Small Business Agency In 20% Operating Expense Cap


Tribune Business Editor


The proposed Small Business Development Agency (SMEDA) can only allocate 20 per cent of its funding to cover operational expenses, freeing “no less than $8 million” per year to assisting Bahamian entrepreneurs.

This and other details are contained in a confidential report, obtained by Tribune Business, that details the ‘draft institutional framework’ for the agency that will play the key role in implementing the Small and Medium-Sized Enterprises Development Bill once it is passed into law.

The August 28 report, produced by Compete Caribbean’s Dr Jennifer Edwards, also highlights the absence of regulations and other concerns that need to be addressed prior to finalising SMEDA’s structure and the Bill’s passage through Parliament, which is anticipated in the New Year.

In particular, Dr Edwards’s report notes that the Bill continually refers to accompanying regulations “when in fact, none exist”.

“The Act [Bill] continually refers and points to the regulations to the Act for for details on key areas within the Act,” Dr Edwards wrote. “It is done in such a manner as though the regulations currently exist when, in fact, there are no such regulations.”

The regulations, which normally accompany all business regulatory-type legislation, are vital to giving Acts enforcement teeth. This indicates that much drafting work still remains to be done if SMEDA is to function properly.

Elsewhere, Dr Edwards also called for the Bahamas to bring the Bill into line with other Caribbean nations when it came to defining its small business sector.

“Given the number of single entrepreneurs, enterprises with very extremely small operations and turnovers, their uniqueness of such operations within the small and medium framework and the need for this size of operations to be given validity and recognition by funding institutions, the Bahamas may want to consider including the term ‘Micro’ in its title and definition of the sector,” Dr Edwards said.

“This is the regional recommendation by CARICOM, and all member states will be moving in this direction if they have not already done so.”

Dr Edwards then said the draft legislation allowed SMEDA’s Board to define a small and medium-sized enterprise (SME) “as they see fit from time to time”.

Suggesting that this may create issues when it came to the consistency of SMEDA’s policies and approach, she warned: “While this gives the Board of SMEDA flexibility to support any enterprise based on their criteria, it does not provide the stability of knowing who or what is an SME under any given Board leadership.

“Based on trends across the CARICOM region, governments are using scientific, small economy island-based criteria with consultation input from public and private sector stakeholders to define the SME sector and are including this definition in the legislation.

“The Bahamas may consider having a national definition for its SME sector that can be used by each Board of Directors during their tenure. Statistical information on the sector would, therefore, be consistent in any given year, making comparisons tracking the sector’s growth easier.”

Getting SMEDA’s structure and operating parameters right is critical to fostering the creation of a sustainable SME sector in the Bahamas, as it will function as a ‘one-stop shop’ through which hundreds of entrepreneurs and fledgling businesses will access capital and a wide range of support services.

Dr Edwards’ report recommended a “staggered tenure” for members of SMEDA’s Board to ensure continuity, while suggesting that the hotel and tourism industry be permanently represented on it given its economic importance and links to all sectors.

She also questioned whether the proposed Bill gave SMEDA the authority to “review the books” of an approved small business lender, and if their records had to be inspected if they were already approved by the agency.

“Can legislation control the questions that may be asked of a lending institution,” Dr Edwards asked.

Her report reveals that SMEDA will be established with 20 full-time staff, and divided into two “client-centred” operational divisions with three functions below them - funding and financial services; the Centre for Special Projects; and the National Resource and Cluster Coordination Centre.

It appears, though, that the Bill has been drafted to prevent SMEDA from becoming a bureaucratic monster that sucks up most of its funding to cover operational costs.

It will initially be capitalised by the Government, via the injection of a total $50 million in capital at intervals over a five-year period, and the goal is to direct 80 per cent of this financing - some $40 million - to the ‘front line’ where it is needed most.

“Of capitalisation funds allocated by government, there shall be no more than a 20:80 ratio for staff and administration costs to client services funding,” Dr Edwards wrote.

“This means that no more than $2 million of the capitalisation funds per year can be allocated to staff and SMEDA administration to facilitate the use of no less than $8 million directly on Bahamian SME and entrepreneurial development.”

SMEDA, though, will not be entirely free of political direction, as loan applications greater than $5 million must be approved by the responsible minister.

The agency, though, can raise its own financing via investments, charges for services or borrowing, with surplus funds deposited in SMEDA’s reserve fund for its own use. The goal being to ultimately decrease reliance on government financial support.

SMEDA’s nine-member Board will be private sector-led by persons with knowledge of SME development and entrepreneurship; financial markets; Family Island development and business clustering.

“The Board will be supported by sector/island advisory clusters to ensure the involvement of SMEs from across the country’s economic sectors, and from across the islands of the Bahamas and Family Islands in particular,” Dr Edwards said.

She added that it had been recommended that both the College of the Bahamas and the Clearing Banks Association be represented on the Board, with other members drawn from the various Chambers of Commerce.

SMEDA, unlike government agencies in the past, will not lend money directly to entrepreneurs. Instead, it will provide loan guarantees for projects deemed “commercially viable”, and can also provide direct loans to financial institutions for on-lending to small businesses. It will even have the ability to purchase loans to SMEs.

Dr Edwards added that as a tax and licence exempt entity that received taxpayer funding, “clear guiding principles” for SMEDA were “of paramount importance”.

“The development of SMEDA addresses the policy position for a co-ordinated approach to SME development which, in the Bahamas, is impacted and supported by several public, private and non-governmental sector agencies,” Dr Edwards said.

“As a one-stop shop SME development and co-ordination mechanism, SMEDA will operate within the overarching national goal for a viable, profitable and competitive SME sector that contributes to economic growth and sustainable development in the Bahamas.”


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