Regulating SMEs- supporting or strangling?


Vicky Bowman

Vicky Bowman

In 2015 Myanmar adopted the Small and Medium Enterprises Development Law. It is debatable whether or not a law for SMEs is necessary. More important is for government and Parliament to ensure that all relevant laws and policies recognise the needs of SMEs before they are adopted. However, a Law is now in place, and in addition to the usual creation of Committees and other bodies, it seeks to define what a small or medium-sized enterprise is.

Most official international definitions of SMEs are based on permanent employee numbers. According to the OECD a micro-enterprise has 1-9 employees, a small one 10-49, and a medium-sized one 50-249. This limit of ‘less than 250 employees’ is used by the EU, although some countries set the limit at 200 employees, while the United States considers SMEs to include firms with fewer than 500 employees. Despite national variations, there is a common recognition that number of employees is the simplest indicator of whether a business is an SME. The European Small Business Alliance (ESBA) recently affirmed this as an essential point, in its response to the review which the EU is currently undertaking of its SME definition.

Some SME definitions in other countries also add an additional parameter of turnover or revenue, particularly where being an SME brings eligibility for grants, subsidies or tax incentives. The aim with tax incentives for SMEs is not to help a multimillion dollar jade trading business with only 5 employees. Under EU definitions the turnover of medium-sized enterprises (50-249 employees) should not exceed EUR 50 million; that of small enterprises (10-49 employees) should not exceed EUR 10 million while that of micro firms (less than 10 employees) should not exceed EUR 2 million. One problem with having a turnover definition is that the threshold, unlike employee numbers, needs to be adapted every few years to reflect inflation.

The Myanmar definition in the SMEs Law took these two definitions of employee numbers and revenue, but unfortunately then added two further dimensions: business sector (six categories), and capital investment. The 12 definitions of what is ‘small’ and what is ‘medium’ which were created by this 4D chess can only be depicted in a table.

  Manufacturing Labour-intensive or piecework Wholesale Retail Service Other
Small <50 permanent
employees or
capital
investment
< 500 million
kyats
<300 permanent
employees or
capital investment
< 500 million kyats
<30 permanent
employees or
annual income
< 100 million
kyats
<30 permanent
employees or
annual income
< 50 million
kyats
<30 permanent
employees or
annual income
< 100 million
kyats
<30 permanent
employees or
annual income
< 50 million
kyats
Medium <300 permanent
employees or
capital
investment
> 500 million
kyats
<1,000 million
kyats
<600 permanent
employees or
capital investment
> 500 million kyats
<1,000 million
kyats
<60 permanent
employees or
annual income
100-300 million
kyats
<60 permanent
employees or
annual income
50-100 million
kyats
<100 permanent
employees or
annual income
100-200 million
kyats
<60 permanent
employees or
annual income
50-100 million
kyats

While this is confusing, it doesn’t end there. The Myanmar Cottage Industry Law of 1991, which was amended in 2011 and renamed the ‘Small-Scale Industry’ Law, defines a cottage or small–scale industry as
having not more than nine workers. Well, that’s unless it makes handicrafts, in which case it needs at least three workers and has no upper limit. This Small Scale Industry Law also introduces another parameter for defining what is small-scale: horsepower. A small-scale business must use between 0.25 and 5 horsepower to qualify as small.

Yes, as the OECD’s 2013 Multidimensional Review of Myanmar noted tactfully, the institutional structure of business in Myanmar is ‘fragmented’.

Does all this matter? It does, because when trying to support the development of SMEs – an objective which is Point 2 of the NLD government’s 12-point Economic Policy - the first rule is Keep It Simple. Having a cat’s cradle of definitions for determining the status of a small or medium sized enterprise fails that rule. A hotel owner with 40 staff should not need to spend time wondering whether she runs a medium-sized service business or a labour-intensive small business.

Furthermore, the more complex the rules, the more cost and difficulty for a small business to follow them, or to access any incentives under them. Additionally, the more complex and confusing the rules and definitions, the greater the potential for corruption, and the risk that the business will be squeezed for tea-money. In some cases, faced with such complexity, the enterprise will opt to stay informal and unregistered, leaving workers without basic protections like contracts, insurance and social security, and the state without tax revenue.

Furthermore, if there are tax breaks and grants on offer, some companies will be tempted to game the system by splitting the business up into smaller companies, staying small. If definitions are based on permanent employees, as they are in Myanmar, companies may keep workers on temporary contracts, which reduces their rights. Thresholds in other countries are based on ‘equivalent full-time employees’ (FTE) rather than the permanent/temporary status of the employee. Such incentives for SMEs can create the so-called ‘bonsai effect’ which prevents improvements in productivity and competitiveness. Artificially restrained, an SME cannot achieve economies of scale, and is not large enough to plug into international production networks, develop overseas markets, pursue international standards, or generate more jobs, and move up the value chain. The EU’s review of its definition is happening, inter alia, to take into account the rapid ‘scale-up’ of successful start-ups. The aim is to ensure that businesses are not disincentivised from growing or taking on more staff because they will immediately lose their SME status and benefits.

Other parts of government also need clear and simple SME definitions too, to create consistency in business regulation, such as labour laws. For example the Payment of Wages Act has a threshold of 100 employees. The Disputes Settlement Law requires Workplace Coordination Committees in businesses of more than 30 employees, which is incidentally a much lower threshold than for Works Councils in Europe, which set the threshold at 50 i.e. a medium-size enterprise.

Further business regulation that will affect SMEs is currently under discussion. Having standardised thresholds across laws, such as small business having less than 50 employees, and exempting them from
onerous requirements that a small business cannot sensibly fulfil would make a lot of sense.

At what size will businesses be required to create Occupational Health and Safety Committees under the forthcoming OSH Law, or appoint an OSH officer? How many employees will a company be required to have before ensuring that a ‘quota’ of employees are people with disabilities, a possibility foreseen under the 2015 Disability Law? Mathematics suggests that if the quota is 2%, as some organisations representing people with disabilities are advocating, it will need to be at least 50, i.e. one employee.

The draft Myanmar Companies Act, currently in Parliament, chose to ignore the twelve types of SME in the SMEs Law when defining a ‘small company’. Instead it simply opted for employee numbers and a revenue cap. A ‘small company’, which has less onerous annual reporting requirements under the draft Companies Law, means a non-subsidiary, non-public company which has no more than 30 employees and an annual revenue of less than 50,000,000 kyats ($37,000). The employee threshold can be adapted. The draft Companies Act does not make any allowances for ‘Medium-sized’.

What Myanmar needs is a simple definition of small and medium-sized enterprise. Basing it on employee numbers, and using definitions of micro <10, small 10-49 and medium 50-249 seems appropriate. Cambodia set its definitions using these employee thresholds, and start-up capital/financial assets excluding land.

Myanmar also needs an effective advocacy body for small businesses. This organisation could identify for government and Parliament where regulations are hampering small businesses to develop and innovate. Most countries have at least two business associations, with one dedicated to the needs of small business. The small companies which Myanmar Centre for Responsible Business meets claim that Myanmar’s thicket of red tape prevents them from doing business responsibly. With laws so complex that it is practically impossible to comply, they tell us short cuts and paying tea money are standard practice.

MCRB believes compliance with the law is a sine qua non for being a responsible business, whatever your size. But we also encourage collective action by business, for example to combat corruption, where cutting red tape and streamlining permitting is central to this. When MCRB hear small businesses complaining about complex and chaotic regulation, we suggest they should join their local Chamber of Commerce and raise a collective voice for regulatory change.

However Myanmar small businesses often tell us that they feel that the Chamber and its constituent associations do not understand or represent the needs of small businesses, or advocate effectively. Indeed, some of them even believe that the Chamber and its member associations even favour the interests of large businesses at the expense of small ones.

An example can be found in the tourism industry, where in principle SMEs are seen as a driver of jobs and growth. However in the accommodation sector, membership of Myanmar Hoteliers Association requires the business to have a license from the Ministry of Hotels and Tourism (MoHT).

Under MoHT Notification 2/2011, the Ministry will only licence guesthouses to host foreigners if they have at least ten rooms, a minimum size of no obvious utility. These guesthouses also need to provide en-suite bathroom in every room, a carpark, CCTV and a security scanner. These are challenging and unnecessary requirements for a small business to implement, requiring significant capital investment.

Furthermore, the process for obtaining a guesthouse licence from MoHT takes longer – at least nine months - and is more expensive than that to obtain a license from the municipality. A municipal licence takes only two to three months, but does not under current rules allow the guesthouse to receive foreigners. A case study published by Myanmar Business Forum in February 2017 documented one process to obtain an MoHT Guesthouse Licence which cost almost 1,000,000 kyats in ‘presents’ and payments for inspection, around four times the total 250,000 kyats required officially for the documentation and licence.

Myanmar regulation in the tourist accommodation sector inhibits innovation by small, local businesses looking to open guesthouses to receive foreign tourists. On top of that, the Myanmar Hoteliers Association
membership rules mean that guesthouses with a municipal licence are not eligible to join the only business association that exists to represent the views of accommodation businesses. Therefore these small accommodation businesses have no channel for their collective voice to be heard to get this red tape removed.

Small businesses, whatever their sector, would probably be better off with a dedicated advocacy body. In 2016, a Myanmar chapter of the International Council of Small Businesses was established https://icsb. org/project/icsb-myanmar/. Perhaps this will be the organisation that can ensure that the voice of small business is heard by government, and can advocate for business regulation to be drafted to help them, rather than hinder. 

But regardless of which business association ultimately becomes the voice of small business, the government and Parliament will only provide an enabling climate for SMEs to flourish, not because of the SME Law, but if it pursues a more transparent, systematic and consultative approach to developing ALL business regulation that takes the needs, experience and frustrations of SMEs into account.

Vicky Bowman is Director Myanmar Centre for Responsible Business

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