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Meeting of the Muslim Business Forum
Strategy for SME Development in BIMP EAGA
General Santos - Mindanao, 10 March 2001

Remarks by
Günter Hecker, Country Director
Philippines Country Office
Asian Development Bank

Mr. Chairman, distinguished participants, honored guests. Good morning!

First of all, in the name of the Asian Development Bank, the ADB, I would like to thank you for giving us the opportunity to present to you a strategy for the development of small and medium size enterprises (SME). Our very special thanks go to the Muslim Business Forum for kindly hosting the first meeting of the Mindanao Forum on Muslim Economic Initiatives. The ADB extends its most sincere wishes to this assembly, for much success in its efforts to draw up a successful agenda of strategies and measures to ensure the participation of the business sector in the socio-economic development of Mindanao.

Mr. Chairman, before going into the actual description of the strategy, let me briefly describe the activities ADB has had in the Philippines in general, and in Mindanao in particular. I will then ask my colleague, Mr. Jacques Ferreira, who is the task manager for the strategy, to answer the questions you may have on the subject.

ADB has had long development partnership with the Philippines:

• ADB's strategic development objectives, are to promote economic growth, reduce poverty, support human development (including population planning), improve the status of women, and protect the environment. With the adoption of its new Poverty Reduction Strategy on 9 November 1999, ADB has emphasized its poverty reduction mission.
• Over the past 31 years, ADB has provided 183 loans totaling $7.9 billion to support economic and social development programs and projects in the Philippines. This represents about 8.0 percent of ADB's total lending to its 38 borrowing developing member countries. Most loans have been provided to support energy, transportation, agriculture and social development programs and projects. Currently, 49 ADB loans with a total amount of $2.7 billion are being implemented in the Philippines. In addition to lending from its own resources, ADB has mobilized $4.4 billion Cofinancing resources from official and commercial sources for the Philippines.
• Complementary to its lending program, ADB has provided $117.4 million for technical assistance to the Philippines for project preparation, institutional capacity building, and policy studies. The technical assistance to the Philippines accounts for 6.04 percent of the ADB's total technical assistance to all its DMCs. Starting in 2000, ADB approved three Japan Funds for Poverty Reduction (JFPR) projects amounting to $4.8 million.

Based on a number of social and economic indicators, Mindanao is lagging the other regions of the Philippines such as Luzon and Visayas. In spite of this, ADB regards Mindanao as one of the regions with the greatest potential for economic development in the country. Given its history of civil strife, parts of the island have suffered from a lack of development. However, the new peace process provides an opportunity once again to revive Mindanao's development process.

ADB's Country Operational Strategy Study for the Philippines (COS) has focused on Mindanao development as a major goal for achieving balanced regional development in the country. In order to support sustainable growth with equity in Mindanao, the ADB COS focuses on the following areas:

1. the poors' increased access to infrastructure in rural areas;
2. promotion of agrarian reforms and rural growth;
3. improvement of human capital, particularly through investments in qualitative education for a better-equipped labor force;
4. support of peace-related initiatives in Mindanao; and
5. enhancement of institutional and planning capacities to harness partnership between the national government, local government, private sector, and non-government organization.

ADB's existing program continues to provide assistance and support for development of Mindanao, particularly in the near term. Of the 21 loans totaling $1,440 million programmed for the next 3 year rolling plan period, 4 loans totaling $235 million are being provided exclusively for development projects in Mindanao . Now that you are a little more familiar with the context of ADB operations in Mindanao¹, let me turn to the strategy for the development of small and medium size enterprises.

1) Background
Let me first explain how this strategy was borne.

Underlying the strategy is the fact that ADB is the only multilateral finance institution that is mandated by its Charter to use regional cooperation as a tool for economic development. ADB uses regional cooperation as a mechanism to promote the efficient use of resources in the sub-regions of a growth area. The key objectives of regional cooperation are to:

1. facilitate trade and investment;
2. coordinate macroeconomic policies;
3. facilitate capital and technology transfer;
4. achieve complementary environmental strategies and policies; and
5. coordinate institution building.

ADB started building up its experience in regional cooperation in the early 1980s in the Greater Mekong Subregion or GMS. Under an ADB study, the potential for subregional cooperation among the GMS six participating countries was assessed and areas where specific cooperation initiatives could play an important role were prioritized. Sector studies were then conducted to identify subregional projects. The GMS development program promotes development of the participating countries by helping strengthen economic linkages between them.

The area is now undergoing considerable change, although traditional lifestyles and deep-rooted customs and beliefs have been scarcely altered by the passage of time. The people of the Mekong are experiencing changes and improvements in their living standards and conditions. Increasingly, modernization and industrialization are emerging from a process of transition and transformation. The Mekong economies are gradually shifting from subsistence farming to more diversified economies, and to more open, market-based systems. Parallel to this are the growing commercial relations among the six Mekong countries, notably in terms of cross-border trade, investment, and labor mobility. Moreover, natural resources, particularly hydropower, are beginning to be developed and utilized on a subregional basis.

With this experience, ADB extended its regional cooperation approach to the Central Asian Republics. These former Soviet republics face undaunting constraints to economic development. They constitute a relatively large geographic area that is distant and, until recently, isolated from the modern market economies of Western Europe and Asia. The breakup of the Soviet Union left these countries with little demand for their products and few sources for needed raw materials and manufactured goods. For each of these countries economic growth and development depend on creating new markets and sources of raw materials. Economic cooperation is essential for realizing their development objectives.

In the southern part of its area of responsibility, ADB had provided assistance to facilitate regional cooperation in the Brunei, Indonesia, Malaysia, Philippines East ASEAN Growth Area, or BIMP-EAGA. The effort had been initiated in 1994 under the Ramos administration. ADB had provided assistance to develop a study on the East ASEAN Growth Area potential. However, the effort was stalled when the Asian crisis affected countries in the region in 1997. In order to revive regional cooperation in BIMP-EAGA, ADB sharpened the focus of its objectives by giving priority to poverty reduction through reviving private sector activity. The reason for this is that while regional cooperation efforts tend to focus on public sector participation, in the long-term, it is the development of the private sector that determines overall economic development.

It is in this context that end of 1999, the ADB commissioned a study to support SMEs in the Southeast Asian countries most affected by the Asian crisis. The primary goal of the activities to be carried out under the strategy is to reduce poverty in the targeted sub-regions by stimulating long-term economic growth and creating opportunities for employment.

Why the SMEs? SMEs were targeted because:

• They have a proven record for stimulating economic activity, particularly in the rural and less developed areas; and
• They have shown a great potential for generating employment and creating the greatest impact on the economies of the focus areas.

What are these focus areas? They are the areas targeted for assistance. More specifically, they are the Indonesia and the Philippines sub areas of the Brunei, Indonesia, Malaysia East ASEAN Growth Area or BIMP-EAGA. In short, this is the Kalimantan and the Sulawesi regions in Indonesia and the Mindanao and Palawan islands in the Philippines.

The study showed that these territories:

• have the greatest needs as they lag their respective countries, in terms of economic development and social progress; and
• have a higher than average percentage of their country's poor.

Accordingly, an economic development program in these areas would be consistent with the ADB's and the two governments' mission to effectively reduce poverty and ensure a more equitable development within the area of the respective countries.

The study was developed into a draft proposed strategy through a number of consultations and workshops held in Manila, in Mindanao and Palawan, as well as in Jakarta and in Kalimantan and Sulawesi between July and September 2000. The consultation workshops had the following objectives:

• present the proposed strategy and
• obtain feedback on how to ensure that it corresponds to the specificities of the local areas.

The consultations aimed at:

• identifying the major constraints to SME development in each area and obtain suggestions on what actions the ADB might take to help alleviate these constraints;
• determining the priority economic sub-sectors, industries and business clusters that could provide the greatest opportunities for SMEs;
• identifying specific SME development projects for each area that ADB or other international organizations might implement; and
• identifying potential development partners and principal stakeholders in each of the areas.

During the workshops we consulted with over 500 people. They represented the local business communities, the regional and local governments, chambers of commerce, NGOs, professional, business and trade associations, and donor-funded economic development projects. These consultation workshops were encouraging, informative and resulted in the validation of the proposed strategy. A lot of ideas and suggestions came out of these consultations and were integrated in the final strategy. Some of the major findings of the consultations were:

• the level of urgency prevailing among SME developers to avail of the assistance within a very short period of time.
• the need for policy reforms to streamline transport regulations for shipping, freight and handling, in order to reduce costs. There were also calls for addressing cross border issues. Other requests related to the need to reform the cabotage laws and implement an open skies policy to ensure greater competition in shipping and air services.
• infrastructure concerns focused on the need for more secondary roads, power plants, ferry ports and telecommunication facilities.
• participants see a need to develop credit schemes that better match the nature of the operations of the SME sectors. One of the recommendations to improve the relationship between the SME and the financial sector is to improve the monitoring system for credit repayment. The objective is to enable those paying their loan obligations to gain better access to reasonably priced financial services.
• Access to credit appears to be a major constraint in the southern Philippines. In fact, there is hardly any venture capital and equity financing available in Mindanao and Palawan. Whatever credit is available, SMEs have great difficulties accessing it, due to the restrictive mechanisms for the delivery of financial services to SMEs.
• SMEs developers require greater access to information. However, SMEs in southern Philippines are far greater and more frequent users of the Internet and computer technology. Further, their greater familiarity with the English language gives them an advantage. The need that was identified relates to establishing networking of information sources rather than to accessing information.

The draft proposed strategy for SME development was presented to a concluding workshop held in Jakarta in November 2000. The proposal was well received and was endorsed by representatives of the private sector, NGOs as well as delegates from the Governments of the Philippines of Indonesia.

The strategy is built on a number of mutually reinforcing pillars. These pillars are aimed at systematically addressing the major constraints that prevent SMEs from attaining their full growth potential. Each pillar responds to a legitimate need and should be addressed to enable SMEs and the private sector to be the real engines of growth. The strategy will be implemented through sub-regional initiatives supported by the ADB in collaboration with the Governments of Indonesia and the Philippines and the international donor community.

The major pillars of the strategy are:

• Policy analysis, promotion and change;
• Infrastructure planning, analysis and monitoring;
• SME credit and finance;
• Business support services for SMEs; and
• Coordination of SME programs.

The first pillar proposes to address Policy requirements. In both countries, the programs would use a mix of diagnostic research, advocacy and technical assistance for policy reform. The objectives of policy reform would be to bring about an increased efficiency in the use and allocation of resources, more competitive markets, a reduction in the costs of doing business, and an institutional framework conducive to a more equitable participation in economic benefits by people in the two sub-regions. A communications team at each Project Implementation Office would publicize the results of its policy analyses, and provide information to individuals and groups advocating policy change.

The second pillar aims to support the implementation of key public and private infrastructure projects, especially those with a short gestation period and resulting in more efficient and less costly movement of agricultural and marine commodities. Here, the objective is to improve "strategic" infrastructure such as farm to market roads, solar dryers and storage warehouses. It may also assist local planning authorities to carry out infrastructure planning for an entire island or an entire territory. Finally, pre-investment profiles would be prepared under the component and promoted as investment opportunities for different types of projects.

Under the third pillar, an economic development fund in each sub-region would be created. Its objective would be to provide investment capital and/or loans for promising SME projects. A development partner, such as a venture capital company would administer the fund in different parts of EAGA. The economic development fund would be operated as a private, for-profit entity on a purely commercial basis.

The fourth pillar proposes to provide business support in the form of technical assistance and training, to help SMEs do a better job at solving business problems - particularly those that are common to an industry or to a group of companies. SMEs would be trained to identify needed technology from either local or international sources, as well as sub-regional and/or international markets for their products. One-stop shops for investment promotion in the different provinces and in the major cities could also be organized. These offices would play the role of matchmakers for business and identify joint-venture investment partners. To ensure sustainability, business support services should be self-financing through the collection of user fees for appropriate cost recovery.

The fifth pillar will strengthen the coordination of SME support programs to increase their impact and effectiveness. It will also support the EAGA Business Council in its effort to integrate economic development programs throughout the entire EAGA region. If you noticed, the recommendations on the coordination component for both eastern Indonesia and southern Philippines are last. This is because the issues are similar. First there are a number of organizations that provide one or more forms of assistance to SMEs in both sub-regions. This includes government agencies, national and local, NGOs, academe, private foundations, and of course donor agencies. Coordination is a major aspect for rationalizing and making full use of the development resources available. Coordination allows for better delivery and management of development initiatives.

The various EAGA working groups would be responsible for integrating the economic development activities initiated by the ADB program throughout the entire EAGA region. The SME Development Program would provide technical assistance to these organizations to help them promote regional cooperation for the benefit of SMEs. For example, the ADB program could assist the Working Groups to organize and present regional conferences and workshops to address issues of pressing concern.

Crosscutting SME development programs and projects sponsored by governments and international funding agencies that affect multiple sub-regions would also need to be coordinated at the EAGA regional level. Such coordination would require working closely with the EAGA Senior Officials, national secretariats, working groups and the EABC to promote, and monitor the performance of regional economic development programs that benefit the SMEs. Regional coordination would ensure that development funds used in the EAGA are leveraged to the maximum extent possible, to the advantage of the sponsors as well as the beneficiaries of these programs.

At the local level, the program would support the creation or strengthening of local economic development councils to coordinate development activity in the local communities. These development councils would also serve as advisory boards for the program's field offices.

In the Philippines, the management unit could have its main office in Davao, in the Mindanao Economic Development Council or MEDCo, with six field offices in Mindanao and Palawan.

Implementation of the SME support program will be supported through loans and technical assistance from ADB, as well as with grants from bilateral donors. The effort will be two-pronged. It will jumpstart economic activity in BIMP-EAGA and strengthen the ownership of its member countries. Examples of the initiatives to that effect are:

• Reviewing transport infrastructure requirements for SMEs is about to start; it will aim at identifying investment requirements with a quick gestation period and a potentially beneficial impact on provincial and rural infrastructure; at the same time, the enhancement of cross border trade and investment opportunities will be considered;
• Setting up a quick response facility (QRF) to provide SME managers, services to help them become more competitive;
• Strengthening access to upstream and downstream information with the provision of technical assistance to the EAGA Business Council to support SME access to the Internet and to e-commerce.
• Setting up an Economic Development Fund (EDF) for equity financing. The EDF would be private sector owned, controlled and managed, with participation from ADB and other financiers who might be interested.
• Most importantly giving you information on the different forms of assistance available for SME development. To that effect, we have prepared a brochure describing briefly the SME Development Programs and Projects Available to the Private Sector in the Philippines Sub-region in the EAGA.

We brought a number of copies of the brochure for those of you who may be interested. Should you need more, please let me know by sending me a message at the e-mail address shown on the screen.

You would have all noticed that although ADB has financed the preparation of this strategy, we make it a point not to call it the ADB strategy. Instead, we refer to it as the proposed strategy. The reason is simple but fundamental: ADB can prepare as many projects as it wants but they will end up as beautiful but useless studies on its bookshelves if those projects are ADB's only.

"Mr. Chairman, Ladies and Gentlemen the objective of our presentation today, is that you as the representatives of a highly dynamic private sector in this part of the Philippines, assess this strategy and see whether it can be of help to you, considering the circumstances you find yourselves in, here in Mindanao. This approach can be implemented with the assistance of the Government of the Philippines, and with the assistance of all the donors, including ADB, who are working at strengthening SME development in one way or another. You have heard yesterday Director Orbeta of DTI. Earlier on, it was Mr. Charlie Feibel of GEM. This afternoon, it will be out friends of MEDCo. You would have understood by now that we know one another as friends and as institutions. Why? Because we have one common objective: support your efforts in making Mindanao more attractive for business, as a step to making it again a better place to live in.

Thank you Mr. Chairman.