Small business support: AOFI’s support to the development of SMEs, entrepreneurship and competitiveness in the Republic of Serbia

AOFI is the official export credit agency of the Republic of Serbia established for the purpose of export promotion and development of foreign economic relations. Our aim is to strategically improve business conditions for the Serbian export-orientated economy and overall promotion of the exports of Republic of Serbia.

Exports play an important role in the Serbian economy, influencing economic growth, employment and the balance of payments.

Small and medium-sized enterprises (SMEs) and entrepreneurs are recognised as the backbone of the economy and a key source of economic growth, dynamism and flexibility in advanced industrialised nations, as well as in transitional and developing countries, such as the Republic of Serbia. The SME sector in the Serbian economy accounts for the largest number of active companies, portion of GDP, total exports and imports, and for the majority of employment.

Due to the fact that the world financial crisis had adversely effected the already vulnerable SME sector in Serbia, the government set up a policy framework for SMEs, providing assistance through business support instruments, with a particular focus on which problems they were to address, and the way the instruments are delivered.

The government of the Republic of Serbia recognised the importance of SME sector, especially export-oriented companies, for the development of our economy. The year 2016 has been proclaimed as “The year of entrepreneurship” and the government has adopted a strategy to support the development of SMEs, entrepreneurship and competitiveness for the period from 2015 to 2020.

Despite the important role of SMEs, which is even more emphasised in times of crisis, the sector is facing significant problems when obtaining necessary financial resources and maintaining liquidity.

It is of great importance for Serbia to secure the development of the SME sector as this will primarily determine the further course of the Serbian integration into the European Union.

AOFI, as one of the instruments of the Serbian government to boost the competitiveness of Serbian exporters in foreign markets, recognises that providing support to the SME sector is crucial both in achieving one of strategic aims for AOFI, and meeting the adopted strategy for SMEs and contributing to the overall goal of the Serbian government.

There are several services in AOFI's portfolio by means of which we are able to provide support to the SME sector. In the domain of financing we provide: direct lending, guaranteeing and factoring services. In the insurance domain we provide: shortterm insurance against commercial risks, and we are currently developing medium to longterm insurance services.

Being familiar with the needs and obstacles SMEs face, AOFI took steps to assess the sector before we were ready to offer modified services specific to SMEs. Some of them were: to make our services easier to use; to react promptly to requests from SMEs; and make sure our employees are informed and prepared to appropriately handle customers. So far, our services are well recognised by SMEs.

Case studies

Here are three examples from our practice for provided support to SMEs:

1. ST insurance against commercial risk

   An SME approached us requesting export credit insurance. The company belongs to the metals industry, and was established in 1992 with 31 employees. The core business of the company is the trade of iron in domestic and foreign markets, and the manufacturing of iron products.

   The company had the opportunity to sign an export contract with a foreign business partner. However, the problem for successful realisation of the project was insufficient financing capacity. AOFI considered the client’s situation and proposed providing short-term export credit insurance to be used as collateral to the bank to obtain the necessary funds to finance the deal.

   The client submitted the request for insurance and we researched the buyer, a Swedish company that manufactures wire products, chains and springs, with 100% ownership of five affiliates worldwide. Two of the affiliates are based in Balkan region. During the process of issuance of the policy we found out that the client will deliver goods to two affiliates of the buyer based in our region. We assessed those two affiliates. Unfortunately, neither of them had sufficient creditworthiness. We made additional efforts in order to support the client and decided to cover the risk with a guarantee from the Swedish owner.

   The client achieved a turnover from €1.8 million in 2015, out of which exports amounted to €15,000. Now, with the business AOFI supported, the client will realise the project totalling €1.2 million which will significantly increase the turnover of the client.

   The recognised needs of the client in a proper and prompt way by AOFI led to realisation of the contracted business. The issuance of the policy impacted the increase of the volume of export business not only for the client, but also for AOFI and overall for the Serbian economy.

2. Guaranteeing

   This company was founded in 2007 in Belgrade. It is 100% owned by a private individual. The company is engaged in hydroworks, recording the current status, repair and construction of projects. Much of the construction is on water, under the water, or in hazardous or inaccessible areas.

   In April 2015 the company concluded a construction contract with a foreign investor in Montenegro, to carry out construction works in a Montenegrin marina, a part of the Portonovi Resort Village. The total contracted value of the transaction amounts to €19.5 million. For the implementation of the work a subsidiary was established in Montenegro. In this business, both companies were acting together as one contractual party. The works should be completed by mid-October 2016. Payment shall be made monthly, for works executed before the 25th of the previous month.

   In order to perform the marine construction works, the company was required to provide a performance guarantee in the amount of €1.9 million, which was issued by a bank. AOFI issued a counter guarantee in the same amount, thus allowing for the contracted works to commence.

   Until the end of first half of 2016, both companies performed and invoiced nearly 85% of the works, approximately €16.4 million. Out of that amount the companies collected €14.3 million. The majority of the works were realised in 2016. During 2015, the works carried out valued €2.8 million, while in the first half of 2016 the amount of the works carried out was €12.7 million.

   Through the realisation of the project, the Serbian company realised the export of services (construction works) amounting to €1.4 million, six times higher than the company’s 2014 exports. Indeed the company became predominantly an exporter, with exports amounting to 80% of total turnover. For the period from 1 January 2016 to 30 June 2016 the exported services amounted to €1.7 million which exceeded the level of total exports in the previous year. The realisation of the project resulted in the growth of the company's turnover in 2015 to RSD 230.9 million (€1.8 million) representing growth of 70.5% compared to 2014, with an increase in EBITDA margin to 33.8% in 2015, while EBITDA amounted to 29.4% in 2014. Realised turnover for the first half of 2016 reached the level of turnover at the end of the last year and amounted to RSD234 million (€1.89 million).

   The implementation of the project involved hiring an additional workforce, which resulted in both companies engaging 134 workers in order to complete the contracted works. Prior to the conclusion of the contract there were 15 employees.

3. Lending

   The business activity of this AOFI client is the production of equipment for the distribution of electricity and equipment for electric energy management. It was founded 1992 with 100% private capital. The company is engaged in the production of medium voltage disconnectors.

   With continuous innovation and significant investments in development, the client introduced in its production program pole substations, medium voltage disconnectors, modern composite insulators for networks of medium and high voltage, etc. All products are made out of high quality materials, tested by both domestic and foreign institutions. The company was selling the majority of its products domestically, while exports accounted for 20% of its turnover.

   Having recognised the export potential of the client, AOFI supported the client’s business in Tanzania in 2014. The deal included the delivery of silicon insulators. The value of the contract was over €2 million. Since the client needed funds for the realisation of the export business, AOFI approved a short-term loan in the amount of €900,000.

   AOFI’s support saw company turnover increase by 111%, from RSD242 million (€2.1 million) in 2013 to RSD512 million (€4.23 million) in 2014. Export revenue grew from €450,000 in 2013 to €2.2 million in 2014. Company profits grew from RSD23 million (€200,000) to RSD106 million (€876,395) in 2014. The share of exports in total turnover increased to 50%.

   Based on our experience and the assessment of the needs of SME sector, we found out that the critical precondition is to ensure proper communication with clients, understand the day-to-day obstacles they meet, provide simplified access to services and offer them the most appropriate service in a timely manner.

Dejan Vukotić

Chief Executive Officer - AOFI