48844 MAY 2009 ABOUT THE AUTHOR Helping Local SME Suppliers Survive the PETER MWANZA is the Program Manager for Global Economic Crisis: Lessons from Zambia the Copperbelt Small and Medium Enterprises (SME) Suppliers Development Economies dependent on resource extraction are particularly susceptible to Program, an IFC Linkages sudden swings in commodity prices. IFC linkages projects should take this program in Zambia. He is an SME development specialist into account by helping small and medium enterprises (SMEs) prepare for with more than 12 years of the "hard times," such as the current global economic crisis, through experience in SME develop- ment from Southern and East diversification of markets and improving their coping capacities. To reduce Africa. Before joining IFC in their dependency on one or a limited number of corporations, SMEs should 2007, he worked for the Southern Africa International also be linked or introduced to market opportunities available from other Business Linkages program, a organizations or firms. Likewise, other players or consumers in the sector USAID-funded project located in South Africa. should be included in "crisis" planning and introduced to SMEs to increase the market size for SMEs. Finally, partnerships should be sought with APPROVING MANAGER Colin Shepherd, Business Line government organizations involved in SME development to design Manager, Corporate Advice innovative capacity-building interventions. This SmartLesson describes how (Africa). we are helping Zambian SME suppliers hit hard by the global economic crisis The author wishes to and sharp fall in world copper prices and the lessons learned from our acknowledge Mutamba experience. Bwalya, Operations Analyst; Mwila Chanda, Team Assistant; and Thilasoni Chikwanda, Line Operations Background: Sharp fall in world reliance on domestic funding that provides Officer, for their contributions copper prices very limited exposure to external credit lines. in writing this SmartLesson. So far, the largest impact of the global While the global economic crisis has badly hit economic crisis has been the very sharp decline economies around the world, resource-fueled in global copper prices and its accompanying economies have been the worst affected negative consequences for the mining sector. because of the sharp drop in commodity As shown in Figure 1, it appears that the high prices. copper price honeymoon is over, at least for now, as the current price of $1.00 per pound By December 2008, the global financial crisis brings it to 2003 levels. and its impact on copper prices had contributed to a significant slowdown in the Zambian mining Figure 1: Increasing Copper Prices from 2003 to June 2008. sector, which is dominated by copper production (cobalt produc- tion follows in a distant second). Between July and December 2008, the price of copper had decreased from about $4.00 per pound to just above $1.00 per pound. This sharp price decline has had a significant impact on Zambia's economy which is heavily depen- dent on copper. The direct impact of the crisis on Zambia's financial sector has been limited, however, thanks to Zambia's IFC SMARTLESSONS -- MAY 2009 1 Mining companies in the country have scaled down help suppliers because these two mines are the largest and operations dramatically, resulting in emergency measures provide the biggest market to local suppliers. Because of that include extended periods of leave for staff or even the impact of the global economic crisis, most SME suppliers halting operations completely. In November 2008, Luanshya are threatened with closure. Copper Mine, one of the six major mines in Zambia, suspended construction of the Mulyashi copper mine; the IFC's Response next month, the company halted operations and laid off 1,740 employees. Between December 2008 and February In 2007, IFC established the Copperbelt SME Suppliers 2009, another major mine, Chambishi Metals PLC, stopped Development Program (CSSDP), a linkages initiative production of cobalt, while a third mine, Konkola Copper undertaken by the IFC Private Enterprise Partnership for Mines PLC (KCM) closed its smelting plant in Kitwe, Africa and implemented jointly with four of Zambia's increasing anxiety and fear of job losses among mine leading multinational mining companies. workers. The objective of the program is to help multinational Mopani Copper Mine (MCM), one of Zambia's oldest mines, mining companies integrate local SME suppliers into their also put its Mufulira mine on "care and maintenance" and supply chain by focusing mainly on SMEs in the laid off a huge number of workers. Further, Albidon, a manufacturingsectorandthosewithvalue-addingactivities. nickel mine, has also closed its operations, with several small The program aims to achieve this objective by helping to exploration companies suspending or completely stopping increase the competitiveness of local SMEs by offering their exploration works. It is estimated that more than trainingonproductivityimprovement,qualitymanagement 10,000 jobs have been lost in the Zambian copper belt due systems,salesandmarketingstrategies,businessdiagnostics, to the global financial crisis. What does all this mean for and quality management systems, as well as helping SMEs local SME suppliers? develop bankable business plans that can be used to access finance. Impact on SME suppliers Specifically, to help SME suppliers survive this period, the The scaling down of operations and contracts by mines has CSSDP is: decimated the availability of business opportunities for local SMEs, which rely heavily on business provided by the · Conducting workshops to train SMEs to understand mines. Suppliers have experienced major downsizing or the importance of diversifying their markets as a form complete cancellation of their contracts as mines embarked of "hedging." The Project Management Unit and on cost-saving measures. steering committee of the program have also been making one-on-one visits to the affected SME clients to help them understand their specific needs and offer solutions. For example, some SMEs have been awarded on-the-spot contracts to help them survive. · Increasing SMEs access to finance. The depressed market conditions in Zambia's mining region have resulted in commercial banks being reluctant to advance loans and other facilities to SMEs, especially those primarily dependent on supplying mining companies. This is despite the fact that the cost of capital is quite high in Zambia. To help deal with this situation, the program has agreed to work with the Citizens Economic Empowerment Commission (CEEC)--a statutory body tasked with empowering local entrepreneurs (citizens) by providing loans at competitive rates to expand or start new businesses. According to the CEEC, poor quality of business plans received from SMEs is one of the biggest challenges hindering them from accessing finance available through the Citizens Economic Empowerment Fund (CEEF). The program is therefore Figure 2.Vicious Cycle of the crisis on local SME suppliers focusing on assisting SMEs to do bankable business plans in order to access these funds. As part of this agreement, CSSDP has began identifying SME suppliers in the copper The cycle is increasingly vicious as more and more local mining regions to prepare bankable business plans, banks are denying suppliers loans because of unreliable which will be financed by the CEEC fund. payments from mining companies, some of which are struggling to survive. Underground mines, such as MCM The plan of this pilot is to help about 50 existing and and KCM, are hit hardest because their production costs per potential SME suppliers with market-diversification plans in pound of copper are generally higher than those with order to avoid a total collapse of the local supply chain. This open-cast mining operations. Unfortunately, this does not is important because the mines will need the supplier 2 IFC SMARTLESSONS -- MAY 2009 network to be available when the market and industry outlook improves. While the global financial crisis and subsequent impact on Zambia's mining sector have brought many challenges for our work, some positive lessons have emerged that will help guide and improve current and future linkages projects. Lessons Learned 1) Help SMEs look beyond IFC clients to diversify their markets and help them survive hard times before they hit. Reduced business volumes--an impact of the crisis. Because of the volatile nature of commodity prices and their severe consequences for SMEs, IFC linkages projects should include market-diversification strategies for SME the CEEC started in March 2009 after we read articles in the suppliers. SME suppliers are often the worst affected and local paper about the challenges that CEEC faced in need the most assistance during the current global crisis. In disbursing its funds because of the lack of capacity of SMEs Zambia, this is partly because they are ill-prepared or lack to prepare bankable business plans. By understanding the the capacity to look for markets beyond supplying the challengesfacingrelevantgovernmentinstitutionsservicing mines. IFC should help SMEs look beyond our partner the SME sector, we were able to develop a partnership that companies and investment clients to help them ride out the was beneficial to all parties--IFC, the partner organization, impact of falling commodity prices. While included on a and our beneficiaries, the SMEs themselves. Under the linkages project, an SME should still seek markets for its arrangement, CSSDP will help SME suppliers develop products or services outside of the extractive industries. For business plans to help them diversify their market beyond example, we approached La Farge, a cement-producing mines while CEEC will fund such business plans with more competitive rates and more flexible lending terms. This partnership is one way to overcome the challenge of access to finance, as commercial bank lending is becoming more streamlined and difficult to access. 3) Engage multiple cooperating partners in helping to cushion the impact of downturns in commodity prices. Having a sector approach where there are multiple cooperation partners has also proved useful during the crisis. In Zambia, the CSSDP program is working with four mining corporations to help them integrate local suppliers into their supply chains, which is primarily based on the import of goods and services. The program conducted a diagnostic of the mines to understand current practices in relation to procuring from local suppliers. Through their continued commitment to the program, demonstrated by Paying attention to a client's needs their attendance at monthly meetings organized by IFC as an honest broker to discuss how to help local suppliers, the mining companies have underscored their interest in this company based in Lusaka, which consumes quite a number cause. of products and services offered by our SME clients. Based onourdiscussionswithLaFarge,thecompanyhasrequested The program has benefited greatly from working with our help to train some of our SME suppliers on business multiple partners, especially during the downturn in the management skills. The suppliers will then be awarded market. The main benefits have been allowing for the contracts. whole industry to capitalize on economies of scale, enabling suppliers to take advantage of alternate markets, and 2) Keep an eye out for "smart partnerships" from allowing mines to share best practices on local procurement nontraditional sources to achieve your objectives. and sharing information on good and risky suppliers. Many organizations are involved in SME development or For example, following the closure of Chambishi Metals, related businesses. While partnerships with donors and one of the SME suppliers (Tonlex Investments) that was corporate bodies are very strategic, we have also explored dependent on doing business with this mine has been partnerships with relevant government bodies that service significantly affected. However, the SME has been given a SMEs, such as the CEEC. Discussions about partnering with new injection of life from small contracts from other mining IFC SMARTLESSONS -- MAY 2009 3 companies after IFC's linkages program and 2010. Although the mines have registered mining partners visited the SME to discuss their interest in continuing the program, their survival strategies. This has helped the commitment will depend on the price of company avoid total collapse and, in the copper next year. Kiwara Mining PLC, an IFC process, retain a few jobs. Another SME on prospective investment client in Zambia, has the IFC program--Dukon Paint, a paint also indicated its interest in building on what manufacturer--was awarded a contract by the program has done, should the investment one of the mining partners. However, another take place. mine has asked the Dukon Paint to forward its samplesinordertohelpincreasetheirvolumes, which are still hovering below production capacity. All such transactions have been made possible because of monthly meetings where information on such issues is available opportunities are discussed. Conclusion The program continues to be relevant in the face of harsh market conditions. To date, the program has trained and assisted more than 300 entrepreneurs from about 150 SMEs in business management skills, quality assurance and management, and using the SME Toolkit. In addition, the project has helped to raise just under $1.5 million for four of its clients by helping them do company diagnostics and prepare bankable business plans. The program isnowhelpingSMEswithmarketdiversification plans survive the impact of the global financial crisis. The program is preparing an exit plan before it reaches the end of its funding in June DISCLAIMER IFC SmartLessons is an awards program to share lessons learned in development-oriented advisory services and investment operations. The findings, interpretations, and conclusions expressed in this paper are those of the author(s) and do not necessarily reflect the views of IFC or its partner organizations, the Executive Directors of The World Bank or the governments they represent. IFC does not assume any responsibility for the completeness or accuracy of the information contained in this document. Please see the terms and conditions at www.ifc.org/ smartlessons or contact the program at smartlessons@ifc.org. 4 IFC SMARTLESSONS -- MAY 2009