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Briefing

Supporting forest- and timber-based MSMEs in the Mekong region

Countries across the Mekong region are engaging in processes to negotiate and implement FLEGT Voluntary Partnership Agreements (VPAs) with the EU to reform their forest sector, address illegal logging and promote trade in legal timber products. In some countries, strictly enforcing the existing regulatory framework could harm micro, small and medium enterprises (MSMEs) and increase rural poverty. VPAs provide opportunities to consider their needs in regulatory reform processes and legal enforcement.[1]

In this context, the European Forest Institute (EFI) has been testing approaches to enable forest- and timber-based MSMEs in the Mekong region to operate legally and sustainably since 2015.[2] These MSMEs play a key role in local economies and generate significant livelihood and employment opportunities in formal and informal sectors.[3] Increasing their capacities, business performance and access to legal timber will allow them to participate in supply chains destined for regulated markets. This in turn would make them more resilient businesses that have the potential to alleviate poverty in rural areas and lessen impacts from crises such as the COVID-19 pandemic.

MSMEs are in some countries part of the problem in driving deforestation and forest degradation because they tend to utilise illegal timber and make a wasteful use of timber resources. In addition, MSMEs can contribute to local corruption by bribing the authorities to keep their operations, which may not be in full compliance with the law, or to ease lengthy administrative processes such as compliance checks by inspectors.

However, MSMEs can be part of the solution to reducing deforestation and forest degradation. This can be achieved if they are encouraged to adopt legal and sustainable sourcing and processing practices through specialised trainings, and if regulatory frameworks are paying special attention to MSMEs.[4] To this end, EFI supported a selected number of MSMEs in four Mekong countries to operate legally and sustainably by testing solutions to their key challenges. This brief describes the approach, challenges and solutions tested, and lessons learnt from EFI’s interventions.[5]

EFI’s approach in supporting forest- and timber-based MSMEs to operate legally and sustainably

EFI’s approach consisted of three steps:

  1. Diagnostic assessments of forest- and timber-based MSMEs in Laos, Myanmar, Thailand and Vietnam. Fourteen supply chains producing timber products for domestic and in part for international markets were analysed in the four countries in 2017–2018.[6]
  2. Consultations with national stakeholders to explore solutions to some of the challenges identified in the supply chains.
  3. Six pilot interventions conducted between 2018 and 2020 to test prioritised solutions identified in stakeholder consultations.

 

Table 1.

Table 1.

Pilot activities in the four Mekong countries

Table 1.

Pilot activities in the four Mekong countries

 

Testing solutions to MSME challenges in the Mekong region

Challenge 1. Low productivity and operational capacity

Low productivity and operational capacity lead to low profitability, poor workshop designs and little interest in complying with regulations, for example on occupational health and safety (OHS) and labour. This results in resource wastages and poor work safety. It also prevents MSMEs from optimising resource use and improving working conditions in their workshops. Furthermore, it prevents them from participating in export-oriented supply chains that require higher standards of practice to comply with international market requirements.

This challenge was addressed by training MSMEs on production management, waste reduction, continuous improvement, cost accounting and human resource management. In addition, horizontal and vertical collaborations were encouraged through exchanges with more established enterprises. 

Lessons learnt from the approach: 

  • Timber-based MSMEs are generally open and willing to commit their time to capacity building on technical, managerial and regulatory aspects.
  • The combination of practical workshops and individual coaching proved effective to motivate MSMEs to participate and apply what they learnt.[8]
  • Production management training was useful because it showed MSMEs that a simple change in the layout of the workshop, including the logical sequence of machines and processes, can improve the productivity of the operation and reduce waste. This approach also provided the opportunity to discuss OHS and the allocation of tasks and responsibilities in the production process, taking gender norms into account. 
  • In terms of horizontal and vertical collaborations, study tours to more established companies were well received by MSMEs. They could see first-hand how more established companies are managing their business. This motivated them to join trainings and improve their own practices. In this respect, EFI observed two impacts that contributed to improving MSMEs’ operational capacity:
     
    • Some MSMEs became subcontractors of larger companies, which brought MSMEs additional income opportunities and knowledge transfers.
    • More established companies started supplying low-risk engineered materials to MSMEs, which enhanced efficiency, reduced waste and increased legal timber use.
Among the MSMEs in Lien Ha wood village in Vietnam, the EFI pilot selected one business to test a coaching approach on production management. The higher number of female workers in the company (65%) was one of the selection criteria, in addition to motivation and willingness to improve. The pilot introduced workers to individual coaching on waste cut, workshop arrangement and continuous improvement through 5S, Kaizen and Downtime techniques and standard production processes. They were encouraged to discuss the allocation of tasks and responsibilities in the workplace and make improvements in their own workstations. The individual coaching approach over six months was effective. The owner reorganised production, rearranged workstations, made investments in work safety and reallocated labour according to efficient production principles. This led to a 20% productivity increase and a 10% waste reduction.
Before and after the production management training

Before and after the production management training

Bach Viet, Lien Ha, Vietnam

Source: EU FLEGT Facility

Before and after the production management training

Bach Viet, Lien Ha, Vietnam

Source: EU FLEGT Facility

Challenge 2. Lack of formal registration and operating licences

The lack of formal registration and operating licences can become a challenge in some countries because it prevents MSMEs from accessing government support programmes. It can also hinder them from sourcing legal and affordable timber. Furthermore, informal MSMEs tend to use undocumented timber and do not monitor inputs and outputs of the raw materials used. This lack of traceability impedes MSME participation in legal supply chains and makes it difficult for governments to monitor compliance with timber legality requirements in the domestic market.

The EFI pilots used two approaches to address the lack of formal registration and operating licences. The first approach, tested in Laos, focused on building capacity for input-output monitoring (IOM) to support unregistered MSMEs in meeting business registration and licensing requirements. The second approach, currently under testing in Myanmar, focuses on connecting MSMEs to government support services, such as special timber auctions, as an incentive to formalise.

A key lesson learnt from the first approach is that informal MSMEs can comply with formalisation requirements if specialised support is provided to them. To this end, using basic concepts of inventory control[9] as the entry point in explaining IOM was effective. It helped MSMEs understand that tracing and documenting the timber used is a key step for complying with national regulations. Where such capacity is built, interest in formal registration and licensing of operations increases.

On the second approach, preliminary lessons learnt indicate that bringing MSME concerns to policy-makers’ attention can encourage reforms that ease their access to legal and affordable timber. Access to timber (as well as other forms of government support, such as subsidised loans and training) is an incentive for MSMEs to formalise. However, MSMEs often do not understand the benefits of formalisation nor the business registration process. Where they exist, associations can help raise awareness and support MSMEs in formalising and accessing support services. To this end, capacity must be built to strengthen the associations. Furthermore, business registration requirements must be clearly explained to association leaders to enable information sharing with their members.

In Attapeu province, Laos, EFI’s pilot built the capacity of unregistered household furniture makers in complying with the Ministry of Industry and Commerce Decision on Timber Processing Manufactured Standards (0719/MOIC). The pilot introduced the concept of IOM through five hands-on technical trainings that included coaching sessions at the furniture makers’ workshops. The trainings showed them how to use inventory control forms while making furniture prototypes. They demonstrated the practical application of the data recorded in calculating timber recovery rate, an important information for product costing. The capacity built and the potential for more accurate product costing calculations motivated several furniture makers to maintain a functioning IOM system and explore possibilities for formal registration with policy-makers.
Workshop of a household furniture maker

Workshop of a household furniture maker

Attapeu, Laos

Source: EU FLEGT Facility

Workshop of a household furniture maker

Attapeu, Laos

Source: EU FLEGT Facility

In Myanmar, the state-owned Myanmar Timber Enterprise (MTE) has a virtual monopoly on teak and auctions the annual harvest. Informal operators cannot access the auctions due to their informal status. Formal small-scale operators are allowed access but can hardly compete with timber traders and large sawmills because of the large size of tenders and the fact that auctions are in USD. Starting from 2018/2019, the Ministry of Natural Resources and Environmental Conservation increased access to timber for legally-established micro and small businesses in special auctions that exclude larger companies, tender small batches of timber and require payment in the local currency. This reform was triggered by raising awareness about the MSMEs’ situation and challenges in Myanmar in interactions with the Forest Department and MTE. Policy-makers saw the organisation of small-batch auctions as a solution and potential incentive for informal operators to register their business.
Carpenter at MSME workshop

Carpenter at MSME workshop

Thaketa, Myanmar

Source: EU FLEGT Facility

Carpenter at MSME workshop

Thaketa, Myanmar

Source: EU FLEGT Facility

Challenge 3. Poor representation in policy processes

MSMEs, in particular the micro entities, often do not see the benefits of joining associations, thus reducing their ability to voice their concerns in policy processes. Their lack of formal representation as a group often prevents them from advocating for their interests, such as revising regulatory frameworks that are not scale-sensitive.

Facilitating the communication between MSMEs and policy-makers, encouraging the formation of new associations, and supporting the uptake of MSMEs’ interests and concerns by the relevant policy processes was the approach used to address this challenge.

Two key lessons learnt from this approach:

  • Exposing MSMEs to policy-makers encourages MSMEs to form new associations. FLEGT VPA structures proved useful platforms for connecting MSMEs with policy-makers in Thailand where EFI’s pilots led to the establishment of two industry associations[10] representing MSMEs’ interests.
  • FLEGT VPA processes can trigger and accommodate legal reforms in support of MSMEs – if the situation of MSMEs is sufficiently understood and brought to the attention of the negotiating parties. Again, FLEGT VPA structures proved an effective platform to this end.
In Thailand, there has been increasing use of reclaimed timber for home renovation and furniture production. Previously, not defined in the Forest Act, transportation of reclaimed timber products was challenging for many MSMEs because it was not recognised as a legal source of timber. EFI’s pilot contributed to resolving this problem by facilitating the inclusion of reclaimed timber as a legal source of timber in the legality definition of Thailand’s timber legality assurance system. This set the foundation for the development of supply chain traceability for reclaimed timber. The pilot supported MSMEs in raising awareness about the importance of reclaimed timber for the local economy among policy-makers. It also helped them bring their position to the national technical platforms set up under the Thailand-EU FLEGT VPA process. An effective strategy was to help MSME representatives attend and share their real-life experiences in national meetings, and support dialogue between government officials and MSMEs during field visits.
Reclaimed timber trader in his warehouse

Reclaimed timber trader in his warehouse

Ban Thi, Thailand

Source: EU FLEGT Facility

Reclaimed timber trader in his warehouse

Ban Thi, Thailand

Source: EU FLEGT Facility

Gender and MSMEs

EFI’s country assessments[11] showed that participation and empowerment of women are enshrined in the national regulatory frameworks of all four Mekong countries, but their implementation is challenging.[12]

EFI’s approach to promoting gender diversity and women empowerment among MSMEs was to integrate gender into the pilots’ activities by encouraging participation from women in trainings and using technical topics as an entry point for raising awareness about gender issues in the workplace. 

EFI actively encouraged women’s participation in trainings through proactive discussions with business owners and by tailoring training activities to women’s needs. This approach proved successful: about 40% of participants in trainings were female. 

Tailoring trainings to women’s needs not only increased their participation but also empowered them while increasing MSMEs’ competitiveness. Topics related to business administration such as basic accounting and product costing attracted many women to trainings (in some cases, the number of female participants was as high as 70%) and proved useful for raising productivity. The feedback received from female trainees indicated that trainings increased their confidence, as well as their communication and accounting skills. Finally, given the connection between business administration and traceability, engaging women offers an opportunity to build capacity on timber legality among MSMEs.

Technical trainings on continuous improvement offered the opportunity to address gender norms in the organisation of the workplace. This approach was tested with one company in Vietnam. The main training session triggered a reflection among the business owner, team leaders and workers about the allocation of tasks and responsibilities in the production process and the cultural norms behind it. In subsequent individual coaching sessions with the business owner, the trainer highlighted the importance of gender equality in the workplace. According to the owner, the training and coaching sessions were successful in raising awareness about gender equality and improved teamwork and job satisfaction among employees.
Cost accounting training

Cost accounting training

Lien Ha, Vietnam

Source: EU FLEGT Facility

Cost accounting training

Lien Ha, Vietnam

Source: EU FLEGT Facility

Conclusion

EFI’s experience in testing solutions to MSME challenges shows that specialised trainings can improve MSMEs’ operational capacity and regulatory compliance. Furthermore, EFI’s pilots demonstrated the importance of regulatory revisions for resolving key MSME challenges. They also highlighted the potential of FLEGT VPA processes to trigger and accommodate legal reforms in support of MSMEs.

MSMEs are a vehicle for development and generate almost half of jobs in the formal forest sector globally. They contribute to local wealth by empowering local entrepreneurship and can engender local social and environmental accountability.[13] However, the recent economic crisis triggered by the COVID-19 pandemic shows that MSMEs are vulnerable to sudden market developments and easily run into cash-flow problems.

It is therefore important to complement productivity trainings with a stronger focus on marketing and business development. All interventions targeting MSMEs should integrate business continuity planning. Moreover, supporting MSMEs in accessing finance is critical to help them rebuild after COVID-19 and operate legally and sustainably. This is because adequate investment would allow them to upgrade operations, buy legal raw materials and employ more permanent workers. Finally, EFI’s pilots showed some positive results in empowering women on MSME level. However, significant challenges remain in promoting gender equality in the Mekong region’s forest sector. These include low levels of interest and awareness among businesses, poor compliance with labour regulations, gender pay gaps and inequalities in access to technical vocational training opportunities. Collaborating with and building the capacity of associations would contribute to addressing these challenges. Associations could raise awareness by promoting national gender policies and strategies to their members and inform policy makers about MSMEs’ implementation of these policies and strategies.

Endnotes

  • 1

    [1] See:


    www.euflegt.efi.int/vpas-smes-mekong
  • 2

    [2] EFI supported primary and secondary timber processors with fewer than 10 full-time employees (excluding temporary workers), located in rural areas and supplying mainly the local market with their products.


  • 3

    [3] Considering direct and indirect employment, the formal forest sector provides an estimated 45 million jobs globally and labour income in excess of USD 580 billion per year. Small and medium-sized forest enterprises account for about 20 million of these jobs, generating value of USD 130 billion per year. See: FAO. 2020. The State of the World’s Forests. Forests, Biodiversity and People.


    http://www.fao.org/documents/card/en/c/ca8642en
  • 4

    [4] MSMEs would benefit from clearer and simpler regulations on land tenure and use, forest management and permitting, business registration and licensing, etc. These simpler regulations should address overlapping and contradictory requirements and consider the needs and limited capacity of MSMEs.


  • 5

    [5] The interventions were carried out by the EU FLEGT Facility, which is hosted by EFI, and were supported by the Swedish International Development Cooperation Agency (Sida).


  • 6

    [6] See: EFI. 2019. Small and micro-size entities in the Mekong region’s forest sector: a situational analysis in the FLEGT context.


    http://www.euflegt.efi.int/publications/small-and-micro-sized-entities-in-the-mekong-region-s-forest-sector
  • 7

    [7] Pilots are ongoing, therefore the number of supported MSMEs is expected to increase.


  • 8

    [8] Coaching is a suitable training method because trainings can be conducted on site, engaging workers. Coaching offers the opportunity to highlight improvements and shortcomings in the actual production setting. However, it is also time-consuming and can only be done with a selected number of businesses.


  • 9

    [9] Such as recording raw material storage, timber work in process storage, sawn timber and finished goods.


  • 10

    [10] EFI’s pilots contributed to the establishment of the Reclaimed Timber Association and the Thai Wood Export Association.


  • 11

    [11] See: EFI. 2019. Small and micro-size entities in the Mekong region’s forest sector: a situational analysis in the FLEGT context.


    http://www.euflegt.efi.int/publications/small-and-micro-sized-entities-in-the-mekong-region-s-forest-sector
  • 12

    [12] For example, the gender wage gap in forest product processing is substantially wider than in many other industrial economic sectors in Vietnam. As of 2018, the overall national non-adjusted gender wage gap stood at 11.5% (women received on average 88.5% the wage of men). In the forest product processing sector, the overall wage gap is 37.4%. The most extreme wage disparities lie in the household business and micro-enterprise segment of industry, where the wage gap is 51.4%. EFI. 2020. Gender + FLEGT + VPAs. Vietnam Situation Analysis. Unpublished manuscript.


  • 13

    [13] See: PROFOR. 2019. Forest Smart Brief on Forest Sector Small and Medium Size Enterprises (SMEs).


    https://www.profor.info/sites/profor.info/files/PROFOR_Brief_ForestSMEs.pdf