Catalyst in Sri Lanka

SMSEs in Sri Lanka

Download the PDF - Analysis of Social Sector SMEs in Sri Lanka

SANASA, a microfinance organization in Sri Lanka, and I recently conducted an investigation of ‘Small and Medium Social Enterprises’ (SMSEs). We found a huge number of dynamic enterprises providing social services to medium and lower income people. These are already the most important provider of vital services to the poor, but are largely ignored by development agencies and social investors.

The investigation was conducted in Ambalantota, a poor town on the Tsunami impacted coast of South East Sri Lanka. We saw ‘SMSEs’ in both urban and rural areas, such as:

small pharmacies offering advice and medicines for $1 a visit, or less to poor customers
independent agricultural equipment dealers selling new technology to poor farmers, reducing the cost of agricultural mechanization by 50%
independent financially sustainable microfinance organizations of 100 – 200 members providing savings and credit to very small shops, home-businesses and farmers
rice mills processing the crops of poor farmers, determining the prices that thousands of farmers get for their year’s labour
telecommunications and internet boutiques in rural areas, using new technologies to provide connectivity, information and advice to farming families
community owned water-supply companies giving villages access to clean water for the first time

These SMSEs were set up by independent businessmen, reacting to the needs of the local community. They were effective because they were independent, locally focused and committed. Many were owned by cooperatives or communities and most were set up with social objectives in mind. In most sectors, they were more effective as they were small.

Sunil Jayanthe, the owner of a small rice
mill in Ambalantota, Sri Lanka

But they could be stronger if they received external support, both technical assistance and financial support. This is best illustrated by an example. There are community-owned water supply companies in many rural villages in Sri Lanka, piping water from a well to houses and collecting fees from each household. These companies need engineering advice on how to repair and develop their systems and financial assistance to pay for improvements. But at the moment there are no institutions to provide this assistance. As a follow-up to our investigation, we are creating a pilot ‘network institution’ which will provide an engineer to these companies and channel funds from social investors.

Creating networks overcomes two problems facing social investors. Firstly, a ‘network’ institution allows a social investor to work with a number of different projects at once. SMSEs are small and local, focused on their local market, so they are hard to find. They often need complex financial products, but their loan needs are small, all of which leads to high transaction costs. Secondly, sector expertise and local knowledge is needed to identify successful projects. Expertise is important as SMSEs operate in a complex market. Distribution systems are expensive, decision making is communal, customers are (understandably) wary yet innovation can completely change a business’s economics. When designed well, a program can bring together technical assistance, grants and investment that creates explosive growth in a sector.

The water sector is just one example – we saw similar opportunities in other sectors. More details are given in the full-length version of this article at http://www.newthinking.org.uk/smse/Page%20outline.htm, but the following table gives a taste of the possible schemes.

Objective	SMSEs	Technical assistance & grant needs	Financial needs
Provide water to rural communities	Community based water supply companies	Engineer to solve technical problems Advice on sanitation systems	Loan funding for capital investment
Improve primary education in rural areas	Private schools	Curriculum development Teacher training Quality audits	Loan funding for new schools
Improve children’s immunization, anti-natal care	Pharmacies	Training in injections and simple medical procedures Subsidies for medicine	Loan funds to set up rural outlets
Support entrepreneurs in rural areas	Microfinance organizations	Enterprise development training for borrowers IT systems to increase productivity of MFI	Funds for on-lending Weather insurance, allowing lending to farmers
Increase the income of poor farmers	Rice mills	Promotion of market information to reduce price fluctuation	Funds to consolidate sub-scale enterprises

Designing a package of assistance is not simple, due to the size of the enterprises and the complexity of the market. But considerable impact can be achieved if investors and funders:

work with existing SMSEs, rather than trying to create new institutions
work with local banks and networks to reduce transaction costs
build-up expertise in a sector – preferably one that needs capital and is facing rapid change
take a long-term view be willing to fund experiments
measure success, so that it is clear when it would be best to exit a sector that is not meeting expectations

Download the PDF - Analysis of Social Sector SMEs in Sri Lanka

Gus Poston
gus.poston@gmail.com
www.newthinking.org.uk

The full-length version of this article can be found at http://www.newthinking.org.uk/smse/Page%20outline.htm