The Small Aggregation Initiative (SAI)

By Clive M. Siachiyako
Zambia mostly depends on micro, small and medium enterprises (SMEs) in driving its economy forward. However, most of these SMEs in the past received lukewarm support from government until now. Nevertheless, a few SMEs are thriving and greatly contribute to economic growth, employment creation and national development in combating poverty. In order to facilitate industrial development through unlocking the potential of its SME sector, Zambia is learning from Southern Asian countries (especially Malaysia). 

Malaysia and Zambia were at the same level of economic development in the 1960s and 70s in terms of per capita incomes, but Zambia has remained behind economically and its manufacturing sector has not faired well as if both countries did not have similar initial endowments. It therefore becomes imperative that Zambia learn from such countries on how they managed to take-off economically with a focus on SME development.

Training (education), research and development, market availability and technological advancement through establishment of industrial linkages as well as the formation of Small Aggregate Initiative (SAI) were some of the outstanding strategies Zambia identified that could be used as a “key” to unlock SMEs’ potential as the country strives to meet some national and United Nations targets such as Millennium Development Goals in particular halving its poverty levels by 2015 and releasing its vision of becoming a middle income by 2030.

The Small Aggregation Initiative (SAI) is a Malaysian initiative that was proposed to Zambia for implementation through the Triangle of Hope initiative to bolster economic growth through SMEs. SMEs wish to expand but they face numerous constraints such as lack of credit among others. However, even when they get funds, the new machinery and equipment they acquire sometimes are “too productive” for limited needs. That is, they may have a market for 100 pieces but the new machinery now produces 500 pieces. In such a situation the government or the private sector may come in to help. How do they do it? By selecting an industry group that has similar needs of machinery, but where the end products are different, for example cupboards kitchen furniture, office furniture and the like, the initial machinery will be similar - sawing, planning or shaping, only the end product/finishing section will be different.

Therefore, the government or other coordinators select within the industry group, manufacturers of non-competing products and bring them together to form a joint venture company for expansion or modernisation purposes. The rationale of SAI is that if three companies are brought together - each can take 30% equity and the 10% held by the coordinators (government or the private sector). By merging the SMEs together, they acquire the strength of the medium scale industrialist and enjoy larger scale production advantages –purchase modern machinery or equipment and can better negotiate for loans from banks, rent bigger space or design joint marketing. If foreign companies can form joint ventures with local investors for profit - why can’t locals do the same?

Funds for Small and Medium Industries (Loans)
The small aggregate initiative also looks at ways of providing loans to SMEs. The initiative thus promotes collaboration with the Citizen Economic Empowerment Commission (CEEC) and other SME funding agencies to facilitate the acquisition of loans by SMEs. This initiative is aimed at promoting SME activities in export and domestic oriented sectors and also to help stimulate growth of SMEs.

Because the world is currently characterised by immense market competition, SAI initiated the Enterprise 50 Award. The Enterprise 50 was borne of a need to recognise such locally established businesses especially that in the age of intense competition, local companies (SMEs inclusive) are faced with tremendous challenges to be competitive globally. The scheme is to enable SMEs position themselves confidently for the future, especially that the world market demands adjustment to the dynamic changes in the market place survive.

Zambia’s Lessons from the Southeast Asian Experience
In order to implement the initiatives that were undertaken in Southeast Asian countries, Zambia needed some basic preconditions for economic take-off as evidenced in the Southeast Asian countries prior to their economic miracle. Preconditions such as strong and effective institutions, physical/social infrastructure, and stable political and macroeconomic environment would create the right business environment for private sector to flourish be it large or small. Why most Asian countries succeeded in their economic development was because they had an educated work force necessary for adapting the modern technology. This entails that unless the entrepreneurs are trained or rather educated no matter how the technology may be brought into the country say by multi national corporations, it will hardly trickle down to the SMEs. Chisala 2006 argues that upgrading the vocational centres and signing training agreements between the SMEs and the vocational centres coupled with increased investments in research and development like was the case in Malaysia would go a long way in improving the skills and technological transfer to the Zambian SMEs.

Zambia’s national industrial policy goal is to develop a competitive, export-led manufacturing sector that contributes 20% of gross domestic product by 2015.  This is a step in the right direction, and thus Zambia is implementing the multi-facility economic zone (MFEZ) much more similar to the export processing zones (EPZs) that Malaysia and other Southeast Asian countries implemented during their industrialisation process. However, the EPZs in Malaysia were not sustainable due to the fact that the linkages between EPZs and the domestic firms were insignificant or rather weak and hence Malaysia embarked on Promotions and Investments Act (1986) that emphasised on inter-industry linkages through SMEs development. Likewise, Zambia may consider introducing deliberate policies that will ensure linkages between the MFEZ firms and the SMEs which currently is not in place. The ZDA Act thus need to include a clause that would compel the MFEZ firms to acquire a certain percentage of the raw materials and intermediate goods from the domestic market preferably the SMEs without violating the world trade organisation (WTO) rules on raw content requirements.

The underlying principle of SAI is that developing the SME sector through linkages to a great extent would sustain the success of the MFEZ in Zambia especially that Zambia’s foreign direct investment outlook seems to be very bright. For instance, for the first time, since the late 1980s, Zambia had a motor assembly industry launched by TATA Zambia in 2005. TATA Zambia spent US$3 million to revive the motor assembly plant, which is the only one in the country now that Rover Zambia in Ndola and Fiat in Livingstone ceased to assemble vehicles sometime back. In addition, TATA international through its subsidiary, TATA Zambia, recently bought Kabwe Tannery and signed a memorandum of understanding with the Zambia Development Agency meant to broker business linkages for small-scale farmers, abattoirs and slaughter-houses to supply hides to the TATA Tannery.

Similar linkages of local industries or rather the SMEs in other areas of the economy can be developed with other large companies in various industries to enhance and increase wealth and job creation in the country. In this way TATA (anchor firm) would transfer some skills and technology to SMEs and other local firms so that these firms produce components of acceptable international standards. For example, the garment manufacturing SMEs could be supplying materials to TATA car assembly for making seats whilst others in the metal fabrication could provide bolts and nuts, among others. Furthermore, a Malaysian cellular phone manufacturing firm M-Mobile in partnership with a local company Melcome established a mobile phone assembly plant in Lusaka at a total investment out lay of US$3 million. This operation will be the first of its kind in Zambia hence capacity will need to be built for SMEs if they are to become vendors to this mobile industry.

With such a mix of interventions that focus on specific sub-groups in the SME sector envisaged in SAI, Zambia’s long-term development objective, articulated in the National Vision 2030, of becoming a prosperous middle income country by the year 2030 would be fruitful. The SAI programme would thus contribute to this objective, in particular by stimulating investment, entrepreneurship and employment creation within the SME sector and through pro-poor business models.

References
http://africanpress.wordpress.com/2007/10/31/14-billion-in-fresh-foreign-direct-investment-fdi/
Bigsten, Arne and Soderbom, Mans (2005) What Have We Learned from a Decade of
Manufacturing Enterprise Surveys in Africa? World Bank Policy Research Working
Paper 3798
Buranathanung, Noppadol (1997) “Rationalization of Japan-based multinational enterprises' automobile components production in ASEAN” Chulalongkorn Journal of Economics, Vol. 9 (3) Pp 293-356
Chisala, Chibwe (2006) An Empirical Analysis of the Determinants of FDI flows to Zambia: A Stochastic Frontier Approach, GRIPS Advanced Development Research Paper.