SMEs could help boost downstream sector
Yousif Saeed Lootah shares his views on the importance of small, niche firms in the GCC's downstream sector
Europe’s downstream sector currently employs around 1 million people in 30,000 different companies, 95% of which are designated as Small or Medium sized Entities (SMEs). What are the advantages of having so many SME’s involved in the sector?
In any industry, SMEs can do a lot in helping bolster a supply chain, especially when you’re talking about local SMEs. Only then do you start depending less on importing goods from the outside.
The contribution of SMEs in the downstream sector is significant. We can depend on these local companies to help us and at the same time take the SMEs to a level that is internationally competitive.
Once they are competitive, according to the highest standards, they are able to venture into any other oil and gas related-work, whether outside or within the country or wider GCC region.
When SMEs become developed and have conquered the local market, I think the natural course that they would take is to branch out and do business elsewhere in other geographies.
The Middle East’s downstream sector currently employs roughly the same amount of people as Europe, but the vast majority work for the regions mega-sized companies. How could the Middle East benefit from cultivating agile, specifically focussed SMEs?
These small business entities form the backbone of most of the world’s largest economies. In mature markets like the US and the EU, SMEs contribute 45% and 67% of GDP, respectively. Public entities and large conglomerates define the business environment in oil-exporting countries in the Middle East. In the past few years, however, governments in the oil-rich Gulf have prioritised private-sector development.
Reforms have been enacted to encourage entrepreneurship in the SMEs. SMEs are important to the region for two key reasons: job creation for a young population and private sector development in order to reduce economic reliance on the oil sector (in Gulf countries). The role of SMEs in the Middle East will grow in importance over the next few years as markets evolve and become more competitive.
What difficulties do you foresee in trying to encourage more SMEs to participate in the Middle East’s downstream sector?
The main difficulty for the growth of SMEs in the Middle East is unfavorable business policies. Government intervention can compensate for market failures that have hindered the development of the SME sector. New businesses need financing, technical know-how, and better regulatory environments.
Falling exports to the US and the EU have hurt economies due to weak global economic conditions and this has affected SMEs in the Middle East drastically. In such circumstances the SMEs are at a disadvantage relative to larger firms because they do not benefit from economies of scale. Since banks are more reluctant to lend to SMEs, contracts with SMEs are often the first to be cancelled.
Financial institutions are generally reluctant to lend to SMEs, as they are classified as riskier.
Even in a business-as-usual situation, SMEs are at a disadvantage when it comes to accessing credit.