SMALL-SCALE FOREST-BASED ENTERPRISES: AN OVERVIEW
Basic characteristics
Growth prospects
Problems
Markets and marketing
Access to raw materials
Access to finance
Technology development and transfer
Management capabilities
Institutional framework
Conclusions and followup
Small-scale rural enterprises (SSEs) as a whole are a major source of rural livelihood in developing countries, often next only to agriculture in terms of current rural employment. As the capacity of agriculture to generate additional livelihoods progressively declines, more rural people in future will have to turn to employment in small-scale enterprises.
Within the small enterprise total, the largest component is accounted for by small-scale processing and manufacturing enterprises (SSIs). In the six countries1/ reported on SSIs accounted for 37 to 80 percent by number of all enterprises and 42 to 63 percent of all small-scale enterprise employment.
1/Fisseha, Y. Basic features of rural small-scale forest-based processing enterprises. (In this publication).The six countries covered are Bangladesh (1978/80), Egypt (1981/2), Honduras (1979/80), Jamaica (1978/80), Sierra Leone (1974/5), and Zambia (1985).
Within the rural SSI total, forest-based rural processing enterprises (FB-SSIs) accounted for from 13 to 37 percent of total manufacturing enterprise numbers and for 16 to 35 percent of employment in the total manufacturing group; usually ranking second only to garments among rural manufacturing activities.2/ In many developing countries, small-scale forest-based rural enterprises constitute an important part of the rural sector, and of the overall forestry and forest industry activity. Table 1 summarises information on magnitude and selected characteristics of the FB-SSI group.
2/In all but one of the countries reported on, fuelwood production and other small enterprise activities not operating from a fixed location were not recorded. As fuelwood production is known to involve large numbers of people, the total size of snail forest based production enterprise activity is therefore probably usually substantially larger than that of just processing enterprises.
In addition to employment, FB-SSIs are important in providing above average incomes to entrepreneurs and their families, and wage income to employees (even if sometimes below the minimum wage level); in transferring skills through informal training; and in generally contributing to the local and national economy and sometimes to exports. An important consideration is that earnings from rural FB-SSI improve farmers' income security and so reduce pressures leading to overexploitation of the agricultural land base. Also, the landless, women and other often agriculturally disadvantaged groups are well represented among those getting income and employment from FB-SSIs.
FB-SSIs are characterised by (a) technologically simple operations which demand limited skills and low capital (b) predominantly rural location, (c) reliance on the entrepreneur and his or her family for much of the labour input, and (d) very small size.
Table 1: Composition and selected characteristics of small-scale forest-based manufacturing enterprises (FB-SSIs) in selected countries.
|
Activity or attribute |
Bangladesh |
Egypt |
Honduras |
Jamaica |
Sierra Leone |
Zambia |
|
|
Year of survey: |
1978/80 |
1981/2 |
1979/80 |
1978/80 |
1974/5 |
1985 |
|
|
Shares (%) |
|||||||
|
|
FB-SSI share of total SSI employment |
13 |
24 |
16 |
35 |
20 |
33 |
|
One-person operations |
36 |
69 |
59 |
58 |
n.a |
69 |
|
|
Production is household based |
n.a |
76 |
72 |
52 |
n.a |
81 |
|
|
Share of employment in rural areas |
n.a |
65 |
100 |
79 |
96 |
95 |
|
|
Share of women entreprenuers |
3 |
65 |
10 |
32 |
n.a |
12 |
|
|
Share of women workers |
21 |
31 |
6 |
30 |
n.a |
12 |
|
|
Share of entrepreneur's family in total labour |
73 |
89 |
51 |
82 |
41 |
86 |
|
|
Composition (% of No. of FB-SSI): |
|||||||
|
|
Sawmilling/pit sawing |
0.9 |
- |
3.2 |
0.9 |
0.1 |
5.6 |
|
Carpenty/furniture |
27.2 |
23.8 |
71.4 |
23.1 |
66.8 |
14.3 |
|
|
Wood carving/bamboocane processing |
11.6 |
- |
0.2 |
12.5 |
5.9 |
11.9 |
|
|
Basket/mat/hat weaving |
32.4 |
70.4 |
10.6 |
63.5 |
23.8 |
60.3 |
|
|
Others |
27.9 |
5.8 |
14.6 |
0.1 |
3.4 |
7.9 |
|
|
Total |
100 |
100 |
100 |
100 |
100 |
100 |
|
|
Average values: |
|||||||
|
|
No. of workers per enterprise |
3.8 |
1.9 |
2.2 |
2.2 |
1.8 |
1.7 |
|
Total investment (US$) |
255 |
n.a |
1055 |
3030 |
431 |
n.a |
|
|
Annual production per firm (US$) |
2362 |
1501 |
2536 |
4979 |
1384 |
n.a |
|
|
Annual work hours (as % of full year of 2200 work hours) |
38 |
78 |
57 |
45 |
91 |
55 |
|
Source: Adapted from Y. Fisseha, op. cit.
Notes: n.a = not available; - = negligible.
Their close integration with agriculture is reflected in seasonal pattern of operations and dependence on agricultural incomes to generate much of the demand for their product. Most FB-SSI entrepreneurs operate their forest-based activity jointly with other processing, service or agricultural activities, so that they seldom occur as separate enterprises.
The greater part of FB-SSIs produce either (a) furniture, builders' woodwork, agricultural implements, vehicle parts and other products of wood, or (b) baskets, mats and other products of canes, reeds, vines, grasses and similar materials. Both of these product groups serve predominantly rural household and agricultural markets, and are usually the principal sources of supply to the latter. The other sizeable group of FB-SSI products, such as non-utility handicraft goods, by contrast, usually has its main markets outside the rural areas.
Although most FB-SSI activities form part of a broader industrial continuum which includes large-scale sawmills, furniture plants, etc., in practice they are very small. Though they were defined in most of the field surveys to encompass all enterprises with up to 50 employees, average employment in practice ranged from about 2 to 4 workers per enterprise. Over half the units were one-person, household-based operations, and less than one percent employed 10 workers or more. FB-SSIs are thus heavily clustered at the bottom of the scale range and could on average be best classified as “micro” units with less than 5 workers.
Such extreme smallness is most pronounced among FB-SSIs processing non-wood raw materials such as reeds and grasses; activities such as mat and basket making are predominantly household based and usually employ no powered equipment. Woodworking enterprises tend to be somewhat larger, and are more likely to be organised on a workshop basis with one or more machines or powered tools. There are also some enterprises which are in a “transition phase”, being partly dependent and based on a household and partly also operating from a workshop.
Urban-based woodworking SSIs exhibit similar characteristics of small size, household dependence, and technologically simple operations. The studies in five countries reported on by Strehlke3/ also highlight the important contribution of urban FB-SSI to employment and incomes, sometimes providing half or more of urban employment. Urban enterprises are closely linked to the large-scale sector and often absorb labour displaced from it.
3/Strehlke, B. Employment in the urban informal sector of the wood industries: summary of ILO studies. (In this publication).
Circumstances under which processing activities are likely to be competitive at a small-scale of operation include (a) where there are factors which favour local production, such as dispersed raw materials; (b) high transport costs; (c) where there are advantages of being small-scale, e.g. to serve small markets; (d) where subcontracting is more efficient than integrated operations; or (e) where the nature of the product does not permit easy mass production. The large component of small enterprise operations in the forestry sector reflects the size of rural demand for its products, and the dispersion of these markets across large areas with a relatively poor transport infrastructure.
As these conditions change over time, for example through improvements to rural roads, it is to be expected that the competitiveness of at least some FB-SSIs will be affected. However, lack of time-series data for FB-SSIs makes it difficult to examine enterprise failures or successes over time. Indicators derived from cross-sectional static assessments of rates of return to capital, returns to family labour or to the business, though useful, do not provide sufficient information to permit conclusions to be arrived at about past or potential dynamic changes among small-scale industries. Nevertheless, it appears that net increase in employment or enterprise numbers ranges from about 2 to 5 percent annually.
It needs to be recognised, however, that the smallness of FB-SSIs makes analysis difficult.4/ Reliable data on real production costs is very difficult to obtain, especially for the smallest enterprises, because they rarely keep records. Comparison and analysis of the results from individual units is also fraught with problems. For example, their integration with other activities of the entrepreneur makes it difficult to isolate just the forest based component. Analysis based on individual enterprises therefore needs to be supplemented with work done at the product and industry level, analysing all the different stages from raw material to end use, in order to identify bottlenecks in the system and hence areas of priority intervention. Such studies could be supplemented by more detailed review for a set of related enterprises in a particular area. In all cases, the difficulty of deriving concrete objective data calls for use of informal techniques of assessment of producers' perceptions and situation.
4/Chuta, E. Growth and dynamism among rural small-scale enterprises: information gaps. (In this publication).
In order to be able to identify which forest-based activities are viable and competitive at a small enterprise scale, and have the potential for continued growth, it has been suggested that the following criteria be used: (a) demand potential for a product be good, (b) technology be available which permits achievement of low average unit production cost for the industry, (c) productivity of labour should be increasing or be capable of being raised, (d) management capabilities and technology be good or (e) existence of raw materials be assured for the planning horizon. Of the above criteria, market prospects is usually the overriding one, and the only one external to the enterprise. Only when market prospects are found satisfactory or capable of improvement would further assessment of the other criteria be useful.
All else being equal, ability to achieve low production costs is likely to be the second most important attribute of potential viability. This in turn depends among other things on good management and high labour productivity. However, improvements in productivity may imply some temporary loss of employment. Productivity may have to grow faster than employment if sectoral sustainability is to be assured. Short term employment loss may be the price to be paid for capturing greater long-term gains.
Small enterprises face a wide array of problems. The FB-SSI entrepreneurs themselves most commonly cite finance as the principal problem they encounter in maintaining their competitive position, with raw material shortages often being mentioned as the second most important.5/ Finance, while a real problem, may also be a symptom of other difficulties. The range of problems that can be encountered by FB-SSIs can be summarised as follows:
5/Fisseha, op cit.(a) Small and insecure markets, due to low rural incomes, seasonality, poor access to large markets, and severe competition;(b) Raw material shortages, often compounded by wasteful processing, restrictive regulations, poor distribution, and lack of working capital;
(c) Shortage of finance, in particular working capital, worsened by problems of access to what is available and by its cost;
(d) Non-availability of appropriate technology in the form of suitable tools and equipment;
(e) Managerial weaknesses, which serve to worsen all the other problems since FB-SSI entrepreneurs often lack capacity to analyse situations and chart ways to minimise adverse impacts of problems;
(f) Lack of organisation of the enterprises in a manner which enables them to make effective use of available support services.
Small enterprises also often encounter a policy environment which compounds many of their problems, usually because it is oriented towards large modern sector industry and fails to accommodate the particular characteristics and needs of SSIs, to the point where policies may severely constrain or inhibit their activity.
Support to encourage viable small enterprise activity essentially needs to focus on identifying those activities which have access to markets and have the potential to improve their productivity. The subsequent sections review the scope for achieving the latter through assistance in improvement in market information and product assessment, better access to raw materials, upgrading management and technical skills, introduction of appropriate tools or machines, and provision of credit and other crucial inputs.
In doing so, it is necessary to keep in mind that assistance needs to be geared to the very small size of FB-SSI, and to the constraints of resources, skills, etc., consequent upon this. Within this aggregate, support activities need to differentiate between the “micro” household units often using non-wood raw materials, and the somewhat larger and more technologically advanced group of woodworking enterprises operating at a workshop level; while the latter may be able to benefit from certain existing support services, the former will usually have more problems in getting access to assistance and will require other approaches. In addition, enterprises that are in the process of moving up from the household to the workshop scale are also likely to require special attention, as they may be unable to use effectively the support appropriate for either the “micro” or the workshop scale units.
The markets for most FB-SSI products are characterised by their rural location and nature. These markets are predominantly for low cost products, demand for which changes seasonally with the fluctuations in rural incomes and activities. Individual markets are likely to be small and localised, (because of poor roads and high transport costs), and to comprise mainly job-orders for single or a few items. Product specifications are likely to vary from order to order.
Most FB-SSIs thus face a number of market problems which make it difficult for them to achieve market size for bulk production or product quality. These problems are usually compounded by severe competition among small enterprises serving a particular market. As the capital and skills requirements for entry into many FB-SSI activities are very low, the industry is likely to attract excessive numbers of units, reducing profit margins to levels at which it is very difficult to generate the surpluses needed for reinvestment in improved productivity and growth.
With improvements in the rural road infrastructure, FB-SSIs face growing competition from the products of larger, often urban based factory scale industries. At the same time, rising rural incomes and expanding consumer information tend to alter rural preferences in the direction of such products. Thus factory-made furniture may increasingly displace its artisanal alternative, and bags and hats made from synthetics those produced from natural raw materials. Similar shifts can occur in the market for agricultural products of FB-SSIs, e.g. metal ploughs displacing wooden ones.
There are several strategies which FB-SSIs can pursue in order to respond to changing market conditions. They can concentrate on market niches in which factory products are not competitive, such as very low-cost basic furniture or high quality hand crafted furniture items. Alternatively they can concentrate on products in which there is no competitive advantage from large scale or machine production, such as cultural handicrafts. Another approach is to specialise in a particular product, or product part, in order to get longer production runs. Or they may use the improved road infrastructure to themselves penetrate other markets, in order to increase their production. Very often they can succeed in this only if several FB-SSIs join forces to share overhead costs.
There are examples of FB-SSIs successfully pursuing each, or several, of these strategies. However, the constraints most FB-SSIs face in assessing, monitoring and developing their own markets means that they will often need assistance in doing so. Given that the existence of a market, and continuing market prospects, has to be the starting point for any enterprise development, it needs to be given first priority in any support programme.
In many countries there is an abundance of marketing assistance programmes from governments.6/ But many are designed for, or inadvertently end up serving, mostly the larger of the small enterprises and medium scale industries. Furthermore, the specific needs of sub-sectors like the FB-SSIs are not being met. Studies indicate that firms being assisted are mostly urban based or export oriented, even though these may be only a minority of SSIs. It seems the impact of such marketing assistance programmes in the rural areas has not been impressive. Many rural FB-SSIs are not even aware of what assistance is available. It is therefore essential to target some programmes at specific subsectors and at rural SSIs to ensure more relevant help.
6/For a review of market assistance programmes see: Salazar, M.S. Markets and market development for small-scale enterprises: the experience of the Philippines. (In this publication).
Rural FB-SSIs, especially “micro” ones, are at a disadvantage vis-a-vis urban firms due to their lack of market information. The situation can be improved somewhat by greater use of radio, the popular press, or market familiarization seminars in the countryside. Providing information about rural FB-SSI products to potential urban consumers is also important. Such provision of information will complement, the SSI entrepreneurs' currently predominant personal selling through word of mouth.
Some form of assistance in drawing up promotional programmes or preparation of brochures may be required for FB-SSI that are breaking into markets not within their immediate vicinity. In the process of market expansion, rural FB-SSI ignorance of the information required, lack of access to existing information, and lack of money to undertake publicity prevent them from exploiting market opportunities. As has been noted above, a prime market strategy should be identification of new product lines which have “safer” market niches with greater potential or where FB-SSIs have comparative advantage over larger scale operations.
Where they wish to expand market share, or move into new markets, FB-SSIs need to improve their products. Urban or industrial markets are likely to require standard products of uniform quality. Even for special “cultural” or tourist products which are not as easily displaced by mass-produced items, it is necessary to improve design, quality, labelling, and presentation when competition increases.
Having improved their products, FB-SSI entrepreneurs also need to improve their marketing. FB-SSI entrepreneurs generally have no formal marketing education, and the small size of their enterprises does not permit internal differentiation of the marketing process. They often also lack technical and financial capacity to cope with larger markets, generally selling their products on a cash basis to fund their operations. Their limited financial resources makes it difficult for them to acquire the working capital needed to boost credit sales which could expand markets, and to hold necessary stocks. Problems of putting their products in the market, at acceptable cost, include poor roads, insufficient capacity in trucking, warehousing/storage, collection/delivery and handling facilities.
Government or non-governmental organisations could help to link FB-SSIs with better and larger markets initially in terms of market information and later in actual movement of products (and inputs). As they upgrade in this way, FB-SSIs usually need to change from gatherers and initial processors of raw materials to higher level producers. The limited resources and capabilities of FB-SSIs mean that, to do so, initially they need almost a “cocoon” of support infrastructure in terms of training, information, technical consultancy, product design and testing, marketing and financial assistance.
In most countries, FB-SSIs like all other SSIs face particular problems in being included among suppliers to official institutional markets such as those of governments. This is often due to centralised purchasing, burdensome tendering procedures, or minimum purchases which are too large for small enterprises to cope with. Decentralisation of government purchasing to lower (rural) levels would improve matters. Also, FB-SSIs could group together and make tender bids jointly so as to have the capacity to meet large orders. Positive discrimination practices are applied in some countries which favour SSI in access to official and semi-official markets, by means of product reservation or price preferences in tendering. These need to be used with care: over-protected markets can dampen innovation in product range and designs.
Forest resources are everywhere becoming increasingly scarce, in particular preferred species, qualities and sizes. Shortages of wood and other raw materials from the forest are nearly everywhere a growing constraint to continued FB-SSI activity.
Their small size and very limited income surpluses mean that FB-SSI entrepreneurs do not have the possibility to invest in long-term forest resource development. Any incentive to do so is usually reduced further by the fact that much of the profits generated by exploiting the resource accrues not to the processing enterprise but to those engaged in distribution and marketing. Therefore, FB-SSIs cannot solve their own raw material problems; if they are to be solved the issues of access to and creation of supplies must involve others as well.
Bringing back wood for sale in the market
Apart from suffering absolute shortages, small enterprises often experience difficulties in having access to raw materials due to distance or to legal, administrative, price or infrastructural barriers. Examples include harvesting controls; exclusive allocation to large industries; complicated licencing or auctioning procedures plus demands for heavy deposits or other insurmountable preconditions; high prices due to state monopolies; the presence of forests in locations too far distant, or served by too poor roads or transport services, to serve most small industries; and monopoly distribution systems. In this connection, forestry regulations are often cited as a major source of operational problems for FB-SSIs.
In addition, forest raw material supplies may be unstable, due to seasonal factors or to uneven or inefficient application of forestry regulations. As small customers, FB-SSIs have little leverage on the resource owners, whether state or private. Furthermore, lack of working capital restricts their ability to buy when supplies are available and hold stocks to cover periods of shortage.
In seeking to solve their raw material supply problems, new approaches to forest resource management are needed which recognise that FB-SSIs constitute both an important part of the forest and forest products sector, and a major source of livelihoods to rural people. Sustainable systems of management to support small processing enterprises need to be based on the understanding that the latter often operate below the entrepreneurial threshold required to exploit the enterprise potential created by extension and support programmes. Investment in resource regeneration needs to be integrated with development of entrepreneurship, products and markets.7/
7/See: Joshi, D. Shortages of forest raw materials and the development of small-scale enterprises in India. (In this publication).
The priority given by many governments to generating revenue from forests is clearly a prime reason for their preferring to deal with large scale industries; for concentrating on wood to the exclusion of other forest produce; and for preventing access by local people to forests. In order to change these practices, forest services need more information which demonstrates the importance and potential benefits of small scale enterprises in broadening the base for adding value to forests. High level policy makers in general need to know more about the actual and potential contributions of FB-SSIs, in order to bring about policy changes needed in order to put in place alternative systems for the disposal of forest produce.
Forests also need to be managed to realise more of the potential of the non-wood components of the forest. Such potentials can be realised if forest resource management and disposal procedures are amended to cover more than wood, and in a manner which makes them accessible to FB-SSIs.
Clearly there is a continuing need in many circumstances to control access to forests in the interests of achieving an appropriate balance between the environmental role of forests and production. However, such exclusion should be applied even-handedly to all parties, whether local people or large or small enterprises. The destructive tendencies of both large and small-scale industries or local communities all require effective control. However, by ensuring greater local community benefits from access to forests, and increased participation in selecting concession holders or in processing itself, forest services can harness greater local support for forest management. Concession practices could often usefully be reviewed, to encourage potentially beneficial collaboration between large and small industries; an example would be to give small units access to residues from large operators.
Though small processing enterprises are themselves unlikely to be suitable entities for managing forest resources, there are other forms of local control and management which could be usefully explored. In many areas there are existing traditions of communal forest management to build upon, and elsewhere new forms are being or could be introduced. The supply of raw materials to FB-SSIs therefore could become a significant source of income and employment to other segments of the rural community, reinforcing local commitment to conserving the forest resource. In short, the most effective pattern of forest resource ownership and management by individuals, private companies, communities and the state should be sought.
Problems with supplies of inputs other than forest raw materials often arise from distributional weaknesses which make access particularly difficult. In many countries, the non-forest inputs have a high import content so that they necessarily have to be transported from cities to the rural areas. This adds cost and unreliability to supplies. In addition, for the many countries where foreign exchange shortages are serious, any rationing system almost inevitably ignores small enterprises whether in terms of raw material quotas or foreign exchange allocations.
A further problem is organisation of the distribution system for non-forest raw materials. For any one small enterprise's requirements of, say, ironmongery and other inputs, there is often a multitude of suppliers, many of them not located nearby. For example, it was found in one survey in Zambia that a carpenter's 16 different material inputs must come from 14 separate suppliers.
Credit, normally at highly concessionary interest rates, is an important component in many programmes designed to encourage SSI growth and development. But, as it is only one element in the myriad of factors comprising the environmental context of the SSIs, it cannot by itself induce the type and level of response desired. Shortage of finance may in fact be as much a symptom of other problems as it is a financing problem.
Thus FB-SSI financial problems may result from market instability which causes enterprises to tie up funds in inventories, or policies which exclude small enterprises from discounted or tax-exempt input prices available to their larger industrial competitors. Governmental policies on pricing, on agricultural development, on industrial incentives, and on forestry development and legislation, all influence the health of their financial position.
Within the finance aggregate, a distinction needs to be made between needs for investment capital and for working capital. Historically, the focus of discussion of SSI financial problems has been on investment capital. There is growing reason to believe that the needs of small enterprise entrepreneurs for working capital is at least as important, and probably more so.8/
8/See: Fisseha, Y., op cit.
There is considerable overall shortage of finance for SSI development. For the limited funds available from formal lending institutions, a key problem is access by rural SSIs even when credit programmes are designed specifically with such enterprises in mind. Most rural SSIs nave little choice but to rely on personal or family savings and/or the informal sector “moneylenders” for finance. These sources are inadequate and therefore improving rural SSI access to credit is important. Emphasis should not be on the design of specific projects, as has been the case in most instances, but should instead adopt a more holistic view and seek to improve the overall functioning of the rural financial market which is a key to improved accessibility of finance to rural SSIs.9/
9/See: Brunton, P.D. Financing small-scale rural manufacturing enterprises. (In this publication).
In order to improve rural financial market performance, measures need to be designed to improve the mobilization of rural savings; to increase the competitiveness and institutional diversity of the financial market; and to increase the use of innovative financial technology appropriate to the rural environment. In particular, the formal financial sector should be encouraged to adopt some of the positive features of the informal sector, such as the low transaction costs, the limited collateral requirements, willingness to lend for short periods, and greater informality of procedures. Reduction in formal procedures would lessen one of the main barriers small enterprise entrepreneurs face. Greater convenience of services through expanded informal networks, more appropriate service hours, lower minimum deposits and loans, etc., could all improve accessibility to finance by SSI entrepreneurs.
There is widespread use of negative real rates of interest in rural financial markets which has had pervasive effects on their allocative efficiency. Removal of controls on interest rates may not necessarily lead to increases in the availability of funds for rural SSIs given the level to which the rates would have to rise to reflect the perceived level of risk. Should concessionary interest rates continue to be used in rural SSI financial programmes, it seems necessary that they be at least positive in real terms and should be at least equal to the rates charged to the established, low-risk borrowers. This will help the lending institutions themselves to replenish funds for further disbursement.
Furthermore, to induce private financial institutions to lend to SSIs, given the financiers' perception of the risks of doing so, some form of credit guarantee mechanism is necessary. Rediscounting facilities and other credit controls, applied within the context of the particular rural financial market, and supported by credit guarantee schemes, can also be useful devices for inducing lending to SSIs.
Financing agencies generally give either only medium/long term loans or only short term credit. Enterprises therefore have little option but to seek assistance from two sources of finance in order to meet both investment and working capital needs. However, borrowing from one source often ties up all collateral and so handicaps the enterprise from making any other loan applications. It would therefore help SSIs if lending institutions could broaden the range of maturities in their lending portfolios to cover the full range of financial needs of small enterprises.
Due to their slower production processes, FB-SSIs may have longer inventory turnaround than other rural small enterprises. Where this is the case, additional working capital needs must be met while longer term, technological and managerial solutions are sought in order to reduce inventories.
Within the total FB-SSI group, the “micro” household-based enterprises and the larger enterprises operating from workshops tend to have quite different financial needs. The former require proportionately more working capital and the latter need an increasing proportion of fixed investment to cover workshop structures and equipment. Financial packages and programmes need to pay attention to these differences and differentiate SSI by degree of household association. For example, packages for micro enterprises may need to be made on a group basis, with members accepting joint responsibility, in order to reduce perceived risk to an acceptable level.
It seems likely that many FB-SSIs are in the transition between household and workshop operation. Special attention should be given to them as they are at risk of not being adequately served by either institutional lenders (many of which prefer long-term lending, generally to larger enterprises) or informal ones (which emphasize short term credit to “micro” units).
Observation suggests that although financing may be made available for a particular purpose such as forest-based production, in practice it is not possible to enforce application of credit to such specific end uses. Problems arise from high fungibility of funds as entrepreneurs seek to meet conflicting demands of agriculture, the household, and their other activities. The emphasis in providing credit should therefore be on assisting entrepreneurs, particularly those with the smallest units, in overall liquidity management rather than on promoting particular units among of their activities. The latter is better achieved by demonstrating the financial superiority or attractiveness as an investment option of the activity one wishes to assist. This calls into question the need for or practicability of setting up loan schemes just for FB-SSIs.
Where collateral is demanded by institutional lenders this can be a major obstacle to SSI access to funds. As collateral is sought to cover against exaggerated perception of risk by financiers, (due to their poor knowledge of the small scale sector), a two-sided approach to resolving the problem is needed. This should include:
(a) provision of technical assistance to improve lenders' knowledge of SSIs, and to promote record-keeping by SSIs, so that risk is assessed on a more logical basis;(b) promoting alternatives to traditional forms of collateral e.g. leasing/renting of fixed assets (hence reducing fixed-capital requirements); hire purchase; life insurance; credit guarantee schemes; project finance. All these are more applicable to larger enterprises than to the “micro” FB-SSIs, which can only be effectively reached with technical assistance packages when they are organised into associations.
In order for financial assistance to achieve its objectives, it should be supported by adequate technical assistance at two levels:
(a) assistance in record keeping and accounting - aspects which are part of loan appraisal and supervision and therefore should be effected by the financing agency;(b) more elaborate assistance in technical, organisational and marketing aspects which may be more effectively carried out by a separate technical assistance agency.
To expand overall availability of finance, consideration should be given to use of venture capital. This option is more appropriate for the larger FB-SSIs, and may be more successful if channeled through development institutions than commercial banks. Resources of private volunteer organisations (PVO's) and other non-governmental agencies can also supplement traditional sources, provided the PVOs/NGOs have competence; they may need to be supervised by a proper bank or local government institution.
10/See: El-Namaki, M.S.S. Developing and promoting technology and technical skills in small-scale rural manufacturing enterprises. (In this publication).
Access to and application of appropriate technology is central to improvement of productivity. However, small industries in general, and small rural industries in particular, have distinct characteristics that complicate the process of technological development and productivity improvement within the sector. It is firstly necessary to determine whether a given branch of industry lends itself to small manufacturing scale. It should also be recognised that technological input is a function of a multiple of variables that includes access to information and scale of investment. It will thus be found that a measure of technological disparity exists among the different types of small industry one may consider.
In general, as has been indicated already, small rural interprises are found to operate in an environment characterised by difficult or weak market, raw material and support situations. Within the FB-SSI group, this process is further complicated by the extreme smallness of the “micro” group of enterprises. As has been noted earlier, these predominantly household based artisanal operations often use no machinery.11/
11/See: Fisseha, Y. op cit.
The problems of technology development and transfer within the SSI group have not proved easy to solve. In view of very limited capacity to develop technology among SSIs themselves, many attempts have been made to transfer to them existing technologies. One method has been the “sister industry” approach (whereby a developed country enterprise “adopts” a junior “sister” in the developing world for technology transfer). This has not worked very effectively in the few cases which have been reported upon, nor has collaboration with foreign partners on a more equal footing provided a satisfactory answer so far. Sister-industry arrangements within a country or among developing countries may prove to be more successful and should be tried.
There are some good examples of in-country technology development through individual initiatives and enterprise-rooted attempts. Institutional initiatives along several lines also promise results; the most tangible being that of the extension-oriented organizations. Research and development organizations have proved their effectiveness in some countries but not all. Training is proving to be a useful method for disseminating technology, but there are serious problems in identifying the right target groups, developing the proper training materials and selecting the right focus.
While keeping in mind the different needs of “micro” and larger SSIs, remedial action could follow two tracks. At the macro level, several actions could lead to improvement:
- regional technological cooperation organized and coordinated by a regional organization, such as “Technonet Asia”,- ensuring that the vocational training systems include compulsory attachment or an internship component,
- encouraging village level basic technical education where emphasis is placed on basic technical skills and essentials of forest-based processing technology,
- encouraging agricultural and forestry extension officers to perform a technology advisory service and forestry for off farm FB-SSI enterprises complementary to their other tasks. (Their role may consist simply of informing entrepreneurs of sources for specialist technological assistance).,
- adopting a continuous consultancy approach to the problem of technological development,
- expanding the industrial estates programmes, in a modified form, to the rural areas,
- encouraging either the re-introduction or continuation of production of technologically phased out tools and equipment needed by FB-SSIs in developing countries,
- improving the technology transfer process by improving the demand identification process and supporting cooperative linkages,
- encouraging the involvement of venture capital in the commercialization of indigenous technology.
At the micro level progress needs to be made both through collective action and through improving individual performance. Collective action calls for close collaboration among the FB-SSI entrepreneurs, e.g., through the creation of cooperatives and the development of national or regional sister industry relationships. At the individual level the issue is that of improving the individual skills of the entrepreneur and the equipment of his facility. Individual skills could be improved by continuous exposure to better ways of doing things i.e., through training and consultancy.
The particular problems of the “micro” entrepreneur can be approached in the following manner: First is encouraging village level associations of manufacturers. These could cooperate in machinery and equipment acquisition and utilisation, exchange technical advice and complement each others' processes. Second is the provision of mobile technical support units to visit the villages with the purpose of assisting in specific technical problems. Third are the village industry “common facilities” where specific production equipment for industrial processes is made accessible to the small entrepreneur. This will ensure small units' access to equipment whose minimum capacity is too great or whose cost is too high for each of them individually. Irrespective of the exact nature of assistance, decentralisation of support services and facilities to rural areas is essential for improved access by “micro” forest-based and other SSIs to assistance schemes.
The different technological needs of “micro” and larger FB-SSIs call for clustering of industry segments in order to distinguish differing needs, areas of weakness and strengths. Sometimes the problem of production technology is simply the unavailability or shortage of simple tools and equipment used in existing production processes and techniques. This is particularly so for “micro” enterprises, and efforts should be made to ensure that where import controls exist these needs are catered for in import schedules. For the “micro” FB-SSI enterprises, improvements in the efficiency with which current methods of raw material extraction and processing are applied may be more crucial than new techniques of production. Emphasis should be on reducing wastage and costs.
To counter the tendency to supply equipment to FB-SSIs without adequate consideration of absorption capacity, more emphasis should be given to first improving managerial and organizational capabilities of proprietors and technical skills of operators. Care should be taken not to allow policies which subsidise capital costs to distort decisions in favour of use of machinery where the latter would not be appropriate whether in terms of technical capacity or managerial ability to “absorb” the more capital-intensive production.
While there is variation by country and industry, the extent of SSI production linkages with the large scale industrial subsector appears to be limited. The capacity for technological transfer between large and small enterprises may therefore not often be greater than that through SSI wage employment, which is a common source of the technical skills which enable prospective entrepreneurs to later build small enterprises. However, where subcontracting is possible, efforts should be made to tap the full potential of such links for technology transfer.
Agricultural and forestry extension workers should be used to the extent possible as industrial extension agents. As they are not technological experts, their function should be to serve in helping identify possible sources of specialist information and assistance to FB-SSI enterprises. Such arrangements make sense in order to take advantage of existing extension networks, and to allow specialist rural-industry support institutions to concentrate on their field, with minimum general-extension work. Furthermore, many of the FB-SSI activities are closely linked with agriculture or forestry and it may be possible to serve them jointly with these sectors.
12/See: Sahlin, A. Improving management and the managerial skills of small-scale entrepreneurs. (In this publication).
Up to 80 percent of small enterprises go out of business within five years, probably largely due to poor management. Management of SSI covers functions ranging from creation of the enterprise, identification and timely procurement of inputs, organization of production, market identification and marketing, and planning for future growth and diversification. The principal contrasts with management of larger scale operations are that (a) in SSI all or most of these functions are carried out singlehandedly by the owner/entrepreneur, who has to combine management with being a worker in the enterprise, and (b) that while appropriate systems have been developed for large-scale industry, SSI entrepreneurs must work only by intuition and without benefit of elaborate data. Thus a function which is by its very nature difficult is made even more so in the case of SSIs.
Features of SSIs which worsen management problems include: (a) personal managerial responsibility of the entrepreneur without specialist support, (b) informality of organization which can cope only with minor disruptions, (c) heavy use of family labour, (d) lack of managerial training, and (e) poor working conditions which attract poor quality workers. It is necessary to develop packages geared to these particular needs and characteristics; it will not suffice to simply dilute management practices of large industries for use by SSIs.
As has been noted earlier, small enterprises differ considerably in the types of assistance they need according to their size. Household units require simpler practices than larger workshop-based ones. Enterprises at the interface between household scale and workshop operation face particularly difficult problems as practices for either one or other mode are likely to be inappropriate. Experience also shows significant differences between countries, partly due to cultural factors and business traditions. Adaptation of training and extension programmes to specific audiences is therefore crucial. In all cases, however, emphasis should be on developing simple materials of a practical nature, which should occupy the minimum of an entrepreneur's time as he has many other tasks to attend to.
Management improvement programmes which try to impart all management skills to each entrepreneur tend to overload the latter with responsibilities and skills some of which could be more conveniently acquired, as required, through extension services. This applies particularly to planning, product design and all research and development. Other points that need to be kept in mind in giving assistance are:
(a) absence of comprehensive education and training policies for the SSI sector,(b) poor coordination and compatibility among assistance/training programmes especially if funded by different agencies,
(c) training periods which are too long for the better SSI entrepreneurs to spare adequate time to complete sessions, and
(d) problems of learning from “formal” teaching methods.
Intra-entrepreneur communication seems to be effective, and low-cost “action learning” has been tried for uniform entrepreneur groups. However, the geographical dispersion of rural SSIs, and the wide range of their activities, cause problems in creating cohesive groups of entrepreneurs for a common purpose.
To reduce incidence of failure among enterprises, it has been suggested that rigorous entrepreneur screening-cum-training systems be used. For new enterpreneurs, however, it is difficult to objectively assess entrepreneurial qualities and managerial ability to run an enterprise efficiently. Screening methods need to be developed which are better able to select entrepreneurs of innate talent - including the illiterate and the very smallest entrepreneurs, who are important in the forest-based sector, and special groups such as women, refugees, etc. Where suitable screening procedure have not yet been developed, simple criteria that can be used in identifying entrepreneurs for assistance programmes are: (a) realistic perception of risk, (b) high motivation and desire to succeed, and (c) evidence of ability to manage.
Managerial skills which apply to all SSIs should probably be transferred by general training-extension agencies. Industry-specific aspects of forest-based activities which may require specialised advice would include raw material, technology, market or administrative-licensing considerations.
For the “micro” FB-SSI category, access to assistance programmes and cost-effectiveness of reaching the enterprises are issues. Effective organization of SSI is essential. Many central small-scale industry promotion agencies have proved incapable of reaching most small industries or of improving their managerial/entrepreneurial skills. In order to extend outreach, use of private volunteer organizations or other extension agencies which already have extensive rural networks may be useful.
Furniture shop in Bangladesh - even small firms need marketing
There is a wide range of support measures which official agencies could take to promote SSI development, the key ones of which are: (a) identification of growth opportunities for SSIs and reservation of products for manufacture by them; (b) sectoral market assessments; (c) technology development; (d) provision of finance at concessionary interest rates and sometimes without collateral; (e) market reservation for SSI in government/parastatal purchases; (f) price margin preferences in government tender purchases; (g) raw material provision, reservation and price discounts; (h) equipment supply on easy terms; (i) skills development though training in all essential disciplines for SSI operations; and (j) continuous advisory services
In general, support systems appear better suited to servicing SSIs at the larger end of the range. In the forest-based subsector, this would imply better possibilities for assisting wood-based workshop enterprises than the household level units often using reeds, bamboos, etc. which tend to be much smaller.
Decentralisation of support services to the greatest extent possible is desirable in order to improve accessibility to entrepreneurs.14/ However, the tendency for this to increase dangers of political interference, dispersion of skills, and loss of coordination needs to be guarded against.
13/For an account of one country's experience with many of these measures, see: Parameshwaran, K.P. Institutional support for small-scale rural processing enterprises: the case of India. (In this publication).14/See: Chuta, E. Decentralising institutional support for small-scale enterprises. (In this publication).
For the smallest enterprises, assistance can usually only be effectively delivered on a group basis. Such groups need to be well organised and motivated. Formation of such entrepreneur associations should thus be a priority function which official and non-governmental agencies should assist in implementing. Field experience suggests that clear benefits to both the community and the individual need to be demonstrated in order to attract sustained community participation in such associations.
The variety and complexity of governmental organizations serving SSI, and their large numbers, must be a matter of concern. Although the channelling of assistance through only one agency is usually impracticable and even undesirable, there is need to reduce the number of uncoordinated organisational units. The present setup is often too complex for the smaller units to cope with, and is unlikely to be fully sensitive to entrepreneur needs. Creation of yet more SSI support institutions should not be undertaken lightly.
The issue of cost-effectiveness of the support is important. Inputs into project appraisal, skills development or “continuous-consultancy” extension methods are sometimes quite out of proportion to the value of the enterprises' output. In certain cases, the level of intervention is on a scale which calls into question the possibility of SSI self-reliance after disengangement of support agencies. The possibility of governments being able to maintain heavy subsidies to SSI operations indefinitely must also be doubtful. Furthermore, excessively generous SSI incentives have led to creation or perpetuation of unviable small industries at great economic cost, a situation which parallels similar developments among officially subsidised large scale industries.
There are also instances where the amount of assistance poses the danger of stifling private entrepreneur initiative and transfering the focus of decision-making from the beneficiary to the advisory/ assistance agency. In developing better systems, emphasis should be on giving the entrepreneur more and better information, improving his/her capacity to base decisions on it, and providing essential inputs, but leaving decision-making to the entrepreneur.
There is a danger that multi-function support agencies may not be able to closely follow the progress of specific sectors or enterprises. Focal points may therefore be needed for particular sectoral or individual interests. For FB-SSIs, rural development banks or forest services might serve this function.
Is his time being used efficiently?
Greater use could often be made of non-governmental organisations (NGOs) active in rural areas. These may be able to act as brokers presenting local interests to appropriate institutional services or agencies, or to reach small and scattered enterprises that governmental agencies cannot provide support to. Some NGOs have specialized in such skills as group organization, financial management, or business organization and may be called upon for such inputs through training and/or technical backstopping. However, care is needed in selection of NGOs which sometimes themselves suffer the same poor management, weak technical skills and inexperience identified as problems for the SSIs they are expected to help.
Summary of main conclusions
Followup in the forestry sector
1. Empirical findings show FB-SSIs to be a large and important part of both the forest and rural enterprise sectors in developing countries; there is need to recognise this and to adjust forest sector strategies accordingly
2. Further study is needed in order to identify which forest based activities have the potential for viable growth as small-scale enterprises; this information should be widely disseminated to policy makers and sector managers
3. Assistance to FB-SSIs needs to be geared to their very small size, and to the consequent constraints on the resources and skills available to them. Within this aggregate, support activities need to differentiate between the micro household units using non-wood raw materials and the somewhat larger and more advanced woodworking enterprises operating at a workshop level; while the latter may be able to benefit from some existing support services the former will usually not be able to do so and will require other modes of assistance. Another category of enterprise likely to need special attention is that in transition from the household to the workshop scale of operation
4. The forest based activities of many small-scale enterprises are closely integrated with other of their processing, agricultural and household activities, and therefore cannot effectively be dealt with in isolation
5. Support to FB-SSIs should not be unduly oriented towards encouraging or perpetuating small scale as an objective in itself; growth and development of many FB-SSI activities will logically require them to increase in unit size
6. Care needs to be taken to ensure that support is cost effective and consistent with the absorptive capacity of the enterprise, and does not intrude on the entrepreneur to the point of undermining his or her self-reliance and decision-making responsibility
7. In order to get access to supporting services, and be able to use them effectively, FB-SSIs, in particular micro enterprises, will often need to organise themselves in appropriate groupings
8. Informal mechanisms such as nongovernmental organisations may have an important role in providing FB-SSIs with access to support and in improving its effectiveness
9. As availability of markets is essential to FB-SSI viability and growth, priority should be given to assisting entrepreneurs with market information, product development, access to markets and marketing
10. Because of the nature of the forest resource, it is impossible for FB-SSI to provide for their own raw material base. Measures to improve their raw material situation include the following:
- improve raw material management and allocation procedures to accommodate small as well as large enterprises,- broaden forest management to include non-wood raw materials of value to FB-SSIs
- amend legislation and regulations which unnecessarily restrict beneficial FB-SSI operations
- assist rural communities to develop ways of managing local forest resources to supply sustainable FB-SSIs.
11. FB-SSIs need improved access to finance from formal sources. Such assistance needs to be adapted to the different circumstances of micro, workshop and intermediate enterprises; in order to be effectively used it needs to be accompanied by technical assistance to entrepreneurs in organisation, record keeping and accounting, and to institutional lenders to improve their ability to service small enterprises
12. The FB-SSI activities which will continue to be profitable and grow will be those which are able to improve their productivity; the problems of identifying appropriate technologies and of effectively transferring them, and the necessary skills, are particularly acute for micro enterprises
13. The task of upgrading management of FB-SSIs has to start with recognition that the entrepreneurs have a technical not a managerial background, and the particular difficulties that they face in adding a managerial dimension to their responsibilities. To be effective, training materials and methods must be accurately matched to their needs and capabilities
14. The organisation of FB-SSIs, and of support institutions, must be consistent with conclusions 3 to 8 above.
The following recommendations were put forward at the Expert Consultation for followup measures that needed to be taken within the forest sector:
1. Creating awareness and influencing policies:
(a) To collate existing information of importance about the characteristics and main needs of FB-SSIs, and bring it to the attention of forestry services and policy makers with a view to their taking greater account of FB-SSI concerns in forestry sector policies and programmes.(b) In support of the awareness-raising activity, to continue gathering information for representative situations in developing countries. In future, attempts should be made to dissagregate data to recognise dimensions of significant difference - i.e., between household-based “micro” enterprises and larger workshop-based ones or between wood-based and non-wood based SSIs.
(c) To initiate in representative situations identification of high-potential products for commercialisation through FB-SSI development - where small-scale production has clear comparative advantage - and to disseminate such information.
(d) To organize for regional audiences or at other appropriate levels a series of seminars for personnel from forestry, economic policy, financing, and rural development agencies with the purpose of reviewing the potential contribution and development of FB-SSIs in the context of broader programmes.
2. Development of basic information or methods:
(a) To collaborate with universities and other interested agencies in filling gaps on:- forest management for multiple-product purposes including non-wood products of FB-SSI interest,(b) To encourage appropriate institutions in developing countries to:- yield potentials and inventory methods for non-wood forest products,
- development of forest industry profiles on FB-SSI activities of high commercial potential (including market, resources and technological needs),
- methods for assessing growth potential and viability of FB-SSIs
- review the legal and institutional framework for forest industry development and identify barriers to FB-SSI growth,- develop cost-effective rapid appraisal methods for assessing assistance needs of “micro” FB-SSIs in a project context,
- carry out in-depth subsector studies for high-potential FB-SSI products (especially in a project context) preparatory to formulating assistance programmes,
- compile, especially for selected countries, a quick checklist of institutions active in helping FB-SSIs, their activities and experience,
- look at possibilities for incorporating small-scale processing considerations in training of forestry sector personnel at all levels,
- review features of government practices in forest management and forest product disposal which unfairly favour large scale industry or work against the interests of small-scale enterprises.
3. Promotion of FB-SSI components in field projects
In participatory forestry projects, and other situations where small-scale forestry resources exist (as in integrated rural development programmes), opportunities already exist for developing FB-SSI components of total rural development activities. FAO should, consider carrying out the following:
(a) Review of forestry projects to determine where FB-SSI activities already exist; and their magnitude, problems and assistance currently provided.(b) Formulation of improved support activities in a total project context, and initiation of support programmes adequately linked to broad-based small industry promotion agencies in the countries.
(c) Preparation and dissemination of project guidelines on how to identify FB-SSI development opportunities, how to assess their needs and how to assist them in a forestry project context.
(d) Development of basic training packages for project staff on technology, management and consultancy support to FB-SSI activities.
Craftsman carving traditional figures from wood - his business also has to find outlets
