Innovations in banking : the Gujarat experiments

DOMESTIC FINANCE STUDIES NO.51 INNOVATIONS IN BANKING: THE GUJARAT EXPERIMENTS By V.G. PATEL The views presented in this paper are solely thcse of the author and do not necessarily reflect the official opinions of the World Bank or its affiliates. August 1978 Public and Private Finance Division Development Economics Department Development Policy Staff CONTENTS Page INTRODUCTION 1.0 INNOVATIONS IN INDUSTRIAL FINANCE 3 1.1 Anti-New Entrepreneur Pre-Innovation Banking 3 1.2 New State Investment Company 4 1.3 The Technicians' Scheme 5 1.4 Emergence of New Entrepreneurs' Scheme 12 1.5 Achievements of TS and NES 15 2.0 IDENTIFICATION AND DEVELOPMENT OF NEW ENTREPRENEURS 15 2.1 Significance of the Gujarat Model 16 2.2 The Programm,,e Package 18, 2.3 Organisation and Administrative Flexibility 26 2.4 Post Training Support 27 2.5 The Cost of Training 28 2.6 Performance Analysis of EDP Units 29 3.0 THE SHEDS PROGRAMME FOR INFRASTRUCTURE 32 3.1 Features of GIDC Programme 33 3.2 What is Innovative? 35 3.3 Assessing the Effectiveness 38 3.4 Role of Organisational Set-up 40 4.0 PERFORMANCE EVALUATION 47 4.1 Profiles of New Entrepreneurs 48 4.2 The Project Profile and Employment Contributioft 61 4.3 Test of Means of Finance Hypothesis 64 4.4 Financial Performance and the Health of the Units 68 4.5 Problems of Small Enterprises 75 5.0 CONCLUSIONS AND LESSONS 80 INTRODUCTION It is increasingly recognised that the capital market imperfections of the L.D.Cs represent an important factor retarding their economic develop- ment. Equally, it is recognised that carefully conceived change and innova- tion in the financial sector of these countries can exert a positive influence on development by removing some of these imperfections. The present paper reports the results of an intensive study of one important example of financial change and innovation, namely that concerned with the provision of finance for small-scale industry in the Gujarat State of India. The study, by the Chief Economic Adviser of the Gujarat Industrial Development Corporation, was initiated by the Private and Public Finance Division of the World Bank, and accords with the Division's interest in reach- ing a better understanding of the role of financial innovation in the develop- ment process. This paper is the condensed version of a more detailed report prepared for the Bank. The Gujarat experiment is unusual in that it carefully integrated three, often separate, elements in the provision of assistance to small-scale industry, namely (i), the provision of finance, (ii), the identification and training of potential new entrepreneurs, and (iii), the provision of infra- structural facilities. The author of the paper provides a detailed description of the arrangements concerning each of these three classes of assistance. Then, by use of a detailed survey amongst those units receiving assistance, as well as those financed through conventional channels, he derives certain important conclusions about the developmental role discharged by the new institutions created under the experiment. While the experiment encountered many difficul- ties in its early stages, it nevertheless provides some important lessons for similar operations in other countries and these emerge very clearly from Mr. Patel's analysis and conclusions. Alan R. Roe June 20, 1978 INNOVATIONS IN BANKING: THE GUJARAT EXPERIMENTS By V. G. Patel* Among the critical factors limiting economic growth in developing countries, abilities to save and invest have often been considered two fore- most constraints. In industrial development these scarcities have meant insufficient funds to set up ventures (financial constraint on entrepreneurs). They have been compounded by a lack of entrepreneurship to perceive opportuni- 1/ ties, organise resources to set-up and successfully run industrial units. Even where financial resources are adequate, indigenous entrepreneurs are not forthcoming. Industrial credit does not reach the potentially needy entre- preneurs due to restrictive norms, policies and procedures of conventional lending institutions. Emerging entrepreneurship is not cultivated and nurtured. Some industrial activity is then generated by a few established industrial groups and families, perpetuating the imbalanced distribution of industrial ownership. If these scarcities are to be alleviated and the pro- cess of indigenous industrial enterprise formation accelerated, imaginative credit policies and development programmes are required, backed up by sound institutional support. This has been fairly well achieved in India, in the State of Gujarat. *Dr. Patel is the Chief Economic Adviser of the Gujarat Industrial Development Corporation in the State of Gujarat, India. 1/ See Albert 0. Hirschman, The Strategy of Economic Development, Yale Uni- versity Press, (New Haven, 1958) P. 35. Also'RollisB. Ch6nery and Alan M. Strout, "Foreign Assistance and Econoniic'Development, AID, Discussion Paper No.7 (Revised), Dept. of State, (Washington, D.C., June 1965), P. 7. -2- In financing industrial ventures of new entrepreneurs, identifying and developing potential entrepreneurs and providing infrastructure for accelerated small and medium-scale industry development, three Gujarat schemes have broken new ground. The constraint of finance facing new entre- preneurs has been fairly well removed by the unconventional Technicians' Scheme of providing loans upto 100% of the project cost by a specially set- up State Investment Company. To identify and develop potential local indus- trial entrepreneurs, a comprehensive Entrepreneurship Development Programme has been started, questioning the earstwhile belief that "entrepreneurs are born not made". To facilitate and expedite implementation of their projects, a specialised infrastructure agency has provided ready factory buildings with essential facilities on liberal terms at multiple points in the State. These schemes have made a significant impact on the banking policies for small- scale industries and (self) employment generation programmes of the Government of India. Their influence is spreading to several Asian and African develop- ing countries embarking upon small enterprise development programmes through indigenous entrepreneurship. This paper presents in a nutshell, the findings of a World Bank sponsored comprehensive research study of the above three Gujarat innovations. The study for the Bank, "Innovations in Banking: The Gujarat Experiments", covered the following schemes: (i) the Technicians and New Entrepreneurs scheme of finance (TS/NES), (ii) the Entrepreneurship'Development Programme (EDP) of training and developing new entrepreneurs; and (iii) the Sheds 1/ The research project was initiated in the Private and Public Finance Division of the World Bank. The Gujarat Study was assigned to the author as a consultancy assignment and was completed in May, 1977. -3- construction programme for industrial infrastructure. The main objective behind the study was to assess the effectiveness of such innovative policies and programmes in new entrepreneurship formation, small and medium enterprise development and productive employment generation for the benefit of develop- ing countries and industrial development agencies. Each innovation was documented and analysed in four parts: (i) Pre-innovation conditions and their restraining impact on industrial/entrepreneurial growth, (ii) process of formation and introduction of the innovations, (iii) content of the programme; and (iv) performance evaluation and lessons for wider applications. 1.1 Anti-New Entrepreneur Pre-Innovation Banking Until the late Fifties the only source of industrial finance for encrepreneurs in India was commercial banks. Conservative, commercial and cautious in their approach, their policies restricted new enterprise formation. The banks preferred financing short-term rather than long-term. Accordingly, 1/ lending was preferred for commercial (commodity) loans. Close to 70% of the industrial loans were for short-term working funds rather than long-term fixed assets financing. This assured quicker turnover, higher return and less risk against mortgaged goods. When industrial development picked up in the Sixties, the bankers limited credit mainly to established industrialists and merchants for existing projects where success was assured. A sample study of 53 projects financed by three leading banks and the Gujarat State Financial Corporatiion (GSFC) in the pre-innovation (1965-68) period showed that: (i) more than two-thirds of industrial loans were given by these institutions for diversification and 1/ "Purposewise Survey of Bank Advances", Reserve Bank of India Bulletin, December, 1968. -4- expansion of established entrepreneurs. The limited (30%) new loans had been given mainly to merchants and traders with adequate financial resources as only they could offer the collateral and the high return which the banks expected, (ii) the debt-equity ratio normally required was 1:1 so that the entrepreneur's financial stake remained high, thereby reducing the banker's risk, (iii) only well established projects which had high returns and a short pay-back period were financed. For example, 62% of the projects in the sample study had no direct competition in the State. Net profit to sales ratio was between 16 and 20% for 20% of the units and 11 to 15% for 36%. For 36% units, return over promoter's investment was over 50%. As a result 75% of the units 1/ were in a position to rtpay loans in 3-4 years. . Under these restrictive financial policies, new entrepreneurs, technocrats in industrial units, other employees and enterprising technical and business graduates were prevented from entering into industry. For they were first timers and lacked enough internal funds and tangible assets to secure matching funds from the existing financial institutions. 1.2 New State Investment Company Since the banks were in the business of sophisticated money lending and not development banking,in 1968 the State Government of Gujarat decided to meet the institutional resistance to the financing of new entrepreneurs by setting up a separate State investment company, the Gujarat Industrial Invest- ment Corporation Ltd.. (GIIC). It was a public limited company with (authorised) share capital of Rs. 100 million (approximately $11 million)*and paid up capital 2/ of Rs. 13.5 ($1.5 million) million. Its scope of activities included promotion 1/ The sample study was supplemented by interviews with leading bankers and credit policy experts at the time to assess the rationale of the conven- tional banking policies. 2/ All conversions between rupee and dollar values are at the approximate rate of Rs. 9 = $1, prevailing at the time of writing. -5- and financing of any industrial development activity in the State by providing loans, underwriting shares, participating in equity and investing in any of the proposed activities. It was to develop non-traditional new industries and un- dertake those functions which an existing financial institution would not or could not handle. It was to be a development finance institution which could afford lower returns and take higher risks for achieving specific industrial policy objectives. Its financing role extended to the developmental activi- ties of identifying viable opportunities, preparing project reports, training and developing new entrepreneurs. Its autonomy, especially from the national banking and credit policy structure,,gave it the policy making flexibility for innovations and for breaking the stranglehold of restrictive conventional norms and concepts of industrial finance. Its success depended upon the dynamism and imagination with which it could break new ground. For this it was provided a strong and imaginative 1/ leadership at the top. 1.3 The Technicians' Scheme In 1969 the unconventional Technicians' Scheme (TS) of finance was introduced by the GIIC. Any technically qualified or experienced person with a viable project and an ability to set-up and run the proposed industrial enterprise was offered loan finance upto 100% of the fixed assets costs, work- 2/ ing capital margin and preliminary and pre-operative expenses. The project 1/ The study identifies the crucial role of appropriate leadership in such an organisation for effectively meeting the hindrances and blocks in intro- ducing new programmes and policies. Without it, the institution alone is likely to become another routine financing agency. 2/ The commercial banks which were the main source of working finance normally loaned upto 70% of the requirement mainly on hypothecation of raw materials and finished goods. The balance was the margin to be met by GIIC if the entrepreneur could not contribute part or all of it. -6- size eligible under the Scheme was normally upto Rs. 200,000 for a single entre- preneur and Rs. 300,000 for a partnership with a flexibility going up to Rs. 500,000 for techno-economic considerations. The loan was offered at the follow- ing attractive terms: (i) It was a 10 year loan with a moratorium on repayment for the first three years and repayment in the remaining 7 years in annual instalments. (ii) Interest at 4-1/2% (50% subsidy) for the first 3 years and 9% for the subsequent 7 years. (iii) No collateral or third party guarantee was essential. Assets created with the loaned amount were to be mortgaged to the Corporation. 1.3.1 Eligibility Criteria: Any entrepreneur possessing technical competence through a degree/ diploma or work experience was eligible. He should be a new entrepreneur setting up his own industry for the first time. He must also be shown to be unable to secure funds from conventional finaeial agencies, and must possess high integrity and good character. The proposed project must be technically feasible and economically viable. The innovativeness of the Scheme was found in its following features: (i) Needs based financing of an entrepreneur leading to liberal loans, in many cases at zero margins. (ii) Reliance on the man behind the project, his entrepreneurial qualities and managerial competence rather than the extent of his financial contribution in the project. (iii) An unconventional interpretation of the entrepreneur's stake in the venture in contrast to the established concepts of promoter's capital, collateral and tangible securities. -7- (iv) Financing of working capital margin by the State agency, a link up with banks for working funds and with GIDC for factory buildings. 1.3.2, Rationale and Assumptions: Why Technicians?: Technicians, craftsmen and artisans possessed production know-how based on industrial experience. Technical employees in existing factories developed manufacturing skills, were exposed to product opportunities and developed the motivation to be self-employed so as to pro- duce a better economic future for themselves and remove job frustrations. Technicians, therefore, were considered a large potential source of new industrial entrepreneurs. They had previously been unable to set up their own units due to meagre financial resources to meet the bank margins and their inability to offer tangible securities against the relatively higher lisk of financing them. In addition, many young engineers and technical graduates with enterprise and innovative ideas were unable to find jobs. Some of these had the capacity and desire to be self-employed in industry if the finance con- straint was removed. Why 100% financing?: These potential techno-entrepreneurs came from low income, middle-class occupational and community backgrounds. Fresh engine- ers, machine operators, turners, fitters, supervisors, sales engineers and works managers, with an average monthly income below Rs. 1,000 were not normally in a position to contribute even 10% of a small enterprise project cost, let alone the normal banking margins, as seen from the example ih Table 1. Not only did fixed assets (land, buildings and machinery) require liberal financ- ing, but the working capital margin, and for some, even the preliminary and pre-operative expenses had to be financed. Needs based (upto 100%) finance was considered essential if the enterprise, industrial skills and project ideas of TABLE: 1 Comparative Means of Finance Under Conventional Banking Vs. Innovative Technicians Scheme Project Costs Technicians Scheme Financing Bank Financing Components GIDC GIIC Bank Entrepre- Total Bank Entrepre- Total (Rupees) neurs neurs Land and 60,000 - - - 60,000 42,000 18,000 60,000 Building (100%) (70%) (30%) Machinery and 1,55,000 - - 1,55,000 93,000 62,000 1,55,000 Equipment - (100%) (60%) (40%) Working Capital - 20,000 55,000 - 75,000 55,000 20,000 75,000 (25%) (75%) (75%) (25%) Preliminary 5,000 - 5,000 10,000 - 10,000 10,000 and Preoperative (50%) (50%) (100%) Expenses Total (Rs.) 60,000 1,80,000 55,000 5,000 3,000,000 1,90,000 1,10,000 3,00,000 (20%) (60%) (18%) (8%) (100%) (63%) (37%) (100%) -9- such potential entrepreneurs were to be converted into industrial units. Why Liberal Terms?: A repayment period of 5 to 7 years common under the conventional schemes would have been too short for the new entrepreneurs, who needed a longer moratorium for setting up the project, finding adequate 1/ markets, reaching break even and generate internal -resources for repayment. Why small size projects only?: These new entrepreneurs were advised to begin with smaller, manageable projects consistent with their limited risk- taking capacity, financial background and business experience, especially when a single man was to carry the multiple management responsibilities. At the time, a project with a fixed investment of Rs. 200,000 was large enough to set up an organised small enterprise employing upto 20 workers. Entrepreneur's stake: The promoters of the Scheme maintained that the decision to leave the security of a job and venture into the uncertainty of ownership was a high risk that the new entrepreneur was taking. Failure to such entrepreneurs would have proved not only economically but socially disas- trous in their traditional communities. For them this was a once-in-a-life-time opportunity to break away from conventional roles and frustrating, life-long employment. Together, these considerations made the entrepreneur's non- tangible stake very high and ensured his commitment to the project and his motivation to succeed and repay the loans. 1.3.3 Project viability and appraisals: The needs based finance was a loan, not a grant. It was to be made available to competent persons with viable projects which generated production, 1/, It normally took at least 24 months for an engineering unit to reach break- even after the loan was disbursed and 18 months after production commenced. - 10 - income and employment and had the capacity to repay the borrowed (public) money. A sound entrepreneur and a sound project were the key securities against the liberal assistance. A project report had to be submitted prior to loan sanc- tion or rejection. To assess both the entrepreneurial competence of the appli- cant and the project itself, experienced industrial experts with management background were appointed exclusively for the new scheme by GIIC. A market research cell was created to assess the demand for products, degree of compe- tition, raw materials position and performance of existing units in the pro- posed line. Integrated technical, financial and entrepreneurial appraisal by the industry expert was the basis on which loan decisions were taken. Industry experience, understanding of the proposed business, motivation and alternate 1/ plans of the entrepreneurs weighed high in these assessments. An attempt was made, however, to keep the procedures and formalities few and simple so as not to prove too off-putting to potential new entrepreneurs. Unlike the conven- tional financial agencies, the new organisation developed its own 'culture' built on trust in the entrepreneur and a commitment to assist him on technical and commercial matters as an essential service from a development bank. 1.3.4 Ready Sheds for Technicians: The Gujarat Industrial Development Corporation (GIDC), the State's specialised infrastructure agency, established in 1968, supplemented the new finance scheme by providing a ready factory shed with basic facilities of power, water, drainage, communications, etc. This was under its own Technicians' Scheme for industrial estates, which was introduced in GIDC,'simultaneously to 1/ This was in sharp contrast with the Banker's mode of assessment where adequate tangible security and business reputation of the promoter made rigorous project scrutiny less important. They also lacked adequate technical expertise for comprehensive project appraisals. - 11 - that of GIIC, and facilitated by the common chairmanship of the two Corpora- 1/ tions. Accordingly, any technician sanctioned loan by GIIC was automatically givettn ready shed,rangingin size from 80Q teA.000 sq.ft-and in value from.Rs. 25,0.0- to Rs. 100,000 in any of the industrial estates on the same liberal hire pur- 2/ chase terms as in the scheme of loan finance. Since GIDC's allotment of a shed on hire-purchase implied a loan for land and building, total loan finance which a techno-entrepreneur could avail of under the scheme went up to Rs. 2,75,000 for an individual and Rs. 3,75,000 for a partnership, taking an average medium size shed price of Rs. 75,000. 1.3.5 Initial Performance: In the very first year of the new scheme, namely 1969, 364 projects were sanctioned with a loan amount of Rs. 24 million. In the first 3 years, 647 projects were financed with a loan amount of Rs. 47.75 million. By the end of 1973-74, when the scheme was expanded to cover non-technicians also, a total of 762 projects by technician entrepreneurs had been sanctioned with loans totalling Rs. 58.96 million. A large number of technicians and engine- ers possessing industrial experience in factories at various levels set up projects ranging in investment from Rs. 30,000 for a small repair workshop to Rs. 300,000 for chemical plants. The industry mix was as diverse as that found in medium and larger sectors. For example, 185 projects were in machinery manufacturing (31.6%), 68 in metal projects (11.6%), 62 in chemicals (10.6%), 53 in electrical machinery and instruments manufacturing (9.11%), 39 in textiles 1/ The common leadership at the top also ensured smoother coordination among the finance and infrastructure agencies, reducing a number of formalities and procedural hardships for the new entrepreneurs. 2/ The only major change was an extended 12 year repayment period to reduce the burden of (unproductive) land and building investment. -12- (6.7%) and 27 in paper and cement products (6.0%). The Corporation simultaneously moved to consolidate the gains by strengthening the project appraisal staff and improving the procedures of loan sanction, disbursement and follow-up, including the arrangement of work- ing capital from (still hesitant) banks, purchasing machinery and arranging 1/ factory premises for the entrepreneur. 1.4 Emergence of New Entrepreneurs' Scheme In 1973 an internal review of the Technicians Scheme was carried out by the Corporation. While the performance of the technicians was considered encouraging, those possessing commercial experience or technicians joining hands with (first timer) non-technicians were found to be doing better. The trust placed in the competence and integrity of the new resourceless entre- 2/ preneurs found strong justification in the Review. To further expand the sources of new entrepreneurs, the Corporations decided to extend the scheme to non-technicians also, especially employees with industrial experience on sales, management and commercial fields and business graduates. Accordingly the Technicians' Scheme was expanded into the New Entrepreneur Scheme (NES) for all new entrepreneurs which remains in operation until the present. 1.4.1 Modifications under NES: The eligibility conditioti have remained the same under the amended 1/ Though upto 100% amount was sanctioned for plant and machinery, funds were not directly released to the entrepreneur. Payment was directly made by the Corporation to the supplier of machinery to avoid over- invoicing and misuse of funds. 2/ Review of Technicians Scheme, March 1973, GIIC,Ahmedabad (unpublished). The findings of the Review have been summarised in the original study. The performance of the Technicians at the time was assessed by the follow-up managers on the basis of their inspection visits to the units. Unit-wise financial analysis was not carried out as the time-span of production was rather short. - 13 - scheme. The extent of financial assistance and terms of repayment have, how- ever, changed under a modified organisational and resource mobilization arrange- ment. With the Technicians' Scheme, the major burden of financing the projects fell upon GIIC's own resources. With low margins, the funds requirement was substantial. GIIC had to raise financial resources from the State Government through loans and equity contributions and from open market borrowings. The extent of fund availability depended in turn upon the financial position of the State Government. Against the advantage of flexibility in policy making, GIIC had lost the benefit of refinance available to financial institutions connected with the Industrial Development Bank of India (IDBI). The State, on the other hand, began to find it difficult to meet the growing demands of the various 1/ development agencies. However, another State financial agency, the Gujarat State Financial Corporation (GSFC) was eligible for refinance. Taking advantage of the close coordination developed among the State industrial corporations, in 1970, GIIC and GSFC decided to jointly finance the new entrepreneurs. 85% of the fixed assets financing, the maximum under the IDBI policies, was now taken over by the GSFC, while the margin for fixed assets and working capital was met by the entrepreneur and GIIC. Since land and building are also part of the pro- ject cost, this arrangement also took care of the funds problem of GIDC which 1/ Under the refinance arrangement, the IDBI, a subsidiary of the Reserve Bank of India,. refinanced up'to 75% the amount sanctioned by. the in- stitutions associated with it. This arrangement replenished the loanable funds supply for the eligible agencies. In the early years of the scheme, for GIIC, open market borrowings offered a continuous large source of low cost funds. Subsequently, however, the Reserve Bank of India introduced State-wise quota/allocation system for such borrowings. The State there- fore was faced with the problem of managing within the ceiling. -14- provides ready factory sheds with infrastructure. Financing of the projects exclusively by loans under the Technicians' Scheme created a heavy interest burden, and a lack of equity reduced the cush- ion available to the enterprise. GIIC's margin amount was now given as-a soft loan (3-1/2% interest) with a long enough moratorium, making it in effect an equity or seed capital loan. The terms of financing under NES became as follows: (i) Upto 85% of the fixed assets loan from GSFC is to be repaid in 10 years with a 3 years moratorium including 18 months moratorium on interest. The rate of interest is 9% as for all small scale enterprises. (ii) The seed capital loan from GIIC for the margin bears a 3-1/2% rate of interest and carries a 7 year moratorium. The loan is to be repaid in 3 annual installments there- after. 1.4.2 The Lead Institution: The multiplicity of agencies could have become a problem for entre- preneurs causing delays in procedures and double scrutiny of applications. Though the State Financial Corporation contributes the largest amount in a project, an important institutional decision has been taken in continuing GIIC (the minor partner) as the lead agency to implement the Scheme. GIIC, it is explained, had acquired the necessary experience in appraising the new entrepreneurs and their projects and had also developed the required organi- sational 'culture' for the unconventional financing. A single appraisal of 1/ Instead of giving shed on a direct hire-purchase arrangement to the new entrepreneurs, now GSFC, GIIC and the entrepreneur pay the full amount to GIDC if a shed in the industrial estate is taken. - 15 - the entrepreneur and his project is made by one expert and a Joint Appraisal Committee of both the Corporations gives the final recommendation. 1.5 Achievements of TS and NES In the 3 years of the New Entrepreneurs Scheme operations (1973-74 to 1975-76), 368 new projects were granted loans with a total investment of Rs. 85.13 million ($9.5 million). Of these, 180 units were in production by the end of 1975, employing 1,980:persons and providing self employment to 250 entrepreneurs. Taking both the finance schemes in their 8 years of operation, 1,114 units by 1,450 new entrepreneurs have been assisted with a total invest- ment of Rs. 130 million ($14.5 million) giving an average of Rs. 117,100 ($13,000) per unit. Total direct employment in 850 units in production is estimated to be 8,020 in addition to 1,100 entrepreneurs self employed either from previous employment or unemployment. 2.0 IDENTIFICATION AND DEVELOPMENT OF NEW ENTREPRENEURS Inspired by the response to and the initial results of the Tech- nicians Scheme of finance, the Gujarat Corporations developed a programme of identifying and developing new entrepreneurs by drawing upon diverse sources of potential industrial entrepreneurship. Its rationale was that many employees in industry and commerce, workers, supervisors, merchants and salesmen and a number of young engineers and graduates had latent entrepreneurial talents and a desire or capacity to be self-employed. Many lacked self-confidence to come forward for their own ventures. Their enterprise was not fully developed, the motivation to take risk despite the frustrations of their current occupation was not strong enough. Some needed opportunity counselling, others knowledge of how to establish and manage an industrial enterprise. If a comprehensive Entrepreneurship Development Programme (EDP) could meet these needs and fill the information, motivation and skill gaps, it was argued that many new - 16 - entrepreneurs might be developed, and made competent to successfully set-up and operate industrial enterprises. A three months training-cum-development programme for carefully' selected potential entrepreneurs was launched in 1970. By March.31, 1977, 1,238 new entrepreneurs had been trained, 667 factories had started and 224 more were in the process of beginning production. From only one training centre in a large (industrial) city, the programme has been subsequently expanded to 5 regular locations, 2 of which are in industrially less developed areas and 3 in large industrial cities. In addition, each year 10 new small towns are selected for training. 2.1 Significance of the Gujarat Model In India, the Gujarat EDP is the longest operating programme of its kind. Its quantitative output in terms of number of new entrepreneurs trained has been the largest. It includes 928 entrepreneurs trained from industrially and commercially experienced persons such as technicians, traders, managers, salesmen and professionals. In addition, 310 fresh (jobless) engineers and other educated unemployeds have also been trained for industrial self- employment. Qualitatively it is recognised as the most comprehensive de- velopment programme for entrepreneurs in India, combining sophisticated entrepreneur selection techniques, development inputs including behavioural, psychological (motivation), training and business management counselling, and culminating in the preparation of a project proposal by each trainee for his industrial unit. It is therefore one of the more succesbful of such pro- grammes with 74% of the experienced persons, 95% of jobless engineers and 55% of the educated unemployed having eventually set-up their industrial ventures. This contrasts sharply with experience elsewhere in India, where the percentage - 17 - is well below 30. Subsequent evaluation of the in-plant financial performance of the units as a part of this Research Project, both in terms of profitability and loans repayment, has shown that the trained entre- preneurs have performed quite well. These results have been achieved at a rather low cost. One new entrepreneur has been developed at a cost of Rs. 1,100 to Rs. 1,500 ($120-165) and the direct training cost per venture set-up is estimated to be Rs. 1,800 to 2,800 ($200-310). The entrepreneurship training model has been subsequently adopted for generating self-employment of technically qualified engineers and edu- cated unemployeds by the Indian Government. Several States in India and developing countries of South-East Asia have started similar local entre- 2/ preneurship programmes based on this model. The programme,. began as an experiment, without a precedent, at a time when the common belief was that "entrepreneurs are born not made!'. The contention that "entrepreneurs can be developed also" met with considerable resistence and scepticism from financial institutions and established train- ing agencies. That it survived earlier doubts and handicaps and was allowed to be started on a pilot scale (in one centre for one year) was mainly due to the forceful leadership provided to these innovative programmes by the (common) Chairman of the two major participating Corporations, the Gujarat Industrial Investment Corporation Ltd. and the Gujarat Industrial Development 1/ See the Report of the ARTEP Mission on Generating Employment For the Educated in India, ILO, Bangkok, April 1973, P. 147. 2/ Some have sent study teams to Gujarat; in a few States and countries, Gujarat experts have directly assisted in formulating and implementing the programme in the country (e.g. Malaysia). - 18 - Corporation. 2.2 The Programme Package Conceptually and operationally, the programme has gone through several modifications over time. The final package is basically as follows. The task of developing entrepreneurs has been defined by Gujarat trainers as that of (a) identifying and carefully selecting those who could be trained as entrepreneurs; (b) developing their entrepreneurial capabilities; (c) ensuring that each potential entrepreneur (trainee) has a viable indus- trial project ; (d) equipping him with basic managerial understanding; and (e) helping him to secure necessary financial, infrastructural and related assistance so that an industrial venture materialises within the shortest 2/ possible time. The key to success is found in undertaking each of the above in an integrated, coherent manner backed-up by requisite training expertise, organisational arrangements and financial support to the entre- preneurs. A partial approach, for example, concentrating on only manage- ment training or behavioural, psychological inputs, is not likely to succeed 3/ as experience of many institutions and agencies has revealed. 1/ The process of formulating the programme in absence of a precedence, bringing in key persons for the job, developing a suitable organisa- tion for implementation and ensuring long-term support from industrial agencies is extensively covered in the Report. 2/ V.G. Patel, "Entrepreneurship Development: Selection Techniques, Training Inputs and Programme Structure", A paper presented at the National Seminar on Entrepreneurship Development, sponsored by the Development Commissioner, Small Scale Industries, Government of India, New Delhi; in May, 1975, page (1). 3 Experience in ghetto areas of the USA showed the inadequacy of sheer motiva- tion inputs in absence of managerial skills and opportunity guidance. See Jeffrey Timmons "Black is Beautiful: Is it Bountiful?", Howard Business Review, November-December 1971, P. 81-94. - 19 - 2.2.1 Selecting Potential Entrepreneurs In formulating the entrepreneur identification tests which precede the training, the Gujarat EDP makes the following assumptions: (1) That all persons cannot be entrepreneurs and that persons must have certain traits to be successful entrepreneurs. (2) Such traits are identifiable (and measureable) through some psychological tests and social indices, (3) People possessing these traits and social indices at a certain level will be more successful than those not reaching that level. (4) Persons possessing these traits or showing evidence of these traits (persons with entrepreneurial aptitude) can be trained to develop these and other dimensions of entre- preneurship. This has led to a three stage selection process which begins with preliminary screening of applications with a specially devised form (Stage-1) which screens out those with only a casual interest in the programme. This -is followed by an assessment of candidates' entrepreneurial abilities by applying behavioural science techniques (Stage-2) and oral interviews for overall assessment about the candidates' suitability to undertake manufactur- 1/ ing activities and about his need for training (Stage-3). The entrepreneurial traits assessed in the behaviour tests include: (a) The need to achieve, evident in an individudl's desire to compete with some standard of excellence and success in performance. 1/ The behavioural tests in the first two stages have been developed for Gujarat EDP by Behavioural Science Centre, New Delhi. The traits iden- tified rely considerably upon the work of Prof. David MacClelland and his Achievement Motivation theories. - 20 - (b) Risk taking, as entrepreneurs are found to have an inclination to take calculated, moderate, intelligent risk. They tend to avoid both excessively high as well as low risk situations. (c) Positive self-concept, which includes self-confidence as well as self-efficacy and a positive image of one's own abilities and achievements. (d) Initiative and independence, as such people not only show initiative but also indepetadence in their day-to-day behaviour. They like to act on their own rather than follow directions. (e) Problem solving, a tendency to approach problems in order to solve them. (f) Hopeful about future, even though they may have dissatis- faction, with their present working conditions. (g) An interest in searching their environment to seek answers to present questions. They also try to set goals under time bound planning. They like to fulfill their time bound plans. In this selection process, persons possessing a minimum level of entrepreneurial traits (normally decided by a cut-off point in the scores) and having experience in or familiarity with commercial or industrial activity stand a better chance of being selected. However, there are no minimum con- ditions of education and length of experience, occupation background or income. Even young engineers and graduates with no work experience are selected if their entreprenetrial capacity is adequate or capable of develop- ment and if they are ready to undertake smaller, simplier projects consistent - 21 - with their overall background and know-how. Such persons should, however, be willing to undertake technical training or obtain work experience in existing factories or attend the Technical Training Workshop of the pro- 1/ gramme. Validity of selection tests: Such a selection technique raises two issues: Does the programme select highly enterprising persons only and hence shows good results? Is there any significant entrepreneurial development if those with low initial entrepreneurial capabilities are rejected? An analysis of the selection process showed that during the (Stage 3) final interviews, "those entrepreneurs" possessing concrete project pro- posals and needing only procedural information/guidance, were excluded and encouraged to directly seek ftnancial assistance and set-up industries. The logic had been to select only those who needed strengthening of entrepre- neurial and managerial capabilities, i.e. those who, without comprehensive training inputs, could not set up independent units. Secondly, in the entre- preneurial capacity assessment, the cut-off point for selectees and rejectees was brought down to a developable minimum level. But between the choice of taking as many as willing, versus selecting those who have potential for development, the Gujarat programmers have a firm and clear policy in favour of qualitative rather than a quantitative criteria. Despite fine training, 1/ The earlier 'oral interviews' selection mechanism tended to be subjec- tive, relied heavily on industrial experience and project familiarity of the applicant and was found inadequate in exploring his inner entre- preneurial capacity. - 22 - liberal finance and other supportive assistance, they find that not every- one can be successful in industry. To avoid wastage of scarce resources and to optimally utilise the limited training and development facilities, this type of selection is considered a critical first stage in the prog- rame. 1/ An expert evaluation team appointed by the Corporations tested the validity of the selection content and tools and found that: (i) The proportion of those starting industries from the rejected applicants was quite low (17%) compared to the selectees (44%). (ii) The numbers involved in "entrepreneural movement" (i.e. those starting a commercial or industrial enterprise from a previous occupation as an employee or member of the unemployed) was much less (13% of the total), among those rejected by behaviour science tests than those rejected by the earlier technique involving oral inter- views alone (26%). 2.2.2 Development Inputs For the (industrially) experienced group, a programme of 90 days in the evening is offered. For the (inexperienced) young engineers, graduates 4nd educated unemployeds, there is a full day, 6-month programme so that work experience for an extended period can be given in the day time. The training inputs to develop the selected trainees into "well-rounded; competent entre- preneurs" include the following. 1/ The Evaluation Team comprised of experts in training, finance, behavioural science and management and also two small and medium scale entrepreneurs. The Team's findings are in the (unpublished) Report: Evaluation of Gujarat Entrepreneurship'Programme, GIIC, Ahmedabad, December 1975. 23 - (1) Achievement Motivation In the first phase, an intensive achievement motivation training, through a 5 day residential programme, is given to develop the entrepre- neurial traits such as need to achieve, risk taking, initiative, etc. as referred to in para. 2.2.1 above. The motivation inputs serve to (i) in- crease the need for achievement; (ii) help participants realistically to define their goals and work towards their achievement; and (iii) heighten their self awareness. (2) Product Selection and Project Report In the initial stage of the programme itself, guidance sessions are held on selecting an appropriate industrial opportunity for each trainee consistent with his experience, competence and overall capabilities. Per- ceiving a profitable opportunity for commercial exploitation is an essential quality of an entrepreneur. By providing inputs on various feasible in- dustrial opportunities through a team of experts (successful industrialists, leading traders and merchants in manufactured commodities and technical advisers from State industrial agencies), the programme converts this pre- condition into an information input. Inadequate knowledge of an opportunity or a clear project proposal need not be a handicap in aspiring to be an owner entrepreneur. The training culminates in the completion of a project report by each trainee. It is found to expose the participants to the thought pro- cess and field experience necessary for the rational choice of business, product-line, market mix, etc., and determining their feastbility in light of environmental constraints/opportunities. It also constitutes an instru- ment for .raising finance for the project and thereby links up completion of training with the support of financial institution for implementation. -24- (3) Business Management Guidance The small-scale entrepreneur has to be a manager also since he can- not afford specialists to look after the multiple business decisions of sales, finance, purchase, personnel, etc. Though "rounded managerial experience" is essential for better performance, the new(trainee) entrepreneur emerging from the ranks of employees and fresh graduates usually possesses familiarity and 1/ experience in only one area, either of production, sales or supervision. The overall managerial understanding is therefore developed in the evening 2/ business sessions. The syllabus has been developed in consultation with operating entre- preneurs, trade and industry experts and past trainees. It aims at enabling the participants to look at an enterprise in totality and introduces them to the elements of planning, budgeting and control as aids to good management. To meet the early criticism of the course becoming over theoretical, the emphasis has been subsequently shifted to knowledge of problem-solving through group discussions, syndicate presentation, case studies and business games. There is no full time faculty except the project leaders and project formu- lation experts. Business inputs are given through specialists in different subjects drawn from professionals, business and industry executives, experts of State industrial Corporations and small-sc"le entrepreneurs. 1/ Inadequate rounded managerial experience is found to be one of the major causes of small industries failures in the starting phase itself. See V.G. Patel, "Strategy of Success in Business/Industry"'(Hindi), Amit Prakashan, Ahmedabad, 1977. 2/ The subject-wise sessions in order of their assigned weightage are: marketing and sales management; finance, accounts, cost and taxes; production; general management; environmental information; project report writing; procurement; legal systems; organisational matters and personnel. - 25 - (4) Practical Training and Work Experience Field trips to selected industrial units are arranged to expose trainees to the operational conditions. For those lacking in industrial experience, a six hours a day, in-plant training is arranged in relevant operating factories as long as required. A well-equipped Technical Train- ing Workshop has been set up by the Corporations which develops industrial skills among fresh trainees and offers product development opporturities. The whole programme is conducted in Gujarati (vernacular) which enables the educated and otherwise diverse groups to comprehend the business inputs. (5) Validation of Training Inputs Tests of comparative performance of the trained entrepreneurs ander the programme who set up industries versus those who were rejected in the selection tests for the training but who nevertheless set up industrial units, validated the inputs package. These tests were based on certain key behavioural and management related indices. (i) Motivation Training: The trained group consistently scored higher on achievement motivation. Even the inexperienced trainees scored higher on achievement orientation than the rejectees. Almost all trainee entrepreneurs interviewed considered achievement motivation training very useful in goal setting, clear thinking and creating self-awareness. Co-relation co-efficients between achievement and planning orientation scores were found to be moderately high, posi- l/ tivd and statistically significant. 1/ Evaluation Team Report, op. cited, P. 44. - 26 - (ii) Practical Experience: Experienced trainee entrepreneurs scored consistently higher on planning orientation and operations management than the inexperienced entrepre- neurs. Experience seemed to increase the trainee's capacity to benefit from the programme. Trainee entre- preneurs unanimously considered practical training/field trips the most crucial part of training. They also in- dicated that class room instructions be made more prob- lem oriented to develop problem-solving skills and practical applications of knowledge. 2.3 Organisation And Administrative Flexibility A full time project leader in charge of the training centre is the backbone of EDP. He acts as "a father, priest, guide and psychiatrist" look- ing after individual trainee's development needs and progress towards project report and subsequent factory emergence. He organises and administers the programmes and is responsible for the entire training process. His is a demanding multidimentional role of an administrator, liaison officer, train- ing manager, trainer, counsellor and technical adviser. Special tests have been developed for selecting such project leaders. The organisation is headed by an Advisory Board chaired by the Industries Commissioner representing the Industries Ministry of the Govern- ment. The Managing Directors of the sponsoring industrial corporations (Gujarat Industrial Investment Corporation, Gujarat Industrial Development Corporation, Gujarat Small Industries Corporation, Gujarat State Financial Corporation) and the entrepreneurship expert in charge of the activity are members. The administrative responsibility for implementing the programme is entrusted to the Gujarat Industrial Investment Corporation Ltd., the - 27 - autonomous state investment company possessing administrative flexibility for formulating and operating such innovative ventures. Training responsibilities are assigned to the entrepreneurship -development expert who is assisted by the project leaders of different centres, project formulation officers (pro- ject report experts) and a Workshop Superintendent (of the Technical Training Workshop). The organisational capability is geared for the promotional and coordination task while the teaching-research-consulting resources mainly come from the industrial corporations, trade and industry. The advantage of this strategy has been that EDP has benefited from a large number of specia- lists, practicing professionals, experienced executives and entrepreneurs. Involvement of such a cross-section of local, educational, business and Government sectors has given it a wide acceptance and support in local com- munities and kept the cost of training low. The Industries Commissioner represents the commitment of the State Government to the programme and provides it with a great deal of authority, prestige and an assured support from any industrial agency in the State. The involvement of the key industrial corporations in sponsoring the pro- gramme has given confidence to the entrepreneur and the trainers of sub- 1/ sequent assistance in implementing the projects. Their financial strength has provided budgetary stability and hence continuity of operations. 2.4 Post Training Support Ready factory sheds and industrial plots with powet, water, roads, drainage, etc. in some 77 different industrial locations of GIDC are given on priority to the trained entrepreneurs. The GSFC finances industries upto 1/ In most other States, such programmes are operated departmentally in isolation of the industrial and financial agencies, as a routine task, with no long run organisational and financial commitment. - 28 - Rs. 3 million while the GIIC operates the innovative New Entrepreneurs Scheme providing u eds-based finance. The GSIC distributes the scarce raw materials and provides a hire-purchase machinery facility. The industrial agencies with a direct stake in the E.D.P. are getting better clients for their loans and infrastructure facilities. It is in EDP that all the 3 innovations are fully integrated. The programme ensures the removal of the infrastructure and financial bottle- necks as well as psychological and motivational handicaps. Close coordina- tion among the industrial agencies is one of the remarkable features of the Gujarat programme. The inter-State studies in the full Report of the study highlight the frustrating experiences of small and medium industry programmes in most other States because of lack of coordination and cross-purpose opera- tions in promoting and developing industries. 2.5 The Cost of Training For 5 regular centers with 2 programmes of 3 months duration per annum and 10 programmes in mobile centers in small and rural areas, the total training capacity has been 500. The annual training expenditure has been Rs. 667,000 ($74,000). Cost per trainee comes to Rs. 1,335 ($150). The main cost components have been salaries and expenses of the trainers, honorarium to the outside experts, publicity and promotion and administrative overheads. The actual cost is however (0%) lower than what it would normally be as EDP often gets free or low cost services because of its reputation, community support and association with the Corporation. Some cost reduction measures by the trainers also keep the expenditure low. The "shadow cost", when all expenses are accounted for, is 25% higher or Rs. 831,000 ($93,000) or Rs. 1,660 ($185) per trainee. The cost varies among centres depending upon the degree of urbanisation and industrial development. In a major developed industrial - 29 - city, a large number of potential entrepreneurs (industrial employees, traders, etc.) and better training facilities keep the costs per trainee very low (Rs. 1,077). In small town and rural centers, low over-heads of non-permanent centers also reduces the cost per trainee. On the other hand, fewer trainees (50%) setting up units in such areas raises cost per unit set-up (Rs. 2,550 or $285) as compared to a large industrial city where around 70% of the trainees actually set up units. A token fee is charged and a deposit is taken to ensure commitment of participants. Thus the training cost is highly subsidised. The sponsoring Corporations have considered this a developmental expenditure with high yields in terms of competent entrepreneurs with good projects who perform well, re- ducing the risk of failures. 2.6 Performance Analysis of EDP Units By March 1977, the programme had covered 20 different locations including 12 in industrially backward regions. Out of 1,487 trainees selected, 1,238 (83%) completed the programmes. 1,008 project reports were prepared while 230 were under preparation. Out of these, 522 projects were submitted to the 2 participating financial institutions (GIIC and GSFC). 90% were sanctioned finance on merit of the case with a low rejection rate of 10%. A total 667 industrial units were in production at the time of the study which included 390 entrepreneurs starting units with personal/family savings and private borrowings. An additional 224 units were expected to start func- tioning within one year out of the loan applications under process, bringing the total to 891 or 72% of the trainees completing the programme. Even in the fresh engineers and educated unemployeds programmes, 310 inexperienced young men were trained for industrial self-employment of which 178 went into operations and 60 more were expected to do so, bringing the output to an - 30 - impressive 77% of those trained. In the similar programme for unemployed engineers in the rest of the country, a total of 2,200 engineers were trained of which only 11% actually started industrial ventures as against 95% in the Gujarat programme. 2.6.1 Profitability and Repayment Performance A sample study of the operating EDP units undertaken for the Research Project, cited at length later in this paper, revealed the following regard- ing their financial performance: (i) The trained entrepreneurs had the least closures (3.57%) compared to the closed units of non-t,rained bank financed entrepreneurs (21.4%). (ii) The profit-loss analysis showed that 76% units of the trained entrepreneurs were profit making as compared to 57% of the non-trained Techno-entrepreneurs, 67% of NES and 75% of conventional scheme units. (iii) In the low investment range projects of less than Rs. 100,000, 84.25% of the trained entrepreneur units were profit making as against 78.9% in the non-trained group. In the relatively high investment range of above As. 300,000 all the EDP units were profit making while only 53.5% of the non-EDP units were in this group. It was in the larger projects that the real test of the entrepreneurial and managerial abilities was found. The trained entrepreneurs did very well. (iv) The average rate of return (ROI) of EDP units was greater than non-EDP. The loan repayment performance further revealed the strength of the trained entrepreneurs: -31 (i) 73.3% of the EDP units were either paying regularly or were only occasional defaulters as compared to 61.76% non-trained techno-new entrepreneurs. Only the Bank/GSFC units with 91.67% had a better record. (ii) Taking "worrisome" and "bad accounts", 26.67% of EDP units were in the group as compared to 38.23% of tech- nician/new entrepreneur units. (iii) A direct comparison between NES/TS financed units with and without training showed that the bad/worrisome accounts were only 15.38% in EDP versus 38.23% in Non- EDP. Assessment of the sample units by the financial institutions indi- cated that: (i) The trained entrepreneurs performed better than non-trained others with 66.6% in the profitable and healthy category vs. 58% of Bank/GSFC units and 53% of TS/NES. (ii) Among the innovative finance schemes (TS/NES), the trained entrepreneurs had 77% in the profitable and healthy group vs. only 53% in the non-trained, highlighting the contri- bution of selection and developmental inputs in providing well-rounded, competent new entrepreneurs. (iii) Only 12.5% of EDP units were considered sick or failure due to incompetence of the entrepreneurs vs. 38:5% of the non-trained TS/NES units and 24% of conventional scheme financed units. 2.6.2 Weighing the Benefits Against Costs The real cost-benefit evaluation of such programmes must go beyond the - 32 - number of factories. The programme attempted to develop only those who were not likely to set up industries without the motivational, managerial and experience inputs. The 890 ventures or a majority of them, can be con- sidered a net addition to the rate of new venture formation and the subse- quent direct and indirect employment, income and production contributions. With an average project investment of Rs. 130,000 output of Rs. 150,000 and direct employment of 10 p,ersons, the programme's economic contribution has been an investment catalysation of Rs. 115.8 million, annual production of Rs. 133.7 million and a direct employment of 8,900 workers. A job is created at an average investment of Rs. 13,000. The majority of the new entrepreneurs were former employees in factories (45%), some were traders (20%), young engine- ers and fresh graduates or unemployeds (20%) and a few farmers and professionals (10%). Sources of new entrepreneurship were diversified by picking out and making it possible for such persons to become owners of industrial ventures. Thus the direct financial cost of training per new factory unit started which ranges from Rs. 1,800 to Rs. 2,500, appears relatively marginal. 3.0 THE SHEDS PROGRAMME FOR INFRASTRUCTURE A factory building with infrastructure (water, power, roads, communica- tion and other facilities) is a basic requirement for setting up an industry. The rate of industrial development can be much faster if financial assistance to new entrepreneurs is supported by ready availability of infrastructure. In absence of a preconstructed shed facility, most of the small-scale entrepreneurs and particularly the new entrepreneurs, tend to face one more'handicap in set- ting up their industrial units as the Indian experience reveals. This is because in most urban and semi-urban centres land and built-up factory premises are normally in short supply and carry a high premium. In backward areas, new growth centres and small towns, suitable industrial premises are virtually - 33 - non-existent. Small-scale entrepreneurs find it even more difficult to pur- chase land and undertake construction on their own, given the problems of procedures and formalities of land acquisition and building permissions, in addition to shortages of construction materials. These become discouraging, time consuming and costly tasks for new entrepreneurs. 3.1 Features of GIDC Programme Recognising the importance of a ready sheds facility to promote small-scale enterprises in various industrial locations, the Gujarat Indus- trial Development Corporation of the State, a statutory body, has undertaken, a massive programme of construction of factory sheds in some 77 different industrial estates in Gujarat. This specialised agency for development of industrial estates has so far constructed more than 4,000 sheds with an 1/ investment of Rs. 180 million ($20 million). According to the report pub- lished by the Development Commissioner, Small Industries Development Organi- sation, Government of India, out of the total 13,670 sheds constructed in the 2/ industrial estates in the whole of India, 27% are in GIDC estates. The following features of the sheds programme were found to be note-worthy: (i) The sheds are provided to the entrepreneurs on a hire- purchase basis with a down payment (payment before pos- session) of 20 to 25% of the price. The balance amount is recovered over 10 years including a two year mora- torium on principal amount. (ii) For the techno-entrepreneurs under the Technicians' 1/ Annual Report of GIDC for the year 1975-76. 2/ Hilf "yearly-report-for the period. ending September 1974 published by the Development Commissioner, Small Industries Development Organisa- tion, New Delhi. -34- Scheme, the sheds have been allotted on liberal terms and without any down payment. Interest dur- , ing the first three years has been charged at 50% of the normal rate (4-1/2%) and the price recovered in the subsequent 9 years with interest at 9%. Under the modified scheme applicable to new entrepreneurs of NES, the Gujarat State Financial Corporation and the Gujarat Industrial Investment Corporation have been providing upto 100% loans on liberal and con- cessional terms for purchase of sheds and plant. The price of sheds is directly reimbursed to GIDC by the two Corporations and the entrepreneurs. (iii) Seven different types of sheds varying in built-up area, sizes from 75 sq.mts. to 750 sq.mts., are constructed to suit the requirements of most of the small and small- medium units and to provide for expansion. In value they range from Rs. 40,000 to Rs. 250,000 ($4,400 to $28,000) including land. (iv) Responsibility for allotment of sheds, documentation and handing over possession has been entrusted to the field offices and very simple procedures have been evolved for this purpose. If the sheds are available, an entrepreneur can expect to get possession within 15 days from the date of his application as compared to an 8 to 12 months own construction time. A package of infrastructure facilities viz., water, power, approach roads, communication services, banking and other support - 35 - facilities are provided along with the sheds. (v) Over 90% of the constructed sheds are occupied by the small and new techno-entrepreneurs. This is indicative of the entrepreneurs' need for this facility and the soundness of advance planning in GIDC. 3.2 What is Innovative? The sheds programme's inclusion in the "Innovation Study" finds justification for the following reasons. 3.2.1 Setting a New Trend GIDC was virtually the first agency to have recognised the impor- tance of ready sheds facility in the promotion of small and medium-scale entrepreneurs. This was at a time when in the Sixties the national thinking was quite the contrary and financing of new entrepreneurs was confined to plant and machinery only. Several Stlidy Groups on small-scale industries appointed by the Indian Government were recommending that building of ready factory sher2s should be left to the entrepreneurs and the State Governments should concentrate only on provision of developed land with infrastructure facili- 1/ ties. The industrial sheds in most States remaining as "empty shells", compelled most of the Review Committees and Study Teams to recommend a very conservative approach to the sheds programme. Against this background, GIDC's large-scale sheds programme marked a significant departure and set in motion a reverse trend in the country as a whole. 1/ The Government of India Report of the Working Group on Small-Scale lidustries, Programme for the Third Plan, December 1959. Also Report of the Estimates Committee of the Parliament of India, 1965-66 and the Report of the Working Group on Financing of Industrial Estates - Reserve Bank of India, September 1972, p. 85. - 36 - 3.2.2 Economic Viability Another noteworthy feature identified in the study has been the economic viability of the programme and the consequent financial support received from lending institutions. Unlike in most other States where in- dustrial estates exist, GIDC has not provided any subsidy either in the price of shed or interest rates and these have been determined by the cost of capital and the sourves of borrowing. It is the liberal repayment schedule which the entrepreneurs were found to be in real need of and not the subsidies in price. It is because of this approach that the GIDC has so far been the only agency to have raised substantial funds (Rs. 153 million) from Banks and other national financial institutions for setting up industrial estates and constructing sheds. 3.2.3 Leading Performance GIDC is recognised to be the pacesetter in India for sheds facility for small and new entrepreneurs. The programme of construction and supply of ready sheds receives high priority in the GIDC's strategy of developing in- dustrial estates at a time when even now, most similar infrastructure corpora- tions of other States limit.their services to developing land only. The investment of Rs. 180 million in sheds construction constitutes 40% of GIDC's total infrastructure expenditure so far. The 4,077 factory sheds in 52 in- dustrial estates are dispersed in 17 of the 19 districts of the State covering urban, semi-urban and rural areas. At the end of the year 1975-76, 2,315 units were reported to be in production in various industrial estates of which 96% were small scale, with a project investment of Rs. 760 million ($85 million), producing goods worth Rs. 1,230 million ($140 million) and employed about 42,000 industrial workers. 1/ GIDC Annual Report for the year 1975-76. - 37 - 3.2.4 Integration with Finance and Training The programme for the construction of factory sheds with infra- structure facilities needs to be viewed as an essential part of a package of assistance to new enterprises comprising of finance, training and infra- structure. During the first 8 years of GIDC operationa (1962-69), only 439 sheds were constructed with the Corporation cautiously and conservatively limiting its infrastructure role to less than 5 estates in large cities where only developed land was being provided. This meant a lower risk of idle sheds and avoidance of the problems of anticipating industrial demand for various types of built-up space needs. The introduction of the Tech- nicians' Scheme with its large and diverse source of new entrepreneurs gave a new thrust to the GIDC sheds activity, Under the common Chairmanship of GIIC and GIDC, the liberal financial assistance to techno-entrepreneurs by GIIC was matched by ready factory sheds supply under GIDC's own Technicians' Scheme simultaneously introduced. The common leadership at the top reduced the problems of double scrutiny and assured coordinated planning of advance construction. The project appraisal was carried out by GIIC and on its recommendation the techno-entrepreneur was automatically eligible for a 1/ ready factory shed from GIDC. With a heavy response from the techno- entrepreneurs, GIDC allotted 150 sheds in different estates in 2 years (1969-70) as against 100 sheds given in the preceding 6 years. The subse- quent Entrepreneurship Development Programme sustained the flow of new entre- preneurs and the demand for sheds. The three innovations, thus, thrived on each other. 1/ The terms and conditions of alloting the sheds to the techno-entrepreneurs have been covered in Section 1.1.0 above. - 38 - 3.3 Assessing the Effectiveness The role of ready sheds facilities in the promotion and accelera- tion of small-scale enterprise development and the assumptions behind the GIDC thrust were both tested by a sample survey of estate units undertaken for this study. Three different industrial estates - Makarpura, Umbergam and Chitra - representing locations in a developed area, a new growth center and a small town were selected. A random sample-of 68 units was taken from the operating small-scale enterprises excluding TS/NES units. 88% of the urban and 95 to 100% of small town and backward areas enterpreneurs in- dicated that availability of ready shed facilities on hire-purchase was a very important consideration in their decision to choose a particular loca- tion for their project. In the absence of such a facility, 30% would have amended their projects and 6% would have preferred other locations where sheds were available. In a small town like Chitra, as high as 55% would have deferred projects due to non-availability of alternate premises. The pro- motional role of the sheds programme in different types of locations was therefore significant. In a typical small-scale project, investment in land and building l/ constitutes close to 35% of the fixed cost. When ready sheds are given on hire-purchase, it helps entrepreneurs conserve valuable financial resources for the production proce5s which otherwise would have been tied-up in land and building. The survey revealed that a large number of small entrepre- neurs had set-up industries (78%) with the help of bank finance, own savings and private borrowings. Obtaining term loans for purchase of land and con- ttruction of buildings was found time consuming, frustrating and a very 1/ Annual Economic Survey of Estates Industrial Units, GIDC Nineth Annual Report 1970-71, Ahmedabad, p. 15. -39- difficult task by 60% of entrepreneurs. As many as 89.7% of the entrepreneurs felt that sheds on hire-purchase made it possible for them to set up units within their limited resources. 29% of the entrepreneurs indicated that in the absence of "hire-purchase facilities" they would have deferred their pro- ject. The programme had thus played an important financing role for small and new entrepreneurs when most financial institutions, especially commercial banks, preferred the financing of plant, machinery and working capital only. The time saving advantage of a ready factory building was found to have contributed to a quickening of the process of setting up an industrial unit by entrepreneurs. Formalities of purchasing land for industrial use, constructing own factory building when most construction materials tend to be in short supply, were estimated to take 18 months to 2 years. Ready sheds constructed in anticipation of demand were recognised by entrepreneurs as shortening the project implementation period by at least 8 to 12 months. For most small-scale entrepreneurs, working as employees or traders, con- struction of own factory buildings, requiring constant supervision, and was a complicated and difficult task. Delays in implementation could have led to escalation in project costs at the rate of 15 to 20% per annum as both machinery and construction material prices were rising rapidly. For many employees plan- ning their own venture, it was helpful to be able to continue their jobs until machinery arrived. The field survey of the innovative TS/NES units revealed even stronger responses in favour of the sheds programme. 61% of the technicians and 67% of the NES entrepreneurs had set up their projects in the GIDC estates with ready sheds. Only 17.4% and 8.3% respectively preferred rented premises within the city limits and even in these groups, 28.6% would have come to the GIDC estates if sheds had been available when they were needed. Among the TS/NES and EDP - 40 - entrepreneurs, 58% and 75% respectively reported "quick availability" as the single most important reason for preferring,ready sheds in the estates, while 33% and 50% considered "avoiding constructioni problems" as the second most important advantage. Responses from backward area new entrepreneurs also showed that 44% had taken GIDC sheds. 60% of those who rented sheds did so only because GIDC sheds were not available, indicating a need for more such infrastructure in backward areas (a result also emerging from other surveys). 3.4 Role of Organisational Set-up The success of the GIDC's sheds programme, reflected in over 80% of-its 4,000 sheds being productively occupied, contrasts sharply with the failures of the industrial estates programme in most other Indian States. A critical problem in such ventures has been assessing potential demand in advance, constructing ready factory buildings with bulky investment which could prove costly if they remained idle for long periods. The usual prac- tice in industrial estates programmes therefore has been to register fil:-m demand with advance payment from entrepreneurs and then construct the build- ings or construct a very small number at a time. The advantage of motiva- tional effects of quick availability and the time saving effect are foregone in such an approach, 3,4.1 Inter-State Comparison To identify the organisational and policy strengths of the Gujarat programme, the infrastructure development programmes of Maharashtra Indus- trial Development Corporation (MIDC) of the Maharashtra State and Karnataka State Industrial Development Corporation (KSIDC) of Karnataka State were reviewed. In the matters of aggressive industrial promotional policy, creating specialised agencies for industrial development, lev.els of exist- ing industrial development and industrial potential, the two States were - 41 - comparable to Gujarat. Though there were 15,358 small-scale units in Maharashtra as against 9,904 units in Gujarat, the MIDC had constructed only 831 sheds as against 4,077 by GIDC. MIDC investment in its sheds programme was Rs. 40 million as against Rs. 180 million in the GIDC programme by the end of l/ 1974-75. It was found that while GIDC constructed 7 different types of sheds to suit various industry needs, MIDC had only 2 types both of which were suitable only for very small units. The applications for sheds in GIDC estates were disposed of by their field offices, situated in the estates themselves. Against this, in MIDC the applications were scrutinized by a Committee consisting of experts from the Small Industries Service Instit- tute, Directorate of Industries and the Financial Institutions. This was indicative of its cautious and half-hearted approach which delayed allotment by months. MIDC was also experiencing a resources constraint for sheds investment and had not been able to raise loans from the banks for want of "bankable estate projects". This could have been done only if the organisa- tion had been equipped to make an assessment of demand, formulate and execute plans in a timely manner and if there were no heavy subsidies. The KSIDC in Karnataka had constructed 1,200 sheds against 4,077 by GIDC. In the matter of sheds designs, lay-out and procedures, its approach was also conservative and dilatory. Sheds were allotted on a subsidised rental basis. It also experienced a constraint on resources as banks would not finance economically non-viable schemes. 1/ Annual Reports of MIDC and GIDC for the year 1974-75. - 42 - 3.4.2 Ingredients of Successful Sheds Programme The inter-state study and an analysis of the operational features of GIDC as an organisation identifies the following key areas for better performance: (i) careful, advance assessment of demand for different types and sizes of sheds for different industries at various locations; (ii) evolving suitable designs and layout for sheds to serve small industry needs; (iii) providing architectural and engineering inputs for efficient and economic construction of sheds; (iv) initiating promotional measures to ensure that adequate number of entrepreneurs are attracted to the estates and completed sheds do not remain idle; (v) providing efficient service to the entrepreneurs in processing applications, and completing the documents quickly; (vi) providing an adequate package of infrastructure facili- ties and other amenities. The problems related to the assessment of demand and hence economic viability of such programmes and the constraint of financial resources de- serve further comment. (1) Demand Assessment For such a programme financed from funds secured at market (unsub- sidised) rates of interest, demand assessment is very critical. While opti- mistic assessment could lead to idle inventory and high interest costs, very conservative assessment could lead to denial of readily available facilities -43- to the prospective entrepreneurs and thereby retarding industrial growth. This factor is more critical in a climate of uncertainty, where it is dif- ficult to predict the sectoral growth even for a short span of 2-3 years. It takes at least 2 years to develop an indusCrial estate, provide infra- structure and construct ready sheds. Any substantial change in the situa- tion in the meantime might adversely affect the new industry plans and demand for facilities created by the infrastructure agency. The agency is therefore required to establish an ability to realistically and quickly evaluate the demand potential by observing the growth rate and pattern of industries in the relevant region, the special factors accelerating or retarding growth, the existing infrastructure facilities, the entrepre- neurial potential, etc. Such an assessment would need an insight into micro-level economic planning, marketing, engineering and architectural aspects. The organisation should therefore have adequate numbers of specialists in relevant fields. While planning for the specific require- ments of a particular industry, the economic viability of the unit in the industry must also be looked into to ensure that the industrial units are able to bear the burden of shed costs. The construction programme will have to be implemented as fast as possible to reduce the burden, of interest on the capital tied up during the construction period and to ensure that the pre-assessed local entrepreneurial, industrial and sheds demand poten- tial does not diminish or change unfavourably. Data availability at the specific location or small region level tends to be poor. '.Regional data do not often reflect the needs and problems of the town. The organisatl'on can develop the "feel" for this task only if it carries out the exercise as a regular function. Despite the difficulties, GIDC had succeeded in building a professional planning team and had institutionalised the demand -44- assessment and project implementation set up to minimise errors. (2) Raising of Resources- A large scale Infrastructure and sheds programme, as the Indian experience suggests, will have to depend upon institutional borrowings. The small allocation available from State budgets, as the experience of '-st state agencies confirmed, has not been adequate to meet the requirement. For this, economically viable projects are called for. Long run subsidies in rents and prices will have to be avoided. GIDC had been able to prepare and implement such viable schemes for the estates programme unlike most other states, and therefore succeeded in securing substantial loans from the bank- ing institutions. The needs of entrepreneurs were at the same time met by low initial payment, liberal repayment terms and a moratorium. In 1975-76, GIDC's total borrowings were Rs. 56 million, of which Rs. 40 million (70%) was raised by way of loans from the banks and financial institutions. The Government-appointed Bhatt Committee on Small and Medium-Scale Industries, recognised the success of GIDC as the only State (agency) which had achieved a significant success in mobilising bank finance for the industrial estates 1/ programme. 3.4.3 Some Problems However, two difficulties experienced by GIDC in its efforts to raise the resources and implement the programme effectively deserve,attention. (1) High Cost of Capital Sheds facilities provided on a hire-purchase basi.s involve financ- ing the fixed assets of small-scale enterprises. If the small and new entre- preneurs are to be provided this facility at a reasonable cost, the infrastructure Q/ Report of the Committee on Development of Small and Medium Entrepreneurs, Government of India, New Delhi, October 1973, p. 70. ~~~~~~. ... ..~-~- ~ ' - - ' -45- agency needs funds at a reasonable rate 'of interest. However, GIDu's experience reveals that the nationalised banks in India have not accepted the sheds construction finance in the "priority sector" and have charged high (14-14-1/2%) rates of interest on loans for construction of sheds in estates. This has tended to deprive the small new entrepreneurs from the benefits of the normal small induatry finance rate of 12%. Because of its high capital costs, GIDC was charging a 15% to 17% rate of interest for backward and developed areas respectively. Among all industry promotion agencies, GIDC's lending rates were perhaps the highest. This high cost of capital to GIDC, which had viable schemes to offer, highlights a lack of appreciation of the importance of the ready sheds programme for small new entrepreneurs among financial institutions. Though the Industrial Development Bank of India (IDBI) now pro- vides refinance to banks for industrial estate lending, which in effect reduces interest on bank loans by 2%, a maximum limit of Rs. 3 million has been stipulated for-an industrial estate project in backward areas and Rs. 2.4 million for a similar project in the non-backward areas. These amounts have not been adequate to meet the large funds required for con- struction of sheds. A 100 sheds project would cost at least Rs. 5 million. The field study of units in the estates brought out the fact that out of a total investment of Rs. 23.4 million in the 68 surveyed units, Rs. 7.16 million (31%) were financed by banks as term loans and working capital assistance. Investment raised from own savings, deposits and pri- vate borrowings totalling Rs. 6.8 million (29%) added to the business oppor- tunities for the banks as these funds were channelled through the banking system in or around the estates. An investment of Rs. 6.35 million by GIDC in construction of sheds generated a potential business of Rs. 14.0 million -46- for the banks. GIDC's requirement of loans for construction of these sheds would have been Rs. 3.7 million at the rate of 70% of the total land and building investment. It is therefore an attractive business proposition for the banks to provide assistance to GIDC at interest rates applicable to small-scale industries. This is especially so when close to one-third small and new entrepreneurs are likely to defer projects in absence of ready sheds. (2) Engineering Bottlenecks Standardised sheds designs have helped GIDC quicken preparation of construction estimates, technical scrutiny, completion of financial documents and thereby ensure speedier construction. The shed designs also provide for the unit's need for future expansion, layout of machinery of different sizes and types of industries. A competent engineering and architectural staff is essential for an infrastructure agency and is found to be GIDC's strength. For the unit, investment in a shed is an unproductive one. The less func- tional the shed is., the higher will be its cost burden. Relatively highier construction costs and poor quality are often associated with public sector agencies. Regular review of costs, prices and quality by outside engineers, designers and professional architects has provided valuable inputs to and checks upon GIDC and has helped it maintain its competitive position in the sheds market. Delay in construction, however, has often added to the cost and this has been a major problem beyond GIDC's control. Such delays have been frequently caused by unpredictable shortages of critical building materials like cement, steel, AC sheets, etc. This has escalated costs through delays and-rising prices and reduced cost-saving advantages of large-scale con- struction programmes. Comprehensive plans for procurement of such essential building materials have now been attempted to minimise the impact of non- availability and at the same time avoid high costs of inventories. It is - 47 - the high technical skill of the organisation in this area which has main- tained its implementation efficiency despite handicaps of raw materials and finance. 4.0 PERFORMANCE EVALUATION The real test of the schemes lies in the performance of the units which went into production. In-plant evaluation of sample units based on relevant facts of operations was undertaken with a comprehensive field sur- vey for this study. In addition, the financial institutions reported their assessment of the workings of the same units. The evaluation aimed at as- sessing the comparative rates of success and failures of units promoted under the innovative versus conventional schemes; determining the extent to which the innovative schemes had diversified and expanded sources of industrial entrepreneurship; identifying the socio-economic characteristics of new entrepreneurs and the techno-economic features of their projects, and estimating the investment, production and employment impact of the units set up. For a comparative performance assessment a sample of 41 small- scale units was taken from 3 leading commercial banks and the Gujarat State Financial Corporation (GSFC) while 78 units were selected from TS/NES and EDP. The units were distributed among industrially developed and under- developed areas, organised industrial estates and outside, trained under 1/ Entrepreneurship Training programme and non-trained. The research team could cover 94 units (80%) of which 83 were working and 11 were closed due to failures. 1/ The 119 units sample represented 12.7% of population. The proportion was adjusted among schemes where the number was too small for meaning- ful conclusion. 2/ An elaborate questionnaire for data from each unit was supplemented by personal interviews with the entrepreneurs. -48- 4.1 Profiles of New Entrepreneurs 4.1.1 Age, Education and Enterprise Findings on the age and educational background of the entrepre- neurs are summarised in Table 2 and 3 respectively. Entrepreneurs were well spread among age groups ranging between 18 and 60 years. However, 76% of the innovative scheme entrepreneurs were found in the relatively younger age group of 40 years or below as compared to 62.5% of the conventional scheme. The new schemes enabled younger entrepreneurs to set up industrial units by substantially reducing the waiting time for accumulating adequate personal savings to meet the stringent margin money requirements of con- ventional schemes. The age of EDP entrepreneurs was lower still with more and more young engineers and fresh graduates identified for self-employment in industry as seen from Table 2. The profit performance however was not clearly confined to a particular age group. But the proportion of profit making entrepreneurs out of the total was higher in the "above 40" age group as compared to the younger groups. This is however better explained by a longer industrial/business experience of the former and with it higher motivation, commitment and realism in operations. The innovative scheme had no educational pre-conditions for lend- ing, the emphasis being on experience and competence. As a result a large proportion of new entrepreneurs had only "up to high school" level education as seen from Table 3. That the majority of them, however, were graduates reflected the growing emphasis on self-employment of educated unemployeds, especially the engineers, during the later part of the new schemes. Among the graduates, those with technical education were favoured under the in- novative schemes (62.2%) as compared to the conventional scheme (42.5%), given the technical knowledge bias of the Technicians' Scheme and the 스 Table 3; DISTRIBUTION OF*ENTREPRENEURS BY THEIR EDUCATION AND PROFIT-STATUS Schemes and Profit Status Educational Background Upto High School Graduates Post-Graduates Total Technical Non-technical Total or less graduates graduates and and post- post-graduates graduates Conventional Scheme Entrepreneurs 24 35 5 64 17 23 40 Row % 37.5 54.7 7.8 100% 42.5 57.5 100% Innovative Finance Schemes Entrepreneurs 13 31 6 50 23. 14 37 Row % 26.0 62.0 12.0 100% 62.2 37.8 100% CD E.D.P. Entrepreneurs 11 14 25 Row % 44.0 56.0 100% Total: Number 48 90 11 139 40 37 77 Row % 32.4 57.9 9.7 100% 51.9 48.1 100% Profit-Making Entrepreneurs: "Column % 85.7 71.3 27.3 73.4 69.2 63.0 66.3 Non-Profit Making Entrepreneurs: Column % 14.3 28.7 72.7 26.6 30.8 37.0 33.7 Total: % 100.0 100-.0 100.0 100.0 100.0 100.0 100.0 - 51 - failure of NES to promote non-technicians in a significant way. Under the Entrepreneurship Development Programme, a more even spread of educated (56%) and uneducated (44%) indicated the limited contribution higher education seemed to be making in forming entrepreneurial attitudes and behaviour. This was further supported by the profit status of entrepre- neurs with varying education as given in Table 3. While 85.7% of the low education group units were profit making, the proportion fell to 66.3% in the higher education group. The performance of technically qualified entre- preneurs in the higher education group was also not significantly better compared to the non-technical graduates. The post-graduates in general had a low 27.3% in the profit making group. The new schemes were therefore justified in not making higher education a pre-condition for financial assistance, training and thereby entry into industry. 4.1.2 Work Experience Relevant experience was found to hold a key to success validating the new schemes reliance upon the business competence of the persons and their search for entrepreneurs among employees. Experience in industry dominated the background of new entrepreneurs with 84.1% having worked in industrial units as seen from Table 4. In the conventional scheme also as many as 75.7% had industry experience but it was mainly as owners of units, while 20% came from trade and commerce. The profit making pro- portion of those experienced in industry and trade was significantly higher than the others with less relevant experience such as in agriculture, re- search , teaching, etc. as seen from Table 4. Disregarding the schemes, trading and commercial experience led to better performance with 95% of such entrepreneurs in profit making units than in industry (66%). The new schemes assisted both highly experienced technical Table: 4 Schemevise Work Experience Background of Entrepreneurs aid Profit Status Scleie ald Experience by Major Profit Status Sectors Duration oEkperience (Years) - Nature of Work/Functions Industry Trade Other Total Less 345 6-10 10+ Total Produc- Machine Market- Admin. Re- Teach- Consgul- Other Total than 2 tion Opera- ing Manage- search ing tancy Super- tion ment + vision Conventional Seheme No. of Entre. 53 14 3 70 9 11 25 25 70 23 6 9 24 1 1 6 70 Row% 75.7 20.0 4.3 100 12.1 15.7 35.7 35.7 100 32.9 8.6 12.9 34.3 1.4 1,4 8.5 100% Innovative Scheme (TS+NES+EDP) No. of Entre. 58 6 5 69 18 23 15 13 69 30 11 10 9 8 1 - 69 Row 84.1 8.7 7.2 100 26.1 33.3 21.8 18.8 100 43.5 15.9 14.5 13.0 11.6 1.5 - 100% Total 111 20 8 139 27 34 40 38 139 53 17 19 33 9 2 6 139 Profit making Column % 66.7 95.0 12.5 67.6 63.0 55.9 77.5 79.0 69.8 66.0 94.1 79.0 66.7 44.4 50.0 100.0 71.2 Non-Profit making Column % 33.3 5.0 87.5 32.4 37.0 44.1 22.5 21.0 30.2 34.0 5.9 21.0 33.3 55.6 50.0 - 28.8 Total 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100 100 100 100 100 100 100 100% *Includes trained entrepreneurs financed under the scheme. -53 employees and the less experienced, often raw young engineers and graduates for self-employment. As a result, 40.6% had more than 5 years of work experi- ence while 39% had a duration of less than 2 years. The proportion of the former was higher in the conventional scheme as the financial institutions had preferred those long established in industry and business. The per- formance of the units improved with extended industrial experience of entrepreneurs behind the projects as seen from Table 4. Only 56% of those having 5 years or less experience were profit making as against 78% of those with more than 5 years experience. The new entrepreneurs emerged with a varying nature of work experience as seen in Table 4. While production supervision dominated with 43.5%, there were many who had worked as machine operators, sales engineers, managers and research technicians. Shop-floor experience was thus prominent. Non-technician employees, especially commercial managers, salesmen and accountants, were very few, indicative of New Entrepreneur Scheme's failure in significantly expanding entrepreneurial sources beyond 1/ technicians. On the other hand, the conventional scheme entrepreneurs mainly had administrative and management experience, production supervision and marketing experience, acquired by many in the capacity of previous owners of industry and trade, senior managers and executives. Profit performance however varied considerably among various experience groups, suggesting the importance of relevant experience for the project or taking up project consistent with one's type of'experience. For example, machine operators had the largest proportion in the profit making 1/ An analysis of project appraisals under NES showed that the bias of technical experts in favour of production experience and a lack of adequate promotional efforts were factors mainly responsible for the few non-technicians assisted. -54- group (94.1%) followed by a different group of those possessing market- ing experience (80%). Mainly supervisory experience, either in adminis- tration or production, did not seem to help much with only 66% of such entrepreneurs making profits. Those possessing work experience other than in industry or trade performed even worse. The remarkable success of the low income but highly skilled technicians such as machine opera- tors was explained by their ability to execute high quality, precision jobs for larger companies with ready market at a good price and keeping their units small and overheads. low. Better division and delegation of responsibilities here found 1/ to have led to better performance of partnership concerns. As against 60.5% of proprietory units, 74.3% partnership concerns were in the profit making group. Among the trained (EDP) entrepreneurs where a 'well rounded' individual entrepreneur was to be developed, proprietory units fared bet- ter with 76.9% in the profit category. But partnerships performed better here also with 88.9%, pointing at the inability of many single entrepre- neurs to meet the multiple and complex management responsibilities in the modern small enterprises. 4.1.3 Financial Background The new schemes indeed promoted those with poor financial means as seen from the concentration of new entrepreneurs in the lower ranges of income and assets in Table 5. Out of the 50 entrepreneurs, 34 had a low monthly income of less than Rs. 500 while as many,as 40 earned less than Rs. 1,000, a lower middle class income amount. Only 6% were in the higher income range of Rs. 2,000 per month as compared to 17.2% of 1/ At the same time some potentially viable units were in difficulties due to partnership disputes, making partnership form of organisa- tion a double-edged tool. - 55 - conventional schemes. The average monthly income of the new entrepre- neurs worked out to be Rs. 600 as compared to almost a double amount of Rs. 1,135 under the conventional scheme. Data on assets also in- dicated a similar pattern with 54% of the new entrepreneurs having no assets of their own. While there were hardly any new entrepreneurs with assets of Rs. 100,000 and above, 18.8% of the conventional scheme entrepreneurs were in this category. That the contrast between the two schemes was not as sharp indicated some changes taking place in the banking policies under Government directives in the post-bank nationalisation period to finance "small men" for self-employment. The study also validated the new schemes' hypothesis that the performance and income backgrounds of the entrepreneurs are not dis- tinctly related. In the low monthly income group of Rs. 1,000 and. below, 71.3% of the entrepreneurs were profit making, while in the high income group of Rs. 2,000 and above, the proportion was only marginally better as seen in Table 5. Relationship between value of "own assets" and performance was also not consistent. Entrepreneurs owning no tangible assets had 66.7% in the profit making category while those possessing valuable assets worth Rs. 50,000 to 100,000 had only 33.3%. Those with Rs, 100,000 and above, on the other hand, had the highest 91.7% in the profit group. The innovative scheme shift towards entrepreneurial competence and motivation and commitment based on non- financial rather than financial stake thus found adequate support. Data on income and wealth of the immediate family members of the entrepre- neur which are normally expected to strengthen his financial standing in the market, reinforced these conclusions. Table 5; SCHEME-WISE FINANCIAL BACKGROUND OF ENTREPRENEURS BY -RANGE-0V01,ONTHLY.INCOME. AND .VALUE OF,ASSETS Schemes and Profit Status Average Monthly Income (Rs.) Value of Assets Owned By Entrepreneur (Rs.) tess than 1000-2000 Above 2,000 Total None Less than -10,000 51,000 Above Tot jks. 1000 10,000 to to 100,000 50,000 100,000 Conventional Scheme No. of Entrepreneurs 40 13 11 64 39 3 7 3 12 64 Row % 62.5 20.3 17.2 100.0 60.93 4.69 10.94 4.69 18.75 100 Innovative Finance Schemes (TS+NES) No. of Entrepreneurs 40 7 3 50 27 3 12 5 3 50 Row % 80.0 14.0 6.0 100.0 54.0 :6.0 24.0 10.0 6.0 100 Total: 80 20 14 114 66 6 19 8 15 114 Profit-Making: I Column % 71.25 50.0 78.60 68.40 66.70 20.00 73.33 33.3 91.7 66.3 Non-Profit Making: Column % 28.75 50.0 21.40 31.60 43.30 80.00 26.67 66.7 8.3 33.7 Total % 100 100 100 100 ·100 100 100 100 100 100 1/ Excludes EDP Entrepreneurs - 57 - 4.1.4 Caste, Community and Family Background The new schemes had succeeded in tapping entrepreneurial potential from traditionally non=business, non-industrial communities, thereby widening the entrepreneurial base. While 53.2% of the families of the conventional schemes entrepreneurs had own industry or business, this proportion was sig- nificantly brought down to 36.0% under Technicians Scheme/New Entrepreneurs Scheme as seen from Table 6. On the other hand, close to 45.1% entrepreneurs emerged from families with occupation as industrial and non-industrial employees. And these new entrepreneurs from non-owner families performed equally well. 64% of them were profit-making as against only 56.4% from industrial families and 69.7% from the business group. Thus success in industry was not influenced by family background. And the entry of various industrial employees and workers into indus- trial ownership marked a break with the caste system. Under the conventional scheme, 53.1% entrepreneurs were Banias, the traditional business caste of Gujarat. Their proportion was reduced to 28.6% among the new entrepreneurs. An equally large group of Brahmins followed by Patels and other sub-castes showed a diverse non-business caste mix of the new entrepreneurs as seen in Table 6. The caste diversity was even better spread among the EDP entrepre- neurs. The profit performance of different caste groups revealed that entry into industry and success need not be a privilege of a few traditionally domin- ant groups. Over 80% of the traditional non-owners (Panchals, Rajputs) were profit making as against 74.5% of the Banias. The community occupation analysis strengthened the above conclusion. The majority of the new entrepreneurs came from communities which had no occupa- tional specialisation, thereby covering diverse socio-economic groups. Many came from agriculture moving from village to city employment and later to TABLE: 6 Caste, Community and Family Occupation of Entrepreneurs and Profit-Status Schemes and 0 A 8 TE B COMMUNITY OCCUPATION FAMILY OCCUPATION Profit Status Bania Patel Brahmin Panchal.- Rajput Other Total Twn in- Grain Agri- TeaQh- Trad- Other/ Total ;Twn in- Own Employ- Other Total Luhar dustvy trading culture ing ing None dustry business ed in in- dustry Conventional Scheme: No. of Entre. 34 10 1 6 3 10 64 9 3 13 - 7 30 64 11 23 10 20 64 Row 53.1 15.6 1.6 9.4 4.7 15.6 100 14.1 7.8 20.3 - 10.9 46.9 100 17.3 35.9 15.6 '31.2 100 Innovative Finance Schemes: No. of Entre. 15 8 14 5 - 8 50 4 - 10 1 6 29 50 5 13 8 24 50 Row 28.6 16.3 28.6 10.2 - 16.3 100 8.0 - 20.0 2.0 12.0 58.0 100 10.0 26.0 16.0 48.0 100 EDP Training Scheme: No. of Entre. 6 9 3 2 2 3 25 2 - 10 1 3 9 25 1 7 5 12 25 Row% 23.1 34.6 11.5 7.7 7.7 15.4 100 8.0 - o.o 4.0 12.0 36.0 100 4.0 28.0 20.0 48.0 100 Total: 55 31 20 13 5 21 139 15 5 33 2 16 68 139 17 43 23 56 139 Profit-Status of Entrepreneurs: Profit-making: Column % 74.5 61.3 70.0 88.9 80.0 - 86.4 80.o loo.o 51.5 loo.o 62.5 76.5 70.5 56.4 69.7 64.0 73.3 100 Non-Profit-making: Column % 25.5 38.7 30.0 11.1 20.0 100.0, 13.6 20.0 - 48.5 - 37.5 23.5 29.5 43.6 30.3 36.0 26.7 100 Total V 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 Includes agriculture, other employment, etc. - 59 - self-employment. Under EDP, the prominence of farming as.a community occupa- tion signified the large entrepreneurial potential to be found in rural and small towns in non-industrial communities and which should be identified, nurtured and developed. And profit performance was not dominated by indus- trial communities, as seen from the grain-merchant's experience. 4.1.5 Motivations for Entry into Industry What motivated these new entrepreneurs to break away from traditional roles and occupations, sacrificing security of employment and taking a high socio-economic risk? The two strongest motivAtions were found in "a desire to be one's own boss" and "dissatisfaction with lower income" in the current occupa- tion as seen from Table 7. An entrepreneurial desire "to be different from others" had been the next most important motive followed by the demonstration effect of "success of others". In the case of 64% of the entrepreneurs, there- fore, non-financial considerations played an important role. The new schemes of finance and training had made it possible for various aspirations, pressures and fru#trations to find vent in industrial self-employment. The importance of these non-monetary motives for identifying and encouraging new entrepreneurs was amply brought out in the profit performance. Against those driven primarily by the money motive (61.1%), the profit proportion of the others was higher. 4.1.6 Perception of Opportunity Perceiving a profitable industrial opportunity is a crucial initial step in an individual's entrepreneurial movement. Sources of.project ideas often reflect entrepreneur's capacity to make realistic assessment of prospects of the venture. It was found that as high as 77.1% of the new entrepreneurs identified projects from own work experience and 17% got help from friends and relatives. The role of financial institutions as development agencies had been therefore very limited in suggesting viable project opportunities. The potential Table 7: DISTRIBUTION OF ENTREPRENEURS BY PRIME MOTIVES TO ENTER INDUSTRY AND PROFIT STATUS Schemes Motivations To Enter Industry and Low income Frustration Success To be To be To use Family Tradition Others Total 'rofit Status in in of own boss different experience push in family past occupation job others from others Conventional Scheme: No. of Entrepreneurs 10 2 5 18 16 2 2 2 7 6A Row % 15.62 3.13 7.81 28.13 25.00 3.13 3.13 3.13 10.93 100 Innovative Finance Schemes No. of Entrepreneurs 14 1 5 14 13 - 1 1 1 50 Row % 28.00 2.00 10.00 28.00 26.00 - 2.00 2.00 2.00 100 I EDP Training Scheme No. of Entrepreneurs 3 3 4 5 10 - - - - 2 Row % 12.00 12.00 16.00 20.00 40.00 - - - - 100 Total: 27 6 14 37 39 2 3 3 8 139 Profit Status Profitable% 61.1 100.0 85.7 72.7 73.7 100.0 - - - 72.2 Non-Profitable % 38.9 14.3 27.3 26.3 - - - - 27.8 Total % 100.0 100.0 100.0 100.0 100.0 100.0 - - - 100.0 - 61 - entrepreneurs of EDP however searched the environment extensively with 41.2% identifying projects from own experience, 17.6% getting counselling from financial institution experts and many others from traders and dealers, family business, friends and relatives. The source of a project idea and performance, however, was.not closely related with the proportion of profit making units ranging between 67 to 70% for most sources. This was explained by the ultimate viability verification at the project appraisal stage by financial institutions. 4.1.7 Contribution of the Innovative Schemes In the absence of these new schemes, would the entry of new entrepre- neurs into industry have been postponed, delayed or rejected despite their motivations and frustrations, skills and experience? Data in Table 8 show that a large group of the entrepreneurs (28%) would have dropped the project plans in the absence of the new schemes of finance and training versus only 4.7% under the Conventional Scheme. While more than half of the Conventional Scheme entrepreneurs would have still set up the units by borrowing from family or friends or taking a financial partner, such non-institutional finance alter- natives for the new entrepreneurs were restricted to only 40%. Under the Con- ventional Scheme, institutional assistance for most entrepreneurs, therefore, was more in the nature of "substitute finance", in contrast to "development finance" and a necessary input for the new entrepreneurs. 4.2 The Project Profile and Employment Contribution 4.2.1 Industry-mix and Products The industry-mix of the projects of new entreprenet;rs was found to be diverse and the projects were mainly non-traditional. Engineering industry dominated with 51.4% of the units, followed by electrical machinery and apparatus (17.1%) and chemicals (14.3%). The EDP entrepreneurs had a better spread with engineering (47.1%), rubber products (11.8%), transport equipment (11.8%), Table: 8 Scheme-wise Entrepreneurial Assessment of Alternatives to Institutional Finance Alternatives Schemes Drop the Postpone the Take Finan- Borrow from Other 1/ Total Project Plan Project Plan cial Partner family or Outside Conventional Scheme Number 3 19 6 30 6 64 Row % 4.69 29.68 9.37 46.89 9.37 100 Innovative Finance Scheme Number 14. 6 8 12 10 50 Row % 28.00 12.00 16.00 24.00 20.00 100.0 EDP Training Scheme Numbet 6 4 2 6 7 25 Row % 24.00 10.00 8.00 24.00 28.00 100.0 Total; 23 29 16 48 23 139 1/ Includes changing/modifying the project to secure institutional finance etc, 4 -63- chemicals (5.9%), ceramics, footwear, etc. (5.9%). Only 2.9% of the units were in traditional sector (e.g., textiles, stone quarrying, ceramics, cement pro- ducts) as against 12.5% of the conventional scheme units. The new entrepre- neurs of backward areas also had a non-traditional bias with engineering and chemicals accounting for 66.6% of the projects. The strength of the new entrepreneurs being their long production experience, their products usually required high level of technical skills and sophistication in production pro- cesses. There were some very small self-employment ventures in the investment range of Rs. 10,000 ($1,100) to Rs. 45,000 ($5,000) such as watch repairing, agro-equipment repairs and transformer rewinding, and larger organised ones in investment range of Rs. 300,000 to Rs. 500,000, such as rubber rollers, dyes and paraffin wax manufacturing, depending upon location, length of experience and business strength of the entrepreneur. The average project cos,t of the Technicians' Scheme unit came to be Rs. 133,500 ($15,000) followed by NES with Rs. 162,250 ($18,000) and EDP units with Rs, 1797630 ($20,000), The products were sold all over the State and many in national markets, indicative of their competitive quality and an organised structure of opera- tions required, While 40% to 50% of the TS/NES units sold more than 50% of their products in the local industrial city, some 25% sold all their products outside the town and 23% sold more than 25% of their products outside the State. Among EDP entrepreneurs, the out-of-State sales proportion was even higher (31%). Even in backward areas, the sales were not limited to local markets. 1/ Some of the products were cinema projectors, electrical switches, trans- formers, mini-computors and micro-meters (in electrical engineering); automobile pistons, V belts, wire drawing machines, precision engineering components, duplicating machines, hydraulic door closers, etc. (mechanical engineering); and paraffin wax, reactive dyes and zinc sulphate (chemicals). 4.2.2 The Employment Multiplier The new schemes' employment,generation contribution has been signifi- cant. Employees and educated unemployeds were self-employed in industry. Apart from creating a vacancy in the previous job, the new unit provided employment to several skilled, unskilled and unemployeds in the organised small-scale units. The low resource base of the entrepreneur kept the pro- ject investment'as'low as feasible. The average employment size under the Technicians' Scheme was 11.7 and under EDP 14.8. Under the New Entrepre- neurs' Scheme, it declined to 8.6 due to the early phase of production in most NES cases. The majority of the units (between 36 and 46% of trained and non-trained entrepreneurs) had between 5 to 10 workers. The dual role of owner-manager was seen in the composition of employment where 88.2% of the TS/NES units and all the EDP units had less than 5 supervisory/administrative staff. Under the conventional scheme, the reliance on hired managers in- creased with 43.5% of the units having more than 5 supervisory persons. The new units generated manpower demand for both skilled and unskilled workers. Under the Technicians' Scheme, 38.7% were skilled and 41.3% were unskilled workers and the composition was similar in the EDP units. The large propor- tion of unskilled workers was a result of the new entrepreneurs own technical skill for production and supervision but also due to a wide-spread shortage of semi-skilled and skilled workers. The investment to employment relationship supported the new schemes' employment intensity expectations. Taking the fixed investment to employment 1/ ratio, the Technicians' Scheme generated a direct employment at a cost of Rs. 9,157 and the New Entrepreneurs' Scheme at Rs. 12,969. For the EDP entre- preneur unit, it was lowest at Rs. 8,281. For organised small-scale ventures, 1/ The average fixed investment in a Technicians' Scheme unit was Rs. 107,140 which rose to Rs. 122,565 for the EDP units. - 65 - these figures were low. But these could have been lower if the average cape acity utilisation was increased beyond 50%. 4.3 Test of Means of Finance Hypothesis Both the TS/NES were to provide needs-based finance up to 100% of the project cost. Was the finance constraint in reality effectively removed? A comparison of the loan amounts sanctioned under the new schemes with the entre- preneurs' loan expectations in the original proposal showed that 40% of the projects were sanctioned within 10% of the proposed amount by the entrepreneur. In 18% of the cases under Technicians' Scheme, 39% under EDP and 60% under NES, the sanctioned amount substantially increased as compared to the original de- li mand. When the projects went into production, however, the loans sanctioned by the financial institutions fell well short of the actual needs of the pro- ject as found in the first year of production data. As seen from Table 9, not more than 33% of the units received 100% assistance. More than half of the Technicians' Scheme and 41% of NES entrepreneurs had to raise over 25% of the project cost from their own sources. The cost component analysis showed that it was in the working funds that the short-falls were fairly large. Under the TS, 43.4% of the working capital had to be raised by the entrepreneur himself. With an improved banking link-up over time, the proportion came down to 29.4% under the NES 2/ which was still high. The banking institutions' support to these schemes 1/ The optimism of the entrepreneurs, their inability to make realistic project estimates and funds flow projections in absence of adequate industrial data base and fluctuating industrial conditions were re- flected in the wide variations between the proposed, sanctioned and actual project costs. 2/ This was after GIIC had contributed working fund margin to the banks on behalf of the entrepreneur. Table 9 Own Finance As A Percentage of Project Cost 0-5% -5-25% - Above 25% Original Sanctioned Actual Original Sanctioned Actual Original Sanctioned Actual * TS 43(39)* 39(30) 17(13) 22 30 30 35 31 53 NES 92(83) 42(33) 42(33) 8 41 17 0 17 41 EDP 53(24) 23(12) 18( 6) 12 41 35 35 37 47 Conventional Scheme 0 0 0 12 8 8 88 92 92 * Figures in brackets indicate zero percentage group, i.e., no own contribution. - 67 - thus fell well short of the expectations while the State Corporations could not raise the working capital margins to meet the entrepreneur's genuine fund needs in production. The final stake of the entrepreneur therefore rema4aed significant in schemes which banked upon high non-financial stake. The financial constraint was not fully removed. The contribution of the schemes, however, in reducing the financial burden was significant. For example, 92% of the entrepreneurs under the Conventional Scheme had to contribute more than 25% of the project cost as against 41% to 53% by the TS/NES entrepreneurs. In the average pro- ject cost of Rs. 639,818 under the Conventional Scheme, the entrepreneur's own contribution came to be 53% as against a low 17-19% under TS/NES. In the fixed costs financing, the State promotion agencies had a better control and their performance reflected it. Under the Technicians' Scheme, 64% of entrepreneurs were actually sanctioned 100% finance for land, building, and machinery as against 58% in NES. On the whole, own contribu- tion in the fixed cost was lowest under NES (12.6%), followed by TS (21.52%) and EDP (25.44%) as compared to 48.9% under the Conventional Scheme. The new schemes had, thus, substantially reduced, if not fully removed, the finance constraint for new entrepreneurs. How did the entrepreneurs finance their larger than expected share if they came from low income groups? If the larger than expected own contribu- tion was met by family funds at reasonable interest rates, institutional assistance only got supplemented by private savings. If it'was met by bor- rowings at high interest rates from professional lenders then the new schemes had failed in meeting the genuine financial needs of the entrepreneurs. Data from the sample units showed that 47.8% of the techno-entrepreneurs raised more than 25% of the funds from own savings, while 56.5% sought help from - 68 - families and friends for meeting more than 25% of the requirement. Reliance on money lenders was for less than 10% of the amount. The pattern was simi- lar in NES and EDP. Even when funds were borrowed from families, friends and private sources, the interest paid was close to what the banks would have charged (12%). For the new entrepreneurs, however, the dependence on own savings and family resources to meet the unexpected burden of margins also had meant using up just about all the limited personal savings and contingency funds in the very early stage of production. Most of them found themselves in difficulties when working funds were needed. 4.4 Financial Performance and the Health of the Units 1/ A financial performance analysis of 83 operating units revealed a mixed pattern of success and failure among schemes and the new entre- preneurs. The techno-entrepreneurs had a large proportion of units in financial difficulties, The entrepreneurs promoted under the modified NES scheme were faring consistently better in their early years of operations.. The EDP trained entreprene.rs had distinctly better financial results than the non-trained. The conventional scheme entrepreneurs had initially performed better than the techno-entrepreneurs, but during the lean year of 1975-76, they were found to be more vulnerable than the new entrepreneurs who withstood the crisis relatively well. 4.4.1 Profit Earning Status Break-even point analysis showed that 71.08% of the same 83 units were earning profits. The trained entrepreneurs had the largest-profit making pro- .2/ portion with 76.4% while the lowest, 56.5%,-was found in the Technicians' Scheme. 1/ Of the 83 units, 24 were in Technicians' Scheme, 12 in NES, 24 by EDP trainees including 7 own financed and 24 in Conventional Scheme. 2/ All the 7 entrepreneurs of EDP who started units with own funds were earning profits. Combining them with 17 who relied upon institutional finance, the proportion of profit making EDP units comes to 83%. - 69 - The NES units did better with 66.7% crossing break-even early in their pro- duction. The Conventional Scheme with 75% fared better than the non-trained new entrepreneurs (TS and NES). The comparison of performance between 1974-75, a normal-year, with 1975-76, the year of industrial sluggishness arising out of anti-inflationary, tight monetary and fiscal controls, revealed that the average profit of conventional scheme units fell by 16% while that of the techno-entrepreneurs by only 10% in 1975-76. On the other hand, the EDP units experienced a 39.35% increase and the NES units gained 50%. 4.4.2 Return Over Investment Schemewise average rates of return for the year 1974-75 and 1975-76 are given in Table 10. In 1974-75, the average ROI's of 15.25% in the Tech- nicians' Scheme and 10.5% in EDP were quite low compared to 23.5% under the Conventional Scheme. In the subsequent sluggish year of 1975-76 however, the Conventional Scheme average fell by 34% to an ROI of 15.5% while the techno- entrepreneurs experienced a less severe 23% decline. The EDP entrepreneurs on the other hand gained by 22.8%. The difference in ROIs among the schemes + was thus reduced to within - 5%. The schemewise frequency distribution of different ROIs for 1975-76, however, showed that with an average cost of capital at 10% for TS and NES and 12% for conventional schemes, the ROI performance of a large number of entrepreneurs was not satisfactory. 50% of technicians, 70% of NES and 47% of EDP units had ROI below 10% while 44% of Conventional Scheme units had ROI below 12%. If a ROI of 20% and above is taken as attractive for small- scale units, only 30% of technicians, 32% of EDP and 31% of Conventional Scheme units were earning such good returns. Thus small-scale units in general failed to perform well during the year disregarding the nature of the schemes and the entrepreneurial background. Both in the high and low 70 - Table 10 Average Rate of Return by Schemes for 1974-75 and 1975-76 Scheme 1974-75 1975-76 No. of Units Medium % No. of Units Median % Technicians' Scheme 13 15.25 13 11.75 New Entrepreneurs Scheme 5 2.25 5 10.00 EDP Scheme 14 10.50 14 13.00 Conventional Scheme 14 23.50 Y,4 15.50 - 71 - return ranges, the performance of the innovative and conventional scheme entrepreneurs did not vary much. 4.4.3 Net Profit to Salos The net profit to turn-over relationship indicative of the marketing and operational efficiency confirmed the above pattern. In the normal 1974-75, the Conventional Scheme units had an average ration of 16% as against 10% for the techno-entrepreneurs and 9% for EDP. However, as the inflationary tendencies came under check and markets began to shrink in 1975-76 in quantity and price, the Conventional Scheme units ratio dropped from 16% to a low of 8.25%. For techno-entrepreneurs, it improved to 13% and for EDP 11%. 4.4.4 Repayment Record Loan repayment performance as reported by the financial institutions indicated that only 47.8% of the technicians entrepreneurs were either re- paying regularly or were occasional, non-worrisome defaulters. Against this, the trained entrepreneurs had a,far better record of 77.3% and the Conven- tional Scheme units surpassed others with 91.7% in the group. On the other hand, 39.1% techne-entrepreneurs had a poor repayment performance (continuous default or bad accounts) against only 6.7% of EDP and 4.1% of the Conventional Scheme units. 4.4.5 Comparative Success and Failures The key hypothesis of the new finance schemes had been that the new breed of entrepreneurs would perform as well'as conventional, financially better off, commercially and industrially more established groups. This found validity in NES and EDP performance but less so in the Technicians' Scheme. Taking closed units found in the sample survey as definite failures 1/ and adding assessed failures using the results of the working units, the 1/ Weak or marginal units due to incompetence of the entrepreneurs were treated as failures based on the field survey and the financial in- stitutions' assessment of the operating units. - 72 - schemewise proportion of failures ranged from a low of 6.6% under NES to a high of 38.5% in the Technicians' Scheme as seen from Table 11. EDP units had a low 12.5% failures while the Conventional Scheme units had a high 24.1%. Since the two diverse groups of technicians and conventional entre- preneurs both had rather low success rates between 62.5% and 75.9%, it appeared that the mortality rates among small-scale enterprises in general tended to be high though the causes may differ. Individually among the new schemes, however, the results of the Technicians' Scheme cannot be considered satisfactory even if it is recog- nised that the financial constraint was not adequately removed. The failure rate was bound to go up in vic- of the large number of marginal/weak units 1/ (26.9%) even if many can be saved by timely assistance. On the other hand, the modified model of financing under NES promised better performance with 86.7% units considered to be healthy, though they-were in the early phase of production. Its provision of seed (equity) capital rather than 100% loan funds plus some financial stake (5-10%) from the enterpreneurs would find stronger justification if such performance can be maintained. Its better performance was also contributed to by better project and entrepreneurial appraisal and an improved link-up with banks for working funds based on the experience gained during the Technicians' Scheme. The importance of improved selection and development of comprehensive abilities of the new entrepreneurs.was clearly established by the EDP performance with 75% profitable, healthy units versus only 48.3% under Conventional and 34.6% under Technicians' Scheme. Since the training programme identified and de- veloped both those (conventional type) with funds but little industrial 1/ According to the GIIC records upto end of 1976-77, 21% of the units were either closed or against which legal action had been already initiated, Table: 11 Scheme-wise Entrepreneurial Assessment of Success Vs. Failure of Units Units Considered Failures Marginal But Savable Profitable/Successful Tøtal. Closed Working but Savable with Savable /Healthy considered failures Counselling with funds Technicians' Scheme 3 7 5 2 9 26 (11.5%) (27.0%) (19.2%) (7.7%) (34.7%) (100%) N E S 1 1 13 15 ( 6.6%) ( 6.6%) (86.7%) (100%) EDP 1 2 1. 2 18 24 (4.2%) ( 8.3%) ( 4.2%) (8.3%) ( 75%) (100%) Conventional Scheme 5 2 5 3 14 29 (17.2%) ( 6.9%) (17.2%) (10.3%) (48.3Z) (100%) TOTAL: 9 12 12 7 54 94 ( 9.5%) (12.6%) (12.6%) (7.4%) (57.4%) (100%) -74- experience, and also those resourceless employees and educated unemployeds of the new breed, it proved its effectiveness in successfully exploiting both the sources of new small-scale enterprises. There was a large group of marginal/weak units which could be saved from ending up as failures if (i) in-plant managerial counselling was available. to the entrepreneurs or (ii) additional (working) funds were provided quickly to many of them. These units were found to be operated by motivated and com- petent entrepreneurs facing one or other problem. The combined healthy and savable units proportion came to be 93.3% under NES, followed by 87.5% in EDP and 61.5% in the TS. The Conventional Scheme units with 75.8% remained well below NES and EDP. 4.4.6 Economic Viability of the Finance Schemes An important test of the new schemes would be their economic viability. To be viable, loaned funds must be recovered to both pay back the Government and open market borrowings, and provide an adequate return to meet the cost of capital and operational/organisational expenses. It is only realistic to expect higher than normal financial risk in promoting new entrepreneurs who face many handicaps in their operations. Hence, the bankers' fear in under- taking such ventures of substantial bad debts. Given the terms of repayment under the Technicians Scheme, the break- even discounted Late of return and bad-debt proportion were calculated. The discounted rate of return for the GIIC came to be 8.5% for a loan. With the average cost of capital to GIIC at 7%, a difference of 1.5%'was left to meet the costs. In addition there was income from the loan application scrutiny fee of 1% of project (fixed) cost. The costs included'Rs. 400,000 per annum, of organisational/operating expenses and bad-debts of principal and interest amount. Assuming approval of 200 projects per year with an average invest- ment of Rs. 200,000, the scheme broke-even if bad-debts amounted to no more - 75 - than 15%. With 38.5%.failures under the Technicians' Scheme including 11.5% already closed units and 27.0% marginal/weak units in difficulties, the bad-debt proportion could well be above 15%. However, the financial loss was not total when a unit failed. Assets including land, building and machines --ere mortgaged to the GIIC and unless they were grossly misused, the resale (market) value was at least consistent with the depreciated value and often came to be higher due to rising prices of these assets. Failure of a unit is usually not due to failure of the industry and there are normally potential buyers of ready units when the project is viable but the failure occured due to inabilities of the entrepreneurs. The losses were, therefore, heavy only when unscrupulous entrepreneurs sold off machines, tools and raw materials. Fortunately, the proportion of such persons was very small. The latest GIIC estimates of bad-debts actually written off after assessing the current and projected working of the units have been Rs. 7.5 million. Of the total disbursement of Rs. 53.4 million under the scheme, the bad-debts work out to 14%, just within the break-even point limit of 15%. The now operating version of the innovation, NES, with its sound initial performance, increasingly fed by EDP trained entrepreneurs, should have a much lower bad-debt proportion, and thus easily attain break-even per- formance. 4.5 Problems of Small Enterprises An analysis of the problems faced by the units under various schemes gives an insight into the major causes of failures of small-scale enterprises. 4.5.1 Integrity and Commitment Unduly large withdrawals of funds for personal use obviously affect the liquidity of the unit and the working capital for production purposes. - 76 - Was irresponsible use of funds under liberal conditions the cause of failures? Field survey data showed that the new entrepreneurs maintained a strict finan- cial discipline as reflected in their monthly withdrawals for salaries and personal expenditure from the units. 58% of the innovative scheme units with- drew less than Rs. 500 per month and an additional 19.3% took out less than Rs. 1,000 per month. In all, 71.4% entrepreneurs took out no more than their previous 'take h(tme amount'. 76% indicated that despite 100% finance, they had a high stake, a great deal to worry for the venture. For their risk was in 'career at stake', 'sacrifice of a regular job', 'problems in getting re- employment or setting up another business' if this venture failed. 'Obliga- tion to the financial institution' regarding the borrowings, 'loss of time and energy' were the other considerations involved. Thus most new entrepre- neurs had lived up to the institutional expectations of high integrity and commitment to the project. 4.5.2 Low Capacity Utilisation and Sales If the basic integrity of most new entrepreneurs was sound, then why the poor financial performance of such a large number of units (disregarding the schemes)? The low rate of return, below break-even performance, low NP over sales ratio, were found to be results of very poor capacity utilisation and failures to reach expected sales. The average capacity utilisation of TS, EDP and Conventional Scheme units ranged between 39.5% and 41.5%. Only 18% of TS, 41% of EDP and 35% of CS units utilired 50% or more of their pro- duction capacity. With production capacity created with substantial borrow- ings, the interest and instalments burden adversely affected repayment capacity and the financial soundness of the units. An analysis of expected versus actual sales showed that irrespective of the schemes, between 89 and 95% of the units failed to achieve sales targets in the first year. As high as 55% of the TS/NES - 77 units and 36% of the Conventional Scheme units achieved less than half their expected sales in the first year. During 1975-76, in the sluggish conditions but with a longer business experience, only 20% of TS/NES, 10% of EDP and 25% of Conventional Scheme units could attain more than 50% of their sales targets. Poor capacity utilisation thus was a general small-scale unit phenomenon and a direct result of poor sales performance. As found in the survey, the foremost problem in achieving planned sales according to the new entrepreneurs was working capital shortage which affected 37.5% of the units followed by industrial recession (27.5%) and intense com- petition (20%). The incidence of plant shut-downs was high with 44.9% of the innovative scheme units and 37% of the Conventional Schemes affected by it between 1969-70 and 1975-76. The highest number of production days (164 per unit) were lost by TS/NES entrepreneurs due to unsold finished goods followed by working capital shortage (145 days). Shrinking markets (recession and com- petition), inadequate marketing abilities (finished goods stocks, competition) and limited working capital were the three prime difficulties which adversely affected the operational performance of most units. (1) Shrinking Markets With the majority of the small-scale industries producing industrial goods purchased by medium and large industries, the markets had begun to shrink from 1974-75 onwards with the general slowing down of industrial growth in the economy. To control rising prices, anti-inflationary monetary controls were introduced which in effect meant a credit squeeze by banks. While small-scale industries, considered as a 'priority sector', were, in theory, to be exempted from the squeeze, in effect a credit squeeze on medium and large industries was passed on to small-scale industries by way of delayed payments for the goods purchased and fewer purchases. Normal credit time for accounts receivable - 78 - increased from 3 months to 8 to 10 months upsetting the working funds cycle, This was an external factor beyond the control of the entrepreneur and was indicative of the high vulnerability of small enterprises to major changes in the environment affecting their funds flow. The financial institutions needed to be quick and flexible in meeting the funds gaps created by such changes in payment patterns. In practice they were not. (2) Marketing and Management Problem' But not all units suffered badly despite this external handicap. The adverse performance of many units during the industrial sluggishness brought out the inherent entrepreneurial and managerial inadequacies of many. An inability to secure markets proved to be the foremost weakness of the new entrepreneurs, the majority of them being technicians and production specia- lists. The inharent optimism of entrepreneurs, enhanced by confidence in production skills and experience in industry-mdi them underestimate the problems of competition, entry into market, sales strategies to compete against established industries and therefore the initial funds needed until 1/ adequate cash inflow was generated. Their experience revealed the inadequacy of industrial experience along, however long, for success in industry unless (i) it was in the product line in which one wanted to enter; (ii) the experience was "rounded" (multi-facet) leading to managerial understanding in crucial areas of purchase, production, finance, marketing, costing and pricing. In practice, most failing small-scale enterpri&es were found to be run by those who possessed 2/ only one sided experience usually in non-commercial aspects.. 1/ Two other studies of Gujarat on small-scale industries also led to the same conclusion. See 'A Special Study of Defaulting/Sick Units of GSFC' by the Entrepreneurship Development Consultancy Services, GIIC, Ahmedabad (August 1977) and "The Starting Crisis", Strategy of Success in Business and Industry, V.G. Patel, Parivar Prakashan (Hindi) Ahmedabad, 1976. 2/ Ibid. -79- (3) Working Capital Shortages The data on planned versus actual means of finance had revealed that unfilled gaps were largest for working funds expected from banks. Half- hearted and erratic support of banks to the new entrepreneurs led to mnade- quate and delayed release of funds in many cases. On an average 7 months were taken by banks after term loan sanctions by State agencies by which time the new entrepreneur had typically used up virtually all his personal savings. The amount sanctioned normally left a higher margin than assessed by GIIC in its appraisals and the gap remained unfulfilled. Sanctioned funds were re- leased in a piecemeal, halting manner preventing entrepreneurs from operating full cycles of production, sales and recovery at a profitable level. Raw materials, which were in short supply, could not be purchased'adequately and, in time, goods sold on credit during recessionary tight money periods did not bring in timely cash inflow. Wages, salaries, power, fuel, rents and other variable costs were not financed by banks. MaAny units thus went into pro'- duction with an inadequate funds provision for the proj ects. This basic error could not be remedied by a change of attitude of the bankers at various levels of operations, nor did the State agencies come in to fill the vacuu.m as was done in the case of fixed assets financing. The credit squeeze and industrial sluggishness in the later years worsened the problem for otherwise competent, settled units with good markets. * But many units which were weak on internal managerial capabilities, especially on commercial aspects mentioned above, contributed to their 6wn working funds shortages. These would not have done well in the long run even with more funds. Their need was management counselling, steps to improve their operational effic- iency in purchase, sales, costing, pricing and so on. The institutional arrange- ment for such in-plant counselling (extension service) should have been a part - 80 - and parcel of new entrepreneur promotion. 5.0 CONCLUSIONS AND LESSONS 1) The three innovative policies and programmes of Gujarat have been effective in accelerating the development of small-scale enterprises. The basic assumption behind these schemes have been validated and major objectives of diversifying the sources of local new entrepreneurs, decentralising enterprise ownership, generating indus- trial employment at low capital cost have been well served by the schemes though the performance could still be further improved. 2) The experiences of the Technicians and the New Entre- preneurs' Scheme of finance would suggest that poten- tial industrial entrepreneurship for setting up and running viable small and medium enterprises is lying latent in a variety of castes, communities and occupa- tional groups inhibited by the constraint of finance. Industrial and 2ommercial employees, technical graduates could be good sources of new local entrepreneurs once the financing bottleneck is removed. Success in indus- try was found to be a result of enterprise and competence rather than financial background of the enterprenc.. as anticipated by the new schemes. A "needs-based" policy of financing new enterprises, breaking the restrictive hold of conventional, security dominated norms, is a pre- condition and an effective policy tool of exploiting the available industrial entrepreneurial potential. Even - 81 - with a higher than normal risk of failures, such a scheme can be financially viable, apart from being socially and economically desirable. 3) The sources of entrepreneurs can be further diversified and more effectively utilised by tapping those who face non-financial constraints of inadequate entrepreneurial and managerial capacities, industrial information gaps and hence a lack of self-confidence, A comprehensive training-cum-development programme like the Gujarat EDP can tap non-industrial and industrial employees, technical and non-technical graduates, traders and pro- fessionals at a low cost with a down to earth, imagina- tive formulation and execution of the development .package, 4) Work experience, especially in industry or business, comes out to be a key element in the process of industrial entre- preneurship formation. Experience as an employee is an important element in successful self-employment and self- employment experience is equally advantageous to success- ful entrepreneurship. If the experience inputs are absent in an individual, they can be provided through a comprehensive training-cum-development programme. The poor results of self- employment programmes for unemployed engineers in India sug- gest that education, technical knowledge, experience and talent cannot be lumped together and are not inter-changeable. Potential entrepreneurs as well as financial institutions need protection against ill considered risk. It is.this view-point which supports the Gujarat trainers' emphasis on the comprehensive - 82 - selection process which favours industrially ex- perienced and 'developable' persons and their belief that not anyone and everyone can be made into a viable industrial entrepreneur. 5) The three imreovations simultaneously introduced and operated by the conglomerate of industrial corpora- tions have fed and strengthened each other. Careful selection and training under EDP, needs,based financ- ing 1in the New Entrepreneurs' Scheme and expeditious implementation of the projects with ready infrastruc- ture and sheds have proved to be highly effective ways of promoting small enterprises. It could well be treated as a necessary package of assistance, as the field studies have shown, while removing various bottlenecks in the small enterprise environment. 6) Such a package calls for sound institutional and organisa- tional arrangements and effective coordination among in- dustrial agencies for effectively assisting the entrepreneur. The creation of GIIC, an independent development finance agency, professionally staffed with policy flexibility, has been the key to the operation of Technicians and New Entre- preneurs Scheme of finance and a pre-condition of introducing the innovation. GIDC's success over most other States was led by dynamic leadership and subsequent support from a strong planning and technical organisation for breaking the conventional attitudes towards industrial infrastructure. The organfsational strength of EDP, where the multiple needs of - 83 - the entrepreneurs had to be met , emerged from the sup- port of the 4 key industrial corporations, the selected team of trainers and entrepreneurship experts, a committed Governmental interest and financial stability. Such in- novations, therefore, cannot be effectively introduced and operated without creating a suitable institutional base which can respond to the needs of such ventures with a combination of commitment in attitudes and professionalism in skills. The sensitivity of performance of the scheme to the institutional character and style is revealed in the banker's approach to the new schemes and the subsequent working funds problems which adversely affected the units' performance. 7) Among the three innovations, it is in the scheme of finance that the performance had been less than satisfactory in the initial phase. The Technicians' Scheme had a significantly high rate of failures (38.5%) and a large number of marginal/ weak cases. Substantial improvement in the performance of the subsequent scheme (NES) would then suggest that even for needs-based financing, a 100% loan arrangement is not an effective method of financing due to its fixed time, high new entrepreneurs were vulnerable to the freqdent major fluctuations in the business conditions because of their low resilience to funds shortages. A cushion in the finan- cial structure is necessary with a part of the financial assistance (15 to 20%) as equity/seed capital. - 84 - 8) The failure rate among new and small enterprises in general is likely to be high. Two major problems facing the entre- preneurs will have to be safeguarded against: (a) Small-scale units are unable to sell their products in required quantities. This is despite State policies to keep the markets large by reservation of products exclusively for small enterprises, import bans, regulating the number of units. Mere smallness of the enterprise without distinct advan- tages to the entrepreneur and his product quickly turns the market into one of intense competition. Selling can be partially facilitated through more and more Government purchases with preferential price treatment. Even specialised sales agencies of the State will not be able to market all the small industry products. Ultimately, the success of the unit will depend upon the entrepreneur's marketing ability backed up by his overall mana- gerial competence in choosing the right product and degree of diversification and innovating and competing through appropriate quality, price and sales strategies. In-plant counselling of small-scale enterprises on marketing and most other commercial and mana- gerial aspects, must be an integral part of the financial assistance programme. The Gujarat Corporations, despite their innovations which -85- put the entrepreneur in his factory, did not carry the process to its logical end and were faced with a large number of 'sick' units. In- plant counselling through industrial extension service, with a regular, institutionalised arrangement of reaching weak and marginal entre- preneurs in time, diagnosing the cause of illness, securing relevant financial and/or managerial in- puts had to be built into the development agencies' operational set-up. That such in-plant counselling and training can significantly improve performance was effectively brought out by the significantly better results of the EDP units where the entre- preneurs possessed rounded managerial know-how. (b) Inadequate working capital has been the second most serious problem. Barring those who ran into working fund shortages due to internal managerial inefficiencies, there had been a significantly large number of units under both new and old schemes which suffered in.capacity utilisation and sales performance because of inddequate working funds. The support of banking institutions fell well short of the needs of new entrepreneurs. Long delays in sanction and dis- bursement, large margins, inadequate sanctions of amounts, non-response to needs at critical times, hardening of attitudes at the first sign of trouble in the unit were the usual banking responses to the - 86 - working capital needs of small-scale entrepre- neurs. As a result, the financial constraint on new and small enterprises had not been adequately removed even though the new schemes made a sig- nificant dent in the highly restrictive fixed assets financing by the conventional credit in- stitutions. With new entrepreneurs falling short of working funds by 30 to 40% and having been called upon to invest 20 to 30% in the total pro- ject cost, the needs-based finance objectives had yet to be fully achieved. The innovative approach, which removed the constraint of fixed assets financ- ing, must logically be extended to the working funds with or without the banking support. Unless the de- velopment finance agencies go full distance in meet- ing the genuine funds needs and support the entrepreneur by effective pre-investment product counselling and in- plant managerial guidance, the incomplete package of assistance would leave him too exposed to the crises.in industry in the initial crucial phase. The resulting many failures may then discourage new ones from enter- ing the field, a trend difficult to reverse once started. DOMESTIC FINANCE STUDIES # 29. Contractual Savings and the Mobilisation of Resources. November 1976. P. Shome. # 30. Tax Evasion and Avoidance: A Crucial But Neglected Aspect of Taxation. December 1976. J.N. Sharma. 1 31. Aspect of Savings Behavior in Rural India. December 1976. Surlit Bhalla. # 32. The Incidence of the Corporation Income Tax: A Fixed Edowment, Specific Factor Model. January 1977. P. Shome. 33. On Monetary Data and Analysis. February 1977. V,V. Bhatt. 1 34. A Program of Research on Finance and Development. March 1977. R. S. Eckaus. 35. The Determinants of Savings Behavior: A Survey of .the Evidence. March 1977. K. Saito. 1 36. Some Project Issues in Indexation of Financial Contracts. April 1977. S. Yusuf & V.V. Bhatt. 1 37. Meeting Basic Needs in Malaysia: A Summary of Findings. April 1977. Jacob Meerman. 38. The Impact of Contractual Savings on Resource Mobilisation and Allocation: The Experience of Malaysia. April 1977. K. Saito and P. Shome. 39. The Commercial Banking Industry in Brazil 1964-1974. ray 1977. Shahid Yusuf. #0. Ehtexprise Control in the Soviet Union and China- The Futility of Lessons. June 1977. Shahid Yusuf. hi. Bank Behaviour and the Control of Credit Flows: Lessons from the Sri Lanka Experience. June 1977 Jamshed K,S. Ghandhi 42. The Distribution of Public Expenditure for Education and Agriculture in Malaysia - Methodological Issues and a New Approach. October 1977. J. Meerman. 0 43. Division of Public and Private Finance: Research Program and Its Rationale. October 1977. V. V. Bhatt. 44. Understanding Self-Management in Yugoslavia. November 1977. S. Yusuf. # 45. A Statistical Analysis of the Dynamics of Economic Growth in Iran: 1959-73. December 1977. W.A. Dellalfar & J. Khalilzadeh-Shirazi. # 46. Innovations in Banking: The Syndicate's Experience. January 1978. N.K':Thingalaya. -4 47. Interest Rate, Transaction Costs and Financial Innovations. January 1978. .V.V. Bhatt. # 48. Decision Making in the Public Sector: A Case Study of Swaraj Tractor. February 1978. V.V. Bhatt. # 49. Portfolio Determinants of Commercial Bank Earnings in Selected Asian Countries. March 1978. Katrine Anderson Saito and Dan P. Villanueva. # 50. Some Theory of the Financial Intermediation in Less Developed Countries. May 1978. Alan R. Roe. # 51. Innovations in Banking: The Gujarat Experiments. August 1978. V.G. Patel.