SMME Policy in Zambia
D.M. Mauzu

• Historical Background
• Institutional Support Infrastructure
  • Small Enterprise Development Board*
  • The Technology Development and Advisory Unit (TDAU)
  • National Council for Scientific Research (NCSR)
  • Zambia Bureau of Standards (ZABS)
  • Village Industry Services (VIS)
  • Summary Institutional Support Structure
• Impact of Support Institutions on the MSSE Sector
• The Consultation Process
  • Appointment of the Chief Executive
  • Removal of the Charity Portfolio
• Legal Constraints of the Development of Informal and Small Businesses
• Co-ordination
• Concluding Remarks
• References

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SMME Policy in Zambia
D.M. Mauzu

Historical Background

The post-independence economic history of Zambia has been characterized by the dominance of copper mining and exports. The performance of the national economy has thus been closely linked to that of the mining sector. While the 1960s were characterized by high mineral output levels and high world metal prices, the oil crisis of the early 1970s adversely affected the world price of copper.

Under the Third Development Plan (TNDP) 1969-83, one of the main objectives was to diversify the economic structure in order to reduce the dependence on the copper mining sector. The manufacturing sector was earmarked to be one of the major cornerstones in this diversification process. Under the manufacturing sector development strategy, highest priority was attached to the development of small scale and rural industries. The emphasis on small scale industries was based on the following premises:-

• Small scale industries, whether in the manufacturing, non-manufacturing or the informal sectors, generate more jobs per unit of investment than larger firms. Their indirect employment impact is greater because they draw more on domestic sources than the larger capital intensive firms which rely heavily on imported inputs.
• Small scale industries are highly instrumental in encouraging the development of local entrepreneurship and technical production skills.

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• The scale of production is more suited to the size of the local market and raw materials conditions.

Several instruments have been employed by the Government to intervene in the MSE sector, including legal instruments, annual and medium term plans (e.g. annual budgets) and policy statements. There are a number of organizations that have been established to provide various types of services to the MSE sector. Among these are:-

• the Small Enterprise Development Board,
• the Technology Development and Advisory Unit (TDAU) at the University of Zambia,
• the National Council for Scientific Research,
• the Village Industry Service, and
• several non governmental organizations (NGOs).

Institutional Support Infrastructure

Small Enterprise Development Board*

From 1964 to 1981, there was no special legal framework for promoting the small and micro business sector in Zambia. The Pioneer Industries (relief from income tax) Act of 1965 was intended to promote import substitution in light industries. The Industrial Development Act of 1977 which has been amended several times was also intended to promote import substitution industrialization.

Both the Pioneer Act and the Investment Act of 1997 were concerned with the promotion of industrial development on a substantial scale. A serious attempt to develop the MSE sector was made when Parliament passed the Small Scale Industries Development Act in 1981 under which the Small Scale Industries Development Organization (SIDO) was established.

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SIDO was expected to perform the following functions:-

1. consultancy services,
2. financial services,
3. procurement services,
4. marketing services,
5. industrial estate services.

SIDO had a number of strengths which included the following:-

• a wide regional network covering all a provinces,
• opportunity to network through regional offices,
• wide/diverse clientele,
• government support,
• possibility of donor support, and
• possibility of acquisition of loans from financial institutions.

In spite of these strengths, SIDO failed to achieve the desired results and this led to the repeal of the SIDO Act of 1981. It was replaced by the Small Enterprise Development (SED) Board Act of 1996.

Other reasons which necessitated the repeal of the SIDO Act were as follows:-

• The SIDO Act was only applicable to small industries in the manufacturing sector. Consequently, small industries in other sector could not benefit from Government support programmes. The new act covers other sectors such as construction, trading and services.
• The SIDO Act was confined to the promotion of small scale industries in the formal sector. The new act covers small entrepreneurs both in the formal and the informal sectors.
• There was a need to improve the incentives to the MSEs.

Some of the functions of the Small Enterprise Development Board are as follows:-

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• to formulate, co-ordinate and implement policies and programmes for promoting and developing micro and small enterprises,
• to develop industrial estates and common facilities for use by micro and small enterprises,
• to establish a training and processing centre to provide machinery and equipment to micro and small enterprises on a lease-out basis,
• to make recommendations on any legislative reform which may be required for the development of micro and small enterprises.

Under the Act, an enterprise is defined as "an undertaking engaged in the manufacture or provision of services or any undertaking carrying on business in the field of manufacturing construction and trading services". This does not include mining or recovery of minerals. Mining was deliberately left out because it is comprehensively covered in the Mines and Minerals Act of 1994.

Under the SED Act of 1996, a micro enterprise is defined as:

"any business enterprise:

1. whose amount of total investment excluding land and buildings does not exceed ten million Kwacha (about US $7,700)
2. whose annual turnover does not exceed twenty million Kwacha (about US $15,400) and
3. employing up to ten persons.

A small enterprise is defined as:-

"any business enterprise:

1. whose amount of total investment, excluding land and building does not exceed:

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   1. in terms of manufacturing and processing enterprises fifty million Kwacha in plant and machinery (about US $38,500) and
   2. in the case of trading and service providing enterprises, ten million Kwacha (about US $7,700)
2. whose annual turnover does not exceed eight million Kwacha (about US $62,00) and
3. employing up to thirty people.

The Technology Development and Advisory Unit (TDAU)

The Technology Development and Advisory Unit (TDAU) was established in 1975, among others to meet the following objectives:-

• to help and advise on the design and production of agricultural and household equipment for local use,
• to service as a development centre for new equipment and process,
• to service as a centre to pool advice from university personnel to various industries,
• to establish an information centre on rural appropriate technology.

Over the years, the objectives of TDAU have been modified and expanded beyond household goods and simple agricultural implements. TDAU currently considers her mission as:-

"To promote the industrialization and growth of Zambia, through the development and dissemination of technology, production processes, equipment and technical and management know-how appropriate to the country".

National Council for Scientific Research (NCSR)

Some of the functions of NCSR are:-

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• to advise the Government on national scientific research policies and activities,
• to co-ordinate scientific research and activities,
• to promote and encourage such research programmes, particularly in relation to development plans,
• to maintain close liaison with those bodies responsible for the application of research results, i.e. government ministries, public or private industries as well as companies or organizations,
• to maintain liaison with other scientific bodies within and outside Zambia and to advise on research co-operation,
• to advise the Government on the provision and use of finance for scientific research purposes, and to advise on the recruitment and use of research staff.

Zambia Bureau of Standards (ZABS)

The functions of the Bureau are defined in the Act as follows:-

• to promote and require the adoption of standards in industry and commerce,
• to make arrangements or provide facilities for the examination and testing of:-
  1. i) commodities to which standards apply; and
  2. ii) materials or substances from which a commodity may be produced, manufactured, processed, treated or finished,
• provide schemes of pre-export inspection of export commodities,
• to provide for other schemes of quality control and quality assurance for commodities in order to promote and improve export trade,
• to co-ordinate the efforts of producers and consumers in the improvement of appliances, processes, new materials and products,

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• to provide testing facilities and such other facilities and technical services as may be required by Government or industry.

Village Industry Services (VIS)

The Village Industry Services is a NGO which was established by a presidential decree. VIS is mainly concerned with rural development to promote labour intensive agro-based cottage and village industries, both individual and co-operative, which encourage income creation, utilize local resources and are based on simple equipment and machinery.

In the area of entrepreneurship development, a lot of emphasis has been placed on training to strengthen entrepreneurship development among artisans.

VIS has hundreds of crafts producers and honey producers. The marketing of these items is done by VIS with some items being exported abroad.

VIS also runs industrial estates. For instance, in Lusaka VIS has established an industrial estate comprising 28 workshops fitted with electricity, supplied with water, and telephone exchange. The estate has a training centre. Entrepreneurs who have taken up rooms are engaged in various activities such as food processing, knitting, woodwork, metal fabrication, handicrafts, stone polishing, repair of electrical appliances, leather goods, and textile printing.

Summary Institutional Support Structure

The functions of existing industrial support institutions can be summarized as follows:-

• to carry out research on any aspect connected to small businesses,

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• to provide or assist in providing managerial, technical and accounting skills training, for persons engaged or about to be employed in small businesses,
• to assist in locating and developing industrial estates, common facility centres and ancillary services,
• to identify investment opportunities within the small scale sector and assist entrepreneurs to prepare feasibility studies and/or bankable business proposals,
• to assist in procuring, or providing supplies, raw materials or getting equipment on hire-purchase basis,
• to offer consultancy services to small businesses in marketing, technical, management, economic, and financial aspects, etc.,
• to provide extension services aiming at supervising, monitoring and evaluating the operational performance of small businesses and devising necessary remedial actions to provide finance and credit.

Although the institutional industrial support infrastructure is available, its impact on the MSE sector has been very minimal largely due to lack of proper linkages.

Impact of Support Institutions on the MSSE Sector

Studies carried out so far, however, indicate that linkages between MSEs and providers of specialized services are weak for a number of factors which include the following:-

1. Linkages have not been based on measurable mutual benefits between the providers of services and MSEs.
2. Communication between providers of services and the MSE sector is deficient. The activities of service providers in most cases are not known.
3. The capacity of the MSE sector is inadequate to meet the full cost of the service requested.

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In order to improve the linkages between the providers of services and the MSE sector there is need for an external intervention in order to establish, maintain and secure its sustainability. This external intervention may take various forms such as fiscal incentives, credit and grants.

The Consultation Process

In developing the current SED Act, valuable inputs were received from major stakeholders both in the public and private sectors.

The process of reaching consensus was smooth except in few areas such as the appointment of the Chief Executive, the removal of the charity portfolio and the incentive structure for MSEs.

Appointment of the Chief Executive

Under the Small Industries Development Act of 1981, the power to appoint the Chief Executive of SIDO is vested in the President. While the intentions were good, in practice this proved to be a serious impediment to the supervision and control of SIDO operations at ministerial and board levels.

In formulating the new Act, a position was taken to shift this responsibility to the Board of Directors. This was a highly sensitive issue because it touched on the powers of the President. However the matter received a favourable response from State House and other high authorities and was resolved amicably. The powers to appoint the Chief Executive are now vested in the Board of Directors.

Removal of the Charity Portfolio

From its inception, SIDO had been playing two important roles which were not consistent with each other. On one hand SIDO was operating as a commercial financial lending institution, while on the other hand it had been operating as charity organization mostly under the influence of political pressures.

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The mixture of charity and commercial operation did not work well for SIDO as this resulted in poor loan recovery to the extent that SIDO could only recover 35% of its outstanding loans. As a result, SIDO could not maintain a viable revolving credit facility.

In order to rationalize and maximize the use of Government funds which are channelled to the MSE sector development programmes, it was decided to delink the charity portfolio from the successor organization. This proposal received most divergent views. The compromise reached was to establish a micro and small scale enterprise fund whose operations are yet to be decided. There are, however, four options being considered:-

1. maintaining the status quo of direct lending to entrepreneurs;
2. lending through non-bank financial intermediaries such as NGOs;
3. lending through commercial banks;
4. a combination of the above options.

The consultations are still on-going.

Legal Constraints of the Development of Informal and Small Businesses

The legislation establishing the framework within which Zambia's small scale manufacturing sector operates today falls into three broad categories:

1. legislation embodying national industrial development policy;
2. legislation of a regulatory or protective nature; and
3. legislation regulating urban land use.

Various acts and institutions embodying national industrial development policy have been introduced in Zambia. They include the following:-

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• the Pioneer Industries (Relief from Income Tax) Act No. 55 of 1965 which was intended to encourage, by way of relief from income tax, the establishment and development of new industrial and commercial enterprises in Zambia. The kind of enterprises which were declared pioneer industries included radio, wireless and electronic products manufacturing industry, wire rope manufacture; cigarette and tobacco manufacture, soap and detergent manufacture, footwear manufacture, match manufacture, fishnet manufacture, rubber products manufacture, and the metal fabrication industry;
• the Industrial Development Act No. 18 of 1977 which has been revised three times through the Investment Act 1986, Investment Act of 1991 and the Investment Act of 1993;
• the Control of Goods Act No. 41 of 1966 enabling the President to provide by regulation for the control of the distribution, disposal of any manufactured commodity and for the control of imports into Zambia;
• the Public Health Act which makes it a duty for every local authority to take all lawful measures to prevent the occurrence or deal with the outbreak or prevalence of any infectious disease and safe guard and promote public health. Under the act, any factory or trade premises which is not kept clean and free from offensive smells constitutes a nuisance;
• the Industrial Relations Act and other related legislation providing for the general regulation of contract of services;
• the Factories Act which provides for cleanliness, ventilation, lighting, sanitary conveniences and safety, especially relating to machinery, dangerous substances and fire precautions;
• the Zambia National Provident Fund which establishes a fund to which all employees of 18 years or more are supposed to be a member. The employer has to pay statutory contributions into the fund for each employee;
• the Environmental Protection Act, which obligates all enterprises to adhere to environmental protection regulations;
• the Small Industries Development Act of 1982 which was repealed in 1996 and was replaced by the Small Enterprises Development Act of 1996.

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Protective legislation with the potential of impeding the operations of micro and small scale enterprises fall into two categories: those that are directed towards the protection of society and those that are directed towards regulating or controlling business practices.

If present protective and regulatory laws relating to public health, safety and control of business practices were actually enforced, most small scale businesses would probably have to close down their operations. However, as the small and informal sectors provide a social safety-net for victims of structural adjustment processes, the enforcement of protective and regulatory laws has been relaxed to the point where some of them are just on paper. Moreover the SED Act of 1996 exempts MSEs from some of the protective and regulatory laws.

A study which was done in 1993 by O.E. Olsen, E. Melby and E. Nkole for NORAD on "Access and Opportunities: The need for support among small and micro scale entrepreneurs in Zambia" showed that legal constraints to micro and small scale industries are quite negligible as illustrated in the table below:

Problems Faced by Entrepreneurs (in percent)

Problem	most strongly felt	second most strongly felt
Credit/finance	40.0	17.5
Raw materials/other inputs	27.5	22.5
Market limitations	10.0	2.5
Location/owning a plot	7.5	15.0
Transport	5.0	12.5
Payment from customers	5.0	10.0
Lack of training	2.5	7.5
Inflation	2.5	7.5
Regulations, tax, etc.	0.5

Source O.E. Olsen, E. Melby and E. Nkole: Access and opportunities: The need for support among small and micro scale entrepreneurs in Zambia, 1993.

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The table indicates that constraints caused by a regulatory framework are not felt as serious problems by micro and small scale entrepreneurs. In fact, the majority of them do not even know that protective and regulatory laws exist.

Co-ordination

Co-ordinating structures have been set up at national and regional levels. At regional level, activities are co-ordinated through the Provincial Co-ordinating Committee. Development agencies such as the local governments, the Small Enterprises Development Board and donor agencies participate in the activities of the Co-ordinating Committees.

Also, specific projects have been established to foster co-ordination. For instance, since 1995 we have been implementing a project called "Support to Micro and Small Scale Sector" under the UNDP/GRZ Private Sector Development Programme.

The project aims at strengthening and developing capacities of existing institutions and creating efficient capacities to co-ordinate support institutions. The project is being executed by a committee of experts from the following institutions:-

• Ministry of Commerce, Trade and Industry
• Technology Development Advisory Unit (TDAU)
• Small Enterprise Development Board
• Youth Entrepreneur Association of Zambia (YEAZ)
• Village Industry Service (VIS)
• Zambia Bureau of Standards (ZABS)
• National Council for Scientific Research (NCSR)
• Ministry of Labour and Social Security (Labour Productivity Department)
• Development Association (WEDAZ)
• Zambia Association (WEDAZ)
• Zambia Association of Chambers of Commerce and Industry (ZACCI) (Small Scale Development Unit)

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• Department of Technical Education and Vocational Training (DTEVT)
• United Nations Industrial Development Organization (UNIDO), Local Office
• International Labour Organization (ILO), Local Office

Apart from implementing various sub-components of the project, members of the committee exchange and share information on various aspects related to the MSE sector. The committee has been meeting once in a month. We intend to maintain this co-operation arrangement even when the project comes to an end.

Concluding Remarks

The Government of Zambia attaches great importance to the development of the micro and small scale business sector because of benefits associated with the development of this sector, including employment and income generation. As a result, the Government has been employing several instruments to intervene in this sector. Legislation and annual budgets are some of the major instruments that have been employed.

A number of institutions have been established to provide specialized services to the MSE sector. However the impact of these support institutions has been minimal largely due to weak linkages between these institutions and the MSE sector. The 1996 Small Enterprise Development Act provides a number of incentives to promote and strengthen these linkages.

The regulatory framework in place if implemented could constitute a big impediment to the development of the MSE sector. However, studies have shown that regulatory laws do not constitute a major threat to the MSE sector development. Lack of credit has been found to be the major constraints.

The co-ordination of support programmes has been done at various levels: at regional level through development co-ordinating committees.

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Specific projects which are intended to promote co-operation among support institutions have also implemented.

Policy formulation is a continuous process. What was suitable and appropriate a decade ago may be unsuitable now. This is even more important in a situation like ours where we are moving from a socialist command economy to a market oriented economy. A lot of adjustments in policies, legislation and institutional framework have to be done during the transitional period. Although our situation is unique, there is no need to reinvent the wheel in some areas. We shall learn and adapt some elements from other models.

References

O.E. Olsen, E. Melby and E. Nkole, Access and opportunities: The need for support among small and micro scale entrepreneurs in Zambia, Lusaka, 1993.

Small Enterprise Development Act, 1996, Government of Zambia, Lusaka, 1997.

Technical Report. Legal Constraints on Small Scale Industrial Development and Proposals for Reform in Zambia, United Nations Industrial Development Organization, Vienna, 1997.

Small Scale Industrial Development and Law Reform, the Critical Issues: Paper Presented by Kaye Turner to the Workshop on Legal Constraints for Small Scale Enterprise in Zambia, Lusaka, 1984.

Report on the first National Workshop on "Policy Directions and Strategies in the Third Republic for the Small Scale Sector in the 1990s", by Small Scale Industries Association of Zambia, Lusaka, 1992.