problems throughassistance both to building materials industries and to small contractors.For building materials this would mean lending to smaller firms producinga variety of construction inputs. For small contractors the need is mainlyworking capital and some technical assistance. It will not be easy to reachthese groups; firms enter and leave the industry with great rapidity. 1/Financing might be provided through the commercial banks, specialized insti-tutions or informal channels (para. 4.30). Publicly financed projects (in-cluding Bank projects in urban areas) can encourage the use of small firmsthrough appropriate design and tendering features -- e.g., revolving fundsto insure that small contractors are quickly paid for work done -- and supportof appropriately designed housing schemes. In summary, the steps that needto be taken are an extension to the building industry of measures by whichthe Bank is supporting the contracting industry in general (No. R76-1).The labor-intensive nature of the industry makes it an important vehiclefor improving the productivity of the urban poor.

4.14 Housing and home improvement may be especially effective contribu-tors to greater welfare for the urban poor. Apart from creating employment

1/ In Botswana the SSE promotion agency has sought to introduce morestability through provision of office sites, common procurement ofstandard construction materials and some TA in accounting; localcontractors have thus been enabled to compete successfully on smallcivil works, previously mononolized by foreign-based firms.

for construction and building materials workers, much oI the work can bedone by the occupants themselves, 1/ given the required materials and limitedamounts of skilled labor. Beneit's in terms of improved nealtn, comfort anamorale are demonstrably substantial; and housing improvement is an importantincentive to saving.

4.15 Demand for housing has been limited in many LDCs by the circum-stances.

(a) that long-term finaricing is often unobtainable, verycostly, or heavily subsidized (and hence severly ra-tioned);

(b) that standards for government-financed housing areusually too costly for those most in need, or even themajority;

(c) that charges for urban services tend to be skewed tofavor upper-income groups; and

(d) that institutional structures, both technical and finan-cial, are generally weak.

4.16 Sites and services projects, with minimum unit costs, can helpdirectly to ameliorate the housing situation of the poor. Conventionalhousing finance schemes, with resources derived mainly from personal savings,have shown promise in some LDCs; they cater to middle income levels, but indoing so create jobs for the urban poor. Possibilities for extending thisapproach more widely -- emphasizing especially its potential for encouragingpopular saving -- should be actively pursued.

(iii) Working Capital

4.17 For most SSEs, working capital is the main financial constraint;in the informal sector, it may be almost the entire investment. It is neededto purchase bulk quantities of raw materials when prices are low, and also tofinance holding of work in process and finished inventories during slow demandseasons; seasonal working capital is critical for industries serving a ruralpopulation dependent on crop returns. In both cases, a working capital bufferpermits steadier production and fuller use of capacity, thereby increasingjobs and earnings at minimal cost.

4.18 Bank policy, and ususally that of DFCs, has limited the use of loansto acquisition of fixed assets and "permanent" working capital. This isgenerally sound practice for institutions whose role is primarily to finance

1/ Productive "employment" is not confined to work done for wages.

- 18 -

fixed investment, but it is also in the interest of such institutions to

ensure that working capital required to meet seasonal and occasional, as

well as expansion, needs is provided somehow to their clients. Collabora-

tion to this end, between DFCs and commercial, cooperative or special-

purpose banks, should be encouraged. Conventional DFCs might open a new

window, with appropriate criteria, for short-term working capital finance

to modern SSEs.

(iv) Collateral Requirements

4.19 Most non-conventional financing techniques are attempts to over-

come the SSEs' lack of collateral to satisfy the requirements of formal

institutions. 1/ BOA in Egypt requires no collateral from SSEs, relying

only on an honor code enforced by their socio-ethical environment to induce

repayment, without undue losses so far; but in other environments such a

policy may be risky. The collateral problem may be approached in severalways. Rental of premises and equipment reduce the loan, and hence the

collateral requirment. Hire-purchase arrangements in part embody theirown collateral. New forms of security such as life insurance certificates

or cooperative guarantees may be introduced. For many types of SSE the

prospective cash flow is a more reliable safeguard than conventional col-lateral. Government guarantee funds help to reduce the preoccupation with

collateral (para 5.07).

4.20 A different approach is for some agency to provide collateral

(funds or equipment) directly to promising entrepreneurs either as equity

participation -- which the entrepreneur might be entitled to buy back on

specified terms once he got established -- or with a contingent liability

for repavment depending on the enterprise's profitability; exceptionally

an outright grant of seed capital might be justified to get a high priorityindustry or service started or to keep it going.

C. Potential Institutional Channels

4L21 Insitnfuinnl rhannels to promote SSE and urban employment obiec-

tives should certainly include some of the DFCs that have been the mainintermediaries for past Bank financina, and nthers of similar tvne. But

various other organizational patterns and operational styles are beingconsidered in the search for maximum flexibility, coverag and cnntnct

with the target groups.

,/ Onereason why mar.y small er.terpr4ises resor to highi-nct bo-rrowir.gs-n ---- -0- ---- ------- 1 -

from the curb market is that whatever collateral they have is preemptedb-y 4nstitutlons from. wh-icb they have borrowed prev4oussly. The formalU'L L. L L. LU L JUiO L UJL WLL. t.L L..LL. . . ItJ .UW . A- .JCA. Lt

credit institutions quite usually require collateral with value a multi-p'Le ofL the 'Loan amount.

(i) Conventional DFCs

4.22 Employment considerations do not seem hiterto to have had muchweight in project planning by Bank-financed DFCs (IAnex 2) but a numberof them have recently shown interest in shifting their emphasis toward (a)favoring --re alabor=ntensive technologies wbere fai. .. 4JCW,and (b)N ass-lsting

smaller enterprises in the modern productive sectors. Ideas and examples fromrnLl,sr t'at s_lo s upe.ri._ :ex C14t an' 1- k .A :_.F-:.A :1:--I,v ol1 o1iLU,r :LlId L I E UL L.L A LoU L.LA.L aLLU ±LI L-V L--V- L.aUELY ----

into the worldwide DFC information network with a view to stimulating otherinsti tutions . As some DFCS hcave poUinted out, hiuweve, LthiL cLapabliLty toinfluence the choice of technology toward more labor-intensive alternativesmay be lilmited. Usually they get involved in project scrutiny only after thesponsoring entrepreneur has reached a fairly firm decision as to process andequipment, influenced by many factors -- including governULment Lncentives andinterest rate policies, the problems of managing and training a large workforce and the prospect of labor disputes, tne equipment's performance recoruand servicing arrangements, and so on.

4.23 Nevertheless, there is potential for constructive influence byDFCs on the choice of scale and technology, in four ways:

(a) by taking explicit account in sub-project appraisalsof the employment effects (positive or negative) oftechnology choices;

(b) by identifying, and encouraging clients to explore,possibilities for sub-contracting, and helping towork out collaborative arrangements;

(c) by helping sub-project sponsors to gain access to theknowledge available worldwide about technologies appro-priate to factor proportions in particular countries; and

(d) in some cases, by financing the development of promisingadaptations of superior technology to local conditions.

Their effectiveness in performing these functions would depend in majorpart on governmental.policies.

4.24 The adequacy and accessibility of information on technology alter-natives leaves much to be desired. Industries patterned on conventionalWestern, Japanese or Russian models can take advantage of these respectivesources of technology, and of their promctional efforts. Finding or devis-ing more appropriate technological solutions is harder. Investigation ofsuch alternatives in product design and production processes is still limitedin scale and rather widely dispersed -- although in a few countries (e.g.,India, Korea and the Philippines) government agencies give considerablehelp to DFCs. There is also increasing interchange, through internationalorganizations, among the consulting fraternity and a few data banks, but

- 20 -

"appropriate technology" information referrals continue to be an ill-servedsideline for several uncoordinated aid programs. 1/ The Bank should explorewith Other international and national agencies, and with the numerous privateorganizations having expertise in this field, how their resources could bemobilized more effectively to apply existing technological information quicklyand practically to specific LDC situations and needs.

4.25 Still more important for the long run will be to create or strengthenagencies in the respective LDCs to inform entrepreneurs and financial institu-tions about the availability of appropriate technology for both production andproduct design and to develop and adapt such technology domestically. Thismight involve trade associations, technology institutes, Uriversitiesand productivity centers -- and Bank assistance where such institutions areinadequate. National mechanisms would extend and strengthen an improvedinternational network; and for them ready access to information alreadycompiled, about other relevant country situations, could avoid duplication --and perhaps inspire further adaptations.

(ii) Other Intermediaries

4.26 Many of the DFCs such as the Bank has usually assisted would findit hard to lend to very small enterprises, and even less to the informalsector. Such activity is fraught with problems and risks that a conventionalDFC may be ill-equipped to assess. The proiect appraisal techniques thatthe Bank has evolved and inculcated into its DFC clients over the years aretoo elaborate for very small proiects. We need, therefore, to look also tonew, differently organized entities.

4.27 Commercial banks, in particular, could be suitable intermediaries. 2/Thev iiquiallv have a branch network that can be more resnonsive to small enter-prises than the more centralized DFCs. They can better assess personalotialities of the borrower and local business conditions. Furthermore; given

1/ Cf. A. S. Bhalla & F. Stewart, International Action for Appropriate Tech-nnlonox7 (ITT.L 19Q76) p. 18 3

"Eltn insftl,ttior.s ,con,cerne w ~ith tecrhr,noloical deveclopmnn,t are fe

working as isolated units, 4-with little communication between them or co-ordinration of their activ4itie-ic. The kabsenc of a Worl A-iAd m nication

network reduces the effectiveness of their work, leading to duplicationand weak d4ssemination if

"The-re i-s need for an ir.ternational 4nstitution -- Ar, InternationalAppropriate Technology Unit -- to provide a means of co-ordinating andAissem-inatinXg work- on appropriale technlog on --olwdebssandtUt.ccmLiia _Lti WIJ itfjiiLtp.t LCLntiIXSjy IJt a WWjt.LLW.Lti UC0.Oa t, CL U L.

foster,encourage and disseminate new R and D to meet the basic needsstrategy."

'L BDank- UGUup LUJtecLb LL1 DiLrngladebLi, Lile Phi L.ppLiibres andL KtenyCa, adLU anoULLIIer

planned in Indonesia, rely mainly on commercial banks as financial inter-mlediaries.

that many small enterprises primarily need working capital, commercialbanks could usefully combine their own short-term funds with longer-termfinance from the Bank. 1/

4.28 Commercial banks are reputedly wary of financing small enter-prises in view of the costs and risks involved. In many countries legallimits on interest and other charges prevent their covering costs. Somebanks, however, are making a vigorous effort in this area, and numerousgovernments are applying pressure or giving incentives for them to do so. 2/In some countries, X percent of the commercial banks' resources must beallocated to the SSE sector, as locally defined. In others, cheap moneyis made available to the banks for such purposes. Often the governmentguarantees the banks, in major part, against loss. Preliminary indica-tions are that a combination of ready access on favorable terms to govern-ment (or central bank) resources, plus a guarantee covering 50% or moreof the risk of defaults, should generally give adequate inducement forcommercial banks to seek SSE business. Part of the repayment risk shouldremain with the lending banks, to encourage effective supervision andloan collection efforts. 3/ Collateral substitutes should be activelysought.

4.29 Investment companies. For smaller (modern) enterprises, pro-vision of seed capital may often be crucial to a sound capital structure,and essential to obtain institutional credit. Investment companies thusmay play a key role. In the Bank's experience, government-controlledDFCs have generally been more attentive to this need but over a longerhistory and wider range, private enterprise has prided itself on pro-motional capability and success, and its potential should not be ignored.Government support in India has provided seed capital facilities at thestate level (through the SFC Special Capital Fund) and at the national"level (through IFCI's Risk Capital Foundation); Indonesia, Kenya andother countries have established equity funds to help their nationals

1/ This calls for synchronization of credit terms, since it is not unusualto find that short-term interest rates are significantly higher thanlong-term rates.

2/ Several of the Indian commercial banks, under Government pressure butwith a serious commitment of banking competence, are serving a wide-spread SSE clientele.

3/ Commercial banks, may, in fact, be better at this than DFCs, since:(a) they may have a stronger tradition of hard-nosed collection efforts,and (b) their clients often have to come back at short intervals foradditional loans or renewals, whereas the DFC client may need no furtherlong-term funding for 5-10 years.

- 22 -

establish enterprises; but the experience in all these cases has been toobrief to draw confident conclusions. The Bank may also help on occasionto increase the flow of equity capital. 1/

4.30 Other Financial Institutions. The Bank Group is exploring possi-bilities for operating relationships with mass-oriented intermediaries 2/such as workers' banks, savings and loan institutions, credit unions, andinstitutions like the Popular Credit Bank (PCB) in Syria and the CitizensNational Bank (CNB) in Korea. Their potential as channels of finance tothe lower end of the enterprise and income scale seems promising. In coun-tries where they are effective they have a broad-based and loyal clientele.They are accessible to the small borrower and better able than more remoteinstitutions to assess his needs and merits, to keep track of his performance,and to give advice when necessary. Sometimes they can obtain collectiveguarantees for loans; in any case their relationship to the community helpsto reinforce the moral obligation of borrowers to repay. They facilitateand encourage popular saving.

4.31 Where such intermediaries are lacking it may take time for them toget established and develop community contacts and confidence. This processcan be accelerated in the context of integrated urban development projectswhich focus the common interest and encourage other, related group activities,and where the project management can give organizing impetus and guidance.The local entity so incubated might then become a nucleus or model for a widernetwork. This would not exclude efforts also to organize on a broader scalefrom the start, where conditions are propitious. In the latter case an apexinstitution would have to be assigned the dual function of providing redis-counting facilities for the local intermediaries and of supervising and up-grading them.

4.32 Cooperatives. The Bank has some experience with rural cooperatives,but little with those in urban/industrial activity. 3/ The success of coopera-tives in the LDCs has been quite uneven. They require an especially high

1/ The sixth loan to the Colombian financieras included a $5 million com-ponent making it more attractive for the financieras to assist enter-prises through equity investments, but its use is still limited.

2! Such institutions are likely to be used in Bank Group proiects nlannedfor Colombia, the Philppines, El Salvador and Pakistan.

3/ The Bank recently sent a mission to India to explore, with severalinstft,itionA which hnve extpnsive exnprienep in assisting indiiutrinland agribusiness cooperatives, possible ways of using such organizationsin a broad attack on urban poverty (see Annex 4L)= Pntpntial proect

in several sub-sectors are being pursued using different approaches;uwe I olrned that nn cimnle, uinifnrm pntFatrn wunili cuiit fno nll cae

The Indian experience with cooperative organizations is especiallyrich and mixed as to performance.

- 23 -

standard of dedication and integrity of leadership, assiduous training andsupervision to maintain this standard, and continued education and motiva-tion of the membership. Potentially, however, they could be enormouslyuseful as a source and channel for SSE initiative and credit programs, asecurity and collection mechanism for loans, a delivery system for tech-nical assistance, and a means for joint procurement and marketing. As co-operatives develop in the urban environment, moreover, they may establishmutually advantageous links with cooperatively organized rural productionand distribution systems -- as an alternative to the traditional middle-man.

(iii) Informal Sector Channels

4.33 Middlemen/Moneylenders play a significant role at the margineven in advanced economies; and in the LDCs, especially for SSE in theinformal sector, they are crucial sources of credit for consumer and pro-ducer needs, at interest rates often exceeding 50%. Moreover, they oftenprovide indispensable links to raw material sources and to larger markets.Until institutional support offers a similarly comprehensive flexible andand convenient package, middlemen are likely to be needed. 1/ Possibilitiesfor using them constructively, as channels for financing and services, arebeing explored, notably in the somewhat controlled context of urban proiects.In any case the techniques and criteria used by curb market operators forloan decisions, supervision and securing repayment deserve study by agenciesfinancing SSE, especially in the informal sector.

4.34 Integranted Programs/Projects. An effective means of fostering em-Dlovment of noor neonle may be through urban and rural nroiects with mutuallyreinforcing components -- irncluding some infrastructure and services, but alsorental facilities for nroduction nremises and tools, redrtsj technicalassistance, help in organizing procurement and marketings, etc. Potentialentrepnreneurs mav he identified in the rTommiunityv and given pecrial training,stressing bookkeeping and rudimmentary merchandizing skills. Work- andemplovment-oriented literncy ssurses could be helnful for a wider target

group. The Philippine Urban project comprises diverse, inter-related elements;and the RBnk'sq DFC units are working with TTrban Pronects an.d Rural Development,respectively, to prepare integrated programs of urban and rural development inthe Tvory Coast, Upper Volta, Mexiro, Pakistan, and Tndnnesim- In tourismoperations, support for local artisans, handicrafts and other aspects ofnonnnl1 r ril t-iirp (muucir p l - Pc _rp frp_ilntlv inoliiz1oA

1/ During the mid-sixties, the Korean Governrment sought to drive

lenders out of business; for a while it seemed to be winning, but thecurb market rebournded .and is now alive and well, morethan before. Inthe Philippines a special Deparment of the Central Bank offers a re-fin.ancing f-c414it- fr 7 r- -.Athro a t.e curb m-rket - -bJect to certir.4

conditions, including audit and interest ceilings well above those ofcotmUmmercial banks; appacrently this approach h..as h L.a. a measure oL success,and its experience is being studied.

- 24 -

4.35 A problem with such integrated projects is their complexity,in both conception and administration. Coordination of the different dis-ciplines, time horizons and bureaucratic interests involved, within theBank and in the proiect management, may be very difficult. But this com-plexity reflects the intricacies of social organization and relationships,of community realities; and an approach based on these realities has avalidity and appeal that more simplistic conceptions lack. The necessarycontinuing linkage among the diverse elements of integrated proiects callsfor highly flexible, sensitive intermediaries on the ground.

D. Savines Accretion and Mobilization

4.36 The savings potential in SSE development of all kinds, and inprograms related thereto; deserves snecial emphasis. As has been mentioned;small entrepreneurs apparently have a high propensity to save as theirearnings rise abnve minimum renuirements; and they are likely n bhe in-creasingly so motivated if there is a realistic prospect of supplementarycredit on reasonable terms, to enable them to make a desired investmentwith good profit potential. If, as a result, their productivity and earn-ings shnoild incres,on e nco rniuld eypept mciih nf the inpremlnt nlcn to hpsaved -- and perhaps deposited in the same neighborhood credit institution,further reinforcing community linkages.

-A7 Tn Aull kinds of nrnor-Amq fnr intpcrAtpcd urhnn flPvPlnonment, for

housing finance, for cooperative production and marketing and the like,the 4mnortance of csaiv

4nga shourld ho at-reaaad and naccible and reoliabl

facilities for that purpose built in. Interest rate policies should alsobe designed to encourage savirng. People's lenina inatitu,t inna mi4ght g1

preference in the extension of credit -- e.g., for home improvement -- todepositors of a specified minimum am-ount. A lottery feature to allocateloans for standard purposes in high demand (housing, transport vehicles)may allso create incentive for deposits.

E. Entrepreneurial Capabilities

4.38~ ~ _1 Somesmal etrereners will have th piueanldknweg4. .JU JLJLIL .3UIa±LL =11LL=jJL =L1U~ WJ-L±. LLOVt- LILR- OjLJ LU LL~IU MI1UW±LVU6C

required to succeed. Others will have potential, but will need help torealize 't. Still otlers may le loomed from the start. Extensive studies_L L, _LL. L _L AL.L ULIL iy U L LA~I1~ .LLI LL nLdLL £A _L UV bLUU±-I

by David McClelland and others have identified certain apparent character-istics of entrepreneurship, and hve oULtL.LieU LeeeinLig and training programsdesigned to enhance entrepreneurial performance. Small business trainingand problem solving seminars are quite widely used in North America and

- 25 -

Europe; and programs initiated in some of the Indian states and in thePhilippines show good results. These approaches need to be systematicallyextended and adapted to the conditions of still less developed countries.

4.39 Closely related to, and following on, such entrepreneurial identi-fication and reinforcement programs. there is need for nermanent and readilvaccessible business extension services to help SSEs in dealing with technical,marketing. financial nlannina and other roiiltinp nrnh1Pmc Riirh .cprvi may*be associated with financial institutions (the banking system, as is envisagedin a pending Tndonesian project-) or may be provided indeenndently But they

are an important ingredient to any SSE promotion effort.

- 26 -

V. COODKINATION AND DELIVERY OF FINANCIAL AND TECHNICAL ASSISTANCE TO SSE

Delivery of Financial and Technical Assistance

5.01 SSE encompasses such a variety of industries and services -- modernurban factories producing diesel engines or electrical goods, bakeries andbicycle repair shops in market towns, truckdrivers and market vendors,craftsmen serving the local needs of a city slum or a village, and artisansmaking handicrafts for export -- and such diversity in markets, sources ofraw materials, levels of technology and patterns of location and organizationthat it is not possible to prescribe common needs for institutional suppartor delivery systems. A first general requirement, however, is for meansof distinguishing genuinely (or potentially) productive units from a merespreading of a constant amount of work. For assisting the former categorysome combination of financing and non-financial assistance (TA for short) isusually needed, and it is important that the two be effectively coordinated.But the nature and emphasis of the mix, and the way assistance is organizedand funded, will vary widely for different types of target enterprises andproblem situations.

5.02 The array of agencies that offer TA for SSE development is itselfrather formidable. Table 2 presents a preliminary summary listing of inter-national organizations active in this field. It is not exhaustive: ourrecords are incomplete, and new initiatives are emerging every month. Itis impracticable to list the many agencies or institutions in the LDCs thatcould provide advice or services for SSE, but such national (or local)agencies, thoroughly familiar and integrated with their varied nationalenvironments, are crucial to SSE development and to the effectiveness ofexternal help. In the design of SSE projects and their TA components, itwill be important to identify and to build in effective participation bylocal technical/management information agencies whose capabilities can beprogressively enhanced (cf. para. 4.25).

A. Needs of Modern Enterprises

5.03 The modern, organized SSEs -- small manufacturing plants, construc-tion, trading and transport companies, and so on -- are, of course, moreeasily reachable; and it should be possible for DFCs, commercial banks andother conventional entities to meet their financial needs, given appropriatepolicy adaptations and some supporting TA.

5.04 Apart from strictly technical matters, some modern firms willrequire assistance in getting established and getting finance (feasibilitystudies, project preparation, choice of technology and equipment, setting upaccounts, etc.) and in their current operations (market information, manage-ment training, subcontracting brokerage, dealing with government regulations,etc.) These problems tend to be most acute at the frontiers between the in-formal and the modern sector, and enterprises attempting to make this transi-tion need capable help.

- 27 -

TABLE 2

SYNOPSIS OFINTERNATIONAL TECHNICAL ASSISTANCE AGENCIES

(n hv tvnp nf TA nedetd

Cooperatives ICA, ILO, Technoserve, IVSIndustrial Estates TITDO, SRISubcontracting UNIDO, IACME, APOTechnological Advice) Georgia Tech, ITDG, ITnIDO, CIDA, VITA, IRRI,

and Referral ) JCI, APO, SRI, CIDR, Technonet, FRIDAHandicrafts/Cottage Ind- ILO, TTnDP, SRI, SIDR, TArME, AVAP

Agro-industry development ITDG, Technoserve, ILO, IIDTraining of:- managers/entrepreneurs ILO, UNIDO, AITEC, Technoserve, IID, INED,

Georgia Tech, TLIechJLnonet , TVS , TALnT , APOn

- workers ILO, UNIDO, AITEC, ORT, IVS= extension workersTT A, TTlIT TA 'TKMThT AIT'rEfC ITDTG, eorgia T_ SRI,

IRRI, E-W Ctr, ORT, TETOC, IVS, IMDI, APO

Institutional development- management & organizatio.l ILO, u,IUDO, SRI, UN'DP, Tec[Ilnonet, TETOC, AITEC,

DMI, FBDB- extension centers UNIDO, Georgia Tech, SRI, APO- productivity and R&D Georgia Tech, ITDG, VITA, IRRI, APO

Centers(b) by regional specialization

Africa Technoserve, CIDR, ITDG, Georgia Tech, VITA,!nMDI, FRIDA

EMENA IACMESouth Asia ITDG, RlKRI, Technonet, APO, !ACMEEAP IRRI, Georgia Tech, Technonet, APOLAC AITEC, Technoserve, ITDG, VITA, Georgia Tech,

CIDR, IACMEAll regions ILO, UNIDO, UNDP, SRI, ICA, IID, ORT, TETOC,

IVS, JCI, FBDB

Notes: (i) for meaning of acronyms and more information on the aboveagencies, see Annex 3;

(ii) the information on most of the agencies is second-hand andtheir inclusion in this paper is not an endorsement of theircapabilities;

(iii) some agencies have been active in particular countries ratherthan a whole region, as highlighted in Annex 3;

(iv) the above listing is still very incomplete (see Annex 3).

- 28 -

(i) Organizational Alternatives

5.01 There is no unanimity among the "experts" in SSE development asto the most appropriate relation between the technical information/advisoryservices and the administration of credit, at the level of their combinedapplication. Alternatives are:

(a) A TA agency fully integrated into a financial inter-mediarv -- which helps ensure coordination but may prei-udice the independence of financing decisions. It mayalso confuse. in the client's mind, the TA function withthat of loan supervision and collection, making both lesseffprtivp. Finallv it might uinduilv roncrntr:at- rp.-nnn-sibility for SSE development in a single entity, and chokeoff potentially useful competition and unorthodoxy.

(b) More usual a separate TA agency, under the directinn o-fthe government Industries Department. This could lead tofriction with D-FC-s or bar.ks, with1 the te-chn.ic-al agencyjpushing its clients' proposals in spite of financial andmnnrkptino dsofiris-nripcQ

(c) A -sa-4factory arrangement, in the Bank's 14 em-J .-- r--4

ence, is a TA agency outside, but closely linked with, thefinancial intermediary(s) for SSE, the financial 4-sttu-tion thus acting as sponsor of TA to its clients (actualor p rrSope ctive) and of its clients to t--h TA ---ency TIe

entity that provides or controls financing seems often tohLave the most leve,age (for .at0al.yt. 4c .inflUence. on boththe other parties.

But institutional structure and patterns of influence, and the policy orien-tati4on of different government --agnies, vary from .n to cessential thing is that very close cooperation should prevail between TA (inLhe broadest sense) and LLLe provision of crLdit.-LL

/ZZ ( LMeigNI- nancial Costs

5.06 Financin1g and TA programs Lor SSEs, evenL modeLU Uoes, WL1l cost

more than programs benefiting large firms. Table 3 shows portfolio qualityand profItability data for tlree countries where tlhe Bank has assisted inter-mediaries catering to both large and small (still not very small) firms. Thedata are not strictly comparable, but they suggest that the intermediariesserving the smaller units (MIB, the SFCs and CFP) have greater arrears prob-lems than those financing larger enterprises. 1/ They also have higheradministrative costs for subproject promotion and appraisal/supervision, areflection of the large number and dispersion of smaii projects. Costs ofTA, provided by other agencies are not included in these figures.

1/ However, some SSE-financing institutions -- e.g., the PCB/Syria, the NCB/Korea, the Halk Bank/Turkey -- do not have greater arrears problems.

- 29 -

TABLE 3

PORTFOLIO ANALYSIS AND PROFITABILITY DATA1/

FOR SELECTED DFCs -

Korea India Colombia

2/ -~Privat,

M1B KDB KDFC SFCs- IDBI IClCl CFP Fin as-

a. Quality of Portfolio

Principal in arrearsover 3 months(% of loan portfolio) 3.5 2.0 2.2 9.8 0.5 2.6 9.5 2.9

Long-term portfolioaffected by arrearsover 3 months (%) 7.6 14.0 6.6 39.3 4.1 7.4 16.6 4.9

b. Profitability

Spread onborrowings (%) 4.5 1.2 5.2 3.2 1.6 2.8 11.5 5.1

Administrative costsas % of average totalassets 3.5 0.5 1.7 1.1 0.4 0.4 6.3 1.7

Profit before tax (butafter provisions) as% of average totalassets 0.2 0.6 4.6 1.9 1.6 2.6 1.2 4.1

Net profit as % ofaverage equity 7.5 2.4 18.0 8.5 9.3 11.7 4.3 16.3

I/ Data are from rercnt TIRD Annraisal Renorts and from the Policy Panper"World Bank Assistance to Public DFCs", IBRD/DFCD, Oct. 31, 1974,PRC/S/G/74-20 (internal docuiment)

21 Figures eistatistic m e for the SFC pdatawhich were computed on a consolidated basis.

- 30 -

5.07 The relatively high mortality for SSE is often a predictable con-sequence of deficiencies in finance, technical know-how and entrepreneurialexperience. 1/ The bankers' typical concern with collateral more than cashgeneration works against SSEs and aggravates their vulnerability. Hence moreconstructive and flexible (though not less hard-headed) lending criteriamight improve the survival ratio for infant enterprises. The SSE borrower,if he has the means, is often conscientious in paying his debts -- so longas he is made to understand clearly, inter alia by effective collectionefforts and nrocedures of the intermediarv. that his financin2 is indeed aserious debt rather than government generosity. So there is ground for hopethat traditions of SS. rpnavment will hp established hbut until this has beendemonstrated in practice, over a considerable period of time, governmentquaranteec will still hp nArpCCsry in mAnv rni1ntriPC Tn Tndtn A

to small enterprises by state development banks and commercial banks hasnncreased severalfold by government pressure on the banks to extend their

network to reach small enterprises. However, the guarantee scheme has beenwidAly, r4 tici zeA ,rincpall fy fr tuncrtainty as t t-he -A4 c -nii fr.s r

compensation; a similar scheme in Nigeria has apparently not worked well, buthas in :Bra_zilc .. C1;Ae 4n Aet1 ae <neee - | 4 1Aent4fy th A;e _faceors affectn,ao L"LCL J.J. as..&a. U X. La.C _.L tflj use ats C. &UU.aU. LV U. .LtL.I L.k 3 x*U ,L aL LJ Cl at .L Ot E .-

ing success of different schemes.

5.08 Even with good repayment performance, or guarantees greatly reduc-lgthe default risk, the ur,it cost of administerir,g 100 loar.s of 5,0ig L[L U I.LU.L L.ElbN LiI ULLL L L. UL iL. bL _L Ii %UU £4L~ UL 9jU vuU

is higher than for five loans averaging $1 million. Different criteria andproceduures cLear'Ly must bue usedU. oome current studies arL seeking tU ditll,from the practices and experience of various entities financing small firms,quick, simple screening devices that could largely substitute for more formaiappraisals. These short-cut criteria will vary in different economic/cul-tural environments but should include potential sales demand, unit costs andprices, raw material supply characteristics, and basic financial ability towithstand market fluctuations. Checklists with specific questions or minimumdata requirements would guide the local branch managers' investigation.

5.09 TA costs for the more modern, organized SSEs can be divided into atleast three categories:

(a) advice associated with supervision (and protection) of thecredit extended, which is in the intermediary's interestand should be deemed part of its administrative expense;

(b) technical or business advice to the client going beyondthe scope of normal loan supervision or beyond the inter-mediary's capability -- generally a government policy/

1/ The statistics may exaggerate. Small entrepreneurs often initiateseveral activities at once -- the corresponding "enterprises" consistingof a registered name and a post box -- until one "takes off", at whichpoint the others are dropped; in reality that were pre-investmentexplorations rather than genuine enterprises, but they show up in thefigures as failed businesses.

- 31 -

promotional function parallel to the credit program andseparately funded, although the financial intermediarymight be the catalyst; and

(c) more elaborate investigations or advisory services, re-quiring special consultancy arrangements, which might befinanced from a subproject loan or (if government policyso provides) from a special promotional credit or grant.

5.10 In general, it seems preferable that TA expenditures going beyondthe commentary and advice normally offered in connection with adequate loanappraisal and supervision be identified and financed separately, whether theadministrative responsibility for TA rests with the financial intermediaryor elsewhere. Otherwise, pressures and criteria for control of the inter-mediary's strictly adminstrative costs could be weakened. Adequate fundingfor TA of all kinds needed by SSE should certainly be provided, but the costand financial liability (placed insofar as possible on the beneficiary)should be identified and controlled.

(iii) Financial Charges

5.11 The pattern of financial charges, and the resulting margins tointermediaries, usually reflect a confusing combination of risk calculations,administrative costs, inflationary assumptions, government strategies, andinstitutional policies that are inconsistent, differ among countries andchange over time. It will be useful, in the assessment of specific creditprograms for support to SSE, to isolate the costs of TA and to cover the riskfactor with a government guarantee. The remaining financial policy issuesare compicated enough.

5.12 The question whether small borrowers should be charged less, more,or the same rate of interest as medium/large enterprises has been the subjectof widespread dispute. Because of widely varying circumstances we have notbeen able to rationalize any clear-cut general rule. Still, some tentativejudgments can be made:

(a) for most SSE in developing countries, the advantage of afew percentage points reduction in interest is less sig-nificant than access to credit on any reasonable terms:

(b) a subsidized interest rate for SSE would reDresent a drainon public financial resources;

(c) to attain a secure status, not permanently dependent ongovernment favor. SSEs must be able- eventuttallvy to mpet

marketplace financial terms;

(d) the costs/risks of lending to SSEs are often higher thanfor lending to large, established industries so thatequivalent interest charges, in themselves, would con-stitute a subsidy to SSE but

- 32 -

(e) much higher interest rates, fully covering the lending

costs/risks, would likely encounter severe social and

political resistance.

5.13 On balance, it seems reasonable that the norm for SSE onlending

rates, through officially-controlled channels, should be no less than for

medium/large sub-borrowers in the same country, putting the two categories

on the same general footing as regards cost of money. A modest implicit

subsidy ((d) above) can be justified on promotional grounds, and may in fact

disappear once lending becomes well-established on a low-cost high--volume

basis, such as some efficient financiers of SSE have achieved. Subsidizationof intePrePt- rarPs for SSE would be self defeating. Dartly because it could

limit the amount, and require rationing of credit resources; this would

accentuate the danger of introducing favoritism in the distribution of suchcredit. In addition, it could encourage more capital intensive production

patterns and discourage saving and reinvestment on the nart of those small

entrepreneurs who obtain subsidized loans. Moreover, the lending institu-

tions should seek to attract individual savings as an increasingly importantpart of their resources, which will prove difficult unless they are able topay acceptable rates of interest= Tt is rerognized, howpver, that nolitical

attitudes may impose levels of interest for SSE lower than this norm in some

countries, and these will have to be taken into account in lending dpcisions.

5.14 Bank-financed DFCs are expected to protect themselves from any

material risk due to currency adjustments by passing on the risk to sub-bor-rowers or arraging for it to be assumed by the government/central bank. Tn

SSE operations, the borrower as well as the intermediary should not be ex-

posed to exchange risk, since most would find i4t incomprehensible. Hence it

seems appropriate that government assume the exchange risk in SSE operations,

charg4ing a reasonable fee.

5.15 rle bad financial reputation of SSE results in part from slipshod

practices of lending institutions, some of them politically influenced and

not cLearly expected, either y the public authorities providing thei-r funds

or by their clients, to recoup their loans. On the other hand, a number of

institutions ihave sho-wni that they can strictly enfLorce repayment obllgatons.

Perhaps the prime requisite for successful SSE financing is to inculcate

such financial uiscipline, riot only to prevenit continuing drain of public

resources but also to encourage rational investment and managerial decisions

by borrowers.

B. Needs of Artisans and Informal Activities

(i) Technical Assistance and Logistical Support

5.16 The fragmented, dispersed character of the smallest SSEs makes it

extremely difficult to organize assistance to them. Informal industries nor-

mally depend on expensive support from middlemen; or are isoiated, cater only

to the closest markets, live from hand to mouth. They could benefit by joint

- 33 -

organization or support services to proviue an integLated package oL assls-tance, spreading "overhead" costs over a number of formerly decentralizedunits. With organization around their critical unmet needs, they could reachlarger markets, increasing and upgrading production capacity, and could offerbanks a better credit risk.

5.17 However, the needs are often industry-specific, only superficiallysimilar. Project preparation must look systematically at the nature ofproducts and markets, and specific functional needs, to devise appropriateproject components and grouping possibilities. Often single-industry, tailor-made strategies would be more effective than general-purpose, "catchall"institutional or TA schemes, but given the diverse and dispersed nature ofinformal industries single industry support may be impractical and costly.For instance, a "full paclcage" approach comprising cooperative production

facilities, TA, bulk raw material supply, and marketing collection pointscould be justified for an urban or rural concentration of shoemakers, but notfor scattered village cobblers -- even though the latter may be in greaterneed of an active, integrated approach due to distance and difficult accessto raw material supplies or markets.

5.18 When the concentration of informal SSEs is not sufficient to war-rant common services, more intermittent information and advice on specificmarketing, procurement, technical or organizational matters might be pro-vided -- the emphasis necessarily on general needs of diverse industries andservices. Scale economies and a more focussed strategy might be achievedby selecting for concentration a few major industrial lines, potential orexisting, in each area, using standard investment and management packagesfor credit and new SSE promotion. Also, extensionists can help form looseassociations among existing producers -- e.g., for village blacksmiths toorganize joint purchase and transport of scrap metal, common sales outlets,and training and information-sharing seminars on improved equipment to re-duce costs and improve marketability of agricultural implements. In thisway, small single-industry networks could develop that depend on outsidehelp only for initial organization and subsequent trouble-shooting.

5.19 Service industries (e.g., commerce, local transport and repair)usually require less institutional support; nearly all cater to local mar-kets, require few raw materials, and have flexible, autonomous organization.Access to working capital and investment credit is usually the main requisite.Cooperatives or associations can provide broader distribution of earnings,possibilities of increasing services and some wholesale purchasing economies.But integrated support and active intervention is usually more difticult andless effective in the services than for manufacturers.

5.20 Marketing is the major problem of most small manufacturers andthe starting point for project intervention. Small firms often lack directaccess to larger, lucrative markets; distances, poor quality and design,limited production capacity, and lack of information about potential nichesimpede their gestation and growth. Firms at a distance from markets, inrural areas or small towns, need institutional support to provide informa-tion on growth markets and related design, price, and quality requirements;

- 34 -

joint collection points with quality control; and common transportation.Firms closer to the market can get much of the information themselves andeconomies in transport are less significant.

5.21 Another important factor is the length of the project life cycle;if, as in fashion and high technology items, the characteristics and designsof products must respond rapidly to changing demands, then small, decen-tralized industries will need close vertical coordination to provide quickdiffusion of market demands and corresponding design and technology changes.Likewise, tight organization of collection points, quality control anddelivery will be needed. On the other hand, for a standard product (e.g.,of grain mills, tanneries) assistance in distribution may be necessary, butquick, tight market information and coordination is less critical.

5.22 When informal producers move into more demanding markets, theyoften need special TA to make the transition to reliably improved quality.In cases where SSEs have vigorous management they can often find their ownmarket niches, arrange stores and transportation, and convince commercialbanks to lend for working capital needs. However, such skills are scarcein most countries; most small producers work through middlemen or for localconsumers, and have little knowledge of broader market potential and require-ments. Attemnts to renlace the middlemen with government or coonerativemarketing structures have sometimes proved more clumsy and done little toimprove the artisans' market contacts, knowledge or autonomy.

5.23 Raw Materials often make up 50-80% of the cost of goods sold bySSEs, partly because their supply is costly and of inferior quality, detract-ing disporportionately from thp final product value=. Artisans must buy hand

to mouth, often squeezed by seasonal or chronic shortage; provision of work-ina canital -could greatIv imnrnvp their hbraninina nnpitionn and nrnducltivity=

Government policy should avoid discriminating against SSEs in access to rawmater ials,import liceanss or g m r imprtat s-trc

5.24 Backward linkages from SSE to the agricultural, livestock, fisheriesand forestry sectors are important, especially introduction of techniquesoand tncentiv-e -oruprade inteJ,,rme te pAJ rrocsng anA handA1 4n- -i, 4 could

greatly increase the value added at each stage. For instance, improved toolsand techniques fo.r flaying and initia4l --- a o- hide in4 Id could-1

double their value and enhance the range and quality of markets for finished

5.25C Techr.ology is often stressed un -l "ISS extension networks, rela-. _L ~ LLJLUL)&Z .j. L.. ~L a ..~a ULLUU.Ly LJJ 0).)L u L ILJL � LVWULML.a, L E.LCL

tive to marketing, organizational and raw material needs. Capable artisansin LDCs have ger,erall'y undUergone long apprenLtiLceshlip andU are technicayllknowledgeable and adaptive. Still, some forms of technological assistancecould well increase thC co,mpetit.LveL1ebs Uo SSE UL enhlliaice tLhe use of localresources. Existing labor-intensive equipment can be introduced selectivelyand made accessible to SSEs by extension work, hire/purchase arrangements andinvestment credit. Introduction of simple equipment may give a major impetusto a small, unorganized producer, provided his other requisites are met,opening up new markets and at the same time imposing stricter quality, price

- 35 -

and minimum contract requirements that call for further upgrading of skillsand/or equipment. At this transition point, the SSE may need TA in selectingmachines, a short practical course on their use, introduction to methods ofquality control. TA can be important to subcontracting arrangements; forinstance, light engineering SSEs can benefit by joint quality/testing equip-ment, and R & D workshops for developing proprietary or joint products.

5.26 Institutional support is needed at least as much in the organizationof production as in its strictly technical aspects. Production cooperativeshave had some success, where artisans benefit by pooling or jointly purchas-ing complementary or expensive equipment (e.g., shoemaking, carpentry, metal-working); in areas resistant to cooperatives, reciprocal use of individuallyowned equipment, combined with joint facilities for bottleneck or highlyspecialized operations, may yield similar benefits. Artisan acceptance ofindustrial cooperatives in some settings has been hampered by the organizers'insistence that artisans pool assets and form joint production units; as inagriculture, industrial producers are more open to cooperating on marketingand input supply, since the producer benefits from economies of scale withouthaving to relinquish control over the source of his livelihood. Reciprocalarrangements and joint facilities may be arranged around existing productionsites or within industrial estates.

5.27 Training should mainly focus on short, practical sessions to upgradeskills of existing artisans, apprenticeships and work-study arrangements--avoiding more lengthy and more formalized types of vocational training whichtends to exclude existing artisans and other target group members. Conven-tional vocational training would be necessary, however, in new subsectors(e.g., electronics) or in countries with a very limited skill base.

(ii) Finance

5.28 Very small enterprises are usually short of cash, hesitate toborrow and have little access to institutional credit. Many of them couldadvantageously use local currency loans for raw materials and upgradedequipment; foreign exchange represents a small (although sometimes critical)percentage of total credit requirements, especially for informal SSEs. Beinglabor- and raw material intensive, SSEs need credit mostly for working cap-ital rather than fixed assets; and while their permanent capital base issmall, their working capital needs are both relatively large and fluctuating.They keep incomplete (or no) accounting records and cater to volatile markets;their risks and returns are hard to evaluate reliably. Hence commercialbanks shy away and SSE, especially informal ones, have to fall back on themiddleman/moneylender.

5.29 The criteria and procedures for more organized provision of fi-nance to the smallest enterprises must be drastically simplified: minimumpaperwork, with standard packages roughly indicating the amounts needed for

- 36 -

different activities; 1/ loans based primarily on the strength of the market,internal management, and institutional support; strict ongoing supervisionbeing the main reliance for loan security. Hire purchase or equipment leasingarrangements may be especially appropriate. Information promotion campaignsare necessary; SSEs often have no idea how to approach a bank. Amortizationterms should be reasonable and flexible; the eventual repayment record of SSEcan be excellent, but temporary slacks in the market, production problems orraw material shortages may cuase renavment delays that are recouped later.

(iii) Altern2tive to the Middleman

5,30 A nrime ohiert of effertive SSE assistance programs in many coun-tries must be to devise an institutional (cooperative, private or govern-mental) delivery system that will similOtP the nositive snpects of the mid-

dleman systems -- its "full service" package, its operational flexibilityan-d lea-nness -_- while redi nc antnl oi t> t-iv fP tiirpsQ qirh :: vystm rnoil i

(a) mi4nim4-e4 -1-,- -th A fo- -vrk4ina capital advirn,ces to in-

dividual SSE participants, since they could draw rawmateralslc from a common wrehoi,se return the finished

products and be paid for the value added;

(b) assess other credit needs and certify them to the banks;

(c) assure repayment, by check-off from the sale of finishedgoods;

()th.rough standard specificat4-n .an inspection, assurecustomers of product quality;

(e) explore wider market possibilities;

(f) provide assistance on design or technical problems; and

(g) provide common facilities, with equipment too costly ortoo seldom used for individual SSEs to own or lease, on afee basis.

1/ Prototypes for such activities as bakeries, auto repair, wood andmetaiworking and stone crushing, gearLd tUo lCal markets of different

size categories, are a feature of the SSE loan to the Ivory Coast. Eachmodel specifies the facilities and working capiLal requireu fUr LLLe

enterprise of appropriate scale, its likely costs and financial results,minimizing tne need for appraisai guesswork by tne loan officer andgreatly facilitating the monitoring of the subproject. On the otherhand, the number of such standard units that could be introduced and

be viable in any locality is necessarily limited; this too needs to beassessed.

- 37 -

5.31 If alternative delivery mechanisms are to compete with the middle-man, performance incentives for the extension staff will be needed to over-come the routine government: lethargy. In larger countries it might helpto establish at least two competing profit centers within the governmentframework, with no geographic demarcation, and to make regular comparisonsof methods and results. Most of the staff should be in the field and havesubstantial autonomy in decisions.

5.32 Such a model wouLd be suitable mainly for fairly homogeneousartisans' activities. The more diffuse informal trading, transport and otherservices are less susceptible to help through package programs. The alter-native to the moneylender, if any, is a generalized commercial banking orcredit union program. Banks frequently have an extensive branch network todistribute and supervise credits, and mobile branches could help to reachout more effectively. They are seen as commercial, rather than dole-givinginstitutions. They have experience in working capital finance, althoughmainly so far to established enterprises; but a judicious combination ofguarantees and incentives can move them toward SSEs.

5.33 Industrial cooDeratives are an attractive concept since they connotemanagement and distribution of earnings among the producers themselves, andthe achievement of some economies of scale without permanent denenaence ongovernment support. However, the record of small industry cooperatives hasnot generally been good. mainly due to weak management. To transform ruiralor slum-dwelling artisans into effective cooperative managers or participantsis likely to be a slow nrocess, for which supnort from an interim, self-liquidating government entity, for training and establishing links, wouldbe useful=- I/

(iv) Meeting the Costs

5.34 The costs of effective institutional support o artsans and in-formal industries are greater even than those for "modern" SSE. But so arethe nnotent-il Prnnnmir hPnPfits, including the possibility of raisng many

1/ The rickshaw-pushers' cooperative in Comilla (then East Pakistan) irn theearly 1960s was a unique example of internal leadership and externalreinforrcemnt. Tnsnired nnd ncassist by the Acnad , em for Rura l Develoment nearby, the rickshaw-pushers, who had been paying something like60nl of thoir daily earnrin as rent for their vehicles, banded togetherto collect a few pennies each day to buy them. Their combined savings,suppleme-ted by lo-ans- from the central cooperative federatlon. and repay

ments at a high (by 1960s standards) interest rate, made them alli jndependent operators wilthin a couple of years; and having learnedU whatmiracles compound interest could accomplish they went on to become jointo-"ners of a repair shop, trucking company and -- LU -- A-rr,, - - - di.. iM

- 38 -

of these enterprises above the commercial thresliold. 1/ As with the modernSSE sector, it seems useful to distinguish the cost of money and loan ad-ministration from other (TA and guarantee) expenses, and to set the normallending rate at a level no less than for larger enterprises. The othercosts would be absorbed by public agencies serving this sector.

I/ SSEs are usually fiercely competitive, which accounts in part for theirhigh birth/death rates. The benefits of commercial survival and pros-perity for some are partly offset by losses of others, but with likelyincrease of efficiency overall.

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VI. ACTION BY THE WORLD BANK

6.01 Based on the information and analysis so far available, the follow-ing conclusions seem justified:

(a) that a very important, perhaps the most important, meansto benefit the great mass of urban (and rural non-farm)population is through expanding effective demand for labor;

(b) that smaller enterprises (SSE) typically provide more jobsper unit of investment than larger ones, service occupa-tions being especially effective in employment creation;

(c) that SSE development is subject to serious handicaps,stemming from government and institutional policies aswell as some inherent weaknesses; and

(d) that a variety of measures have been identified, andtested to some extent, that seem to offer promise formitigating these weaknesses and anti-SSE discrimination.

Implications for World Bank policies and actions are suggested in subsequentparagraphs.

A. General Orientation

6.02 During the five-year period FY 1972-76, Bank Group financing forDFC projects amounted to about $2,200 million, 1/ of which only about $100million was explicitly directed to SSE, almost all since 1973. HIowever, mostconventional DFC loans, as well as some industrial estates operations, alsobenefitted small firms. 2/ During the FY1972-76 period, total Bank assistanceto enterprises falling within the small-scale definition set out earlier istherefore estimated at about $180 million. Table 4 lists proiects approved,plus those anticipated in the Operational Summary dated February 19, 1977.

6.03 It is recommended that in future lending programs the Bank givegreatly increased emphasis to assiting SSE. including sole proprietorshipsand firms with only a handful of employees. 3/ This is not to suggest an

1/ Additional direct lending for industry and mining (almost entirely largeenterprises) during FY 1972-76 was $3,100 million.

2/ A study of a large sample of Bank-associated DFCs in the 1970-72 periodindicated that about S ,-000 enternriss financdcI hv the rponnndent DFCs,

about 50 percent (by number) had fixed assets after project completionless than $300,000, about 30 percent below $100,000.

3/ Tentative Drogram targets are set ou t in npra- 6 07 helnw=

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Table 4(As of February 1, 1977)

Bank Projects with SSE Impact-'

Estimated SSECountry FY Nature of Project Amount Share

($ million) ($ million)

Approved

Pakistan 1962 Industrial Estates Development 6.5 6.5Pakistan/ 1970/72 TA and Import Finance 3.0 3.0Bangladesh

India 1973/76 DFC 65.0 30.0Mauritius 1973 Industrial Estates

Development and ExportProcessing Zone 4.0 2.0

Yemen 1974 Industrial EstatesDevelopment 2.3 2.3

Nicaragua 1974 Sites and Services Develop-ment and Credit 2.5 2.5

Jamaica 1974 Sites and Services Develop-ment and Credit 1.9 1.9

Colombia 1975 DFC and TA 5.5 5.5Philippines 1975 DFC and TA 30.0 15.0Sri Lanka 1975 DFC 4.5 0.2 2/Cameroon 1976 DFC 3.0 1.5Cyprus 1976 DFC 6.0 0.8Ivory Coast 1976 DFC and TA 5.6 5.6.Tnrdan 1976 DTM' 4=0 0.3Korea 1976 DFC 30.0 15.0Knrea,q 1q77 DFC 82=5 7=5

Kenya 1977 Commercial Banks (IFC) 2.0 1.0Liberia 1977 DGC 7.0 2.0Nigeria 3/ Integrated SSE DeveopmentRwanda 1977 DFC and TA 4.0 1.0Senegal 1977 DFC 4.2 0.2Somalia 1977 DFC 5.0 2.0

Total 273.5 103.8

1/ Some projects, including some of those in gestation, are described inA,nexes 4 ar. 5 . Aefin-ion of CSS is the cu-t'se up

1-1 LL- I ,- I ~ ~ ~ I L IIC U-- C y UeC LtltLL._ LIon I

to fixed assets of $250,000. A DFC project has an SSE share if i) itlhas an earm,arkmedu SSE"1 com.ponent or i1i) m.ore th1an 20% of the general DFCll~i til COtLIIIL N U .J1L~l.tJlLp~1iC1 L t .L J IltJ C Lldh /U . 'JL LI ,C LC i LI %U

loan is expected to go to SSE projects.- Thi~4s i thLe portlo ear.ared ------ of the genra loan --- also e--L. I Lllt~ £_L I -JI L ULtJE cL rid l.C * PAL Ut LIIC- rtiiCt_- _ L.VtUdl -o dI-bU tCX

pected to be used for SSE projects.J/ iThe BDankN h1das provided techntical assistance andi will1 provide additionai

assistance toward the implementation of the project. The funds, how-ever, are Nigerian. Total cost is $165 million including a creditcomponent over the next five years of $80 million.

- 41 -

Estimated SSECountry FY Nature of Project Amount Share

($ million) ($ million)

Appraisal Stage

Bangladesh 1978 SSI II 6.0 6.0Burundi 1977 DFC 2.0 0.5Colombia 1977 DFC/SSI 20.0 20.0Indonesia 1977 ? Small Business Development 20.0 20.0Kenya 1978 SSE & Industrial Estates ? ?Lesotho 1977 DFC 2.5 0.3Mauritius 1978 DFC, SSE & SS Ag. 15.0 3.0Somalia 1977 DFC 5.0 2.0Swaziland 1977 DFC 5.0 0.3Turkey 1977 DFC 74.0 - 4/Upper Volta 1978 Urban & DFC 11.0 3.5Sierra Leone ? DFC 3.0 1.0

Preparation & Preappraisal Stage

Ghana 1978 SSI Development 10.0 10.0Ivory Coast ? SSE II 10.0 10.0Mexico 1978 DFC/SSI 30.0 - 5/Nicaragua 1978 ? DFC/SSI ? ?Philippines 1978 SSI II 20.0 20.0Tunisia 1978 ? DFC/SSI ? ?

4/ Portion below $250,000 in fixed assets will be small.

5/ A high percentage is expected to be SSI.

IDFD

2/18/77

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uncritical "small is beautiful" aporoach. It will sometimes be better tofoster projects benefitting both small and medium enterprises; depending oncountry circumstances, medium enterprises may offer greater notential forindustrial and service linkages, labor productivity and employment objectivesthan the smallest categorv. Enterorises of every scale of assets and emnlov-ment should be encouraged to choose technology appropriate to the relativefartor nrnnnrtinns in thpir conntryv where a rhir-p pxists-

6.0n4 Tn its cruntrv Pronomic and indiuvtri1l sect-nr work, and in the

continuing dialogue with governments on,development policy, the Bank shouldulrgp nprslstPnt1v the crrrprtinn of nnlircipe nd reguulatorv mpeasurpe that

have the effect of (a) encouraging undue capital intensity in investments,and (h) of inl;ihibiting the nhilityir of SE t-o fuinction effectiveolv anrl ton

expand (paras. 2.04 and 4.01). In come cases these issues may usefullybe addressed in the ontext of no nFG/qqpprojects.

6.05 With due regard to specific country situations and relationships,e h a DonA r- ,mc h ..

1A AX A r.nn,n mn,st; nFiAne fc.F nvrc a n,rr rl -, rn.0,, 1 nn nAo A hLe Reg ios L should send communicatins CU E toDFtCLLs cLy XceivintgLLos

underlining the Bank's desire to increse the employment and income effectsof development efforts, specifically (a) setting forth the Bank's concern(and rationale) for assistance to SSE, including the need to involve poorpeople mUore dlrectly in the process and benefits of develJopm,enr.t (b) urging

them to examine possibilities for labor-intensive options in their appraisalof subprojects; and (c) soliciting their suggestions as to effectiv

of promoting appropriate technology applications and SSE development in theirrespective countries, to w.4ch the Bank .. ight make some contribution. As

appropriate, communications to the governments concerned should convey aparallel mtLessage anU also emphasize the importance of a favorable public

policy environment; make clear that Bank assistance, though potentiallyplayirg a 'larger rol`e £1 supporLt of SErA eve tpment can cover Lthe Lilalc i

needs only in part; and encourage further consultation on possible forms ofcollaboration in thilLs gernLera l area.

B. Tentative Lending Operations

6.06 Early in calendar 1976 the uuits of the Bank concerned with DFCand SSE projects analyzed the potential for expanding Bank lending to inter-mediaries assisting the manufacturing ana service sectors, with specialemphasis on smaller enterprises. Their preliminary assessment of projectpossibilities indicated a very large unscreened potential. More recentprojectionis, shown in Table 5, suggest that during FY1977-80 total DFCapprovals could reasonably be expected to amount to $3,435 miiiion, of whichabout $775 million would be SSE lending. Extending the projection by an addi-tional year, the FY1977-81 total would rise to $4,535 million, including$1,105 million of SSE lending. The DFC totals would amount to 10-11% of theoverall Bank/IDA lending program (as of November 1976) for FY1977-80, approxi-miately the same proportion as in recent years, and an estimated 11.6% of theFY1981 overall program, about the same as in the previous peak year FY1976.

- 43 -

Included in the DFC figures, however, are some operations of types notpreviously so classified, such as industrial estates, portions of variousurban/rural development projects, technological research and development,business extension services, etc. SSE lending might be expected to rise from$90 million in FY1977 to $300 million in FY1980, doubling its relative sthareof the DFC total from 12-plus percent to 30 percent, and hold at about thlatproportion in 1981 and beyond.

6.07 If one compares the figures shown for FY1978-80 with actual ap-provals in FY1974-76, thinking of FY1977 as a transition year, the DFC totalrises by 65 percent, from $1,632 million to $2,700 million. SSE lendingjumps by nearly 1,400 percent, however, from less than $50 million to $685million. These are currrent-dollar increases, of course, not allowing forprice inflation. The precise extent to which future SSE lending can bechannelled through our traditional DFCs is not clear at this time, but itseems likely that a substantial proportion will have to be passed throughnew (to the Bank/IDA) intermediaries. The projections include sufficientamounts to permit continued assistance to most (but not all) of our cur-rent DFC clients, many of which lend in substantial part to medium/smallbusinesses and lack access to other suitable resources.

6.08 Apart from the tentative DFC/SSE projections shown in Table 5, wewould hope to achieve during FY1977-81,

(a) at least 10 experimental projects, with Bank assistancetotalling at least $50 million, involving (i) new tvDesof intermediaries and technical assistance, (ii) newapproaches such as cooperative programs, cottage indus-tries or integrated schemes (with minimal average fixedcost per iob), or (iii) R & D initiatives in develoningregions;

(b) at least 8 industrial estate projects to support in partsmall enterprises, with Bank assistance totalling atleast $60 million; and

(c) at least a third of total DFC lending being directed intosubnroiects for which average rapital cost/iob wouild bewithin the country-specific guidelines agreed for theUrban Poverty nrogram I/ (see narn- 2-01 fnotnotep)

1/ This criterion is designed to highlight; inter ali2, the Bank's concprnfor the application of "appropriate technology" in project design, i.e.,avoiding undue use of Pnuipmieint in labor-surpluseconomize This appliesto DFCs catering to medium and large enterprises as well as for SSE;some of th.- SSE lendino mnv not 'ztiqfv tho root-npr-i;h gidl."ines,whereas some of the conventional DFC lending will.

- 44 -

Table 5

Tentative DFC and SSE Lending Projections FY1977-81(million $)

Total DFC SSEFY Lending Lending SSE/DFC

1977 735 90 12.2%

1978 800 160 20%

1979 900 225 25%

1980 1000 300 30%

1981 1100 330 30%

1977-80 Total 3435 775 22.6%

1977-81 Total 4535 1105 24.4%

IDFD!/18/77

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C. Lending Policies

(i) Local Currency Financing

6.09 Use of Bank financing through DFCs has typically been limited tothe cost of imported goods and services, sometimes including the estimatedimport content of locally produced goods. 1/ This restriction has not ad-versely affected conventional DFC projects to an appreciable extent. But formost labor-intensive and SSE projects, the incidence of imported machineryand raw materials is lower than for larger firms. SSEs often operate in sec-tors where labor-intensive, domestically developed technologies are availableand adequate; their local markets do not require sophisticated technology; 2/their lack of access to capital dictates investment in domestic/labor-inten-sive rather than imported/capital-intensive equipment; and cumbersome importlicensing regulations often compel them to buy "off the shelf".

6.10 These assumptions are confirmed by the Bank's experience in assist-ing intermediaries catering to both small and larger enterprises int the samecountry. In Colombia. the imnort content in fixed investment was 24% and 45%for small and medium firms, respectively. In India, the corresponding figuresare 16'! and 35.. More generallvy an analvsis of direct imnort content onthe basis of different project sizes suggest that there is a strong positivecorrelation between imnort nronensity and scale of manufacturing- 3 / Althoughno data are available on the informal sector, the direct import component maynfrtn hp 7Pzr nnd thp indirprt one small1

6 11 Tol the extPnt that notpntally cnmnpetitivo dnmestic indiust-rips are

precluded from bidding on contracts, benefits from indirect employment andimnrrovped larnl knowhonw a.nrnd exvperience wdel bhe h lnot- The negactixve cornse-

quences of discouraging local production and encouraging capital intensiveim.nnrt, - if BanL finan--- ic liit- t- importeaA gnoosa -I 1 -end t- inc-rase

with the clhanging magnitude and emphasis of Bank programs and the expansionof doimesrir industrial crnnpiry AlzSO, the psychological effect of exclusionof domestic suppliers runs counter to the attitudes favoring employmentcreation which the Bank is seekig t ft For all these reasons, and

subject to specific justification, the Bank should approve local cost financ-ing in specific SSE cases, particularly in the informal sector where therequired loan amount may be considerably in excess of the total direct andindirect im.port com.pon.ent.

1/ Explicit local currency components have been included in only two cases' .*l eC t aL..1 t; '-L ICL L. JL L

E V. t L Cl t

in/ Thl fato is... por, o.t,jt,cant,. Xln explai.LXingLL U the significtanti d t!.ifft erencs

which IDA observed in lending to the 18 SFCs in India. SSEs locatedtin b.ackw1a a rea apparently had -. ,uch _lowe -irport requmlrer,ents tha..

those in the more developed states.

3/ See Annex 2.

- 46 -

(ii) OtLir Leidinig Poltcies

6.12 ro make the forms and terms of Bank lending appropriate for theneeds of SSE, some otlher adjustments in lending policy may be necessary, asfollows:

(a) greater flexibility in permitting working capital finance,to include certain priority needs of shorter term (paras.4.17-4.18).

(b) drastic simplification of criteria and procedures requiredfor SSE sub-project evaluation, relative to conventionalDFC operations; and

(c) permitting governments to pass on Bank/IDA funds to an SSEintermediary at a level below the Bank's normal interestrate, if necessary to permit the intermediary an adequatespread to cover high administrative costs, provided therates charged to ultimate borrowers are consisted withpara. 5.13.

(iii) New Intermediaries

6.13 Intermediaries of different kinds from those generally used in thepast will be needed in order to get down to the target group. The Bank isexploring the potential, in various country contexts, of the institutionalpatterns and programs outlined in Daras. 4.21-4.39 (see also Annex 4). Giventhe paucity of reliable knowledge on many of the factors affecting the growthof small enterprise and informal sector activity, our approach must be one ofpractical experimentation for some time to come, before the Bank can prescribedeliverv svstems offering good nrosnert-s for suienessful rpnliratinn.

6.14 The experimentA will need to be designed with narticular care toassure close project monitoring and feedback of experience. Monitoring pro-cedilres and stVandardq thtr may he annropriate for SSF. onperation of various

kinds are being designed, and discussions are underway with several Bankcl ientsQ with n vioew t-o asciuringy their fenaihility anrl rolexvanoe and assess-

ing tiheir costs, prior to introducing a comprehensive monitoring/evaluationsvstem.

D. Staffing Implications

6.15 3..- Experien.ce so far is too CCt.I to pr.i preie estilmate of

additional administrativecosts which the proposed shift of emphasis towardencourage,,ent of more llabuorLintensive teciLInoLogy andU assistance to smallerenterprises would entail. Certainly they must be taken account of, includingthose associated with

- 47 -

(a) attemnts tn imnrnvP nocrps by intprmpdiaripe and inxvPtoirs

to appropriate, lower cost, job creating technologicala1ternatixvPe whichb rd nnt bePnefit from theo cQmonmmercial

subsidies as does promotion of conventional technologies;

(b) the more complex institutional mechanisms (financial, TAand R & n) reoq,ireA f-r effective and e-onomically sound

SSE development; and

(c) the smaller size of SSE projects, relative to past DFCoperations, reosulting l n much higher cost per dollar oflending aggravated by (b) above.

6.16 The meager initial experience suggests that SSE projects involvingthe creation (o0r m,a j o r rest r u cIurineJwnstturing) of new i LLsti Lu1ion r=e4quJire approxi-

mately twice the staff time (per loan, and much more per million $s lent) asas,.V Zx £L'.rs 110 L i £1 511t. ntIClt:: sill 15.3Ll LU tIIIpuhUIL Lb LUIiIl) I,U WlLII .1 conLvenI-

tional DFC operation, the incremental staff involvement may be about 50 per-cent. With further experience, clearer guidelines a-nd staff training, thesedifferences in staff costs will be reduced, but never to zero.

ANNEX 1Page 1

The Potential Contribution of Small Industriesto Economic Development

1 . The following discussion relates essentially to manufacturing enter-prises producing goods and services for a market wider than the neighborhood,SSIs using powered machinery and other relatively "modern" techniques. Itdoes not deal with the traditional or the "informal" sector.

Relationship of Small to Large Firms

2. The technical and commercial transformation called the IndustrialRpvolution was accomn1inhpd largely through what (in riurrpnt tprms and bythe definition used in this paper) are SSIs -- entities with modest capital,a few score workers at most owned and managed by a sinale individull or

family. Really large firms were slow to emerge. As late as 1,900, thehundred largest British industrial firms accounted for no more than 10-15percent of manufacturing value added, and the picture was little different inthe rest of Western Europe and North America. The explosive growth of reallylarge-scale organization occurred in the next half century; large firms arenow the do0m4nant- modle. Typically the hundred largest manufacturing enterpr4ses&ktW LLt .. tJL.LLaI U L L~ -9taL.J L ALC CL. LlJ Oi £u A -L 0 W LL . IUA .L5 CLL jJL 0

in developed economies now control at least half the total of manufacturingassets, with a varyiLng bJut comparabULe figure for value auueu, Uut a Lesser

employment share relative to output.

3. Nonetheless, in these economies many small manufacturers have con-tinued to exist, 1 proviiUding thLe faLmiliar s.LLkewedU distribution with thLe moUadaL

size being close to the smallest, and an extremely long rightward tail stretch-ing toward ithe giants. Many OL these small rLinms are seLVice-Uoienlted, orproduce for a circumscribed or specialized niche in the market. Many produceintermediate products Lor large firms; tne development of the subcontracLingrelationship has been particularly marked in the economic history of Japan. 2/As industrialization proceeds, small firms seem naturally to snift fromactivities that compete with large firms to complementary ones.

1/ The data were recently developed by Dr. S. Prais of the British NationalInstitute of Social and Economic Research.

2/ See S. Paine, Bulletin of the Oxford Institute of Economics and Statistics,May 1971; and Table i.

ANNEX 1Page 2

TABLE 1

Janan: Denendence of Large-Scale Industries on "Sub-Contracted"Industries in Terms of Proudction Cost

Percentage of Production Cost Shared

Industries By Sub-contracting Industries

1. Rolling Stock 702. Ship Building 703. Motor Car 624A Textile Mchinery45. Telephone Switch Board 266. Sewing Machines 407. Ammunitions 408. Bicycles 319. Gauges 30in. Weav4ng Machines 28± U* nILVCt Ja,LL,~

11. Automobiles 2812. Olpticall & Precision Instruments 26

13. Motor Bicycles 251 4. Other InduustrLal M'cht-ines 2

15. Communication Apparatus 2016 .TWatches 1J. U. YE L.LI1~

17. Vehicles 18la. Electric Mlotors 1 7

19. Electric Appliances 11

~~~ r _ __ _ _.{ 1\T _:_ 1 C_ A 2 _:__l … _ __1 fl. C.. c _- _-

Sources:. (1 ) rur iL ltle 1 LU t ab.Ls an 'a-ULi UL1l i C II X U:L e L1 C c, L..V., p .P7 .

(2) For the rest, Asia Kyokai, The Smaller Industries of Japan, 1957,p.101.

4. Apart from firms involved in subcontracting, why do so many otherSSIs continue to exist? A common answer is that they have distinct advantagesin organization and marketing flexibility. A deeper answer is found in thenature of the process by which firms generally grow. Even if, in the absenceof direct or implicit government restriction, the ultimate size ot the moderncorporation may be unlimited, there are financial, organizational, and marketingconstraints on its rate of growth. on the financial side, past profits limitfuture growth. As for organization, there is strong evidence that it is excess-ively rapid expansion, rather than excessive size as such, that leads to thecharacteristic forms of managerial inefficiency. 1/ Enterprises often play an

1/ See for example, Edith Penrose, The Theory of the Growth of the Firm,Oxford, 1959, page 47 et seq; Mason Haire, Modern Organization Theory,New York, 1959, page 283; R. Marris, The Economic Theory of ManagerialCapitalism, London and New York, 1964, page 114 et seq.

AN'NE

Page 3

Relative Prevalence of Subcontracting Firms in Different Categoriesof Manufacturing Industry: Japan 1966, the firms with employees less than300 persons.

O$t |n p. CA

:Zs ct | Vz-rw<ss 1atwy.,ack/as>3 sw LO

C) I tR '/ ei..'.- >.

I-. .-iSns wA /n't1A C A Cr 1

CD .C.AverwteEC{ff 7U En Lu r,he-r

o' E" r,/ r ^Cenco fO _-Shvo|

c-I I' K I

(n /X - II.° to v ~~o 3 o 4-o0

% of the total firms wrhi ch are subcontractorsexclusively of one single primary firm

Source: Smaii and Medium Enterprise agency, r.u.L, dLLi- La-ka Chaushou Ki~gyo

Sogo Kihon Chosa Hokokusho, Sokatsu-hen (Report on The Third Coin-prenensive and Basic Survey oi Small and riwieium EntLerpL±se, aso

December 31, 1966 - General Report), March 1969.

From Shigeru Ishikawa, Appropriate Technologies -- Some Aspects ofJapanese Experience (mimeo, 1976), p.40.

ANNEX IPage 4

important role in developing labor skills, especially in developing countries,but there is a limit to the number of people who can be effectively "trained"in any given period.

5. Different firms can grow at different rates and their growth ratesin one period may not be highly correlated with their growth rates in the nextperiod. But it remains valid to conceive of a kind of natural rate of growthfor any enterprise, consistent with its continuing to function with reasonableefficiency. Thus many small firms exist because they either operate in fieldswhere there is little opportunity to grow or lack the combination of luck andability to grow larger.

6. By contrast, the international development effort other past threedecades has tended to foster the "creation" of large-scale organizations, byfiat or feasibility report. In most developing countries a conscious indus-trial development policy was formed only after World War II, or later. By thattime the model of industrialization in both the OECD and the Eastern EuropeancotntrieR featured large- inteerated nlants: this is what thev had for Rale.

conceptually and commercially. And it was what the incipient tycoons in theLDCs- or the industrial nlanners and managers in their governments- wantpd.It seemed the modern way, the way to catch up quickly, with imported techno-logy and turn-key cnntrarts. Rence the big enterprises, niphlir or private,enjoyed tax, tariff, import licensing and credit favors while smaller unitsiirviued as bhet thev cou1ld, nftpn with Qsriousi handicran in relation to the

administrative and financial establishment. i/

7. Such exotic industrial implants have a poor record the world over;nation.alized industries otLer than tIhose dirActlyA taken over witht ajLordisruption), many corporate mergers and state enterprises provide familiarexamp.les. Less A. well L WLL.is eVidence that r. China enterprises bi onpreviously existing small private firms have displayed a significantly betterrecordu of f[lex-iblle cor.tribution tow develop-mer.t (es-pecially to thne Udiffuslion

of skilled labor) than state enterprises founded with Soviet assistance inthLe 1950J s . 2/L.& wid'er 'J.iterature 3/ confirms that the rati'ona'le ofL the ChLLinILe se

policy known as "walking on two legs" is based on intermediate technology andorgan,LzatioUal potential.

1/ See for example, Peter Marris, African Businessmen, ana IKU, tinancingthe Development of Small Scale Enterprises, (RPO 277, July 1974).

2/ Thomas Rawski, "Problems of Technology Absorption in China Industry",American Economic Review, Vol. 65, No. 2, May 1975.

3/ For a major survey, see Carl Riskin, "Small Industry and the ChineseModel of Development", China Quarterly, Vol. 46, June 1971.

ANNEX IPage 5

Employment Creation

8. A more explicit case for encouraging SSI lies in its employmentcreation potential. Large firms designed on the OECD or East European modelhave undoubtedly raised industrial production and productivity levels in manydeveloping countries, but without reducing unemployment correspondingly, sothat rising output is often associated with widening poverty. An allegedcapital-intensive bias in large firm development is held partly responsible;small firms, by contrast, are said to be more labor-intensive without neces-sarily being too costly or unprofitable. These arguments need furtherexamination.

9. A sufficient number of comparative studies of small, medium and largefirms in different developing countries, as well as in developed countries, per-mits the following generalizations: 1/ small firms in contemporary developingcountries use less canital ner man. produce less value-added ner man. and naylower wages per man, than large firms. (All these are also true of therplat1-nnshinR hptwppn mpdilTm andti largp fi-rm, nn t-hp one hand- and small firms

on the other, in more advanced industrial countries.)

10. Comparative investment costs per direct job generated, as shown inTable 2, suggest that small enternrises iiue ignificantly morel r-aorptive

factor proportions. In interpreting this table, three points must be stressed.First, the data reflect 4n'estment decisions taken perhaps 5-20 years ago, andassets since depreciated. Second, asset values would be substantially higheri- n 190176 no so a 9 / 4 e ; n 1 4 1 - 1he 1 1 4 w uld n s h-w an

average fixed asset/direct employment ratio between about $1,000 and $3,000,anAr. 4-d1 4eiu/lrg enepi esi $10,000$20,00. '".zilt is theref--- Jmportant 4sthe relative labor intensity, roughly 4-10 times higher for small firms.LiLU.rd, these 'LIgures reflect the situation ofL the fILrm as a whLLoLe, usua.L'Ly

comprising a succession of expansions and improvements; and the cost/job ratiosare signiLfcantly higher for the later investment in all sizes of firms, onaverage about three times higher. This is because in many cases, as a companygrew anu prospere, iL upgradUeU" 'Lts product'ion technology, became more"modern" and capital-intensive; some of the later investments were explicitlydesigned to replace labor, and still others served to break bottlenecks andraise capacity utilization and output without greatly increasing the work

1/ See for example, UNIDO, Small Scale Industry in Latin America, UN, 1969,pp. 89-113; ILO, Sharing in Development, 1974, pp. 539-567; S. Paine,op. cit., and B.F. Hoselitz (Ed.), The Role of Small Industry in theProcess of Economic Growth, 1968.

2/ Based on a sample of 435 companies in its portfolio, ICICI (India)found that their incremental cost/job ratio increased by 20% between1973 and 1974.

ANNEX 1Page 6

TABLE 2

Fixed Assets/Direct Employment in Selected Countries

India/ Colombia/ Mexic / Philippine -Size of Enterprise (1965/1973) (1974) (1970) (1970)

Small $278 $3,000 $ 3,700 $1,020Medium $557 $ 9,500 $2,850Large $2,450 $13,400 $14,500 $8,000

($5,000)

/a Data from Annual Survey of Industries, 1965, and (in parenthesis) ICICIpublication Financial Performance of Companies, 1973/74, p.23.

/b Banco de la ReDublica. El Mercado de CaDitales en Colombia. Bogota. 1974.Other estimates of the cost/job in Colombian medium/large enterprises,quoted in the Bank's 1972 OED report on Colombia. range as high as$15,000 - 22,000.

/c Data from 1970 Industrial Census.

/d ILO, Sharing in Development, 1974.

force. Hence project-related (rather than company-related) cost/Job ratiosderived from the Bank's DFC borrowers are much higher than the figures in

!I. A series ofr Spec4al Stud-e nte"eeomn Impact T- f- D-FCs"I1 insix countries showed, on the basis of 160 projects, an average fixed invest-ment per direct job of $10,200, w-th two=thirds of -le projects be'low the~~.L~LLL jJ~~~L U.LJ. ~~~ L J UU 4J.L y LU, ~~~~~.AJU W .4.. L~~~L LWU LILLI. U~~~~~ UL LLL~~ jJi. UJ L Y'... 1.0L L. .LLJW LILI-L

average. 1/ A more recent study, 2/ undertaken in preparation of this paper,confrms tha___ cost per j` ratios are also highly correlated with pro:ULII 1L Ilb LLLaL (:UbL pt5X JUU dLaUt -L t eL54.) LI_LrL1_LY -:LLtlU W.lLII i)UJUUtL

size (not just company size). The main findings from this study are presentedin Annex 2 and they are summarized here for convenience:

1/ IBRD, DFC Policy Paper, R75-i72, August i975, p.i2. This average, whichwould be about $15,000 in 1976 prices, can be taken as representative ofmedium-sized projects assisted with Bank funds.

2/ This study involved all sub-projects submitted from July 1974 throughDecember 1975 for authorization to withdraw from loan accounts, whichcontained employment information. The sample is, however, skewed infavor of large projects (above the "free limit") since withdrawalapplications for small projects usually did not contain employmentinformation.

As'.,rr 11UNLIM4A I

Page 7

(a) compared to data from the earlier Speciai Studies, investmentcosts have gone up sharply, mainly on account of inflation,real cost increases for machinery and equipment and exchangerate adjustments, resulting in an average fixed investmentper job estimated at $16,000 in 1976 prices;

(b) there are considerable variations in cost/job ratios accordingto DFC and region and, also as expected, by sector; and

(c) capital intensity is generally highly correlated with projectand firm size, but for at least half of all DFC-assisted proj-ects a fixed cost/job ratio below $8,000 is estimated.

12. Tables 3 and 4 present more detailed statistics, from Japan andIndia, which support the conclusion that smaller firms generally employ morelabor per unit of capital. Table 3, for Japan, also suggests a more efficientuse of capital by relatively small industries -- except for the very smallest(measured by number of workers) -- an assessment that is strongly confirmedby the cross-country comparisons in Table 5, for which we are largely indebtedto the DPS paper on Urban Poverty and Employment. In corresponds also to theconclusions of an earlier Bank study based on evidence from a number ofdeveloping countries, "that smaller enterprises [excluding the smallest]. witha lower level of investment per worker, tend to achieve a higher productivityof capital than do larger, more capital intensive enterprises." 1/ Table 4brings out the sub-sector variances in investment per job, which are discussedmore fully below.

13. To what evtpnt, however, do smnller inei1iqt-rJq1 unit-s cnntribhit-e moreto employment of poor people in urban (or rural non-farm) settings? Insofaras they create a grreater number nf Jonh nor-nv tun4tiecs at t-ho mnrain it mYay hbeexpected that the urban jobless, generally poor, will benefit. Moreover, thedata from about 250 recent DFC sub-project appraisal reports suggest thatsmall to medium enterprises sponsor projects having an appreciably higherproportion of emplom ent for unskilled people than medium to large enterprises

-- 65% as compared to about 50%. Creation of unskilled jobs certainly has adi rect rovertty 4mpact gmater fo- Smnl 1 t me4,i an4-enr-r- coo f-1- Frir 1--n

ones.

14. It is sometimes argued that large firms and projects, even though

indirect employment generation through backward and forward linkage effects.,The su'4ect of indirect employmment 's enormously complex. The. -Colomb-i,a±11 LL U Oij L. L '. LLJ. L L UwJLJy..L L A.L _ULI1 L.Ub.Y L'LUP.4L=4t. J.LL0 %JJ.L%JWU .

Special Study, 2/ a first attempt at quantifying indirect employment effects,

1/ Keith Marsden, The Role of Small-Scale Industry in Development:Opportunities and Constraints, iLO and iBRD, Mimeo, ray 1974.

2/ IBRD, Developmentai Impact of Financiera-Assisted Projects, ReportNo. 842-CO, August 22, 1975.

ANNEX 1Page 8

estimated that they amount to about 50% of direct employment generationoverall, but it took account only of industrial sector jobs, not services. 1/Individual projects showed wide variations; in fact, in 13 of 28 projectsthe indirect effect was negative and in five of the 13 cases, the inclusion ofindirect employment actually made the overall industrial employment effectnegative. In many LDC situations the job multiplier effect anticipated fromsetting up a major industrial plant does not occur, or occurs only partially,because establishment of the large industries has not been parallelled by asufficient evolution of the linkages.

15. In the absence of comprehensive and reliable national input/outputdata -- which are not likely soon to be available for most LDCs, it is diffi-cult to prove conclusively whether SSIs typically generate more total employ-ment per unit of investment than larger ones. There are wide variations, bothin capital intensity and in the ripple effects on employment (see Table 4).There is, however, strong evidence that small firms do have a greater overall,as well as direct, employment effect.

16. The evidence is linked to the inputs used by small and large firms,respectively. Large firms usually have a much higher propensity to import rawmaterials and capital goods. Small firms buy more domestic inputs, producedby dnmestic lAhnr Onn miiut admit that an Pnternrigs's imnort function doesnot provide a complete picture of its net impact on a country's employment; ifa large firm wprp tn epnnrt oareat deal its net nob creation rouild hp su1npriorto that of a small firm. But the fact remains that large firms are more1 i VP 1v tr iQ I;nl:r P- oY;tino ra eirt d,V nrndlii-rArA q:nd t-hp CnIn MA: qnPri:A1 CeIIAv indicates that firms with roughly 90 workers had a markedly higher indirectemployment 4impat thar. f4irms -4 th A400 w-rrs. Tn sum, there 4i a strong

prima facie case that small enterprises do have a greater overall employmentgeneratior. effect th.ar large firms.

17. Of'JCtic en, to Ie sure, thLe size of firm, and/o the capital 4.tensity

of its operations, will be dictated by its products and the technology avail-aUle JUor their manufLacture. Backyard blast Lurnaces LhLave not provedU efficientin overall use of resources. However, small foundries or metal working plantsmay be both relatively labor intensive and competitive. Many small firms,catering for a limited market, are labor intensive simply because capital isnot divisible below a certain size range; capital intensity becomes uneconomicon a small scale. On the other hand, large firms, producing for a wider

3/ Input/output calculations for 52 subsectors in Korea derived employmentmultipliers (i.e., the ratio of total to direct employment, and includ-ing secondary and subsequent employment effects resulting from theinitial job creation) ranging from about 1.4 to nearly 42 -- the highermultipliers generally from a small base. J. Stern, The Employment Im-pact on Industrial Investment: A Preliminary Report (mimeo, 1977)pp. 25-26.

Table 3: Productiorn Structure by S,ale of Employees perEnterprise of Manufacturing, in Japan (1957)

Size (number of Y/LI K/L Y/K W/L(=w) Lw/Y (Y--Lw)/K(P)regular employees) 'CI0O0 Index Y'000 ][ndex - i index Y'0O Index _ -- Indesx

1 - 9 l,2 3El 7 31 2.43 122 118 61 34.6 1.59 12:3

10 - 19 272 5'3 7 6 30 :3.59 180 132 69 44.9 1. 98 15:3

20 - 29 31,5 62 8:L 32 :3.90 196 144 75 43.8 2.]19 170

30 - 49 347 68 9( 35 3.85 193 144 75 42.1 2.23 173

50 - 99 420 82 120 47 :3.45 173 156 81 38.1 2. :L6 167

100 - 199 489 9 6 1616 65 :2.95 148 168 88 35.7 1.90 147

200 - 299 566 111 2093 81 :2.70 136 192 100 33.6 1.80 140

300 - 499 695 136 3093 120 :2.25 113 204 106 29.9 1.58 122

500 - 999 784 153 407 158 1.92 96 228 119 29.6 1.35 105

1,000 and over 921 180 624 242 1.48 74 300 156 33.1 0.99 77

Average 512 10( 275 100 1.99 100 192 100 35.1 1.29 100

Notes: Y = value added; L = emp'Loym.ent; K = value of assessment Cf tangible fixed assets(excludling land); W = amount of wage payiment; P = rate of return on capital.

Source: Ohkawa and Tajluma,, Smaill Scale Manufacturing Industrv - A, Coniparative Sttidvf Japan andDevelo2ing Nations International Deveolopment Centre of Japan, Working Paper Series No. A-02,March, 1976.

T7able 4: I'dia: Rat, s or C-: . c./i, Labr, Out uC:/E;mDcOvee, Capital/cutpurin Sele ccd rrd,st= Gru -by Size (1965)

T-ids. Fired C a,-aI/E2 2 lovee RTalue Added/Emlployee Carital-Oicout Rario_--^-- __- 3r.4ustrt Grr,uD (Rs; (Rs)Srn,F 11 M'ediun I-arge Srmall Medium Large Small Mcd cium Large

2t.;-Craift 'iill Prcd-u-ts 2,349 8 3<+5 1]L,711 2,426 4,590 7,806 0.84 1.82 1.50J^'9 MIiscellaneeous Food Preparations 2,066 5 ,9:32 8,449 2,243 4,145 8,705 0.92 1.43 0.97'22U TObEICCO YkLaufac:uree 328 1 1e'4 :3,403 1,,369 1,441 16,486 0.24 0.79 0.21.' ;1 ~Spirning, ;qeavillg and finlishing.f textiles 1,313 2,753 :3,768 2,423 2,549 3,444 0.54 1.08 1.09Te-'tiles n.a.c. 1,o31 5,01/ 18,130 1,075 2,827 4,850 1.57 1.77 3./4

5. S ; I ,lills i L _ W c c d 3r od: c _s 1 .4+ 6 4.423 5.247 1,8s2 3,279 1,149 0.82 1.35 4.57- '- f (C.^E P pE?Cr & rurniture)

?,rintint, publishing end-liied i c'uc-ies 3,061 3,199 5,545 2,777 3,491 4,752 1.10 0.92 1.17311 LIs c -,du.tri l m 2hev cals

niud1n i .rtnizer 4,272 8,1'73 4:L,408 4,858 7,957 10,0/5 0.87 1.03 4.11, ._) S.-h.! S . -d nucq ers, .~ , , .. nS _ . .; WO U : 2. . _ D rD*zc 1,983 5,485 11,920 3,236 8,499 13,713 0.60 0.65 0.82,;9 ~ Cr! ;:_-;i'. r,LIeraI1S -.r.ucts n.e.c. 1,506 3,771 10,291 2,030 4,302 9,206 0.78 0.88 1.121 T -. o -, e rd s i e e i D S ' tic ^¢ .cs 2 ,i223,6;632,522 3,656 39,917 4 6,502 0.97 1.18 6.1h5ee.;' Prc<.eCCS e-c-Z!t r 2 ,,Inery

-UL: zrL.nort ecu pu'-c 2,519 5,385 8,939 2,978 4,744 8,213 0.85 1.14 1.09

1' y 3,4+5 4,/73 12,277 2,782 4,857 5,417 1.24 0.98 2.27e2/. _u.'L; i;_C1J. r.ac'inery aupiratus,,: S ,-.s3 .3;,p S i. S 28 9 4,016 11,814 2,985 5,498 6,622 0.77 0.73 1.78,'-4 7-zcp. :r t ,c vohac1s 2,136 3,842 5,050 2,380 2,/11 2,373 0.90 1.42 2.133'99 Fur p-od,mz .sx. cet wisari-ig

appD !r-l anr' -e,-nufazturingproducts ri.e.c. 2,447 4,221 12,569 2,516 4,067 8,441 0.97 1.04 1.49

Source: Ai.nual Survev of Industrie- 1965, India.

CD fH

ANNEX 1Page 11

Table 5: Capital Productivity VLriarnce by Scale (Workers per Enterprise.)

Malaysia, 19681/ Pakistan, 196,9/70-1/ Philippines, 1970 India, 1965 _ Mexico, 19651/(Size of

Enterprise)

Number of Number of Number of (Size of Number ofWorkers Y/Kf Workers Y/Kf Workers Y/Kf Entierprise) Y/Kf Workers Y/Kf

1. - 5 1. 341L - 9 2.01 1 - 9 2.15

5 - 19 0.96 f6 - 15 0.7610) - 19 1.30 10 - 119 C0.75

Small 1.16 16 - 25 0.65210 - 29 1.32

20 - 49 Cl.97 20 - 49 0.98 26 - 50 0. 6430) - 49 1.05

51 - 75 0.6450 - 99 1.44 50 - 99 1.46 50 - 99 1.24 Medium 0.95

7 6 - 1LOO 0.615100) - .199 1.02 100 - 199 1.25

100 - 249 1.16 101 - 250 0.6:2200 - 499 0.77 200 - 499 1. 1L8

250 - 499 Cl.81 Large 0.29 251 - 500 0.61500 and 1.13 500 and 1.L1over 500 - 999 Cl.65 over 501 andl 0.61

over1,000 and

over 1.20

Average 1.07 Average Cl.99 Average I .:L3 Average 1.03 Average 0. 64

Notes: 1. Y/Kf = value added per unit fixed capital.2. Malaysia, Kf = book value of fixed assets excluding land.J

Pakistan, Kf = value of' fixed assets inclucling land.Philippines, Kf = book value of fixed assets including land.

Y/Kf of '70... Taken f'rom ILO, Sharin?, in Develping in the Philippines, 1974.India, data derived from IBRD report # SA-33a, Small Scale Industry in India, 1972'Mexico, Kf = book value of fixe!d assets including :Land, as of December 31, 1965. _:

Source: 1/ Ohkawa and Tajuma (cf).

AM1VXlV 1

Page 12

market, may have a choice amog relative Lactor proportLons in planniLig their

investments and operations. But use of labor-intensive techniques in large

enterprises often poses special di£ficuities -- labor union pressures, govern-

ment regulations, etc. -- which weigh much less heavily on SSI; it is partly

to avoid these problems that the large firms move toward capitai intensity and

less "appropriate" technologies. So, where an option exists, SSIs may be

more inclined and better able than larger firms to use resources efficiently,

in the light of their relative availability and cost to the national economy.

18. The foregoing argument relates essentially to employment effects in

manufacturing industries. But the indications are that service occupations

tend to provide something like three times as many jobs as manufacturing, at

every level of economic/industrial development, 1/ regardless of the scale or

composition of the manufacturing sector. This conclusion is, perhaps, surpris-

ing; one might expect that the costs of transportation and merchandising of

(for example) cigarettes, or textiles, or housewares would be fairly uniform

regardless of whether they are produced in large, modern plants or in labor

intensive SSIs. But the less modern plants are also often associated with a

less modern distribution system, itself more labor-intensive, less systematic;and its customers are relatively undemanding. On the other hand, as capital

intensity, sophistication of production techniques and wage rates in the

manufacturing sector rise with development in a given national economy, so

also does the remuneration in service employment and likewise incentives toward

use of labor-saving techniques. So the balance between manufacturing and

services, at various levels of development and incomes, remains relatively

stable.

19. The qualitv of service iobs that may thus be made available is, of

course, extremely variable. The services category is a catch-all -- from

refuse-picking thrnioh street-corner vending, through diverse modes of trans-

portation, to the most sophisticated kinds of commercial, financial and

governmental activity- Tn most LDCs the average value of remuneration and

value added in service occupations is inevitably lower than in richer econo-mi,es; and this iis likely tn hp esnpeclalv true- for the services ancillary to,

and dependent on, SSIs. But the present discussion relates to the job creation

effect of different scales of industrial organization. And it annpars that

highly labor-intensive manufacturing employment generates and supports still

more labor-intenslve service Jo`bs n a proportion comparable to large, capital-

intensive industries. Thus it may be concluded that SSIs tend to have substan-

tiai…y greater empLoy-ment efifect == usually, but not alwa.ys, a t lower produc-

tivity and wages -- not only directly and indirectly in manufacturing, as

discussed earlier, but through a fairly constant multiplier effect in the

services sectors.

1/ IBRD, The Task Ahead for the Cities of the Developing Countries, Staff

Working Paper No. 209, Table TV-i, p.5 5.

A^NEX !

Page 13

Benefits Other than Employment Creation

20. Management. SSIs may also make better use of Lndigenous organLiza-

tional and management capabilities, drawing upon a pool of entrepreneurial

talent that inevitably is limited in the early stages of economic development,

and providing opportunities for these entrepreneurs to gain experinece and

prove themselves. The more successful ones will generally grow larger (and

doubtless more capital-intensive) and in the process will fulfill an important

incubating function. Unlike the contention that small firms have a greater

employment generating impact, the argument relating to organizational potential

is unsupported by statistical evidence. But it seems clear that at various

levels of economic development the technology and factor proportions must be

appropriate to the stage of organizational development.

21. Enterprise. In this connection, one must distinguish between man-

agerial and entrepreneurial abilities. In much of LDC planning and policies

the latter is neglected, partly because it is so hard to define. Yet its

importance is clearly evident in comparisons of performance among countries

and sectors where individual or collective initiative has been encouraged, and

those subjected to a more bureaucratic regime. Entrepreneurial experience and

training, and testing entrepreneurial competence, whether in individual or

cooperative undertakings, typically evolves in the small enterprise.

22. Savings. The potential savings role of SSI development has not been

adequately exploited. Although, again, quantitative data are scanty, there is

abundant empirical evidence, from many countries over many decades, that small

entrepreneurs are very highly motivated to save and invest and reserve a

greater proportion of their incomes for this purpose than do the general popu-

lation. In part, this reflects their inability to obtain financing from insti-

tutional sources; but in large part also it stems from their psychological

commitment to protect and enlarge the enterprise in question, which is both

their essential security base and their best hone for an easier, more secure

existence. 1/ In rural areas, given conditions of confidence, funds may bemobilized from large farmers and channelled into rural industry. The Chinese

experience is worth noting in this connection; their "induced investmentmechanism" lays great stress on fixed capital creation, even by families at

the subsistence level, through a greater social awareness program.

1/ Studies of SSI financing, insofar as they are available, show thatplowed-back profits are overwhelmingly the mAin source nf epnansion

capital. The recent study in depth of SSI in Sierra Leone indicatesthat 60%1 of initi4al 4rvestment, and 90% of that for expansions, came

from the proprieters' savings. C. Liedholm and E. Chutta, Small Scale

Industr-; in lural an. U T rban Areas: Evidence 'Prom Sierra Leone ,1976), p.38.

ANNEX 1Page 14

23. Domestic Technology. The generally greater labor intensity of SSIsstems in part from the fact that they are more likely than larger firms to makeuse of relatively simple, general purpose machinery, that is often obsolete bydeveloped country standards, in their production processes. Such machinery canoften be manufactured locally; small machine shops, that are themselves quitelabor intensive, exist in almost all countries, even the least developed, andthey are excellent training grounds in mechanical skills. By necessity theirmachinists become intimately familiar with the equipment of their customers,including SSIs. This equipment, perhaps originally imported, often secondhand,is likely to be in frequent need of repair or replacement parts -- which theoriginal supplier, like as not, no longer manufactures. Not infrequentlyalso, the local industrialist may see ways in which the original equipmentcould be modified to better suit his needs, and commission his neighborhoodmachine shop to work out the improvement. Graduallv machine building andadaptive capability evolves, stimulated and supported in the first instance bythe small scale user of simple, less "efficient" and elegant machines. withwhich the embryonic Henry Fords can start the evolutionary process. Large,showniece industries; seeking instant modernity, provide little sustenance forthe early stages of local machine working.

24. Regional Balance. In most developing countries industry is highlyconcentrated in a few plnacsQ hiQtnricallu dotermined lnrctionnl advantnage

have been reinforced by natural accretion, linkages and habitual assumptions.The result has been to aggravate regional imbalances: (a) between the urbancore and the peripheral areas, with the latter remaining relatively underdevel-

pedA ( b1)\ be en t7he u.rban -.-nA rur-l popul ai ons, A1 A 4

- more

vigorous rural elements and worsening urban unemployment; and (c) betweenmajor regions withln the natlon, glving zise to p tal tensions. Both

large and small industries contribute to these imbalances, the latter espe-cLaJLly WILere thiiey are stimulated LUy or dependent on the foLrLer. BDu SOS.

generally has more locational flexibility. It requires less infastructure andusually caters to a narrower geographic market. Its relatively labor intenslvetechnology benefits from the lower wage rates generally prevailing outside themetropolitan centers -- while helping in some measure to raise these rates.Comparative studies suggest that the profitability of SSIs is higher in mediumsized towns, away from the metropolis, ij so that promotion of SSI developmentin outlying towns confirms to the individual entrepreneurs' interests as wellas the social benefit.

25. Rural Development. SSIs are also crucially important in ruraldevelopment. In most LDCs a major problem of the rural economy is underemploy-ment, especially in the slack agricultural season. This depresses ruralincomes and increases migration to the cities. The obvious need is to createmore non-farm jobs -- and to the extent these are industrial jobs they willgenerally be in the small scale sector, given the conditions of infrastructure,market radius and labor skills. Certain agricultural processing industries

1/ Liedholm and Chuta, op. cit., p. 100.

A^NNF 1,-A Page 15

may be exceptions, and they deserve encUuragUemet both for creating employmentand (potentially) for enhancing returns to farmers. But their peak demand forlabor is likely to coincide with the agricultural peak rather than complementit. Other types of small scale production for the rural community -- black-smithing, brickmaking, lime kiins, tailoring, carpentry and furniture making,etc. -- are indispensable in any rural development effort.

26. Environmental Impact. SSIs, just as their larger counterparts, maypollute or otherwise adversely affect the environment. However, their smallersize and dispersion, their lesser need for massive infrastructure and theirgenerally simpler processes make it likely that the environmental consequencesfrom SSI activity will be less grave and more easily remediable.

27. All these considerations tend in a similar direction. Their cumula-tive weight, together with the employment creation advantages of SSI, make apowerful case for governmental policies and actions, and for external assist-ance, aimed at reducing the handicaps that SSIs face and helping them to makethe maximum contiribution to sound economic development.

ANNEX 2Page 1

EMPLOYMENT CHARACTERISTICS OF RECENT DFC SUB-PROJECTS

In the course of a Spec4ial cudy series on th e developmental 4-l -

of DFCs in six countries, information had been gathered on the capital/labormix of DFlC sub-projects. Uo,-r,1- alt iA-.-esmer.t dei-io A4_A s i -he

were taken several years ago and with abnormal price increases during recentyears, par ticUlaL re g6aiLn1 coOstUtioUnl anu quipmeCnt , as w eL L ALIIsecag

rate adjustments, it was appropriate to undertake a study based on more recent.,Ivestment dec'sions in order to obLtain a more realistic picture oUL thecharacteristics of DFC sub-projects.

For that purpose a sample of 315 recent sub-projects (almost allsubmitted to the Bank during FY75) was studied. Tne sampie is not representa-tive of the universe of Bank-assisted sub-projects and certainly not for allDFC sub-projects, mainly because over half (178) of the sampie projects are"A" projects, i.e. above the "free limit" requiring advance Bank approval.Relatively large projects are therefore over-represented, by default ratherthan by design, since smaller sub-project submissions contained little or noinformation on empioyment effects. Nevertheless, some generai conciusions arepossible which can be balanced by information from Bank appraisal reports.

Capital/Labor Mix of Sponsoring Firms

For 106 companies information was available on fixed asset/job ratiosand on the amounts lent by DFCs to projects sponsored by them. The tablebelow summarizes the results:

Table 1

Fixed Assets/Job ($) No. of Sub-projects % Loan Amount %($ million)

Up to 5000 39 37 34.3 205000 to 10000 19 18 37.3 2110000 to 15000 10 9 14.5 815000 to 20000 5 5 15.4 920000 to 25000 4 4 5.0 325000 to 40000 19 18 36.6 21Over 40000 10 9 31.9 18

Total 106 100 175.0 100

A picture of somewhat surprising extremes emerges: More than half (58%) ofthe companies show a fixed assets/iob ratio below S10.000. They account for41% of total DFC loan assistance to projects sponsored by them. Relativelyfew companies show fiypd aset- binh ratfis hbtwppn 10O_00n and $2 i0f9fnn where-as 27% of the companies (accounting for 39% of DFC assistance) appear to berelatively capital inte.nsive in their operations with a fixed assets/Job

ANNEX 2Page 2

ratio above $25,000. (The median value for the total sample is $8,900 for thefixed asset/job ratios, and the median employment per firm is for 220 people.)

To test the correlation between the sizes of firms and the employ-ment created by them, a logarithmic regression analysis was performed which

2showed a surprisingly good fit (R =.71):

0.65Y = 1.56 X

where Y...number of employeesX... fixed assets of sponsoring firm in thousands ot dollars-

The size of the exponent (<1) indicates, as expected, a diminishing rate ofemployment growth as company size increases above a certain level (see over-leaf graph). This is illustrated by the median employment figures for foursize groups of companies:

Table 2

Company Size (Fixed Assets)

below $250,00 $250,000-$2 mil. $2-5 million above $5 mil.

median fixed assets $96,000 $943,000 $2,815,000 $6,290,000median employment 293 192 287 450fixed assets/job $ 3,300 $ 4,900 $ 9,800 $ 14,000

Although the small sample sizes for each subgroup do not permit conclusivefindings, the above broad orders of magnitude tend to confirm a relativegreater labor-intensity of smaller-scale operations and a significantlygreater capital-intensity for companies with fixed assets over $2 million.

DFCs Catering to Relatively Small Firms. Given the Bank's recent involvementwith SSE. few hard data are available as yet but a comparison is possible fromtwo countries (Korea and India) where the Bank has assisted DFCs which caterto diffreDnt size groups of enterorises (MIB-Korea and SFCs-India assist smallfirms whereas KDFC-Korea and ICICI-India assist larger borrowers).

Table 3

Korea IndiaMTRB nFC SFGs ITcGT

average fixed assets/emploYent $'5,9 r /I $17 $430 e!A •n,4 Ann

/1 Data ftom recent analysis by the Asia.a Development Bank.

ANNEX 2Page 3

These results corroborate the general conclusions of ANNEX I as to the greaterlabor-intensity of SSE.

Sectoral Comparisons. Many studies have documented significant differencesin the labor-intensity of various industrial sub-sectors; we shall highlightthe findings of two recent reports and augment them with the results from oursample.

A recent ADB investigation of small/medium firms assisted by MIB(Korea) has found firms with below average assets/labor ratios in the follow-ing sub-sectors: electoronic assembly, foot wear and garments, cutlery,bicycle parts, small metal and wood products. A much larger sample (435companies) studied by ICICI (India) yielded sector results with below averageassets/iob ratios for glass and Dotterv. textiles- machinery manufacture;electrical equipment and food products (sugar excluded). High assets/jobratino rharacterized chemicals, non-ferrois metal rroduct, rcement, automobile

and cycles, and pulp and paper.

Our sample yielded the following average fixed investment/job figures(N=RB these nre nrnipct-rplntpd data! company-rel2ted infnrmatinn wns not

adequate to permit sectoral comparisons): leather and footwear ($5,400),mechanical1 part- ($9,300) electrialmchnryn ($!!,500),paper ($!!1,Q00)

mining ($14,500), metal products ($15,900), textiles ($16,500). Industrieswith high co-sti/Job -atos4 ncud concrete -an cemen ($4,50) chemical

($20,500) and hotels ($18,800).

Employment Characteristics of Bank-asisted DFC Sub-projects

For 203 projects data were available on fixed investment/job ratiosand on the amounts lent by DIFCs. Te table below g'ves thle Lreakdo-K I by fixed

cost/job:

Table 4

Loan AmountFixed investment/Job No. of Sub-projects % ($ million) x

Up to 5000 31 16 28.9 85000 to 10000 38 19 28.6 810000 to 15000 29 14 42.9 1315000 to 20000 19 9 45.7 1320000 to 25000 18 9 27.9 825000 to 40000 24 12 64.3 1940000 to 100000 33 16 79.3 23Over 100000 11 5 26.3 8

Total 203 100 344.1 100

GRRPH 1

rnMppNy S!7t fNU fIRFF-T 1MPI 0LMENT

fl C i I , n ICC 9 1 C n Qfl E- Afn A C n.fl r-1-

I II I III ITI i IIi I I II II I j III I il I I I j II I 1i 11

+I3 - Sa mbr otf Dat 09 subprojects 3

|Rgression Equation r = 1.56 X0'6 5

(in r0o of USCorrelation Coefficient 0.70Standard Devi.ation 1.04-X Average 5.5 (Mill. of US$)Y Average 565 (Employees)X MIedin I-07(Mill of tlS$)F + T Mbdian 256 (EWolye.a)

'n 2 _ -42

+ 1

CD1 ++ +Li

1+ + 1I

-4-~ ~~44

'I + .-

+ ORIGiNAL "R T Rl, ^ REGRESION CURVE

0 5 10 15 2'0 25 30 35 40 45 50 55FIXED RSJETS OF THE HIRM f MILL US$

(For narti al enlargemrnt of this graph. excluding comnanies above $10 minion. see Graph IA)

COMPF.NY SZEL RiNO DIRECT EMPLOYNENT

0 1 2 3 4 5 6 7 8r T 7 T T I I I I I I I I I I I I

+

V ~~~~~+

CD ~~~~~~~~~~~~~~~~~~~~~2

CT)CT) ~~~~~~~~~~~~~~~~~-4-

I- I

+ ORIGINRL ORTRM I- A REGRESSION CURVE

)1 S + +

++F LI - -44 +~ dL

; + T+ + - t 1

0 1 2 3 4 5 6 7 T 3i-r XEE O 'l¶ TS ':F THE FI RY (MY.ILL L O So

PROJECT SIZE RF C EMPLOYMENT GEINERPTION

0 5 10 1 5 20 25 30 35 40I I I I I i I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I

Xmgrmsaion Equation y . 0.89 1 0.6(in 000 of nsII

Correlation Coefficient 0.71Standard Deviation 172X Average 2,8 (-1.or 1ut&N

Y Average 160X Median 1.3 (Mill. et S*

CD)

+

A

--3

Cl + A+ IL-1~~±

++Z++ +1

+ ORIGINAL DRTRA- REGREb3ION CURVE

0 ' 10 15 20 25 30 35 40FIXEO INVESTMENT OF PROJECT ( MILL JS$ )

(For partial enlargement of this graph, excluding projects above $10 million, see Graph 2A)

r I- T , ' {O -1K L i IiMNT ri E N[RhT ,I N

U 9 L z 4 '5 h 7 i 9 10

' I 'I ' !-I I ^ ' ! i I i I I ! I I ! i I I i I

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CD

A + A~~

-~~~~~~~~~~~~~~I

+4 I

o I +g+ f 3'J1 1

FIX ++T + + + +

+.t ~I++ +s +

~~~i OIG1NAL OPTR+

ii!F~ =± ± ' £ERS i ONLuRVE

LI 1 2 3 4 .' 6 7 3 3 10FIXED INVEZvTMENT 0- F(0RJECT I MILL JS$ 1

GRFPH # 3

PRn.1EFT SiZF RNG 5HRRF OF DIRECT IMPORTS IN FIXED INVESTMENT

5 5 O ., 20 " 3 ' 40

t') I I I I I I I I I I 1 1 , III I I I I I I I , I I I I , I I , I I , I '

4 4~

L + +2I

+

A 1_f _ ~ ~~~~ ~~+ + AC

cz ; + + 1

' + + DSbAer of Data 223 subprojects

0 F+ +- + 4+ Regreasion Eqnation Y b9r4.78 :X0-9(kin 000 Of uS$)_ + 1 Correlation Coefficienit 0.81t ++ Standard Deviation 4.5

+ Af9 X Average 0.77 (Mill. of irb$)_1- + A +YAverage 3.01 (Employees)

+ .f X Ibdian 1.03 (Mill. of US$)

7T 1 t+ Y T Ydian 0.35 ( w loysee)

I $ i ± TFI 1

, t + ++ L+

+ + ORIGIMAL DATA

+ ^A REGRESSION CURVE

n n

0 5 10 15 20 25 30 35 40IXED INVESTMENT OF PROJECT M MILL UST )

(For partial enlargement of this graph, excluding projects above $10 million. see Graph 3A)

( g pI I W 1 I -3 Iflr>d A fl !NSW1 AN! 3X. I4

01T 6 9 L 9 S b C;

+~~~~ 3^ ~.'J8Ser3 -Ilt

' 818018I1l0 +F~~V~ + +4 I++ g

~~~

+ +± + + T +

L + + ±+ +

F ++ + -I-

01 C, 2 9 S Z t

+ +±

++A ~~~~~++

F +~~~~

C'C I C'z

IN.3W l'AN 1 OXIA NI 'BIdOdWI Y1 8 1 i0 8 bH S 0N. 4 1 i ir 0 Jd

h i g i

ANNEX 2Page 4

About half (49%) of the projects had a fixed cost/job below $15,000. Theyaccounted for 30% of total DFC assistance extended to the 203 projects. Thevariation in cost/job ratios for projects is considerably wider than therange in fixed assets/employment for sponsoring companies. It was found that43% of the projects had a cost/job ratio exceeding $25,000; they accounted for50% of DFC assistance to the 203 projects.

These findings are not unexpected since several large projectsinvolved modernization or balancing operations with relatively little employ-ment creation. Although, as mentioned above, the sample is biased towards thelarger projects, it can be concluded that most of the Bank's assistance hasgone to relatively capital-intensive operations.

The median direct employment generation is for 99 jobs and the medianfixed investment/iob figure for the samnle is S16;350. The inrrpmpnenal rnotljob ratio is thus considerably higher than for the firm as a whole. This isconfirmed by a 1975 study undertak-en by TCTCT (Tndia) of about 500 companies inits portfolio, which yielded an incremental (project-related) cost/job ratiow…hich was almost three time highr than the fix assets/empon-1- ratios ofsponsoring firms.

As with comparny size, proJect size tends to lbue positively corre±LatedUwith employment generation, as indicated by a logarithmic regression analysis

(R = 0.7) similar to the one above:

0.64Y = 0.89 X

where Y...Direct jobs generatedX...Fixed investment by proiect in thousands of dollars.

The overleaf graph shows diminishing employment generation effects as proiectsize increases; for investments over $2 million the curve flattens, pointingto substantially smaller employment effects of large proiects. This featureis confirmed when comparing project sizes above ("A" projects) and below ("B"projects) the "free limit".

Table 5

B-nroiects A-nroiects

Nuimber of nrnierts 100 166Median fixed investment $730,000 $1,708,000Medain empnnlment 57 100Median fixed investment/job $ 12,800 $ 17,080

ANNEX 2Page 5

"B"-projects thus showed considerably greater employment effect than "A":-projects. (It should be noted, however, that the two categories overlap,since DFCs have different free limits.) We will comment on this further belowwhen attempting to reach a more balanced estimate on the capital/labor mix inDFC projects.

Regional Comparisons. The table below shows selected median figures by region:

Table 6

EMENA LAC Africa EAP South Asia Total

Number of projects 75 77 28 74 61 315 /1Median fixed investment

($'000) 1,639 1,079 1,962 1,732 675 1,155Median number of jobs

created 71 62 200 141 101 99Median fixed investment/

job ($'000) 19,410 17,580 16,340 15,090 8,500 16,350Average fixed investment/

job ($'000), weightedby DFC loan assistance 33,230 28,310 17,490 31,130 17.810 26.810

/1 Of the total number of projects (315), information on employment creationwas available for 266 nroiects. Furthermore. a few extreme and clparlvunrepresentative values have been deleted.

The regional comparison shows no pronounced differences in median cost/jobfigursc, excpnt frv the hich VM.NA ratio anA tho cignificpntly lnrw So,uf-h Ac4n

ratio. The latter is, however, influenced by relatively many small projectsassisted by the SFCs (India). The last l4ne (average fixed irvestment/jobweighted by DFC loan assistance) illustrates again that most of the DFC's£ .4nanc.cal assistance bas g o ne to relatively capLital=intensive proJects.

C11i4led3 an' TTnskale-d nml-yet.O considerable Jmport-ance irtdigth-ea M±L.LL.U aiU U _ &J.-.L.U DL,UP_UYIL1fLIL * JiLUL ALU_I.,dLPJC LiIiPU. LCILC .LLL b LUUY.LL1, Lt

employment effect of projects is their demand for skilled and unskiled employ-ment. The Latter has, by definition, a greater impact in providing Jobs forpoor people in urban and rural areas. We found that, on average, 62% of thetotal employment generated directly was for unsKillea JODS, wiLn relatlivelysmall projects generating a higher share, as follows:

ANNEX 2Page 6

Table 7

Fixed Investment Costbelow _2250,000 $250,000-$500,000 over $500,000

Number of projects 5 6 68Ratio of unskilled jobs to

total iobs (%) 75.6 63.2 61.9Average fixed investment

($'000) per lob 2.850 8;280 18.900Average fixed investment

($'000) per unskilled iob 3.760 13100 30j500

The above results have to be internrePed with ronnidprblep raiition Qinre the

sample contained few projects under $500,000 which had information on unskilledemn1nv xmPnt_ Fllrt-Inrmnar- dlfi ni tio nn f 'Iinilnlo 1Dill 1 n'her hnuxo ::lmnc:t rart-M4r1 ET

varied among DFCs and enterprises. In fact, it would be an important area ofresearch to investigate tha demngraphic features of employent generation.Finally, the data relate to projects, rather than companies, of differentsizes but, it -slgcla-- to- expet that- -11l enepiss -aticularly those

5____ - --r - - - k-~~~~~~ ------ L.l L.L .LJ L.lClJO

in the informal sector, would also generate, on average, a relatively largershr aou *W~1-4d as Aga4n As zt oneTal C_ 4_ A w4|AA1 ---- -- A---_- A_ 4 -- A ot.aJ.. w VaLJtJlA4 Xwv-LW..Js LU*U. lao 00 05 0J.lLO I. lJLO-*,LI A. -L . CL. CL CU L AtILL pL .. CD1 6 d L L

significantly lower investment cost. Comparative data for India and ColombiaII/ supporJlt tis. hypothesJLJ isCt.

I LUJOLL ULC aL.u LLWFUL.LA £U pOIA. .L

Flroject Size and Import Propensity

.Ie DFCL.5s were lound to finance, on average, adOUL one-hiaif of iixeaproject investment. However, for large projects above a fixed investment costof about $1.7 million the DFC financing share diminished somewhat due to maxi-mum exposure considerations.

A similar relationship emerged when the IBRD contribution was com-pared with fixed investment costs. The former can be taken as proxy for theshare of imported machinery and equipment in fixed investment, although thetotal import share is thereby underestimated for countries where indirectimports (off-the-shelf-purchases) are significant and for those (mostly large)projects where other foreign financing (direct foreign investment, supplierscredits et al) is involved. Data on these aspects were not available, however.Nevertheless, a logarithmic regression of the Bank financing share against

1/ The Colombia Special Study showed a 60% and 50% share of unskilled labor,respectively, for enterprises with assets below and above Col. $35 mil-lion. In India, the 1975 study by ICICI on its portfolio showed thatunskilled workers account for 44% of total employment in 435 assisted(mostly large) companies. By contrast, subproject data for the smallerenterprises assisted by the SFCs show a 59% share of unskilled workers.

ANNEX 2Page 7

fixed investment showed already a relatively strong correlation (R = .81) asfollows:

0.92Y = 4.78 X

where Y... Fixed investment of project in thousand of dollarsX... IBRD Loan amount for project in thousand of dollars

The overleaf graph demonstrates an almost linear equation with theBank financing an import value equivalent to about 21% of fixed project invest-ment. Only for large projects does the Bank share diminish somewhat onaverage, which is again consistent with maximum exposure considerations. Insome cases (for instance, for the private financieras in Colombia) exposurelimits were negotiated by the Bank; for most other DFCs they are contained intheir policy statements.

If all foreign financing (other than the Bank) could have beencaptured, the exponent in the above equation would certainly have increasedfrom 0.92 to well above unity, indicating a concave exponential relationshipbetween project size and import propensity. Furthermore, as mentioned above,the sample contained relatively few small firms and no businesses from theinformal sector. These enterprises require mostly local currency financingso that, over the whole size spectrum of firms, the import content in fixedinvestment cost increases progressively with project size. Comparative datafor Colombia (where the direct imnort content in fixed invesment was 24% and45% for small and medium firms, respectively) and India (where the corres-ponding figiirpe werp 16%- and 35%) are indirativp of this trend-

A simila-r trenA wouildl rhaqracte9-riz7 the cshare f imporrtc in rorierringmaterial inputs for different sizes of firms. The Colombian Special Studyyielded that larger enterprises had a nOhige importi compo~nen ir maeial

inputs: 11% of total material inputs required by relatively small enterprises\i.e. those w-i emplo,ment under 200) were impor ted , comp a r- to a 182 share

for larger enterprises.

Overall Capital/Labor Mix in DFC Sub-Projects

The 315 projects included in our sample yielded a median fixedin-vestmenLt per direct job gLrLaLteU UL $16,350. Exc±UULL% a 'ew etreLLmet a

clearly unrepresentative projects, the average cost/job was about $20,000 andthe weighted average cost/job, with the DFC financing share in fixed projectcost constituting the weights, was $26,810.

The overleaf table shows selected median values for those DFCswhich were represented in the sample by at least 8 projects. There is awide range among DFCs, from $6,500 to $38,600, in the median fixed investmentper job, with 6 DFCs (38%) showing a median value below $10,000 and ii DFCs

ANNEX 2Page 8

(69%/) Delow 20,000. However, severai of the DFCs are represented mostly by "Al!projects and the resulting median cost/job figures are higher than what theuniverse of their projects would show.

From Bank appraisal reports of DFCs further information is availablewhich shows the following average fixed cost/job ratios:

PDCP (Philippines) - $27,450 (based on projects approved through 1974)KDB (Korea) - $18,720 (based on 32 recent projects to be financed by

the Bank)MIB (Korea) - $2,720 (based on 174 projects approved in 1973 and 1974)MIDF (Malaysia) - $14,700 (based on all projects approved in 1973/1974)DBS (Singapore) - $8,420 (based on Bank-assisted projects financed in

1973)CDC (China) - $25,000 (based on 81 projects aproved in 1974)

Given the wide range of DFC's cost/job rations it is difficult toarrive at a balanced estimate of the average fixed cost/job figure (in 1976dollars) for the universe of projects assisted by the about 70 Bank-assistedDFCs. It is clear, however, that the average is substantially higher thanthe figure ($10,200) yielded by the Special Study services in six countries.Our best estimates are that the averaae fixed investment Der direct iobgenerated for the universe of DFC-financed sub-projects is about $16,000 forall proiects assisted during 1976 and that at least half of them have a fixedcost/job ratio below $8,000.

These estimates are based, in the first instance, on actual datafrom some 250 Bank-assisted DFGC sbh-nrojiPt-s (averap fixed investment!/ob

of $20,000) as well as from over 350 recent DFC sub-projects (average fixedinvpetmsnt/;nh of $178A00n 1/ which wererl rl, t in TTNTT)nl'- " TnA for the

Exchange of Information on Industrial Projects in Developing Countries."These data are contained in Tables 9 andl 0 (overleaf) they hae beer pooled, - _ - \_, I -- , - - l

below in Table 11 to show empLoyment trends with rising project costs:

1/ The median and average fixed investment figures of the Bank sample proj-ects were $1.4 mli. Jon andI 9J i1l respectively; the correspond-ing

figures were $1.1 million amd $4.9 million for the 369 DFC projects intU111.'s sample. TIe uIwuV sample whIch cotLanedu alsU noUn-BDn-asbbisLeU

subprojects showed median and average fixed cost/job figures of $10,650anu $1,800, respectively; i.e. although the 'uIDO sample included, onaverage, even costlier projects than those in the above Bank sample, itshowed lower cost/job figures.

ANNiEX 2Page 9

Table 8

Median Employment Figures for Seiected DFCs

Region/Country DFC Number of Median Fixed Median Median FixedProjects Investment Employment Investment per

($1000) Job ($)

LAC

Colombia Priv. Fin'as 24 1,342 73 15,710Ecuador COFIEC 13 576 24 31,510Mexico FONEI 22 1,707 61 38,630v; rI1q flW /'P- TnPr 0 17n 7I -1n n AnnLi. ..L*J..%.4O'.A | ±t.LJ

6' A. .LJAJ V . I V ~J V.'J J V J VVV

South Asia

Pakistan PICIC/IDBP 18 530 130 10,050T_): C*s:rl3 jH 1 T., t41.0 'I% Z r7<iLnU1La OX %is CL _I v4v UU 4 J ) A U

India ICICI 22 1,463 125 11,940

r1' A T~

Tnailand FCT 17 i,l23 12 ,3

Philippines DBP 12 3,571 227 11,070Indonesia BAFPNEDU 10 1,800 70 19,320

Africa

Kenya IDB 8 3,050 219 15,030Mauritius DBM 8 1,987 270 15,970

EMENA

Iran IMDBI 15 1,547 70 29,200Turkey TSKB 20 2,871 137 25,210Morocco BNDE 20 1.442 55 20,480Tunisia BDET 20 1,106 38 12,170

ANN-X 2

Table 9

Employment Generation of Bank-Assisted DFC Sub-2rojects

Fixed Investnent No. of Fixed Inv. No. of Fixed Inv.(US$ '000) Projects % ($ '000) % Jobs % per job ($)

Below 500 49 18.9 14,447 1.9 3,036 7.8 4,759500 to 1,000 50 19.3 36,115 4.7 3,641 9.5 9,7851,000 to 1,500 40 15.4 48,979 6.4 4,322 11.1 11,3331,500 to 2,000 25 9.7 41,704 5.5 2,224 5.7 18,7522,000 to 2,500 17 6.6 39,059 5.1 3,054 7.8 12,7902,500 to 4,000 29 11.2 94,052 12.4 5,100 13.1 18,4424,000 to 10,000 32 12.3 190,867 25.1 10,630 27.3 17,956Over 10,000 17 6.6 296,564 38.9 6,900 17.7 42,980

Total/Average 259 100.0 761,787 100.0 38,957 100.0 19,555

Table 10

Employment Effects of Different Project Sizes(UNIDO Sample of DFC Sub-projects)

Fixed Investment No. of Fixed Inv. No. of Fixed Inv.(US$ '000) Projects % ($ '000) % Jobs % er job ()

Up to 500 128 34.7 27,305 1.5 1 .211 13.8 1,921500 to j,000 49 13.3 37,146 2.0 5)599 5.5 6,6341,000 to 1,500 25 6.8 29,479 1.6 3,682 3.6 830061,500 to 2,000 26 7.0 45,687 2.5 4,958 4.8 9,2142,000 to 2,500 12 3.2 27.742 1.5 1.66q 1.6 16i6612,500 to 4,000 42 11.4 139,697 7.7 15,635 15.2 8,9354,000 to 10,000 52 14.1 3095733 17e0 1880 18.3 16,466Over 10,000 35 9.5 1,210,150 66.2 38,138 37.1 31L731

Total/Average 369 100.0 1,827,211 100.0 102,698 100.0 17,792

ANNEX 2

Paze i1

Table 11

Project Cost and Employment in DFC Sub-projects

Fixed Investment No. of Fixed Inv. No. of Fixed Inv.(Uo9 vJvJ ± 000) \y Proj 1e Li (I0JL JUU ($J

TT_ to C rAN 1 -7 7 1) O 1) / I ,7 rC q1 I f 7 , /. L 7 1')) n . 11 1 , IUp LU JV I I I L0 .L / LIJo 1. L L -,+I 1 L .L 41s1

500 to 2000 215 34.2 239,110 9.2 24,476 17.3 9,769nnnrA to lnnnr I OL A It on i I ro *, ^ I C on,9o200 LU LUU1 U 0 14 29.3 8O1,1J 31.0 54,84 38.7 14,595over 10000 52 8.3 1,506,714 58.2 45,038 31.8 33,454

Total 628 100.0 2,588,726 100.0 141,655 100.0 18,275

The table illustrates a rising capital intensity with increases in the fixedinvestment cost of projects with extreme values for cost/job ratios of $3,000for projects with a fixed investment below $500,000 and over $30,000 for proj-pcts costing more than $10 million. The average cost/job is $18,275 or about$20-21,000 in 1976 prices.

However, the composition of this sample of 628 projects is not, aspointed out earlier, truly representative of all Bank-assisted DFC sub-projectssince relatively large projects are over-represented. Unfortunately, no aggre-gate statistics are available on the size distribution of projects assistedby all DFCs, but we do have some evidence that large projects, involving afixed investment of more than $2 million, account for only one-half of totalDFC-financing. 1/ Table 12 shows, on the basis of several Bank appraisal re-ports on DFCs, our estimates as to the current and projected (1980) distribu-tion of DFC lending by size of projects.

Of th e_n ag r e gant e loannn amo-_un t -fro-_m abo-0u t 8,50 s ub-loar.s m ade b y D FC s

in the 1970-72 period involved amounts below $750,000. 54% of DFC lending.has EthereforJe benefited large projects withL a fixed investment of at leas,$2 million.

ANNEX 2Page 12

Table 12

Distributon of DFC Lending by Project Size

Fixed Investment Average Cost/Job Share of Aggregate DFC Lending(US$ '000) (in 1976 US$) 1976 1980

Up to 500 3,000 10% 25%500 to 2000 11,000 40% 40%2000 to 10000 16,000 35% 25%Over 10000 37,000 15% 10%

Weighted averagefixed investment/job $15,855 $12,850

Projects costing less than $2 million constituted already two-thirdsof the total number of projects included in the above sample of 628 projects.It can therefore be stated with confidence that at least two-thirds (probablythree-fourths) of all DFC-assisted sub-projects have a fixed cost/job ratiobelow $11,000 and that at least half of all projects show a cost/job relation-ship below $8,000. 1/

Given some uncertainty about the distribution at the upper end of theproject size spectrum, the overall estimate as to the fixed cost/job ratio intntal (Rank and non-Bank-assisted) DFC lending is more tentative. Our best

estimate is that DFC sub-projects as a whole would show a fixed investment/direct Job ratio of about $16,000 in 1976=

There is a further reason why this estimate has to be regarded astentative: detailed information on recent DFC clients was not available. Someof t.llem (for instance DY-Turkey and BDAgerila as-4._ predminn-.-Y _1-r-Eclients; other recent DFCs (for instance CFP-Colombia, BIDI-Ivory Coast andBCD-CaJmero)j assist sma.L.L enterFris es. It is p-_ssl4-e that teir combinedeffect would tip the scale in favor of relatively capital-intensive projectsso that the $16,000n figure may b-e an underestimaste. On the other har.d, if

the increased emphasis on SSE development in DFC operations materializes, an/v_ a a LJ L Ji.JCU1c«nn I.L1L U(.LJ 9UJ7~~ {;A *4' A j..' 11t 51 average costjobU dgure .L .bevwLd.±AA Li. n CLAdI prices" e,ould result by .

Asb shown abuove iLn Table 12, if. thLe sbLare of projects costing under$500,000 increases to 25% (with corresponding decreases in the share of largerprojects aDove $2 mU ±LJ.lon"L, an average fixed cost/JobU of abouLt $13,00 (n1976 prices) could emerge in 1980. In this case it would then be likely thatthe median fixed cost/job figure woulU drop to abIout $5,000, i.e. -alf of thetotal number of sub-projects assisted would have a cost/job ratio below$5,000.

1/ The average loan amount in the i970-72 sample of 8,500 ioans was $210,000.A conservative estimate would put the median project size (fixed invest-ment) in the $500,000-$1 million range. The fixed cost/job for thisproject size (calculatedi from Tables 10 and 11) is about $8,000.

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ANNEX 3_Page 3

AGEN4CY DESCRIPTION COUNTRIES TECHLS1CAL SERIVICES OrTHER EXITENSLONi SERV'ICES TRAINING INSTITUTION BUILDING

INSTITUTE FOR SEW A--nice, no-profit organize- None outside US, but interes I -s ere of 2-day week-edENTERPRISE tnn with eetablished prooen- sho at 1975 Intorsa.ti-no workshops as we1 El a individuelDEVECLOPMENT (INER) t. ore id-rtity and anist Syspoalun end Eoirepre--vhip noosliog.(Belmont, Nuns, enopeigetrepteneoftr estab- and toonint D-velp-net.U.S. A.) Iis thei ewe husine -; helps

thes ow ekill. and notimatinend hb-k ide-tify good credit

TECNNONET - -5EIA Cnpt 'egsoupiog of I organ- Song Rung, Indon-ia, Malayssa Has haok-up servces from Eke Sponsors- trling nuse RotSeps partinipetin~goraie(Oniarin,' istiotnc Iu 9 Aaiaocose n Philippines SingaIp-r, Tet-i-nIe 1Svfo-r-sni- Serice industrial esten.itn engineers Ironl tiase establish new pregeinsECe-de) hioh e..eint ISIs -ndHSIs., Thaileod, Rongladesh, Earn, fi the Nationa Resseroh C--cl meaNer Asian -rganeaians an the and capabilitie..

enphs-s upon t--nfenriog kno- Sri Lanka. of Zena.da (NRC/TIS) ahith nn Small Industry Estansios Team.ingledge abost brows teobutipes to prc.ida teosninal inquiry a-d Entitute (SIET) in Npdarahad.enistiog enteprises joint ind-strial rutenio- s-ppor to India aten..ting i,-plsnt -ork;effor to build up nonnise se-SOs. aragsa teaminig inits by -embsvines for industry Is SE Asie.a¶&ietc staff meber to

NREC/TER) ie Cana.da

ORGAN IZATIO POlR A.eri,an p-tca teo-profit Africa, Asia and Latin A-ensc, Prcioessp.eusiss-d -on -lnaREHkBILITATILON develop-et tirsieg oeganiea- with recet emphesis opon Ernin-g peugrama 5 go- -mmtTHR)UIs TRAINING ties w,ith 95 ear of eeper- Aftios. and privees sennr, h-n searly(Sr) i_no is tehia. dcio 1,000 reciting units in OS'Re, York/Geneva) and vontinu..l tainirg in ooi-ntis .. ..thkeJeh traciog.

LDCs. e-oetly esiphasieed, trains ...stee-

parts at fenility -n Gene:a, alsotraise th-i lIa...Il to. desig1 thei

EASTr-WSNT CE7NTER Training of e-te.si. agss9-

(Ha-ii, -Perone,U.i.A.)

INTERNATIONAL An asn-iati-r f nations1

Worldwide, regional office..o.ta asistau.e from member Rips -codissie islos-ti- Adv,ises on ed..ti-n sod tsaising Beilp knild sd strengthenCOOPERATIVE nooperati-e, premtieg and in East esd Central Afita -rganinati- like Ih Cooper- e-oheng end thkninal. asis- o LOC toperaiv-s, helping national -pe-tiaALLIANRCE (SEA) safeg-adingishe interets f and SE Asis, tine League Eke Limited Stietea Inelo insd end eciside mesiet rgsi i to I increas -cmets,the c.P Itprtiv mI m n (CLISA) to ],elp establish the toopr-tive movmet, e.g. the aletvne f theIirteo perati-s industrial projsist more advancd copeasi-e tising programsIn theI ThirdWol, movementsIn Europe supply man-

powe -Id T/A to cooperativein the Th IrdW Word.

INTERNATIONAL Pri-te,ue-roi, ta-hoica Algeria, Ba-gladeeh, Botsan, Capable ot providing teshoi- Busine-s eanagmost asc,ietaste Tra,ining oftanrs swll eTLTARY Eaisat ...eainspo- Rsdor, Roudursa, Indones ia, niss g. mebslolhnop-si-s simple~ maaesantnaina hlsNEREECES (ISO) vdimF interaioalySden, M-uriLnia end Pspua engineers,. bl-ok-mitb et.financ, etc.O eut is or volster to(Wahisto . erIed de-elpmet teesieis.. m,ine ,(he-e most of the smel to yel et hiek sal pAsse the-lne ou.t of Jobs theoghUS A.) onafl-isI oute basis bsi...sas sistenc Is given). industries andlisupply teehnI- sh-iog emets ithenwrrs

to proJects dirc-tly inovig t.I supervision of produntion..theIpoor, patinularlp in ruralara- bat with capabilIities in

IIRTRNIATIONAIL U.S. eo-profit -op-reso con-.. Tralinig programs in~ 16 Conducts seinar end pracisal Ent-gthes mon-aa-t insti-MANliiiGEOlPMET dntlitg nationa-I-d regional - Afoicas -utries since opera- mcgmet trining for gevermoent tti. th-h .g- tDEVILO UT leekrann iwt ol oftoshgci 1 .ofnas private busisesme, training.INSITOTUT (IMDIl) enhemoing m-sgem-tsklsIan smlbuiese r/sgr;(Ne York, U.NS A ) de..iopingc....tries inodr oasotan

onre..as trali.g, pri-oipellp- repol e apwrdvlP-fisasned th-ogh training progra mnicotrats asd pa-tInipantfe le.

JAPAN COSUOILTING Japanese institute with tehninal, In pas three yeses Ass repond- Provides (soaIl...cai) ind-tiry-(N TIT ( ) isdostry-speoifin empertise for ed to 2k reques.ts from 1 specific feasibility stodie-uoTYiyo. Japee) ONE d-Iep,.me, era..sfe-rd ..ustese In Africa, Asia and request as well as IOU-plus

through puhliahed booklets and Latin A-eios, il-lodieg 3 or enclle-t SSI profiles --,eing-urvya amd reports prepared lot more Iron Nigais, Indoneia and mstiomls -.a, plant andmauatg"overnm t egnisa and ind-anial Malaysia. u-ing oi,prodont desig, prods--

groups. in developin coutries. tIn roee,lbor andpoe

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ANNEX 3Page 5

AGENCY DESCRIPTION5 COUNTRIES TECHNICAL_SERIVICER OTHER EXTENSION SERV'ICES IRAINIHG INSTITOYTIOH HUILDING

INSTITUTE FOR The In-titute for.. evlap oent Re- Neinly Afric- end India R-eserh studiee already descr ibed. OcRing the exper fen of ihe Rural Seminera 00 res.earh findiege. lotegreted Rural Dev-lopmntDEVLOPMENT RESEARCR searh isegooer-is-tal inotitoti-s Industril1 D-velPean t Program is Plan far West Lake Region,(IRE) esthliahed in INhI. The obJect of Keaya to~ pies the new organinfs Te...anJa. HiitsEtry

0 f Pinass(Cop-shages, De-sakI the Isetitute Ja to underoake, toitended s support the developee-t an.lnif ay. Regien..Ipr-mte. and to pobliah research enofemilscl auraiho beco. lasEg in -Ynae k State,impor,tan,t.preblesmocegerdiog the India.essooni andeaie deseIopne.t of

the developisgH. coutries, isciudingprel imi_ary ioveetigati-s end aneve1ution uf developnet assisetance

as ohs asEtnnfinancedtby theCG-ernrt of t.enrk.Th e Institute, bee been engaged i

stdies on rura aha"ge, smal-aalc-d-tria development, reg.ioneplann.ing and Danish i-eet-ets inthe developing counties.

PUNS FOR RESEARCH AND FRISA, a private intErsatioaI non- Miaialy Africa, but also coutries FRlVs technical assistanc The project financing, depar.tment PRIR wilcDai ous in P R.IOA gill ban a ner_rkiofIRVETOENT PFSOR1 proft orinotin created in 197h in other cotinen.ts with a pops- deperte...t gill ()provide co- apassad folos plano business adminitrasion and fiId offices who willJ buildDEEOLETO ndrgstrda aCaitgste eb o esthn1 mlin sutnydevcs nChsgset ml hnirftadinutiltrvdeyhirais t oa o htlcldveohntbnsAFRICA (PRIDA) UE he niiiledson o n e-niammalne hn frtedvlpet fhnirfs Imotoratdpoet ae suensfeidsna riig aaiiist rt n(LndonE O0ENT OF imlin t beciei o $0.()inascainwt h dRDI joinlydic loa !delomn prgasifrincutis,prieepntrjcs.I

lady he sallet an pooest pojecs ithas denufied nditrmmecLaldrge.ieathipt selterte1-1E. J. outtesisAfic, n h prpJe.prdcuwl ioud ()prh-

cemponet. PRIE s aim s to (s effectvebway to. p.sute h fIsn- (b) Prjciad, aktn

arganpnin arisn, pr oratgth alotrep,an oloe te tadn o t. c dcnrprdeimo ighgqalit teodi- osblte oices core mkttsgru i n fi EtC ..t.ntrie

espor-onisted Idusre idfIa orot sb ult

patiulrl. o he b,. n p:the EEC- y .. . t. f, E..iiy. J~p :i h by proiig asEtarce ppocinlodoerjc idenriteto end.i . i.iid-d _..7 giti.t 1 t

Cevevawhich on th post fine yearsEi

scutrs o b inletaro lohsptoct- i.fitic1 . l .d~:.12tdevelopleg cousories for esporto to ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ i',1.- t.dig . .K eth EC n ndrae a campaign

wrtd EtiC entepenur q.Ito ihedi- is-blt-t -. ttit -ktgg.pJ EArca.ft, plii k.'.pt Pz g-dfig -- e d .eitgip

ANNEX 3-Page 6

AGENCY

Note: The fEcllving ageoci.el ve believe to be active is prcntingappropriate tehtnology, end Vo are seeking inforntio, ontheir activItis

BRACE RESEARCH LNSTITUTE (ERI)(Caiceda)

GROUPE DE RECHERCHES SUR LES TECHNOLOGIES APPROPRIEES (GREr)(Fran e)

CENrRO DE ESTUDIOS MESO AYERICANOS PARA LA TECHNOLOIEA APPROPRIADA (CEIAT)(Gu-temala)

CENTRO DE ESTUDIOS ECONCOMICOS Y SOCL:ALES PARA EL TEERCER MMiDO (CEESTH)(Me sico)

TECiNISCNE ONTWIFKELING ONMWIKELSOFSS LANDEN (TOOL)(Netherlands)

CENTRE DE RECHERCHE DU GENIE RURAL (CRGR)(Tu,is ia)

ARBEITSGEMEINSCRAFT UMNELT (AGU)(Switoerlend)

SCH14EIZERISCIE VEREINIGUNG FUR MITILERE TECHNOLOGIE (SVMIT)(Switorrlsnd)

SC1JEIZERISCHE ARBEITSGEMEIN SCHAF1' FUR ALTERNATIVE TECRNO;LOGIE (SAGAT)(Swliteerl _d)

ANNXY A

Page 1

VrVTRlTM17'r AT L' C L'V flfC 1`E1'CT£.A %L IMr~L.qA7I 1~I' 00L ILIXUJ El£,UI

UNDER CONSIDERATION

i. Upper Volta. An integrated SbSE project is likely to materialize in

Upper Volta which would aim at making institutional credit available to thewidest possible range of firms, including small housing, road equipment andother civil works contractors, agricultural artisans (operating singly or incooperatives), quarries, well makers and small service businesses catering tolocal urban markets.

The project will seek to design and implement a fully coordinatedmechanism to deliver credit and technical assistance (business, managementand engineering advice) to small entrepreneurs and will be coordinated withinthe Bank to mesh with highway and urban development projects in the lendingprogram. For example, the DFC operation will include a credit and assistancecomponent which will directly support a highway project and which will bespecifically allocated to Voltaic civil works contractors, who are in aposition to subcontract such work as feeder roads and culverts. Another por-tion of the loan would be available for housing credit as well as credit andassistance for businessmen located in urban redevelopment sites.

2. Philippines. The rural credit project of 1974 initiated financingof three types of small agro-industries. Based on the experience gained, andneed to assist small rural entrepreneurs, the coming project of 1977 isenvisaged to include, as a major component, financing of both small subbor-rowers engaged in cottage industries as well as larger-scale agro-industrieson a much larger scale than in 1974 ($0.3 million in 1974 and $5.2 million in1977).

Technical assistance would be provided largely by the industrialsnecialists employed by the Central Bank, and MASICAP. Other sources avail-able at the local level may also be included. Project funds would be channeledthronilgh nri vto riirnl hbnks and nrivate savings and lnan asnri Ations hv thh

Central Bank. A particular area of investigation would concern ways to mini-mize lendn costs and risk aciated ith hiiundraec of cmnll lons,c epc-aially

by organizing a network of technical assistance usable by small credit institu-tions and smOall subborrJowers, as well as by t-4i4n credtJ off4crst

improve their appraisal capability.

3. Egypt. Through its 80 branches the Bank of Alexandria (BOA) has beencarryJ.ing ~JUL dli ~A.jJ~L .- out an -im- -g -- assist smal l busi- U ---- an' artisans

with loans varying from $250 to $5,000. During the last three years an average2,000 small enterprises have been assisted annually. In addition, otler small

borrowers have received financing from BOA through hire-purchase schemes. BOAsees these progLams as efforts to hlelp poor families to escape poverty by pro-

viding them with small amounts of capital they need to help themselves, and hasinstituted liberal lending criteria and security requirementLb. So far, tnis

policy seems to have worked, but small firms are frequently squeezed by largefirms which buy their output in bulk at low prices while supplying them withraw materials at elevated prices.

ANNEX 4Page 2

Given that most of BOA's activities have been concentrated in theCairo area, there is an opportunity for the Bank to help BOA in its efforts tomake credit available in the regions. Even though mostly local currency fi-nancing would be involved, there is a shortage of credit for small businessesand the Bank has been invited to help. Innovative project components couldinclude joint facility cooperatives for both purchasing and marketing (alsofor exports), hire purchase arrangements for small agro-businesses and sub-contracting schemes between BOA's larger borrowers and small enterprises.

4. Colombia. An SSE experiment is under consideration to develop aninitial integrated project in an urban center with substantial unemploymentproblems (e.g. Barranquilla). Target enterprises would encompass a wide rangeof manufacturing and service subsectors including small artisan shops, retailand commercial outlets providing goods and services to urban consumers,tourism and transport services, low-cost housing, and small construction firms.A project management unit would be established to quantify the size and natureof the employment gap based on present programs and trends; identify unsatisfieddemands for goods and services and opportunities to stimulate increased demands;and facilitate the supply of these demands by new or existing labor intensiveenterprises through the development and implementation of an integrated systemfor delivering finanical; technical. marketing and trainina aRsigtanrce

On the basis nf pynpripnrp gained with this initinl project, it isplanned to develop an analytical, operational and organiztaional model formuniiting inteorate-d nroarnms n oonerateo nrnA-uctive omrl,n-t- opportunitie.-

The model would then provide the foundation for a broader program that wouldbe extended ,successively to cover other major urban areas in onoianbiaaelsewhere.

5. India. A Bank mission visited India in April-May 1976 to surveyAseverAl_ 1 .. A_setos AS or J? n _ 1 _ _ A_l ._1 O _ _ _ __t i>VCLa.L SUU-e_LUL LI Lii. .L1ormIa±l pLrlUULLo ±UUe. aLthC-r t ::L.LUU1LULt, lid1U-

looms, village industries, carpets and light engineering. The mission recom-menudeu a variLety of measures -- including better raw maLerial supply, tecnnicalassistance for improving des:Lgns and help in obtaining finance and access towider marketing channels -- whereby the Bank might help to upgrade OSE opera-tions in these sub-sectors. Extensive discussion of the mission's reportwithin the Bank' led to a consensus that investigation of possible Bank assist-ance in these areas should be pursued along the lines suggested, givingpriority to the preparation of projects for leather and small scale textiledevelopment.

It was recognized that an important feature in the design of suchSSE projects could be the involvement of cooperatives as intermediaries forchanneling technical assistance and credits.

The report of the mission has been transmitted to the Indian Govern-ment, and it is hoped that follow-up steps during 1977 will lead to innovativeproject designs which may also be suitable for some other countries.

ANNEX 4Page 3

6. Mexico. Financing institutions in Mexico have requested Bank

assistance for chaneling more credits and other forms of help to small and

medium industries in that country. A mission visited Mexico during October

1976 to survey the whole small and medium scale sector and analyze the oper-

ations of the existing institutions, with a view to preparing a project for

Bank consideration. The project will propose a comprehensive framework for

expanding financial credits for the smaller industries linked to a program

of technical assistance.

7. Indonesia. An appraisal report is in draft on a proposed

loan to assist small business development in Indonesia, by strengthening

the capability of the banking system to administer programs of financial

assistance to small business, and improving cooperation and liaison with the

Department of Industry and other technical services groups. The initial phase

would be limited to East an Central Java and West Sumatra.

The target sectors would include manufacturing; services such as

repair shops, transport and tailoring; construction; and wholesale and retail

trade. The modern SSI sector would receive more attention than in past programs.Total financing for the proiect is estimated at US$218.4 million equivalent.

The project is to be managed by Bank Indonesia (Central Bank).

The total project subloans over a 4-year period would finance an

Petimatpd 35;000 fixed assets and working capital projects with an average

size of $8,000. About 93,000 additional jobs should be created, at an aver-age cost per inh Petimated at $3;000.

ANNEX 5Pagoe I

SELECTED BANK-ASSISTED SMALL/MEDIUM ENTERPRISE PROJECTS

(Summaries)

IndustrLl1 rLJectL UDepaLLWrtment

Pakistan

The IDA credit to Pakistan in 1962 for $6.5 million repreSentS Ltle

Bank Group's earliest explicit attempt to stimulate SSE investment. Theproject includes the purchase and development of two estate sites as well assupport for industrial consultants to assist in managing the estates andappraising estate located investments. Continuing technical assistance tofirms after appraisal is provided as part of an ongoing government program,coordinated through the estates. The objective ot the project as describedin the appraisal report was one of modernizing existing firms to increase pro-ductivity and output. Entrepreneurs themselves were to pay for factory sitesand machinery but were given long term credit to do so, as well as advice onobtaining credit for working capital needs. The project encountered signifi-cant disbursement delays, and the one industrial estate located relativelyfarther away from the urban center suffered from a lack of viable investmentsand was far from successful. Nevertheless, it was demonstrated that smallindustries could be assisted if credit arrangements are relatively straight-forward, investment appraisal techniques sound and industrial estates are setup near natural markets.

Pakistan/Bangladesh

Before the separation of Pakistan's Eastern Wing and the formationof Bangladesh, IDA had approved a $3 million credit to the East Pakistan SmallIndustries Corporation (EPSIC), a government agency established to set up andmanage industrial estates, provide and coordinate technical assistance toborrowers and arrange for (and provide in a limited way on its own) finance.The IDA credit, although including assistance for industrial estate management,was fundamentally a credit project designed to meet the foreign exchange needsof entrepreneurs. At the time of the war, the credit was two-thirds committedbut only a small amount had been disbursed. After the war the project wasreactivated (December. 1972). although the effects of organizational changesaffecting the delivery of technical assistance to subborrowers and in thecommercial banking sector were not entirely clear. In the reactivated credittechnical assistance to the borrower was largely eliminated. Under theoriginal scheme the central bank rediscounted 75% of loans made by commercialbanks under the program. In the case of default the commercial banks and EPSICshared enqallv the risk- This plan was retained tinder the reartivated credit;

although the commercial banks had been nationalized and consolidated.

ANNEX 5Page 2

Yemen

The objective of IDA's industrial estate project in the Yemen ArabRepublic, which was assisted by a $2.3 million credit in FY1975, was primarilyto demonstrate modern industrial techniques to small businessmen and craftsmen.In addition to the physical development of an industrial estate and the neces-sary institutional arrangements associated with it, the credit provides fortechncial assistance to the estate authority and sub-borrowers as well as long-term credit through the majority government owned Yemen Bank for Reconstructionand Development (YBRD). In addition to the normal public utilities provided inindustrial estates, a common repair facility is to be provided. Long-termcredits from the Government Controlled Development Bank (previously unavailablein Yemen) would be available only to entrepreneurs with projects approved bythe estate authority.

Tndnnpqi n

An industrial estate be ing constructed on the outskirts of Jakartareceived support in the form of a $16.5 million IDA credit in FY1974. Thenroticrt 1.is a stnandard induiitrinl Petate nnoperation designed to reduce costs

of services to industrial firms and to speed the implementation of investmentpiroj acnt M-et of the f4 r;mc eaxpctA ed 1 noc,ta on tha aeta te 1e P arge 1 Jint

ventures. The small scale enterprise component of the project, although smallin 4tself, take -count of the fact that SSEs require help -as pat of a broad

program providing standard factory buildings, credit, and techncial and manage-men.t assistance. Al tUough the project does not include a credit component

specifically for SSE (or other firms for that matter) an estate-located officeis established to assist firms inL negotiating credit from existing sources,as well as providing help in production techniques, market surveys, etc.

Nigeria

The Bank has provided technical assistance, which will continue(although no loan is contemplated) in support of an overall SSE "sector" devel-opment policy formulated by the Government to be carried out over five years.The total funds are Nigerian, a total cost of US$165 million including a creditcomponent of US$80 million. The scheme is interdisciplinary in design,building on NDP experience with industrial estates, but including importanttraining and credit components. Coordination of the project's techncialasistance components (to subborrowers and estates) and the credit portion willbe undertaken by a strengthened Small Industries Division of the Federal Minis-try of Industries. The project, which is innovative in both its geographicand institutional scope, should have a significant impact on SSE's growth andperformance. Immediate objectives are institutional (training institutes,financial intermediaries and industrial estates) in support of the longerrange objectives of industrial dispersion, job creation and localized indus-trial development.

ANNEX 5Page 3

Other

Four other NDP projects have had an impact on small enterprises, al-though for different reasons each has certain atypical aspects. The Mauritianindustrial estate project, for example, suports small and medium-sized export-inv fnrmR in the modern spcnr. Althoueh certainlv in tune with Ma11ritinnneeds, the situation is not a typical one, there being few countries withexcrss rh chap skilled In ar- sitiintd on mjinr tradin8 routesa Similar ly, the

industrial estate component of a Nicaragua project meets a different type ofneed and focuses on rehabilitation of preexisting firms. Tanzania's industrialestate project has a very small component for small firms (10%).

Development Finance Companies

India

The SSE project in India was the first of its type done by a DFCdivision (December 1972). It is conventional inL its primary concentrationon institution-building goals but unconventional in that it involved 18state-level institutions, thus aiming Bank assistance at regions and a size-class of enterprises that have previously not been touched by this Bank'sindustrial assistance. The fundamental objective of the project (and in arepeat project in FY76) was therefore to meet quickly and efficiently thefinancial needs of small and medium enterprises. Reflecting this objective,and because of the federal nature of India, the project relies on a two-tier,or ;apex", approach for making credit available. The Industrial DevelomentBank of India (IDBI), a fully owned subsidiary of the Central Bank, receiveda $25 million IDA credit for on-lending to 18 State Financial Corporations(SFCs). This approach enabled the Bank to address the institution buildingneeds of the SFCs, which are critical to effective credit support for SSEs,through IDBI, which deals with them on a regular basis through a refinancing/rediscounting mechanism and supervision. 75% of the country-wide operationsof SFCs is for small-scale industry, but they are only marginally involvedin mobilizing business and engineering assistance for small Indian entrepren-eurs. In view of the formidable institution-building task of the Bank, andin view of the fact that technical assistance to SSE is available from a widevariety of sources, the Bank concentrated on financial delivery to ease thetraditional problems small entrepreneurs had faced with untimely provisionof credit. At this juncture, however, the specific technical needs of SSEare being reviewed and future SSE operations in India foresee a close integra-tion of credit and technical assistance.

Cameroon

The SSE project in Cameroon ($3 million IDA credit in 1975) relieson a majority government-owned DFC as the credit intermediary. However, boththe Government and the Bank recognize that reaching SSEs successfully requiresmore than financial and operational support for the DFC, and in fact, the

ANNEX 5Page 4

oriainnl rpuiipst of the Government for Bank heln was not for credit but for

help in providing techncial assistance to subborrowers. More than in India,the bottleneck is not lack of finanria1 resniirres, hbut also management and

business failings. As a result, delivery of technical asistance to Cameroonian

subb1orrowers as wel1 as t the finanrinl intermediary w seen as rvitircl hy

both the Bank and local authorities. Operating on the assumption that assist-ance to subborrowers should not be supplied bu the finani4al interI mediary

itself, but by one or more of the three existing organisms, the Bank soughtto coordtiate the grau1u5 'Agof pCrog.amofffered .LJy thsOe g1ro.p. _Furt h e rmo

two other project components are worth highlighting. First, the governmentfofts part is firmly committed t-o support SSE, seeing suchL support as anLor iL pati L LLIL LJIU.LEUL L- 00 Et1

6DU

important part of its overall industrial sector policy. In line with this

commitment, the government has rationalized the system of incentives for small

businessmen, and made an attempt to speed decision-making on applications forthese incentives. Second, in recognition of the risk involved in promotionalwork with SSE, a fund guaranteeing up to 80% of loans to SSE firms by the DFCand local commercial banks was established on the basis of central governmentsupport and a levy on the profits of commercial banks.

Philippines

The Philippines SSE operation ($30 million in FY1975) is probably

the most complex such DFC operation to date. The loan was made in responseto a direct government request to improve, for small entrepreneurs, access

to institutional credit and techncial assistance to solve day-to-day operatingproblems. Because a wide variety of Philippine institutions exist to providecredit and assistance to SSE and because of a need to have a broadly-basedgeographic impact, the project has four quite distinct components. Includedare (i) a $15 million component for on-lending to SSE by DBP, a wholly owned

government DFC; (ii) $12 million for a fund guaranteeing up to 80% of loansmade by commercial and private development banks; (iii) $2.3 million for on-lending to rural industrial cooperatives through the rural electrifications

authority; and (iv) $700,000 of direct Bank support for regional techncialassistarnce centers. National coordination of all assistance to small entre-

preneurs in the Philippines is carried out by the Commission on Small andMedium Industries in the Department of Industry. Most important financialintermediaries (including two supported by the Bank) are represented on this

commission, and field operations are carried out by fifty action teams and at

seven Small Business Assistance Centers. These latter centers are supportedthrough the technical assistance financed by the Bank.

Ivory Coast

The request of the government of the Ivory Coast for a small enter-

prise project stemmed from the Government's desire to upgrade the operationsof the local technical assistance agency, Office de Promotion de l'EnterpriseIvoirienne (OPEI). In addition to strengthening this organization and itscapabilities the pronect nrovides financial assistance (S5.6 million in 1975)

ANNEX 5Page .

to a local financial intermediary, Credit de la Cote d'Ivoire (CCI), foron-lending to SSE. The central concept of the project is to develop "model" orprototype projects in specific subsectors--banking, garages, woodworking--whichcan be used for repetitive operations, thus reducing risk of failure andadministrative overhead. The IBRD funds are designed to finance the foreignexchange cots of projects, while local commercial banks meet the workingcapital requirements. Estimated financial and economic rates of return forthe firm to be assisted in the project (largely bakeries, woodworking opera-tions and garages) range between 25% and 33%. Approximate allocations ofthe cost of technical assistance to individual subprojects reduce these ratesof return significantly, although they still remain above 12%. Similarly,adjusting for the cost of assistance raises the average cost per job generatedfrom $5,700 to $8,700.

Colombia

The $5.5 million Bank loan (1974) in Colombia has as its centralobjective alleviating the twin constraints for SSEs of insufficient accessto credit and the need for technical assistance. Project components include$5 million for on-lending to small firms to meet the foreign exchange costassociated with investment and $50,000 to finance technical assistance tothe government-owned financial intermediary (CFP) and to subborrowers. Inconnection with its normal credit operations CFP agreed to increase itstechnical assistance efforts to help its clients. In addition, since manypotential clients require extensive help (especialy techncial and managementadvice), Bank funds are also available for technical assistance credits toentrepreneurs, usually for the services of Colombian consultants, includinguniversities, private consultants, and government-supported groups.

Korea

IBRD's $30 million loan (1974) to Korea's Medium Industry Bank(MTR) covers mainly modern, medium-sized firms, but is also expected to havea significant impact on smaller companies as well. The relatively wellmodernized SSE ruiiset-or in Korea reprpcsntc an important part of the full

industrial sector and has received extensive and well conceived governmentsupport. MIB, which is full" government owned, is the financial intermediarydesigned specifically to meet the needs of the smaller to medium sized firms.Acs a wel1l-run and -noan l zatio it has developed, alng i

4th, t-hegvern=

ment's program of assistance and incentives, an in-house technical asistancec_ap_ability which provides help in solving operat.ing zid managemet polems,

training courses, publications and some help in preparing feasibility studies.

International Finance Corporation

IFC's first small/medium enterprise project ($2 million in FY77),prepared uy its Capital 'r'LkeLs Department for Kenya, relies on tne existingcommercial banking system of Kenya to provide both credit and basic managerial

ANNEX 5Page 6

advice ___ to -- Al -- A 4-medi --um -- -nrpe.us - The ob"ective of th4s f4rst- pro,ect

in Kenya is to provide a package of needed inputs to small entrepreneurs,whl'''e at the same time devel0ping anL- aproc -hc is -applicablein oth-er

countries.

Commercial banks are already involved in the small-scale sector,providing working capital loans. Geographic spread is wide, with continuouscontact with consumers. IFC wanted to use a set of flexible institutionsalready in place, but separate from the Government. To meet the needs ofsmall businessmen in Kenya, IFC anticipates lending to them directly roughly70% of the term finance needed. The commercial banking partner will bothadminister the IFC Loan and lend the residual 30%. Needed working capitalwould come from the commercial bank. Non-financial assistance to the borrowerwill be provided by the commercial institution on a self-liquidating basis andis pitched at a fundamental level (basic book-keeping, marketing and planning).Engineering and technology assistance to small/medium enterprises is notincluded in the project.

Urban Projects

Project components to promote small business development are being

included wherever feasible in recent urban projects. These are generallypilot efforts in this field and consequently the lending amounts arecomparatively small, ranging from $0.5 to $2.4 million.

Although there is considerable variation among project designs to

suit local conditions, institutions and practices, the following three basicingredients are generally incorporated:

(a) provision of space for workshops and markets;

(b) credit mechanisms for purchase of tools and equipment, shopconstruction or expansion and working captial; and

(c) technical assistance and training in fundamental businessmanagement and onprations and techncial skills.

The followina are hrief desrriptions of nrniocrt hv region:

Easte Aftric

The FY77 Second Tanzani TrTjn Pr-item- ihmsizes imnroing the rnnnrityv

of existing small business and artisans in selected enterprises in project townsby providing workshop space, small loans for equipment and working capital, andtraining and assistance in basic bookkeeping, marketing, etc. A second projectappraitsedu lin Zambia inclUAdes similar features.

ANNEX 5Page 7

West Africa

The $44 million Urban Development Project loan (FY77) to the Ivoryr-oast f inrludiep Qsuppnrt fnr small sca1le informal sector activitipe hv setting

aside specific areas within the project sites. The Caisse Centrale pour laCooperation Ecor.omique is reviewing a paraliel technical ajsitance and cred4t

line activity to support entrepreneurs who would buy plots in the site andservices areas. The Upper Volta project (FY78) hs as4milar -assistance component administered by the Development Bank and destined toindLiVilAuals in proJect upgrading areas.

East AsiLa andu Pacific

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Government of the Philippines of the purpose of assisting very small businessesand cottage industries found in the Tondo and Dagat-Dagatan areas of Maniia.This is an experimental effort that includes both technical/managerial servicesand credit facilities. The package is primarily designed to fill a gap infinancing for small businesses whose assets are less than US$20,000. Whilefunds for small businesses are nominally available, banks have tended tochannel funds to larger, more secure investments.

A line of credit will be provided to the National Housing Authoritywhich will enter into an agreement with commercial banks for administering theloan for subprojects involving general manufacture of furniture, householdimplements and simple tools; woodcraft and shellcraft; machine shops and repairshops and others. This project will provide 60% of the loan amount needed withthe remainder lent by the commercial banks involved. The technical services willbe provided by the Department of Industry for project preparation and review,professional assistance, training, processing of loans, and advice during im-plementation and supervision. Managerial assistance will be offered under theauspices of NHA including special courses in business management, elementaryaccounting and record keeping.

South Asia

An IDA Credit (FY77) of US$2.4 million will be provided to the Gov-ernment of India for Madras, of which US$1.6 million will finance work sheds andmachinery loans for small industries and US$.8 million will finance training,equipment and sheds for cottage industries for areas in the sites and servicesand slum upgrading schemes of the Madras Urban Development Project. It isproposed under the project that work sheds be provided by longer term, lowerinterest rate loans since the Government prefers that these be built for saleby hire-purchase rather than for rent, and it has not proved possible tointerest banks in the venture.

The Small Industry Develnment Cornoraton will build the sheds andextend loans to small industry entrepreneurs to cover about 70% of the esti-mated total cost of machinery= The halance ic epencted to be available from

ANNEX 5

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other sources, including local banks. Preference will be given to personswho are prepared to stay in the area and willing to recruit labor from theproject area. Working capital will be provided by banks whLch nhave agreedto locate branch offices on the site. Most of the small industries areexpected to be lig ht engineering worlkshops produc.L5g for larger industries inthe area. Technical, consulting and marketing services will be available. Itis expected that linkages would develop between the small and cottage indus-tries and selected training-cum-production centers might be used for trainingin more industrUa' activt'es.

Latin America and the Caribbean

In El Salvador (FY77), after providing limited credit assistance tosmall production co-ops in areas developed under the first urban project, thesecond project will expand the credit and technical assistance to any smallenterprises meeting basic eligibility criteria concerning size, presentincomes etc. Projects to be appraised in coming months in Mexico (FY78) andColombia (FY78) have similar components. The small business component of theGuatemala Earthquake Reconstruction Loan (FY77) specifically focuses on thoseenterprises that produce home building materials such as bricks, blocks, doorframes etc.