15 October, 2002

SMEs Supporting Systems in Saudi Arabia

Mitsuo OTSUKI ( JICA / SAGIA ) I am now with SAGIA under the technical cooperation of JICA (Japan International Cooperation Agency). My task is to transfer my expertise on SMEs to SAGIA. My work is basically advisory and consulting work. Today I am very happy that I was given the opportunity to speak about SMEs supporting systems in Saudi Arabia. The government must play a greater role in SMEs development which is very important for industrial and economic growth of the country. My presentation will consist of following three parts. 1 SMEs Vital Roles in Saudi Economy 2 Present SMEs Situation in Saudi Arabia 3 Proposal for SMEs Support Systems in Saudi Arabia

1. SMEs Vital Roles in Saudi Economy SMEs constitute the majority of total business enterprises in most of the countries and are one of the driving forces in the national economy. In most of the developed countries, the contribution of SMEs to national economy represent over 80% of industrial production. SMEs in Saudi Arabia too, is expected to play a vital role in the industrial and economic growth. (1) Diversification of Economy SMEs play a significant role in diversifying national economy and expanding industrial production in Saudi economy by entering into various sectors. 1
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(2) Contribution to National Economic Growth SMEs can contribute to significantly (say more than 50 %) of future industrial production of Saudi national economy. (3) Generating Employment and Vitalizing Saudization The population of Saudi nationals is expected to reach almost to 30 million by 2020. Saudi labor force will expand to 8.8million by 2020 from 3.3million in 2000. 46% of total population in 2001 are under 14 years old and 74% of total population are under 29 years old. The Kingdom must provide these young working forces with appropriate job opportunities. SMEs will play a decisive role in generating employment by providing the many job opportunities to Saudi nationals. SMEs will greatly contribute to the Saudization by offering various jobs to Saudis. (4) Regional Development SMEs also contribute to the regional development. The geographic dispersion of SMEs helps to achieve a more balanced growth of local economy and creates employment opportunities for local people in the national economy. (5) Technological Innovation SMEs are the sources of new products and very innovative in creating and adopting new technology. (6) Export Market Expansion SMEs are quite flexible in adopting the change of market requirements and very hungry in expanding their market. They have no traditional markets. Therefore, they are always seeking new markets, especially export market. Big companies usually are very conservative, but SMEs are very aggressive and progressive. 2 SMEs Situation in Saudi Arabia (1) SMEs Definition When we discuss SMEs, we need the definition. However, it is very difficult to define SMEs properly. Because the SMEs definition differs in 2

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each country depending on different parameters such as number of employees, amount of capitals and annual sales turnover. There is no common definition of SMEs in the world. According to SAGIA study made by Dept of Industrial Development Dr. Faroque Mekhaimer in June, 2001, the industrial classification of SMEs based on labor factor is as follows. Small Size Enterprises: Employees less than 59 Medium Size Enterprises: Employees 60-99 Big Size Enterprises: Employees more than 100 Regarding classification by invested capitals, there are many arguments in the Kingdom. Total capitals and registered capitals are not always same because of various reasons, including Zakat saving. In my speech, I would like to put the definition issues aside, because I want to avoid the confusion by so many different opinions. However, just for your information, I would like to show you the various definitions of SMEs in selected countries. Japan: Number of Employees Capital Manufacturing: less than 300 300million(about SR 9 million) max. Wholesales: less than 100 100million( -- SR 3 million) max. Retail: less than 50 50million( -- SR 1.5 million) max. Services: less than 100 50million( -- SR 1.5 million) max. USA: Manufacturing: Employees 500 1,500 Construction: Annual Revenues US$7 17million Wholesales: Employees less than 100 Retails: Annual Revenues US$5 21million Banking: Total assets less than US$100million Services: Annual Revenues US$2.5million EU:( Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland Italy,
Luxemburg, Netherlands, Portugal, Spain, Sweden and UK )

Criterion Micro Employees(less than) 10 Annual Turnover(Max.euros) 2 million Annual B/C(Max.) 2 million Max.% owned by Other n/a Enterprises 3
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Small 50 10 million 10 million 25%

Medium 250 50 million 10 million 25%

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India: Small Scale Industry: Max. Investment Capital Limit Rs.30 million Medium: No Definition Tiny Enterprises: Max. Investment Capital Limit Rs.2.5million Malaysia: Employees: less than 150 Annual Turnover less than RM2.5 million 2) SMEs Situation SMEs sector in Saudi Arabia at present is not playing the prospected role, due to lack of supporting programs and lack of authority responsible for SMEs supports, but is estimated to represent the largest sector among other products sectors in the Kingdom according to Saudi Chamber of Commerce and Industry. Saudi SMEs contribute about 14% of total industrial production and utilize about 35% of the energy consumption of industry. It contributes about 8% to the total value of industrial exported goods according to 7th Development Plan. The numbers of licenses granted to commercial establishments by the Ministry of Commerce by the end of 2001 are 675,425. The individual establishments represent about 95% of the total commercial registrations. The numbers of licenses issued for shops through Municipalities Ministry has reached to 161,855 by the year 2001. 71% out of total numbers of industrial sector are SMEs. Small factories are 1,105 with capital 1 to 5 million SR and medium factories are 1,360 with capital 5 to 20 million SR. Numbers of small(1-19 employees) and medium(20-59 employees) enterprises in KSA in 1999 were 24,853 (84%) and 1,752 (6%) respectively out of total numbers of enterprises 29,569. This shows SMEs represent 90% of total enterprises in the Kingdom. The industry-wise, 47% of SMEs are engaged in commercial and hotel businesses, 27% in construction field, 12% in industrial manufacturing sector, 6% in social services and 8% in other different businesses.

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3) Major problems of SMEs in Saudi Arabia (a) Lack of Fund A shortage of paid up capitals and credits makes SMEs vulnerable to fluctuation in the supply and demand market economy. They often face the refusal of financing institutions to provide necessary funds without credits guarantees for the establishment and operation of their enterprises. (b) Lack of Skilled Human Resources Because of direct proceedings toward modern industries through importation of production technology from developed countries, Saudi industries became dependent on foreign manpower. Therefore, there are shortages of skilled workers and qualified human resources in the factories and companies. In the case of small enterprises (1-9 workers) in the kingdom the percentage of Saudization has reached to only 2%. (c) Lack of Management Skill Small firms typically have lower management standards to run the businesses or factories due to lack of administrative and managerial experiences. Most of Saudi SMEs owners are not involved in their daily management of the companies and leave the management to the non-Saudi expatriates. ( d) Lack of Marketing Skill There are restrictions in the size and area of markets to which they have ready access due to low quality, high and uncompetitive prices and inadequate marketing skills. Individually, they are often unable to satisfy the large market requirements which need large production quantities, homogeneous outputs and consistent international quality standards. (e) Lack of Modern Technology They use rather old fashioned technology. The weak industrial and scientific approach to modern technologies are caused by the limited funds and human resources. (f) Cost Problem and Raw Material Purchase SMEs experience difficulties in lowering cost by achieving economy of scale in manufacturing. They also have the problem of higher purchase prices of equipment and raw materials because of small quantities which causes the increase of production costs. 5
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(j) Lack of Information A limited availability of information and data on the production technology and know-how is caused by the weak human resources and fund shortages. They also have difficulty in attracting foreign investors, emanating from the lack of appropriate information and public relation needed by the investors. 3 Proposal for SMEs Supporting Systems in Saudi Arabia 1) Government Policy We need the clear government policy on SMEs and special incentives for SMEs in order to promote SMEs development. The government assistance and supports are indispensable for SMEs growth. The government should provide various kinds of supports to SMEs including management and marketing skills, technology upgrading , financial assistance, human resource training and special incentives such as tax reduction. I understand that the SMEs policy in Saudi Arabia has not been clearly established yet by the Saudi Government. In the 7th Development Plan, we know the general government policy for SMEs. But these are too general. The Saudi Government should take more active steps towards SMEs development by providing SMEs with specific support programs. 2) Mobilizing National Committee on SMEs The national committee was formed by royal decree dated 17 April, 2001 to prepare comprehensive programs to support and develop SMEs by coordination among the Supreme Economic Council, Ministry of Finance and National Economy, Ministry of Industry and Electricity, Ministry of Commerce, The Council of Saudi Chamber of Commerce and Industry, SIDF and Saudi Credit Bank and SAGIA. This committee proposed several recommendations on SMEs supports in the last one and half years but nothing was implemented. The progress of this committee is rather slow because of challenging task in its nature. I believe that this committee must be mobilized and activated for immediate action planning and implementation of SMEs support programs. For immediate action plan, I would like to propose following ideas. 6
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 (a) Legal Framework Legal framework of SMEs supports is essential to support SMEs and is still in a preparatory stage. SMEs must be supported through the special SMEs law and regulations on corporate taxes, labors, minimum wages, accounting standard on depreciation, etc. (b) Government Authority to be responsible for and support SMEs New government authority being responsible for SMEs supports has to be newly created. We need the government agency to specifically support SMEs. Many problems are caused by non-existence of government supports and government programs for SMEs. Therefore, the specialized government authority to support SMEs must be newly created or at least be established within the existing government ministry or agency. (c) Financial Support System Financing represent a major element in the development of SMEs. At present there are limited financial loan services for SMEs by SIDF and Saudi Credit Bank in the Kingdom. The government is recommended to establish a special fund or joint programs to facilitate loans and credit guarantees for SMEs through either, exiting SIDF and Saudi Credit Bank,or by newly establishing the banking institution for specialized financing and credir guarantee for SMEs. The commercial banks also requested to provide as many amount of commercial loans as possible to SMEs (d) Manufacturing and Business Facilities The Industry Ministry is expected to provide the manufacturing facilities so called SMEs Industrial City specifically designed for SMEs. The Commerce Ministry is requested to rent the business office facilities for SMEs.

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(e) Training of Management, Technology and Marketing I understand that GOTEVT (The General Organization for Technical Education and Vocational Training) was approved the setting up of the SMEs Technical and Vocational Training Center for employees of SMEs. The early start-up of this center is waited. GOTEVT also is expected to set up a database for small projects. (f) ational Association for SMEs

There is no national association for SMEs in the Kingdom. The nationwide association must be established for the successful growth of SMEs separate from chambers of commerce and industry. This association will provide member SMEs with know-how and expertise of management skills and marketing skills, technical supports, legal, accounting and financial consultations, assistance of economic feasibility studies, provision of information and research activities, human resource training and various seminars and workshops on theses subjects.

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15 October, 2002

Summary of My Presentation
Mitsuo OTSUKI

SMEs Supporting Systems in Saudi Arabia 1 SMEs Vital Roles in Saudi Arabia Diversification of Economy Generating Employment Contribution to Saudization Regional Development Technical Innovation Export Market Expansion 2 SMEs Situation in Saudi Arabia SMEs are expected to contribute more than 50% of total industrial production in future 90% of total enterprises in Saudi Arabia are SMEs Lack of fund Lack of Skilled Human Resources Lack of Management Skills Lack of Marketing Skills Lack of Modern Technology Lack of Information Lack of Cost Competitiveness on Sale and Purchasing 3 Proposal for SMEs Supporting Systems in Saudi Arabia Government Policy and Legal Framework Creation of Government Authority supporting SMEs Establishing Financial Support System for SMEs on Loans and Credits Technical and Vocational Training Center for SMEs Manufacturing and Business facilities Organizing National Association for SMEs

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