PANAMA: A DAY IN THE LIFE OF SMALL AND MEDIUM

UNCLAS PANAMA 000320 SIPDIS WHSR PLEASE PASS TO USTR E.O. 12958: N/A TAGS: ECON PM EFIN ELAB ECON SUBJECT: PANAMA: A DAY IN THE LIFE OF SMALL AND MEDIUM ENTERPRISES (SMES) ¶1. (U) Summary: Small and Medium Enterprises (SMEs) represent over 92% of Panamanian businesses. This cable surveys an unrepresentative sample of small businesses and attempts to get a glimpse into their experiences. The six entrepreneurs interviewed appeared confident about their businesses. They all earn above the minimum wage of $310 dollars a month, and compare favorably with 81% of the country,s employees whom earn $7,200 a year or less. However, these businesses find it difficult to grow because of little access to financing, labor rigidity, and a scarcity of programs to assist their development. End Summary ¶2. (U) Panamanian categorization of business size is solely revenue based, unlike U.S. classifications based on revenues or the number of employees depending on the industry. Panama defines micro- enterprises as businesses with revenues up to $150,000, while small and medium enterprises have revenues from $150,000 to $1 million and $1 million to $2.5 million respectively. These businesses, generically called small and medium enterprises (SMEs),represent 92% of all businesses in Panama, according to Rosemary Piper Executive Director of the National Center of Competitiveness, a private organization that works to enhance Panamanian businesses. A March 2009 newspaper article estimated that 866,200 people, or approximately 61% of the economically active population, are employed by small businesses. These figures are likely underestimated, Piper added, because Panama has a significant informal sector as well. Small businesses that rely on personal assets, work out of their homes, and employ family members tend to remain informal, Piper continued. Piper noted that the Authority of Micro, Small, and Medium Sized Businesses (AMPYME) estimates that more than half a million people work in the informal sector. ¶3. (U) After the military government of Noriega fell, many electricians, plumbers, and other workers found themselves unemployed, Piper explained. They began selling their services independently and informally. The same thing happened when the American military bases left Panama. &These entrepreneurs had a trade but did not have managerial skills; they did not know how to grow their business. This is part of the history of small businesses in Panama.8 -------------- Business Descriptions -------------- �0A; ¶4. (U) Six SMEs were interviewed; an artisanal vendor, beauty salon, auto-repair shop, pharmacy, construction firm, and a bakery. - LeiArt Artisanal Crafts: Founded by Leilani Gonzalez, LeiArt produces personally hand crafted artisanal jewelry, bags, and clothing. Gonzalez decided to leave her job at a Dell Call Center and began selling artisanal products in ¶2007. Her customers, a mix of Panamanians and foreigners, can buy her products from her home show room in Panama City, her internet site, various artisanal fairs in which she participates, and also from two local retailers. Gonzalez earns an annual profit of about $12,000 (revenue figures unavailable). - Racheli Beauty Salon: The three year old salon is a partnership owned by Elizabeth Ortega and Raquel Valdes that offers hair and beauty care services in Panama City. Previous to establishing their own business, the two partners -and only employees, worked for 10 years at a salon where they met. Gross revenues in recent years have averaged $24,000 annually with annual profits of $12,000. Each partner takes home about $500 per month. - Taller Enrique Auto-Repair: The auto repair shop offers services in car maintenance and body work in Penonome, a town about three hours outside Panama City. It was started by Vidal Enrique Jaen in 1972 on a small plot of land that he bought from a friend at a discount. Taller Enrique has now grown to a business that has 10 fulltime employees and 5 part-time employees. The auto repair shop is predominantly managed by Jaen,s son, Eric. In 2008, Taller Enrique collected $150,000 in gross revenue and about $30,000 in annual profits. - Farmacia Jacinto: Farmacia Jacinto sells over the counter medications, prescription drugs, and some school supplies. It was founded by Juan Jacinto Chang in 1992 with loans from friends and family, and has grown to include three locations in Penonome. Most of Chang,s customers are from Penonome and neighboring towns. Chang has 13 employees and earned a profit of $36,000 from the pharmacy in 2008 (revenue figures unavailable). - Construciones Y Proyectos: This construction firm, owned by Radames Batista and located four hours outside of Panama City in Santiago, specializes in building aqueducts to harness potable water, schools, sidewalks, and gutters in the interior of Panama. It lends its service primarily to government agencies or private enterprises with capital. Radames Batista has one business partner and 48 employees. Construciones Y Proyectos has average annual gross revenues and profits of $500,000 and $80,000 respectively. - Pan Y Canela Bakery: Pan Y Canela is a bakery and cafeteria in Panama City, founded by Colombian citizen Jose Mauricio Borrero and his wife, both engineers. It was first established in 2000 but found success and grew significantly only after moving to its current location in the Ciudad del Saber (City of Knowledge) in 2006. Pan Y Canela has 20 employees, up from 2 in 2006. In 2008, gross revenue increased from $450,000 to $650,000, a jump of more that 40%. Throughout their growth profits have averaged 22% of revenue, totaling about $143,000 in 2008. In addition to the drop in bakery/cafeteria, Pan Y Canela offers catering services which comprise about 15% - 20% of their business. -------------- Business Conditions -------------- ¶5. (U) The businesses reported varying impacts from Panama,s macro-economic cycles. When asked whether Panama,s economic boom from 2004 - 2008 influenced their business, only Taller Enrique said his SME was directly impacted by the economic boom. Taller Enrique described a lag effect on his business from the increased car purchases that accompanied Panama,s economic boom. Following a slow year in 2006, business has increased from 2007 to the present. Eric Jaen pointed out that the first three months of 2009 have already brought in more earnings than the first six months of 2008. According to Eric Jaen, 2008 was a record year for car registrations in Panama. Eric Jaen is not very concerned about an economic slow down because the increased number of cars on the road will continue to need repairs. The Association of Auto Distributors of Panama (ADAP) stated this March 2009 that annual sales of new autos are expected to fall by 20% to about 36,000 cars, from a height of 43,239 cars in 2008. However, ADAP pointed out that these figures are still above Panama,s natural market of around 25 - 30 thousand auto sales per year. Eric Jaen commented that he has seen an increase in the number of cars on the street in Penonome. &Five years ago Penonome did not have a traffic light now it does8, Jaen continued, referring to three new traffic lights that were installed this year. ¶6. (U) For Construciones Y Proyectos the economic boom has brought increased competition to Santiago, Veraguas. His business now has to work harder to remain competitive. ¶7. (U) A number of the SMEs were concerned about a possible economic downturn in 2009. Racheli Beauty Salon noted that they have seen a drop in customers in the first three months of 2009 and are worried about a continued slow down. Farmacia Jacinto did not feel influenced by the global economic downturn until this March when sales flat lined after growing consistently during the last few years. Pan Y Canela noted that although they are wary of the financial crisis, their growth has piggy-backed on the development of Ciudad del Saber, Panama,s growing international NGO and technological center. Meanwhile, LeiArt, one of the youngest and smallest businesses, noted that she was more affected by seasonal trends including pay periods, and the tourist season. -------------- Challenges: Finance -------------- ¶8. (U) Access to finance is one of the key challenges that Piper noted she consistently hears from small businesses. AMPYME estimates that only 9% of SMEs demand for credit is being satisfied and there is a need of an additional $246 million dollars in financing. Fernando Marquez, President of the private National Union for Small, Medium, and Micro Enterprises, commented that the lack of bank financing endangers the thousands of jobs generated by small businesses. All of the entrepreneurs interviewed financed the launch of their business without formal banks loans. Personal resources, credit cards, and loans from friends and family were commonly used as seed capital until revenue was enough to support the business. In order to avoid collection problems, transactions with clients were predominantly cash based. One to three months of store credit from wholesalers were often the only credit used. Only Farmacia Jacinto and Taller Enrique reported using bank loans to support their businesses. -------------- Challenges: Labor -------------- ¶9. (U) Labor also featured as one of the key challenges among the entrepreneurs. The SMEs commented that the labor code was restrictive and that they had difficulty finding good help. They stated the labor code was always on the side of the employees and -outside of grave offenses- it was difficult to fire employees without having to pay a significant sum based on salary, vacation, seniority, and severance. &You can fire someone in one day; but you have to pay.8 commented Jacinto Chang. Also it was common for former employees to attempt to sue employers for additional compensation. To avoid subsequent lawsuits from disgruntled employees Farmacia Jacinto, Pan Y Canela, and Taller Enrique have all seemed to arrive at the same solution. They all pay more than the obligated amount when discharging an employee to prevent follow up suits. Pan Y Canela, which has paid additional sums for three such suits, stated, with his new practice judges now dismiss the lawsuit noting that the former employee has already been compensated beyond the legally required amount. ¶10. (U) Only Taller Enrique commented that they did not have any trouble finding good labor. Farmacia Jacinto commented that finding employees with the required Assistant Pharmacist Certification or the higher Bachelor Degree in Pharmacy was difficult. Particularly, employees with the Bachelor preferred to work in the Panama City. Continually improving customer service was also a common challenge among the businesses. Pan Y Canela noted that his employees often needed to be closely supervised and did not work independently. As Pan Y Canela put it, good customer service can improve the tasteof a glass of water. ¶11. (U) Racheli Beauty Salon had a unique problem of having a majority of clients that preferred personal attention and would feel offended if they were being handled by another hair stylist. LeiArt wanted to keep her business small and create all the artisanal pieces herself, although she is considering hiring someone to help buy raw materials, make packaging, and assist with administrative tasks. -------------- Challenge: Government Services -------------- ¶12. (U) The government appears engaged but not intrusive in terms of regulation. All the businesses were regulated to some extent. Ministry of Commerce (MICI) regulates the formal establishment of all the businesses. The Ministry of Health (MINSA) calls for employees of Racheli and Pan V Canela to receive a certificate of health. Pan V Canela, Taller Enrique, and Farmacia Jacinto are all subject to site inspections from MINSA as well. All six businesses reported that the Ministry of Labor (MITRADEL) verifies that employees are being fairly treated and are registered under the government,s social security program. ¶13. (U) However, the government appeared less active and coordinated in providing supportive services. Upon visiting the web site of AMPYME, one finds that the most recent press release is from October 2008. One of AMPYMEs key initiatives, the Garantia, encourages lending to SMEs by providing collateral for bank loans. However, Piper commented, that the program is undermined because banks often require the SMEs to put down personal collateral anyway before approving the loan. Therefore making intended beneficiaries, those without personal collateral, unlikely to get the loan. Furthermore while MICI and other government agencies offer programs to assist business development, these agencies do not cross-reference each other and therefore fail to facilitate entrepreneurs, access to the full pool of available resources. AMPYME,s website does not offer links to programs available at MICI or elsewhere that may be relevant to entrepreneurs. All of the SMEs interviewed started without business plans. Although the SMEs appear to be fairing well, the lack of widely publicized financial and managerial supports make growth difficult even when the business is succeeding. Only Farmacia Jacinto had more than one location, and they were all within five minutes of each other. Good management is essential for growth because the entrepreneur cannot be in multiple locations at once. Pan Y Canela is considering franchising their business, and for the first time developing a business plan, but they are concerned that difficulty in finding good managers can cause the endeavor to fail. ¶14. (U) The only business interviewed that participated in a government program was LeiArt. LeiArt engaged MICI to establish her trademark and register for her optional artisanal license. The license exempts her from taxes and increases access to government artesian programs but is not well publicized, according to Leilani Gonzalez. In September 2008, Leilani Gonzalez participated in a government sponsored program in which she represented Panama at a fair in Madrid, Spain. Her business has also been deemed eligible to participate in Impulso Panama, a program funded by the Inter-American Development Bank, the GOP, and the private sector to assist Panamanian businesses )large and small. Impulso Panama awards funding of 30% to 100% for capacity building projects related to technical assistance, quality and management, networking, and innovation. With this eligibility, LeiArt can now submit a project proposal to solicit funding from Impulso Panama. However, while Gonzalez has been able to participate in some government programs she feels they are not well publicized and often come to her attention on short notice and through personal connections. &Without constantly searching the internet, I would not be able the find out about most of these programs,8 commented Gonzalez. Gonzalez added that a useful government initiative would be to create business associations for various groups such as youth, artisans, etc. &The government can then tailor workshops for the various business groups. Some training programs exist for indigenous groups but not for others,8 Gonzalez added. STEPHENSON