Unfair procurement requirements leave SMEs behind

BY RICHARD CHIROMBO

MALAWI’S attainment of foreign debt cancellation three years ago may take long to yield the desired trickle-down effect, in the long run, in the absence of clear pro-Small and Medium scale Enterprises (SMEs) Procurement policies, business analysts and captains warned this week.

Also at the mercy of foreign devices, is the country’s overall economic – policy agenda to turn Malawi into a pre-dominantly producing and exporting economy, from a background of predominant imports and consumption, as foreign investors would easily squeeze weak domestic enterprises out of the market due to glaring inefficiencies and lack of competitive capacity.

They argue that since SMEs are widely touted for being key turbines behind the economic turn – around of great economies, the country cannot embrace meaningful development without initiating favourable strategies aimed at developing the sector.

“(External) debt relief remains one of the best milestones accomplished by Malawi, and Malawians stand to benefit a lot because instead of paying loans, the funds will be channeled towards development initiatives, especially in rural areas. But you may appreciate that our culture values the concept of extended families where people – most of whom (some 86 percent according to the National Statistical Office) live in rural areas – send money of farm inputs such as fertilizer to the village.

“It is also a fact that many of these bread – winners engage in business of some sort, be it small or medium scale, and if these people do not earn enough profits because of procurement policies that subject small and large firms to similar conditions, it means there will be no trickle – down effect, in the end those who depend on them will end up vandalizing development infrastructure to earn quick money, and it is national development that suffers” said Mike Mlombwa Indigenous Business people Association of Malawi(Ibam) interim president.

Malawi had a land-mark year in 2006 when, in August, the International Monetary Fund (IMF) and World Bank boards agreed that the country had reached the Highly Indebted Poor Countries (HIPC) completion point, resulting in the write-off of US$3 billion of the country’s debt. This translates into annual savings of US$100 million in debt service costs.

The gesture was replicated immediately by the Parish Club, a grouping of creditors – agreeing to reduce the amount of debt owned to them from US$363 million to US$9 million mainly as a result of purported government commitment to fiscal discipline and good macro-economic policies.

What remains, however, is for the benefits of such cancellation to start trickling down and possibly, change the economic fortunes of the country, especially for the 65 percent who live below the poverty line (one dollar thresh-hold a day).

Mlombwa, whose organization aims to economically empower Malawian entrepreneurs, most of whom fall within the small and medium scale sector, says there is need to modify requirements for the bid – bonds and procurement documents so that small scale entrepreneurs pay half or quarter the requirements expected of larger firms and companies which, he hopes, will help level the playing field and leave SMEs as competitive.

According to the local business magnet “it is unfair to pit small traders against big entities under the same monetary requirements” as it works against ideals of local empowerment, adding that it is also goes against Ibam objectives as such policies frustrate the participation of indigenous Malawians in social economic development of the country; discourages them from owning viable business that would equally complete with those of foreign investors’ marginalize indigenous people in accessing business opportunities; as well as depriving most people of the opportunity to earn honest income.

In addition this state of affairs has thus far hindered Malawians from forming joint venture partnerships with foreign investors wishing to invest within the country as they nurse a hung over of capacity deficiencies and nurture deflated entrepreneurship egos.

The case of Thomas Munthali, who runs KGA Enterprises in Blantyre-Malawi’s commercial city – may be a good point. When Munthali, 42, set out to start his business in February 1993, leaving behind more than 50 relatives still living below the dollar-a day thresh-hold, he hoped he was sharing in the first steps to bail his kinsmen out of the poverty trap.

But fourteen years down the line, quantity of the contents in the small room that is his business hall have almost always remained unchanged, albeit for the room becoming dingy and drab. Of course he sells and replaces replenished products, but the stationery and paper work business simply doesn’t grow.

“That is where the problem is. The cost of living has gone up and there are people I look after, all from this same business. Of course there are tenders flighted in the newspapers but small traders like me do not apply because most procurement charges are far too expensive for us.K5000 to my business is quite a lamp sum of money almost a whole lot of profit. How if I buy six bidding document at K3000? That is K18000. I cant risk it in a process I am not sure to win,” Said Munthali, who plies his trade behind Blantyre Post Office.

He pleads for an end to the chilly attitude portrayed by policy makers towards small scale entrepreneurs, arguing that if the playing field separated small firms from the large, he would willingly take part without any quarms, as was the case last year.

“When the Malawi Polytechnic ( a constituent college of the University of Malawi) requested tenders for the supply of stationery materials last year and the bidding documents were pegged at a reasonable cost of K1000, I expressed interest and was picked among the ten, or so, successful bidders. Other than that, many others are expensive and would force my business to go bust.

“After all, why should one government department peg such documents at K5000 another at K3000 and yet another (department) at K1000? What criteria do they use to come up with such charges?” queries Munthali who is at pains to understand why small and medium scale entrepreneurs are made to pay K1000 for them to be gazetted as qualified suppliers of various products and materials to government in the first place, only to be bombarded with restrictive procurement charges later.

He added; “I don’t understand how they arrive at their decisions. If your products are a bit on the higher side they do not pick you saying its too expensive. When you decrease the price, they don’t pick you, they say you do not qualify, you cannot meet supply. They charge K5000 for the documents yet photocopying process (of binding documents) does not even surpass K300. In what government account does the money realized go?”

So, unless the myriad of challenges faced by SMEs in Malawi, mainly attributable to fundamentally misplaced policy and strategy emphasis are rounded up, the country’s economy may lose out on high employment-generation created by the sectors labour-intensive nature and a meaningful push on Gross Domestic Product(GDP) - major advantages associated with SMEs the world over, according to analysts.

Despite there being no comprehensive study on the number of SMEs in Malawi, observers estimate them to be between the ranges of 97 to 99 percent calculated around the percentage number of SMEs within the European economy (99 percent).

The challenges of prohibitive procurement charges and bid-bonds aside, the SMEs sector is also plagued by lack of money – borrowing opportunities by lending institutions as they are considered high-risk borrowers. This comes against the background of most business climate and enterprise papers and surveys supporting the need for deliberate policies in favour of the sector due to their employment generation trickle-down effect, key in the reduction of poverty – a top agenda within the Malawi Growth and Development Strategy (MGDS) and the Millennium Development Goals (MDGS).

For instance, a policy discussion paper, “Small Scale Enterprise and Sustainable Development – key issues and policy opportunities to improve impact,” published with support from the Swiss Development Corporation, International Institute of Environment and Development (LIED), and the UK Government is Department for International Development (DFID) calls for policy interventions in favour of SMEs if long-term sustainable development is to be attained.


It argues that the sector often has a numerical significance and reaches into the poorest communities that large scale enterprises lack; irrespective of any other advantages that they might have, market failures disproportionately (inequitably) affect SMEs; and that , lastly, the economic, social and environmental advantages intristic to some types of SME in certain particular contexts warrant deliberate and appropriate support.

The paper further points to three pragmatic areas that are billed to produce significant impact, top of which is the setting-up and implementation of SME- tailored procurement policies, added on to good incentive and competition practices. The other two areas are the adoption of ownership and association partnerships that secure greatest economic, social and environmental benefits, and processes of standard – setting and labeling and constructive consumer engagement that enhance the benefits of the sector.

The concerns about restrictive procurement policies come quick in the wake of a Euro 30 million (about MK5.7 billion) line of credit approved by the European Investment Bank (EIB) for the benefit of SMEs in Malawi, and will be administered through three yet-to-be-named commercial banks.

Reacting to the concerns in a separate interview Office of Director of Public Procurement (ODPP) Public Relations Officer, Mac Pherson Mdalla, acknowledged having received complaints on the same, but insists the charges are meant to cover the administrative costs incurred in the course of production. The charges, according to Mdalla, fall within the context of the Public Procurement Act and should be followed to the letter, so long as they are not profit – oriented, reasonable and understandable.

“Yes, we have received complaints in the recent past, and we explain clearly that the charges are not for profit, but to be used towards production of bidding documents,” said Mdala.

He said technical documents especially attracted a fairly higher cost – attachment as a lot more goes into the course of their preparation and production. Such documents call for through preparation and vigorous arrangements, sometimes resulting into the production of a whole booklet, according to the ODPP Spokesperson.

However, to make sure that the positive effects of debt relief still trickled down to the poor through SMEs, Mlombwa disclosed that Ibam is in the process of organizing a meeting between Malawian business people and ODPP to iron out issues that mill small entrepreneurs out of competitive business.

This, according to the Ibam president, is because his lobby group has, too, been inundated with complaints from small scale traders. Mlombwa however dispelled out the notion that only small entrepreneurs and “not most of the big people in Ibam” bear the brunt of the unfair procurement charges, as they too had problems hence need for consolidated efforts.