Public Disclosure Authorized Public Disclosure Authorized

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DISCUSSION PAPER

South Africa Characteristicsof and Constraints Facing Black Businesses in South Africa: Survey Results ThyraA. Riley

Public Disclosure Authorized

Public Disclosure Authorized

Abtr

THE WORLDBANK SOUTHERNAFRICA DEPARTMENT

INFORMALDISCUSSIONPAPERS ONASPECTSOF THE ECONOMYOF SOUTHAFRICA

PREVIOUS WORLDBANKPAPERS PreviouslypublishedIn the WorldBankseriesof Informaldiscussionpaperson SouthAfrica: Levy, B. January1992. "HowCan SouthAfricanManufacturingEfficientlyCreate Employment?An Analysisof the Impactof Tradeand IndustrialPolicy." Kahn,B., Abdel,S. and Walton, M. May1992. "SouthAfrica: Macroeconomic Issuesfor the Transition." Fallon,P. October1992. "An Analysisof EmploymentandWage BehaviorIn SouthAfrica." Belli, P., Finger,M., and Ballivian,A. August1993. "SouthAfrica:A Reviewof Trade Policies." In addition,"An EconomicPerspectiveon SouthAfrica"was publishedby the World Bankin May 1993. A numberof technicalpaperspreparedby the World Bankstaff and SouthAfrican counterpartsin key sectorsare currentlybeingdiscussedin the country.

Copyright0 1993 TheWodd Bank 1818*H"SUret, N.W. Waiton, D.C. 20433,U.S.A.

Southr Afica Depun Ihc Wodd Bank November1993

The Wle in ths paer arm*e of te auhor and ShU not be aeibued sothe WorldBank, to As qOatlaedorganizaolns,or to nme of 11Boardof &EWw Dikeors or the cowuns they represu.

FOREWC

THIS DISCUSSION PAPERIS THE FIFTHIN A SERIES of informalstudieson different aspectsof

the SouthAfricaneconomypreparedby staff membersof the WorldBank and South African associates.The studies have beendiscussedwith a wide rangeof SouthAfricansand have benefitedfrom SouthAfrican ideasand inputs. The Bank's studyprogramaims to support the ongoing effort by South Africansacross the institutionalspectrumto understandthe weaknessesand potentialof their economyand to identifyoptionsthat may be available in a post-apartheidera. These optionsfocus on restoringeconomicgrowth, increasing employment,findingaffordableways to improvethe distributionof incomesand infrastructuraland social services,and generallyalleviatingpoverty. This report documentsth3 characteristicsand constraintsfacingsmall black businessesin South Africaand evaluatesrealisticallytheir potentialto play the dynamicrole expectedof them. Currentgovernmentpolicyrelies on deregulationand market-basedsolutions. Deregulationhas begunto createa climatein whichblack businessescan expandand prosper in South Africa. Significantconstraintsremain, however,and continueto limitthe abilityof even the most dynamicbusinessesto grow, createemployment,accumulateassets, and generallyprosper in either the formal or the informaleconomy.Blackentrepreneursclearly identifyboth internaland externalconstraintsthat adverselyaffect their businesses.The principalinternalconstraints,which are the direct legacyof apartheid,includethe lack of adequatetechnical,administrative,and managerialskills and the lack of accessto financing. The principalexternalconstraintsincludehighlycompetitivemarkets,lack of market infrastructure,and a politicallyunstableand often violentbusinessenvironment. Deregulationand market-basedsolutionsmust be accompaniedby measuresthat directly eliminatethese constraints.As is evidentfrom the profilespresentedin this report, black businesseshave the potentialto be dynamic,productiveplayers in South Africa's economy. The preliminaryversion of this report waspresentedat seminiarsheld in Cape Town, Durban, and Johannesburg,SouthAfrica, during the last weekof May and first week of June 1993. At the seminars,participantsdiscussedthe experiencethat other countrieshave had with supportingsmall- and medium-scaleenterprisesin generaland in the contextof disadvantaged racialgroups. The seminarsserved to initiatea dialogueon the developmentof black businessesamongthe World Bank, South Africanenterprises,policymakers,and practitioner organizationsinvolvedin developingblack businessesin SouthAfrica.The content of the seminars is summarizedin section5: PolicyLessonsfrom InternationalExperience.The resolutionsof the participantsare presentedin appendix2. and the agendaand list of participantsare presentedin appendix3.

ACKNoWLEDGMENTS

researchcarried out for the World Bank during 1992. I wouldlike to thankJulian May and the other researchersat Data ResearchAfrica, the surveyresearchfirm that conductedall the interviews,as well as Carlos MartinCalcopietro,K. S. Cattell, Colleen McCaul,Nicoli Nattrass,C. M. Rogerson,and Mark Schacter, whosedetailedreports were invaluable. THE INFORMATIONCONTAINED IN THIS REPORTis basedon

Informationon the black microenterprisesector relies heavilyon research carried out by the Growthand Equity through MicroenterpriseInvestmentsand Institutions(GEMINI)group under contractto the UnitedStatesAgencyfor InternationalDevelopment.Carl Liedholmand MichaelMcPhersonwrote the reportpresentingGEMINI'Sresearchfindings. I would like to thankthe followingindividualsfor their help on this project:David Cook, managingchief, and StephenDenning,directorof the SouthernAfricaDepartmentof the World Bank, for supportingthis research;BrianLevy, the lead advisor, for lendinghis expertise and guidingthe research; AtamanAksoyand Mark Schacter,for contributing extremelyuseful commentson early drafts; AshleySymes,executiveassistantfor the ConsultativeBusinessMovement,for attendingthe conference,taking notes at the seminars, and writinga most useful report summarizingthe presentationsand the ensuingdiscussion; and ElizabethForsyth, for doing a masterfuljob as editor. I wouldalso like to thank the ConsultativeBusinessMovement,the KagisoTrust, the DevelopmentBank of SouthernAfrica, the Federationfor AfricanBusinessand Consumer Services,and the NationalAfricanFederatedChamberof Commercefor hostingthe seminars. Through these seminars,they offeredthe WorldBanka most useful forum for discussingthe research findings in the contextof internationalexperience. Thyra Riley Senior Private SectorDevelopmentSpecialist

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CONTENTS

TABLES ANDFIGURES

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ExEcuTivE SUMMARY

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The Growing Black Microenterprise Sector More Established Small and Medium Black Businesses Policy Directions 1. INTRODUCTION I Methodology Organization 2. BLACKBUSINESSES IN SoUTHAFRICA:HIsToRICALCoNTEXrANDPREsENT CIRCUMSTANCES 5

Legal Restrictions Placed on Black Businesses Efforts to Deregulate Black Enterprise The Informal Secto: and the South African Economy 3. AN IN-DEPTHLooK AT SOUTHAFRICA'S BLACKMICROENTERPRISE SECTOR 11 Characteristics Constraints Policy Implications 4. A DETAILEDLOOK AT MoRE ESTABLISHEDBLACKENTERPRIMES 35

Methodology and Overview The Retail Subsector The Transportation Subsector (Black Taxis) The Construction Subsector The Garment Subsector Policy Implications 5. POLICY: LESSONSFROMINTERNATIONAL EXPERIENCE 55 Designing an Overall Policy Framework Improving the Representation of Entrepreneeurs in Policymaking Defining the Role of Institutions Supporting Market Links Making Financing Available Strengthening Markets and Business Infrastructure Developing Training and Skills Conclusion 6.

CONCLUDINGREMARKS 65 -

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REFERENCES

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APPENDIX 1. SURVEYOF MICROENTERPRISES 71 APPENDIX2. THE WAY FORWARD:RESOLUTIONS OP THE DELEATES APPENDIX3. AGENDAAND LIsT OFDELEGATES 79

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77

TABLES AND FIGuRES

Tables Table 2-1. PotentialLabor Force and FormalEmploymentOpportunitiesin South Africa, 1960-90 8 Table 2-2. ChangingAbsorptionCapacityof FormalEmploymentin South Africa, 1960-90 8 Table 2-3. EstimatedProportionsof the LaborForce Not Engagedin Wage Employmentin South Africa, by Race, 1960-90 9 Table 24. AbsorptionCapacityof the FormalSectorin SouthAfrica, by Development Region, 1980-90 10 Table 3-1. SectoralDistributionof Microenterprisesin Mamelodiand KwazakheleTownships, South Africa, 1990 12 Table 3-2. Amountand Type of WorkersEmployedin Microenterprisesin Mamelodiand KwazakheleTownships,SouthAfrica, 1990 13 Table 3-3. AverageAnnualGrowthof Employmentin Mamelodiand KwazakheleTownships, South Africa, by Age of the Firm, 1990 13 Table 3-4. GrowthRates and Genderof the Proprietorof Firms, by Sector, in Mamelodiand KwazakheleTownships,South Africa, 1990 15 Table 3-5. Distributionof Microenterprisesin Mamelodiand KwazakheleTownships,South Africa, 1990,by Numberof Employeesand Sector, 1990 16 Table 3-6. MonthlyTurnoverin SouthAfrica, by Type of Enterprise, 1992 17 Table 3-7. Age of BlackMicroenterprisesin South Africa, 1992 17 Table 3-8. Age of BlackMicroentrepieneursin SouthAfrica, 1992 18 Table 3-9. EducationalLevel and MonthlyTurnoverof Black Microentrepreneursin South Africa, 1992 19 Table 3-10. Support AgenciesContactedby Microenterprisesin SouthAfrica, 1992 20

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Table 3-l 1. EducationalLevel and Percentageof BlackMicroenterprisesContactingand ReceivingAssistancefrom a SupportAgencyin SouthAfrica, 1992 20 Table 3-12. Size and Turnoverof Black MicroenterprisesContactinga Support Agencyin South Africa, 1992 21 Table 3-13. Age of Black Microenterprisesand Receiptof Assistancefrom a SupportAgency in SouthAfrica, 1992 21 Table 3-14. Level of Education,AverageTurnover,and Contactwith a SupportAgency in South Africa, by GeographicLocation,1992 22 Table 3-15. Major ConstraintsFacingBlackMicroenterprisesinrMamelodiand Kwazakhele Townships,South Africa, 1990 24 Table 3-16. FinancialConstraintsFacingBlack Microenterprisesin Mamelodiand KwazakheleTownships,South Africa, 1990 25 Table 3-17. MarketConstraintsFacingBlack Microenterprisesin Mamelodiand Kwazakhele Townships,South Africa, 1990 26 Table 3-18. Locationof BlackMicroenterprisesin Mainelodiand KwazakheleTownships, South Africa, 1990 27 Table 3-19. Percentageof RespondentsCiting Regulationas Their Most ImportantProblem, by Phaseof Operation,in SouthAfrica, 1992 29 Table 3-20. RegionalVariationof EnforcementProblemsin SouthAfrica, 1992 30 Table 4-1. Breakdownof BlackSmall and MediumEnterprises,by Subsector,in Cape Town, Durban, and Johannesburg,SouthAfrica 36 Table 4-2. Characteristicsof More EstablishedBlackRetailEnterprisesin CapeTown, Durban, and Johannesburg,SouthAfrica, by Subsector 39 Table 4-3. ConstraintsFacing More EstablishedBlackRetailEnterprisesin Cape Town, Durban, and Johannesburg,South Africa 40 Table 4-4. Characteristicsof More EstablishedBlackTaxi Enterprisesin Durbanand Johannesburg,South Africa, by Subsector 42 Table 4-5. ConstraintsFacing Mori EstablishedBlackTaxi Enterprisesin Durban and Johannesburg,South Africa 44 Table 4-6. Characteristicsof More EstablishedBlackConstructionEnterprisesin Cape Town, Durban, and Johannesburg,South Africa,by Subsector 46

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Table 4-7. ConstraintsFacingMore EstablishedBlackConstructionEnterprisesin Cape Town, Durban, and Johannesburg,SouthAfrica 47 Table 4-8. Characteristicsof More EstablishedGarmentEnterprisesin South Africa, 1991 50 Table 4-9. ConstraintsFacingMore EstablishedGarmentEnterprisesin Cape Town, Durban, and Johannesburg,SouthAfrica 52 Table 4-10. Obstaclesto ExpansionFac.ng More EstablishedBlackGarmentEnterprisesin Cape Town, Durban, and Johannesburg,SouthAfrica 53 Table A-i. Most ImportantProblemsFacingMicroenterprisesin Mamelodiand Kwazakhele, South Africa, Summaryof SpontaneousResponses 71 Table A-2. ConstraintsFacingBlack RetailEnterprisesin CapeTown, Durban, and Johannesburg, SouthAfrica

74

Table A-3. ConstraintsFacingBlackTaxi Enterprisesin Durban and Johannesburg,South Africa 75 Table A-4. ConstraintsFacingBlackConstructionContractorsin Cape Town, Durban, and Johannesburg,South Africa 76 Figures Figure Al-I. Obstaclesto Startinga Black-ownedBusinessin South Africa,Spontaieous Responses 72 Figure A 1-2. Obstaclesto Operatinga Black-ownedBusinessin South Africa, Spontaneous Responses 73

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EXECUTIVESUMMARY

THE BLACKENTERPRISESECTORIN SOUTH AFRICAhas, despite a long history of exclusion

and restriction,substantialpotentialto help distributeemployment,income, and wealth more equitablybetweenwhitesand blacks. This reportsummarizesresearchon the subjectand attemptsto evaluaterealisticallythe potentialrole that black enterprisecan play in this effort. The researchdifferentiatesbetweenmicroenterprisesand more establishedsmall and medium enterprises.Traditionally,microenterprisesemnployfewer than 10 employees,whilesmall and mediumenterprisesemploy 10 to 200 employees.In SouthAfrica, however,the legacyof apartheidhas ensuredthat virtuallyall blackenterprisesare small. They, therefore, are distinguishedless by their size than by their ability-that is, their preparation,financialassets, and human resources-to play a dynamicrole in the generationof employmentand wealth. Both categoriesemployfew persons,but smalland mediumenterpriseshave more assets, more training, more education,more skills, more abilityto moveup-market,and higher profitabilityand turnoverthan microenterprises.This researcheffort expectedto find that dynamismand potentialdynamismexistedonly amongsmalland mediumenterprisesbut discovered,instead, elementsof dynamismin both groups. The GrowingBlack MicroenterpriseSector Sinceapartheidbeganunravelingin 1990,the formalsector has stagnated,whilethe microenterprisesector has grown dramatically(half of microenterprisesare less than three years old, and employmentamongsurvivingfirms is growingan estimated24 percent a year). The followingcharacteristicsprofileblack firms in the microenterprisesector: *

Most new firms are not registeredand were creatednot becausethe owner was attracted by the pulls associatedwith entrepreneurship-independence,prospectsof higher income,and so forth-but rather becausehe or she was unemployed.Persons who are not employedcreatemicroenterprisesprincipallyas a survivalstrategy.

*

These businessesare, by and large, one-personoperations(averageemploymentis 2.1 workers, includingthe proprietor)that rely on unpaidfamilylabor.

*

Employmentgrowth is relatedto the age of the firm. Firms createdin the past year are growingan averageof 46 percent, wi-ile those in existencetwo or three years are growing25 to 29 percent. Thoughgrowingmoreslowly, older firms (those at least eleven years old) are still growinga respectable7 percent.

*

Womenoperate 62 percentof all microenterprises,and their firms tend to be located in the homeand concentratedin sectors with the lowestlevelsof profitabilityand growth in employment. -

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Blackmicroenterprisesare heavilyconcentratedin commerceand trade (70 percent), where the barriers to entry, such as the amountof capitalemployedand skills needed, are low and where other microenterprisesexert tremendouspressures. Street vendors account for half of blackmicroenterprises,whilemanufacturers-mostof whom manufacturesoft goods-account for only 17 percent.They are squeezedinto these highly competitivemarketnichesbecausethey cannotcompetewith the massproducedgoods suppliedby SouthAfrica's well-establishedformal sector.

*

The majorit" of black microenterprisesearn net monthlyincomesbelow the establishedsubsistencelevel of R650 and thus offer little potentialfor retaining earningsand accumulatingassets. This is particularlytrue in the productionof soft goods, which is dominatedby women.

*

The owners of microenterprisestend to be young(35 percent are less than thirty years old) and have a medianeducatiouiallevel of six years of formalschooling;30 to 40 percent lack basic literacyskills. Few have workedin the formal sector aad thus have few skills and virtuallyno supervisoryor managerialexperience.

CONSTRAINTS. The principalconstraintsidentifiedby the microentrepreneursthemselvesare

lack of accessto tinancing,tremendouslycompetitivemarketconditions,includingthe high cost of inputs, and inadequatepremisesfrom which to operate their businesses.Recent deregulationmeasureshave effectivelyremovedregulationas a primary constrainton the establishmentand growth of black businesses,althoughmicroenterprisescontinueto be highly constrainedby the legacyof apartheid,whichlimitedthe abilityof blacksto gain skilled employment,establishbusinesses,and receivegood education. Financialconstraints.Lack of operatingfunds (workingcapital)is a problemwhen microenterprisesare createdbut becomesless importantas time passes.The opposite is true of the lack of investmentfunds, whichbecomesmore importantas time passes. Although20 percentof microenterpriseshave receivedcredit, the owner's own savingsand friends and family are still the majorsourcesof funding. Accessto financialresourcesfrom banks, suppliers,and other formal lenders is scarce until the firm exceedsfive employeesand has been in existencelbree to five years. The unmet demandfor financingis substantial,especiallyamongyoungfirms. *

Marketconstraints.The lack of customers,the increasingnumberof competitors,and the rising cost of suppliesare dominantmarketproblemsfacingmicroenterprises, which competewithinsmall, location-specific,low-incomeniche markets.While com,petitionwithin a givenniche intensifies,broadermarketsare virtuallyclosed.

*

Businesspremisesand tenurearrangements.Mostmicroenterprises(71 percent) are operated in the home, far from commercialtraffic;half of the firms operatingoutside the homedo not have permissionto occupytheir sites. Few emergingblack businesses can afford space in town, and appropriatelysizedand priced premisesare simplynot availablenear markets.

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Regulations. Microentrepreneuars attributelittle importanceto regulatoryissues, althoughseveralpracticescontinueto pose actualor pott.atialconstraints:municipal rules concerningstreet trading; iealth, safety,and labor codes for the workplace;and taxation, especiallythe new value addedtax. Blackmicroentrepreneurssee racially motivated enforcementof regulationsby the police, rather than regulationsper se, as a constraint.

South Africa's black microenterprisesector is highlyconstrainedby the restrictionsthat apartheidplaced on the establishmentof businesses,on the opportunitiesfor skilled employment,and on educationalopportunitiesfor blacksas well as by the restrictions affectingthe spatial arrangementsof cities. Despitesevereconstraints,evidenceof dynamic growthdoes exist, notablyamongsmalllight manufacturingenterprises,whose incomesand employmentare abovethe averagesfor the sector. Also,the incomesof even the most survival-levelbusinessesare criticalto the survivalof manyhouseholds.The black microenterprisesector has (wodistinct roles that deserveto be supportedin any project or policy intervention:it is a residualemployerwith an importantrole to play in improving welfareand alleviatingpoverty,and it is a source of dynamicand potentiallydynamicfirms that create wealth and generateemployment. INTERvENTiONS. To raise incomesand improvethe qualityof life for this sector, albeit gradually, interventionsshould supporteffortsthat seek to accomplishthe following: *

Increasethe sector's accessto financialresources,perhaps buildingon the demonstratedpotentialfor group lending

*

Develops!black firms

*

Build appropriatemarket infrastructurelocatedwithinurban areas and near market demand

*

Reexaminethe conceptof buyer and productioncooperatives,which have the potertial to achievethe benefitsof bulk buying;to create a committedclientelefor marketing, commonmarketing,and administrativeoverhead;and to coordinatesupportfrom assistanceagencies.

,

and on-siteassistanceto improvethe qualityof productsproducedby

The challengefacing South Africais to design an institutionalframeworkthat accordsblack microenterprisesmuchbroader accessto financial,training, and technicalassistance. Organizationsclo. ; associatedwith apartheidhave more contactwith microenterprisesthan other organizationsin the formalsector, and losingtheir resourcesaltogetheris not feasible. Many nongovernrnentalorganizationshave madelaudableefforts, but they have had little impact.A possibleapproachto increasinginstitutionaleffectivenesswouldbe to devise financingand training programsin which larger organizationseffectivelywholesalefinancial and technical assistanceservicesto smaller, qualifiednongovernmentaland community-based organizationsthat retail them, in turn, to the final beneficiary.

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More Established Small and Medium Black Businesses The owners of more establishedblackbusinesseshavemore education,prior business experience,and incomethan ownersof microenterprises: *

They averageten years of formal schoolingcomparedwith six years for microentrepreneurs,and more thanhalf havepursuedpost-schoolcertificatesor diplomas.

*

About 60-70 percent of constructionand retailownershad left employment,served as an apprentice,or both beforeopeningtheir own businiess;few microentrepreneurs have such experience.

*

Mosthad entrepreneurial,rather than survival, motivationsfor startinga business.

*

They are aboutten years older than the average microentrepreneur,beingforty to forty-fiveyears of age.

Their firms also have fewer internaldisadvantages,althoughthey were constrainedby apartheidfrom becomingintegratedwith the formalSouthAfricaneconomy: *

Manywere launchedduring the apartheidperiod; the average age of the firm is seven years.

*

Despitesevere restrictionson businesslicenses,a few black businesseswere allowed to exist and to functionas virtual monopoliesin the townships.Blackbusinesseswere also establishedin the homelands,where they were, in some areas, effectively supportedby training, accessto finance,and subsidizedinputs.

*

They have higher levelsof turnoverand profitabilitythan microenterprises,although employmentremainslow, even amongthe most dynamicfirms.

The analysisof the largest and most well-establishedblack enterprisesin the retail, taxi, constn:xtion,and garment manufacturingsubsectorsrevealedcategoriesof enterprisesthat are clearly distinguishedby their dynamism,which is definedby growth in turnover, profitability, employment,and assets. Only about20 percentof the more establishedenterprisescan be definedas dynamic (fast laners, includinghigh flyers, whichare the top 10 percent of firms). Another 20 percent are potentiallydynamicbut constrainedfrom growingby various internal and externalconstraints(slowlaners and middlelaners).The remaining60 percent, although better off than the average microenterprise,functionat the survivallevel (survivalists). RETAILENTERPRISEs.In the formalsector, retail enterprises,together with the catering and

accommodationsectors, accountedfor approximately12percent of gross domesticproduct (GDP)during the 1980s. Mostdynamicand potentiallydynamicblack retail businessesare registered, have only a few employees(an averageof 4.3 employeesfor high flyers), and have relatively high levelsof turnover,profitability,assetsat start-up,and investments.No firm in the high flyer group operatesa home-basedspaza, although27 percentof survivalists - xii

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do. A relativelylarge portionof retailershave receivedcredit since startingtheir business. Fast lane enterpriseshave receivedboth larger loans and more overdraftfacilitiesthan other groups of dynamicenterprises,yet the owner's own savingsand family and friends are still the major sources of financingtor 96 and 43 percent of retailers,respectively. Dynamicretailersscore market-relatedissuesas high as survival-leveland microenterprise retailersdo, althoughthey cite the high cost of suppliesrather than the lack of customersor the strain of competition.The secondmost strikingconstraintis the lack of civil order that adverselyaffects the businessenvironment.Theft, violence,and gangsterismare major constraintsfacingmore establishedretail businesses.The most dynamicenterprisesconfront issuesrelated to administeringthe value addedtax. All businessesconfrontlabor issues, includingaccess to skilled labor; high flyers hive difficultyfindingskilled labor, while expandingfirms havedifficultyfindingreliablelabor. TRANSPORTATION. The kombitaxi industryis the dominantform of black entrepreneurshipin

the South Africantransportsector. Few ownersare formallyregistered,but all are subjectto a limited degree of governmentregulationand to strict self-regulationby private industry associations.In 1989,transportationgeneratedone-fifthof the entire informalsector's contributionto GDP, or 1.7 percentof total GDP. Black-ownedtransportfirms accountedfor virtuallyall this activity.The industrywas highlyregulatedthroughthe mid-1980s,but the comprehensivederegulationthat occurredin 1987producedmanynew entrants, increased competition,which took the form of taxi wars, and raisedentry costs. In 1989, the estimated 50,000 kombitaxis in operationrepresentedmore than a threefoldincreasesince 1980. Most taxi businessesconsistof one or two taxis, and averageemploymentis abouttwo persons. Most personsowningthree or more taxis havebeen in businessmore than ten years. Amonghigh flyers, about40 percent havefathers in businessand 12 percenthave fathers in the taxi business.Only 10percent of taxi operatorshave a bank loan, and most rely on selffinancing. Averagemonthlyincomewas R2,800 in 1989,and the turnoverand profits of the dynamic and potentiallydynamictaxi businesseswere muchhigher. The top four constraintsamongtaxi operatorsare the high cost of vehicles, township violence,competitionfrom other taxis, and taxi wars. Accessto financingand competitionare closelyrelated constraints:operatorsneedfinancingto purchaseexpensivevehicles, and competitiondepressesprices, makingit difficultfor themto accumulatecapitalor repay shortterm bank loans. The squeezeon profit marginshas resultedin an increasein bad debts and repossessions.Many operatorsfeel that fares are too low to be profitable,althoughdynamic firms have much higherturnoverthan potentiallydynamicfirms and are less concernedwith the cost of vehiclesand accessto financing.The same is true of entry-getting a footholdin a restricted, saturatedmarket-which concernsless dynamicfirms more than larger, more dynamicones. The most dynamicenterprisescite townshipviolenceas their most severe constraint,followedby competition. CONSTRUCTION. The constructionof low-incomehousingis seen as a leadingsector of the

economybecausethe potentialdemandfor such housingis largeand the overall labor componentinvolvedin constructingit is high. Nevertheless,South Africa's black construction -

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industryis beset by fundamentalproblemsrelatedto internalmanagement(lack of skills) and the externalbusinessenvironment(effectivemonopolyof whitecontractorsover the housing market). Most black contractorsoperateeither as informalsubcontractorsworkingfor whitecontractors in the formal sectoror as general contractorsin the informalsector. Significantdifferences exist, however, betweenthe least and the most dynamicfirms. Three-fifthsof survivalistsare labor-onlysubcontractors,while three-fifthsof high flyers are generalcontractors. Moreover, high flyers have more employeesthan survivalistsdo (5.5 and 2.2 persons,respectively). Most black contractorsoperateat the bottomend of the marketand lack supervisoryand managerialexperience.This lack of training and skills contributesto the general reputation that black contractorshave for poor-qualitywork: 88 percentfeel they need further training in businessmanagement,productionmanagement,and trade skills. Mostfirms have been in existencebetweensix and seven years, and abouthalf of all groupshad experienceworking in constructionor as an apprenticebeforeopeningtheir business.Yet, the shortageof skilled and reliable labor is critical. Accessto loans and the high cost of materialsare major constraints becausecontractorsmust obtainbridgingfinancingto coverthe initialcosts of land, labor, and materials.Accessto land for development,competition,and the preferencegiven to white contractorsare externalconstraintsthat keepblack firms small. The Job ReservationLaws, which existeduntil 1979,permitted skilledjobs to be filled by Indiansand coloreds,but not blacks. In garmentmanufacturing, firms owned by blacks are scarceand tend to be smallerand less well-developedthan firms owned by whites, Asians,or coloreds.None of the black ownershad been employedas skilled workers in textile or garmentfactoriesbefore startingtheir own business,while most of the non-Africanowners had. Blacksthus have littletraining in this area, and only oneeighth of black-ownedfirms have developedthe qualityand timelydeliverystandardsneeded to becomesubcontractors,which wouldgive them accessto new productiontechniques.More than half of all blackgarment firms are not registered,and most pay salarieswell below the requirementsof the IndustrialCouncil. GARMIENTMANUFACTURING.

Lack of accessto financingis a major constraintfacingall garmentmanufacturers,although firms that have subcontractingarrangementswith largerfirns rank it less highlythan those that do not. Half of the firms surveyedhaveaccessto some financing,yet financial constraintscontinueto be a major concernbecausethe cost of materials,especiallytextiles, and of financingis high. Managerialand skill problemstouch blackgarment firms heavily, especiallythe scarcity of competentworkers,lack of managementskills, and scarcity of competentworkers. Theseconstraintsare the legacyof formerrestrictionsrather than of current legislation.Politicaluncertainty,whichaffectsthe businessenvironment,is also a concern. INTERVENTIONS. Althougheventhe dynamicand potentiallydynamicenterprisesgenerate

little employment(theyaveragefive employees),they offer the potentialfor more growth in the future. They currentlyface importantmarketconstraints,however,and must be integrated more closelywith the white economy,where marketsand purchasingpower are concentrated.

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*

An operationaldefinitionshoulube developedthat details the type of firms that will receivesupport withineach subsectorand the type of supportthey will receive. Dynamicblack businessesface constraintsditferentfrom those facingdynamic firms run by Indiansor cokreds, and interventionsshouldtarget a definedgroup of businessesand its particularlimitatiorns.This complexityrequiresoperational definitionsthat recognizedifferencesamongdisadvantagedfirms.

*

Incentivesshould be designedto encouragebig businessesto buy from qualifiedsmall and medium enterprises.These incentivesshould recognizethat havinglarger enterprisesprovidetechnicaladvice and training to smallerblack firms is essentialto achievingthe qualitynecessaryfor procurementarrangementsto be voluntaryand mutuallybeneficial.This recommendationappliesto manufacturingand retail enterprises in particular.

*

The South Africangovernmentshould makea committedeffon to procure from small black businesses,especiallyin the publicconstructionof housingand schools. Such procurementefforts should includestrong training,technicalassistance,and even financialcomponents.

*

The size of land allocationsshouldbe decreasedto allowsmallerdevelopersto submit bids. Also, the tenderingproceduresshouldbe simplified.

*

Coveteddiversificationoptionswithinthe transportationindustry exist and should be examinedwith the aim of looseningthe regulationsthat maintainpublic monopoliesof bus and rail transportationas well as haulingfreight. T The administrationof the value addedtax, which is of particularconcernto dynamic retail businesses,shouldbe exploredand addressed.

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Police protectionand the enforcementof civil order must be extendedto black communitiesbecausea stablebusinessenvironmentfosters long-terminvestmentand growth.

Policy Directions Black businessescan play a dynamicrole in creatingemploymentand rebalancingincome and wealth in post-apartheidSouthAfrica, but the obstaclesare tremendousand will require more than quick fixes. Deregulationis not enough. Dismantlingthe regulationsof apartheidis, to be sure, an essential step toward creatinga climatein whichblack businessescan expandand prosper. It is not the most importantstep, however,as the researchpresentedhere shows. Regulations are no longer a major impedimentto the creationor expansionof blackbusinesses,and the deregulationthat began in the 1980shas not eliminatedthe constraintsthat are. Policymakers and implementingagenciesalike shouldfocus their activitieson the constraintsidentifiedby the entrepreneursthemselves.

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Despitethe recent moveto eliminatethe restrictionson blackenterprises,significant constraintscontinueto limitthe abilityof even the most dynamicbusinessesto grow, create employment,accumulateassets, and generallyprosperin either the formalor the informal economy. Blackentrepreneurs-owners of both microenterprisesand larger, more dynamic firms-clearly identify both internaland externalconstraintsthat adverselyaffect their businesses.The principalinternalconstraints,which are the direct legacy of apartheid, include the lack of adequatetechnical,administrative,and managerialskills and the lack of accessto financing, which is a result of the inabilityto own land that can be used for collateral.The principalexternal constraintsincludehighlycompetitivemarkets,lack of market infrastructure,and a politicallyunstableand often violentbusinessenvironment. Deregulationand market-basedsolutionsare a step in the right direction,but they must be accompaniedby measuresthat directlyeliminatethe constraintsthat prevent blacks from starting businessesor from runningbusinessescapableof playinga dynamicrole in the formal economy. Clearly, SouthAfrica cannotand shouldnot adoptanothercountry's modelfor its own use. Evaluatingthe mistakesof others, in conjunctionwith assessingits own needs and priorities, can, however, help SouthAfricaformulatepoliciesand strategiesfor strengthening black enterprises. An effective lobbyfor small and mediumenterpriseswillbe an essentialcomponentof this process and shoulddraw attentionto the followingkey policy issues: *

The policymakingprocess must have as broad participationas possibleand must seek diverse, long-termsolutionsfor complex,deep-rootedproblems.

*

Institutionalsupport is vital. Governmentmust makeadequateresources availablefor public sector institutions,but functionsand responsibilitiesshould be devolvedas much as possibleto specialized,local, flexibleagenciesthat work with a range of other partners(fornal business,nongovernmentalorganizations,and community organizations,amongothers).

*

Existing state institutionsmust be reevaluatedand their usefulnessreassessed. Many of them have accumulatedexperienceand knowledgebut have been taintedby apartheid.

*

Nongovernmentalorganizationshave an importantrole to play in building relationshipsbetweenblack enterprisesand the formaland publicsectors. They can also be instrumentalin makingtraining and financingaccessibleto small enterprises. They must, however, streamlinetheir focus, infrastructure,and operationalefficiency.

*

Accessto financingis vital, and new financialinstrumentsand intermediariesmust be developed.The provisionof information,skills, and marketinfrastructureis just as important.An integratedapproachto policyand strategy-one that addressesall aspectsof the problem-is essential.Such an approachmust work at many levels: local, regional, national;short, medium,and long term; and others.

*

Determiningthe focus is problematic.Shouldattentionbe focusedprimarilyon businessesin the informaleconomythat alreadyhave a track record and demonstrate -

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an immediatepotentialfor becomingintegratedintothe formal economy?Is it justifiableto regard developmentof the microsectoras primarilya functionof social developmentor the alleviationof poverty?Will this attitudestifle the potential dynamismof the microsector?How can a balancein focus be ensured? As is evidentfrom the profilesof small and mediumenterprisespresentedin this report, black businesseshave the potentialto be dynamic,productiveplayers in South Africa's economy. They also offer an avenueof opportunityand achievementfor a large sectionof South Africa's too-long-frustratedhumanpotential.

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xvii

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1. INTRODUCTION

SOUJTH AFRICA'SCHALLENGE is to achievea stable,growingpost-apartheideconomy.To this

end, the countrymust devise and implementpoliciesand incentivesthat encouragethe creationand growth of employmentand balancethe economicparticipationof the black and white populations.Inevitably,emphasishas been placedon the resumptionof labordemandinggrowth in the white-dominatedindustrialsector.The black businesssector also has a role to play, however, and the researchon black enterpriseshas identifiedthe characteristics of and constraintson their abilityto createemploymentand to forwarda strategyof growth with redistribution.tThis report presentsthe findingsof that researchand poses two questions: *

Do the characteristicsand constraintsfacingblack businessespermitthem to contributedynamicallyin both the short and long terms to the creationof employment and the balancingof economicactivity,income,and wealth?

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What policies and programscould enhancethe capacityof the sectorto contributeto these goals in post-apartheidSouthAfrica, and is deregulationan adequatestrategy?

research in South Africa was predicatedon the notionthat, as in manyother developing countries, small enterprisescouldbe dividedroughly intotwo categories:(a) marginally profitable,survival-orientedmicroenterprisesand (b) dynamic(or potentiallydynamic)firms. Microenterprisesare firms operatedby individualswhosemainmotivationis to generate incomerather than to grow aud operatean enterprise.A typicalmicroenterprisewould be owned by a womanwho is seekingto supplementher family's householdincomeor a businessrun by someoneforced intoself-employmentby a weak labor market. By contrast, the dynamic,or potentiallydynamic,firms are ownedby individualsmotivatedby the classic entrepreneurialdesire to own and exoanda firm. Key questionsguidingthis researchwere (a) Does dynamicbusinessactivitytake place in the black-ownedprivate sector?(b) If dynamic (or potentiallydynamic)firms exist, what are their characteristicsand what constraintsdo they face? How do thesecharacteristicsand constraintsdiffer from those of firms that are not dynamic? The

It is importantto note that the status of black firms indicatedby the researchfindings is conditionedin part by the worst recessionaryperiodin SouthAfricanhistory. The dynamic potential of all businesses, including black businesses, could be very different if growth were

resumed.

1. Thesurveysincludedin thisstudywereof enterprisesinvolvingblackSouthAfricans,excluding colouredand Indian enterprises.

^1

Methodology This report is based on three principaldata sets. First, macroeconomicdata on employmentare used to establishrelationshipsbetween employmenttrends and the growth of the microenterprisesector, which is typicallycalled the informal sector in SouthAfrica.2 Second, the results of a survey by the Growthand Equitythrough Microenterprise Investmentsand Institutions(GEMINI) groupare reportedto providegeneral informationabout the black enterprise sector. In Octoberand November1990,GEMINIconducteda survey of small enterpriseswith up to fifty employees,includingthe proprietor, in two black South Africantownships:Mamelodiand Kwazakhele.The surveysconsistedof a completecensusof townshipbusinessesas well as two supplementaryquestionnairesadministeredto a subsample of businesses.These additionalquestionnairessoughtto identifythe nature of overall constraintsand financialissues. Althoughuseful, the GEMINI survey was based on only 2 out of 100townships,which makesapplyingits resultsto the entire countryrisky. Nevertheless, it constitutesperhaps the most completesurveyof microenterprisesin South Africato date (havingsurveyed5,000 firms in the two townships)and is thus useful for indicatingthe characteristicsand constraintsfacing blackenterprisesgenerally. Third, World Bank surveysare used to examinespecificsubsectorsof economicactivity in South Africa's black community.The WorldBank contracteda multisectoralsurvey of microenterprisesthat focusedon whetherregulatoryissuescontinueto constrainthe establishmentand growthof blackenterprisesnow that significantderegulatorymeasureshave been enacted.3 The researchfocusedon the retail, garmentmanufacturing,construction,and transport subsectors,where it was thoughtthat the proportionof dynamicenterpriseswould be substantial.Withineach subsector,data were disaggregatedto differentiatecharacteristics and constraintsfacing enterprisesat various levelsof operation,from the most dynamicto the most basic or survival level. By differentiatingthe constraintsfacing microenterprisesfrom those facing more establishedenterprisesand then separatelyidentifyingconstraintsuniqueto givensubsectors, it is hopedthat the surveyresults will enhancethe capacityof policymakers and assistanceagenciesto providecost-effective,targetedinterventionsin a way that general studies cannot. Becausethe methodologyof the researchidentifiesthe proprietors' perceptions of the problemsfacing their firms, it mayor may not capturethe underlyingcausesof those

2. The tenn informaldefinesthe sector by its legal characteristics;that is, it includesbusinessesthat are not registeredor licensed. t he term microenterpriseavoidsthe legalisticinterpretationand focuses on the fundamentalsof the business,such as employment,tunover, and profitability.Since the micro surveys presentedhere are basedon the fundamentalcharacteristicsof the sector rather than on its legal status, the terms informalsector and microenterprisesare used interchangeably. 3. This survey was multisectoraland focusedon firms that operatein one or more of the following ways: (a) rely mainlyon cash transactionsand infornal credit markets, (b) use very basic technical knowledgeand extremelysimpleproductionand managementsystems,(c) serve highly localized marketsthrough simplemarketingchannels,and (d) operatein a marketgeared primarilytoward lowincomegroups. 2-

problems.The responsesdo, however, identifythe entrepreneurs'perceptionof constraints and thus offer a basis for placinga priorityon interventionsin the future. TMeresearch findingsconfirmedex ante expectationsalhoutthe two classes of enterprise. Firms in the microenterprisesector had, on average, smallerturnoverthan firms in the sectoral surveys,were more likely not to be legallyregistered(that is, to be functioningin the so-called informalsector), were more likely to have a proprietorwith five or fewer years of education,and were predominantlypushedinto operatinga businessfor survivalreasons (that is, becauseof inadequatehouseholdincomeor unemployment).All of these factorscontrast sharply with the characteristicsof the more establishedbusinesses.Largely becauseof the legacy of apartheid,both microenterprisesand more establishedbusinessesemployfew persons. Even amongblack microenterprises,there are, however, importantsigns of dynamismand potentialdynamism,althoughthis dynamismis characterizedand constrained in different ways than it is amongthe more establishedfirms. In this respect, the research findings differedfrom the ex ante expectations.For both groups, despitethe high death rate of small firms, the economy-widerecession,and the legacyof apartheid,significantsigns of dynamismwere evident. Organization This report is dividedinto four principalsections.Section2 framesthe historicaland present relationshipbetweenthe black businesssector and the South Africaneconomy.Section3 provides an overviewof the characteristicsof and constraintsfacingmicroenterprises,along with a general indicationof possiblepolicyand interventionoptions.Section4 focuseson the characteristicsof and constraintsfacingthe more establishedblack enterprisesin the garment manufacturing,construction,retail, and transportationsubsectorsas wellas policy options. Section5 examinesthe experiencethat countrieswith similarcircumstanceshave had in implementingprogramsto supportand promoteraciallybased small and mediumenterprises. This section, in particular,reflectsdiscussionsthat took place in the workshopsand plenary sessions of the seminarsheld in South Africain May and June 1993.The resolutionspassed by the individualsparticipatingin those seminarsare presentedin appendix2.

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2. BLACKBUSINESSESIN SOUThIAFRICA: CONTEXTAND PRESENTCIRCUNISTANCES l{IST'ORICAL

BLACKBUSINESSESIN SOUTH AFRICAare very inuch the product of historical circumstances, and South Africa has a long history of denying opportunities to black entrepreneurs. The system of apartheid with its complex set of restrictions limited the existence of black businesses as well as their ability to grow and become part of the tormal economy. Even during the apartheid period (pre-1990), however, sonmescope existed tor the establishment of black businesses. Indeed, most of today's more estahlished black firms were created during the period of apartheid restrictions, which effectively permitted them to operate monopolies over the supply of a restricted list of goods to the black community. Black businesses were also a significant presence in the homelands, where, in some areas, they recei-ed support in the form of training, access to financing, and subsidized inputs.

Legal Restrictions Placed on Black Businesses At the root of the legal restrictions placed on the formation and growth of black businesses was the notion that blacks were temporary residents in so-called white urban areas and were there solely to provide labor for white industry and commerce. This doctrine denied the need to encourage the emergence of a group of black entrepreneurs in urban areas, and any serious prospects of such a group emerging and thriving were killed by the Land Act of 1913, which prohibited blacks from purchasing land outside the so-called na&iveart.as. With the strokt. of a pen, restrictions on black ownership of land excluded blacks from financial markets, and thus from becoming entrepreneurs, by denying them the means to provide sound security to prospective lenders. Based on the notion that blacks were "temporary sojourners" in white cities, a large apparatus of controls was constructed to suppress black entrepreneurship and to defend and support the interests of white business. This was the basis of the Influx Control Act, which denied blacks the right to move freely around the country. White authorities controlled the allocation of all formal business sites in urban black townships. The only formal small businesses permitted to operate in these areas under the Native (Urban Areas) Act No. 21 of 1923 (subsequently replaced by the Natives [Urban Areasi Consolidation Act No. 25 of 1945) were those that provided nothing more than the daily essentials of living, such as milk, bread, or vegetables. Requests by black entrepreneurs to own and operate dry cleaners, bookshops, garages, or pharmacies were denied. These activities and all other kinds of businesses satisfying more than the barest daily necessities remained the defended preserve of white entrepreneurs and were located in white urban areas. The legislation that controlled and denied opportunities to black small business entrepreneurs became even more restrictive after 1948. Under the Group Areas Act, the few black entrepreneurs who had managed to secure a business site in white areas were forced either to

- 5-

close up their operationsor to relocateintotownshipareas. The apartheidgovernmentwas particularlyresponsiveto complaintsthat competitionfrom black entrepreneursthreatenedthe white standardof living. Whenthe new NationalParty governmentwas elected,official support for whiteenterprisewas strengthened,and further controlswere placed on the formationand expansionof formalblack smallbusinessactivitiesin South Africa's cities. Hostility toward black small-scale business culminated in an important policy document that

was circulatedin 1963to all local authoritieschargedwith townshipaffairs. In what became knownas the 'one man-one business"policy, black entrepreneurswere limitedto running only one businessand were preventedfrom formingcompaniesand partnershipswith the objectiveof initiatinglarger businessventures.In addition,the 1963legislationblocked the creationof black-controlledfinancialinstitutions,manufacturingindustries,and wholesale businessesin white areas and decreedthat all buildingsnecessaryfor businessactivitieswere to be erectedby local authorities,not blacks.The new legislationalso sought to persuade black entrepreneursto movetheir activitiesaway from urbantownshipsand to establish businessventuresin the homelandsinstead.It did so by issuingblackslicensesto operate formal small businessesin townshipareasonly as grocers, butchers,fish fryers, greengrocers, dairy owners, and wood and coal dealers. Such activitiesofferedlimitedprospects for expansion.Blackbusinessesthat were not confinedto meetingdaily essentialneeds of the black communitywere prohibited;this controlextendedto such activitiesas garages, service stations, and dry cleanersin townshipareas. Prior to 1976,blackswere only allowedto participatein a limitedrangeof twenty-fivetrades, businesses,and professionsin urban areas. In 1976,tb" was enlargedto some fifty-twotypes of activities,and during the 1980sall restrictionswere finally removed. The new controlswere designedpartlyto defendwhitebusinessesby ensuringthat blacks shoppedin whiteareas and partly to providea legal basis for evictingpersons whoseservices were deemednot essentialto the whitepopulation.These personscouldthereforebe required to return or be relocatedto a Bantustan.Ironically,black entrepreneurswho were successful in a formal businessventurein urban townshipsran the risk of being pressuredinto relocating to the rural Bantustans.Such a prospectwas scarcelyan inducementto growth and success amongblack small businessesin the 1960s. Closelyrelatedpolicies were those of Bantueducationand job reservation(in effect until 1979),which restrictedblacksfrom beinggivenapprenticeshipsand jobs in certainskilled trades. These trades were reservedfor whitesand generallyrestrictedthe build-upof industrialskills in the black community.As a result, the supplyof black entrepreneurswith the technical and managerialskills necessaryto operatetheir own businessesis severely constrainedand so, too, is the foundationneededto subcontractwork from large enterprises to smaller concerns.Becauseof this, SouthAfricalacks one of the fundamentalrequirements for growth of a flexiblemanufacturingsubcontractingculture. Efforts to Deregulate Black Enterprise During the 1980s,the policyclimatesurroundingsmall-scaleindustrybegan to shift from outrightrepressionto new initiativesfor the promotionof black businesses,albeitwithin limits definedby the state and big capital. Beginningin 1980,under the leadershipof the -6 -

newly foundedSmall BusinessDevelopmentCorporation,a joint state-privatesector agency, efforts to galvanizesmall-scaleblack manufacturerswere gradual'y consolidatedas part of the wider growth strategy. In addition,severalprivate sector initiativesactivelybeganto promote the development(mostlyalongmarket lines)of small-scalebusinesses.The 1987government whitepaper on Privatizationand Deregulationin the Republicof South Africa reiteratedthe imperativeof encouragingentrepreneurshipand stressedthat "the approachto regulationmust therefore emphasizethe promotionof economicactivitiesand be less directedtowardstheir control." The abolitionof apartheidlegislation,which includedthe abolitionof the Influx Control Act in 1986and culminatedin 1991with the repealof the GroupAreas Act, the Black Land Act, the DevelopmentTrust and Land Act, and the PopulationRegistrationAct, removedmuchof the legal frameworkthat the governmenthad, for decades,used to control and restrict black businessactivity. In 1991,the governmentpassedthroughparliamentthe BusinessesAct, which eliminatedmanyof the remainingregulatoryburdenson black small businesses.The Act also denied municipalitiesthe right to declarecertainareas off-limitsto street trading, a practice commonin many SouthAfricantowns. The force of this restrictionwas, however, mitigatedby another provisionempoweringmunicipalauthoritiesto applyto the provincial administratorfor permissionto close areas to streettrading. Moreover,municipalregulations, health, safety, and labor codes, and taxationadministrationrelated to the value addedtax continueto affect small businesses. From 1986to the present, deregulationhas been the watchwordof governmentstrategyand the chief tactic for stimulatingsmall businessand the informaleconomy.To date, proactive interventionsto relievethe constraintsfacingblack businesshave been limitedand inadequatelycoordinatedand targeted. The Informal Sector and the South AfricanEconomy Quite distinct from the more establishedblack enterprisesector is the increasinglyvisible black microenterprisesector, which is typicallyreferredto in South Africa as the peripheral or informalsector. This sectiondiscussesthe emergenceof black microenterprisesin relation to the decliningcapacityof the SouthAfricaneconomyto absorb labor. These microenterprisesare createdlargely by the unemployedas a matterof basic economic survival. In numbers, they representthe great majorityof black businesses. Due to a lack of data, preciselyestimatingthe growthof the informalsector is not possible. Nevertheless,the existence,growth, and prospectsof today's black microenterprisesseem to be closely relatedto the dramaticallydecliningcapacityof the formal South Africaneconomy to absorb labor. Between1960and 1990,the percentageof the populationwithoutformal employmentincreasedfrom 33 percent (2.2 millionpeople)to 51 percent (8.4 millionpeople; see tables 2-1 and 2-2).4The averageannualincrease(incremental)in formal employment opportunitiesbetween 1985and 1990(33,000)was less than onequarter of the average annual

4. The workforceconsistsof all menand halfof all womenbetweenthe agesof nineteenand sixtycreation. four yearsold, accordingto the President'sCouncil(1987)reporton employment - 7-

increase in the periodbetween 1960and 1965(157,600).By the 1985-90periodthe formal economywas only absorbing8 percentof the entrantsto the labor market comparedwith an 81 percent absorptionrate in the 1960-65period. As shown in table 2-3, unemploymenthas fallen increasinglyon Africans. Table 2-1. Potential Labor Force and Fornal Employment Opportunities in South Africa, 1960-90

Population without

Fonnal employment

Potential

formal employment

opportuniuies

laborforce Year

(number)

Numnber

Percent

Nunber

Percent

1960 1965 1970 1975 1980 1985 1990

6,901,000 7,875,000 8,985,000 10,576,000 12,453,000 14,377,000 16,340,000

4,652,000 5,440,000 6,164,000 6,942,000 7,450,000 7,788,000 7,953,000

67.4 69.1 68.6 65.6 59.8 54.2 48.7

2,249,000 2,435,000 2,82',000 3,634,000 5,003,000 6,589,000 8,387,000

32.6 30,9 31.4 34.4 40.2 45.8 51.3

Source: Adapted from Development Bank of South Africa (1991), p. 24.

The inabilityof the formalSouth Africaneconomyto matchthe high growthof thepotential labor force has escalatedgrowth in the peripheralsector, a term used by the Development Bankof South Africato describeactivityin the informaleconomyand the subsistence agriculturalsector. in South Africa, 1960-90 Table 2-2. Changing Absorption Capacity of Fornal Enploymneni

Year 1960-65 1965-70 1970-75 1975-80 1980-85 1985-90

Averageannual increase in workforce (nu,nber)

Average annual increase in fornal employment (nunber)

Average annual absorption capacity (percent)

194,800 222,000 318,200 375,400 384,800 392,600

157,600 144,800 155,600 101,600 67,600 33,000

80.9 65.2 48.9 27.1 17.7 8.4

Source: Adapted from Developmcnt Bank of South Africa (1991), p. 25.

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The formal sector constitutesbetween8 and 12 percentof recordedgross domesticproduct (GDP).5 In 1990terms, this representsR18,036million-R27,070million. Although substantial,the value of this contributionto economicactivitymust be seen in light of the fact that this amount-approximately 12percent of GDP-is the principalsource of incomeof the majorityof the population.Indeed, Ligthelmand Kritzinger-vanNiekerk(1990), using householdsurveys, estimatethat 80 percentof nonwhitesinvolvedin informalactivities receive a monthlyincomebelow the R650 regardedas a minimumstandardof living. Table2-3. EstimatedProportionsof die Laor ForceNot Engagedin Wage Emnployment in SouthAfrica, by Race, 1960-90 (percent) Year

Africans

Asians and coloreds

Whites

1960

28

29

15

1970

27

21

is

1980 1985 1990

37 43 50

Is 29 30

16 18 19

Source:Fallon (1992).

Table 2-4 showsthe regionalincidenceof laborabsorptionand informalsector employmentin South Africa. The absorptioncapacityof the formalsector is closelyrelatedto the migration of the black populationfrom the homelandsto urban metropolitanareas. This capacityvaried between 22 and 59 percent in 1990.The developmentregions(as definedby the Development Bank of South Africa)that recordedthe lowestlabor absorptioncap-rcitieswere Durban/Natal (35 percent), the Eastern Cape (34 percent), the NorthernTransvaal (22 percent), and the Northern Cape (45 percent). The regions that recordedhigh labor absorption capacities-namnelythe WesternTransvaal(51 percent),the EasternTransvaal (52 percent), the Orange Free State (54 percent),The Cape (57 percent),and Pwv (59 pei.ent)-were unableto supply adequateformalemploymentopportunitieseither to their own potentiallabor force or to the migrant workersfrom other developmentregions. Consistentwith the statisticson unemployment,some studiesshow a direct correlation betweenunemploymentand growthof the informalsector. A study by May and Stavrou (1988) on the growth of unemploymentand the informalsector in the Durban metropolitan area shows that push factors-mainly the lack of employmentopportunitiesin the formal sector-are the predominantreasons(57 percentof respondents)given for starting an informal

5. These estimatesalso take into accountthe estimatesof the CentralStatisticsService,which indicatethat the informalsector is about 8 percent of recorded GDP. However, those figures probably substantially underestimate the extent of informal activities by excluding (a) the "independent"

Bantustansof Bophuthatswana,Ciskei,Transkei,and Venda;and (b) nonwhiteinformalactivity in white urban areas. Estimatesbasedon moneyin circulation,whichestimatethat the informalsector contributes40 percent of GDP,should be treatedwith consWerablesuspicion. -9-

business. This contrastswith the moretypicalreasonsrelatedto independence,opportunityto increase incomes,and so forth that are givenby personswho have alternativeemployment opportunities.By and large, the informalsector is a residualemployerin an otherwise stagnanteconomy.Projectingincreasesin the populationand in the labor market and growth in formal sector employment,May and Stavrouestimatethat the proportionof participantsin the informalsector will increaseas a consequenceof unemployment:that is, push factors. Thus the importanceof the informaleconomyas a residualemployerwill increase in the future unless employmentopportunitiesin the formalsector increasedramatically. Table 2-4. Absorption Capacity of the Fornal Sector in South Africa, by Development Region, 1980-90 (percent) 1980

1985

1990

Migration Fornal Infornal

MigraJionFormal Infornal

Migration Formal informal

Developmnent

region

0.0 The Cape 0.8 Northern Cape Orange Free State 0.0 18.9 Eastern Cape 11.2 Durban/Natal Eastern Transvaal 0.0 Northern 21.5 Transvaal 0.0 PWV Western Transvaal 0.0

72.6 59.3 67.9 38.0 42.7 65.0

27.4 39.9 32.1 43.1 46.1 35.0

0.0 2.2 0.0 17.3 13.4 0.0

63.8 49.2 61.1 35.7 38.1 58.7

36.2 48.6 38.9 47.0 48.4 41.3

0.0 2.8 0.0 16.3 12.6 0.0

57.4 45.2 54.1 33.7 35.2 51.7

42.6 51.9 45.9 50.0 52.2 48.3

28.6 74.8 63.3

49.9 25.2 36.7

25.1 0.0 0.0

25.5 65.9

49.3 34.1 42.8

24.4 0.0 0.0

22.4 58.6 50.6

53.2

57.2

41.4 49.4

Source:Adapted from Development Bank of South Africa (1991).

This finding is consistentwith Fallon's conclusionthat, "as eventhe most optimisticscenario indicatesthat the formal sector will mop up unemploymentquite slowly, informal sector growth providesthe only plausiblerouteto fill the gap for manyyears to come" (Fallon 1992). Fallon concludes,however,that the informalsector is providinga sustainablesource of income to a substantialportionof South Africa's labor force. The sustainabilityof incomes in the informalsector and the potentialof theseenterprisesto generateemploymentand opportunitiesare analyzedin the followingsection.

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3. AN IN-DEPTHLOOKATSouTHAFRiCA'SBLACK MICROENTERPRISE SECTOR

THEINFORMALSECTORDESERVESto be given policyattentionbecauseit is a residual

employer and has the potentialto alleviatepovertyand help redressthe inequitiesof wealth and incomethat divide the whiteand blackpopulations.Moreover,it is the recourseof individualsand familieswho are functioningon a survivallevel and have no other options. Also, the sector has an unexpectedpotentialfor growth. Characteristics The followingparagraphsuse informationobtainedin two major surveys.The GEMINIsurvey describesthe black informalsectorand identifiesthe disadvantagesthat constrainits dynamic potentialin the short term.6 This surveywas administeredto 5,000 enterprisesin 2 out of 100townships,which makesit a virtuallycompletecensusin those two areas. The World Bank survey is a nationalsurvey of 632 firms, and its findingslargely confirmthose obtained by the GEMINIsurvey. Taken together, thesesurveysdescribethe circumstancesof black enterprisesnationally.Their findingscertainlyindicatethe types of constraintsfacingsuch firms.

percentof blackbusinessesare concentratedin commerceand trade (wholesaleand retailtrade, restaurants,and hotels; see table 3-1). Street vendorsaccount for half of microenterprises;manufacturersaccountfor only 17 percent. Dressmaking,shoe productionand repair, and beer brewing-called the manufactureof soft goods-are the only manufacturingactivitiesfound in any abundance.So-calledhard manufacturing(such as woodand woodprocessing;paper, printing, and publishing;chemicals and plastics; fabricatedmetalproduction;and mineralprocessing)is muchmore rare. The concentrationof microenterpriseactivitiesin retail and commerceis a typicalpattern found in informalsectors in other parts of Africa. However,the percentageof manufacturingactivity in South Africa is substantiallysmallerthan that found in other Africancountries.In Maradi, Niger, and in Maseru, Lesotho,for example,the share of manufacturingactivityamongsmall enterprisesis, respectively,32 and 36 percent, abouttwicethe rate in South Africa. The very small importanceof transportationis especiallynotablegiventhe prominentpositionthat black-ownedtaxis have in businessesrun by SouthAfricanblacks.It is unclear whetherthis SECTORALDlSrRIBUTION.Approximately70

6. Although the survey included firns with up to fifty employees, 97 percent of firms surveyed can be described as microenterprises because they have five or fewer employees; 72 percent have one or two employees (including the proprietor). The survey also included a few more established, "modem" enterprises. -aa1-

represents a bias in the particular population surveyed or whether it accurately represents the relatively greater importance of other sectors. Table3-1. SectoratDistributionof Microenterprisesin Manetodi and KwazakheleTownships,South4frica, 1990

sector Business

Percentof smallfirms

Namberof smallfirms

Mwa.vfawrig

Food, beverage,tobaccoproduction Textile,wearing apparel,and leather production Wood and wood processing Paper, printing. and publishing Chemicalsand plastics Nonmetaic mineral processing Fabricatedmetalproduction Other manufacturing Al manufactunng

3.6 6.9 1.3 Lossthan 0.1 0.1 0.8 1.2 3.1 16.9

187 360 67 1 6 42 64 162 889

0.6

31

0.2 59.0 70.3

13 3,101 3,698

2.7 2.3 7.1

141 120 374

100.0

5,253

Consution Tde

Wholesale RPail All trade Servces Tranpoit Fnancial, real estaw, and buiness services AlUsevic AMl Jm enterprises Sowrce:G3M3IJ (1990).

Nearly all the enterprisesin the two townshipsare extremelysmall. Based on EMPLoYMENT. the numberof workers(includingthe proprietor,family workers,and trainees), the average firm employs2.1 workers, which resemblesthe results found in similarstudies conductedin Africa and elsewhere.Size, however, variesby business.Constructionfirms have the most workers(an averageof 4.94 persons),followedby manufacturingfirms with 2.39 workers. Trade employsthe fewestworkers: an averageof 2.06 workersper firm. Amongthe enterprisessurveyed, 47 percenthave only one worker (theproprietor),26 percent have two, 24 percent have three to five, 3 percenthave six to ten, and only 0.5 percent have eleven to fifty. In Lesotho,76 percent employonly one person, and 3 percent employfrom eleven to fifty workers. In SouthAfrica, more enterprisesemploybetweentwo and ten workersthan is true in similar countries.In Easternand SouthernAfrica,the middlerange is missing, with few firms faJlingin the rangeof II to 100employees.Nevertheless,even in these areas, the share of small enterprisesthat employeleven to fifty workersrarely falls below I percent. If we compare the size of firms in SouthAfrica's blackenterprisesectorwith that of middle-or high-incomecountries(like SouthAfrica), the resultsare striking. Fully 97 percent of South - 12 -

Africa's black enterpriseshave five or fewer workers, whilein the averagemiddle-income country (with a GDP per capitaof US$1,000to US$2,000),about I I percent of firms employ I ;weenone and four workers.In the average high-incomecountry(witha GDP per capita u,tween US$2,000and US$5,000),a mere 8 percentof firms employbetweenone and four employees. Table 3-2. Amount and Type 4!f Workers Emnployedin Microenterprises in Matnelodi and Kwazakhele Townsihips,SouthlAfrica, 19990

Percent of all workers

A verage number of workersperfinn

73pe of worker Proprietor Unpaid family member Hired employee Trainee

1.06 0.63 0.40 0.03

50.0 29.7 18.9 1.4

Total

2.12

100.0

Source:

GEMINI (1990).

Table 3-3. Average AnnaualGrowth of Einployment in Mamelodi and Kwazakhek Townships, SowhltAfrica, by Age of the Firm, 1990 (percent) Average annual growth of employment

Age of the firn I year and kss 2 years 3 years

46.2 28.8 24.7

4-10 years

17.1

6.5

11 years and older

23.9

All ages Source: GEMnIN(1900).

The proprietor and unpaidfamily membersaccountfor about 80 percentof the labor employedin black microenterprises(see table 3-2). Put another way, the average of two workers per firm is composedof 1.7 parts the proprietorand unpaidfamily membersand only 0.3 parts paid labor. GROWrHIN EMPLOYMENT. Overall, survivingenterprisesin South Africa's townshipsare

growing vibrantly at almost24 percent a year, a rate significantlyhigher than that in

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comparableareas elsewhere(see table 3-3).7This aggregatefiguremasks the relativelylarge proportionof firms (48 percent)that are increasingtheir employment;in Nairobi, Kenya, for example,only 38 percent of firms are growing. Nonetheless,internationalexperiencetells us that a small proportionof firms accountsfor the bulk of new employmentcreation, leaving the great majoritystagnant. Further data mustbe collectedand analyzedbefore we can indicatemore preciselythe patternsfollowedby firms that are growing, as well as the pattern of firm deaths. In the meantime,the followingobservationscan be made: *

Growth is strongest amongthe youngestfirms. Sinceapartheidrestrictionshave been lifted, firms have grown to meet potentialmarket demand.Most of the firms in the townshipsare quite young. In the GEMiNisurvey, more than half of all firms were created in the past three years, and firms createdin the past year are growingan average of 46 percent (table 3-3). Firms in existencetwo or three years are growing on average 25 to 29 percent. On the other hand, firms with a longertrack record, having been in existencemore than four years, are growingat 17 percent. The oldest firms, which have been in existenceeleven years or more, are growing at less than 7 percent. Even thesegrowth rates are higherthan employmentgrowth in the formal economy.

*

Employmentgrowth is greatest in firms that beganwith only one worker. These firms are growing an impressive26 percenta year. Firms that began with eightor more workersare actuallydecreasingin size at an annualrate of almost 8 percent.

*

Employmentgrowth is concentratedin certainsubsectorsthat can be characterizedas light manufacturing(see table 34). The highestgrowth rates are found in woodand woodprocessing(43 percent),fabricatedmetalprocessing(38 percent), construction (33 percent), and chemicalsand plastics(129percent). The lowestgrowth rates are found in textiles,wearingapparel, and leatherproduction(13 percent);food, beverage, and tobaccoproduction(19 percent);and financial, real estate, and business services (2 percent).

*

The sectors with the highestaveragegrowthrates are also more likely to have the most workers (see table 3-5). For example,whereasfirms across all sectors have an average of two employees,with 72 percentof all finns falling into that category. 54 percent of wood and woodprocessingfirms, 47 percentof fabricatedmetal processing firms, and 52 percentof nonmetallicmetalprocessingfirms employ betweenthree and five workers. The size of firm is related, in part, to the characteristicsof the sector, althoughthe correlationbetweengrowthand firm size cannot be denied.

These numbers untierstatethe growth in employmentin the microenterprisesector. A large amountof employmentis createdby the proliferationof new enterprises.Studiesshow an importantpositiverelationshipbetweenthe growthin unemploymentand the growth in new

7. Averale annualgrowth ratesare caJculatedas follows:[(A - B) / Bi I C, where A - numberof workers at the time of the survey, B = numberof workers at the time of start-up of the firm, and C = numberof years the firm has been in existence.

- 14 -

microenterprises.This accountsfor the prevalentconstraint,which is describedas too much competitionand inadequatenumberof customers,and translatesinto low rates of profitability. Table 3-4. Growth Rates and GenderofJzhe Proprietor of Firns. by Sector, in Mamelodi and Kwazakhele Townships, SouaaAfrica. 1990

Percent offirns run by women

Sectoral growth rate

72.2 63.1 13.4 100.0 16.7 0.0 6.3 4.3 43.2

19.4 13.0 43.3 27.3 129.0 23.8 38.1 20.2 21.1

0.0

33.1

Trade Wholesale Retail Restaurants, hotels, bars, and shebeens All trade

69.2 69.9 62.2 68.7

11.2 25.1 28.6 25.6

Services Transport Financial, real estate, and business services All services

11.3 60.8 66.8

21.8 2.0 21.9

All enterprises

62.1

23.9

Businesssector Manufacturing Food, beverage, and tobacco production Textile, wearing apparel, and leather production Wood and wood processing Paper, printing, and publishing Chemicals and plastics Nonmetallic mineral processing Fabricated metal production Other manufacturing All manufacturing Construction

Source: GEMIN (1990).

Womenoperate 62 percentof all informalsector businesses,and enterprisesowned by women tend to be concentratedin the sectorswith the lowest levelsof profitability:food, beverage, tobacco, textilesand garments(dressmaking,knitting,crocheting),and retail (table 34). Men are more evenlydistributedamongthese subsectorsas well as in sectors with higher profitabilityand growth such as fabricatedmetalproduction,other manufacturing, construction,transport, and services.Employmentgrowthtends to be lower in sectors dominatedby womenthan in sectorsdominatedby men. Even withina particularsubsector, businessesoperatedby mentend to have moreemployeesand moreemploymentgrowth than businessesoperated by women. GENDER.

Data on accessto credit and training, combinedwith data on the growth of firms, show that relativelyequal access-or relativelyequal lackof access-has not translatedinto increasesin employmentfor female-ownedenterprisesto the extentthat it has for male-ownedenterprises. - 15

-

Althoughsmall enterprisestend to be based in the home, more microenterprisesowned by men are locatedin commercialbusinessdistrictsthan are those owned by women. Most evidenceindicatesthat home-basedenterpriseshave lower growth rates and lower profits than market-basedfirms. Althoughhomelocationshave the advantageof allowingwomen to combine their domesticresponsibilitieswith their businesses,they have the disadvantageof limiting the firm's accessto customers,at least comparedwith a market locatior. The incomesearnedby the majorityof womenwho own businessesrepresentless than half of the family's income. Table3-5. Distributionof Microenterprisesin Mamelodiand KwazakheleTownships,SouthAfrica, 1990, by Nunber of Employeesand Sector, 1990 (percentof all firns) One

Two

three to five

Six to ten

Eleven and more

51.9

21.4

23.5

3.2

0.0

51.4 19.4 0.0 33.3 19.0 26.6 32.1 42.1

22.5 20.9 0.0 33.3 14.3 17.2 23.5 21.6

24.4 53.7 100.0 0.0 52.4 46.9 35.2 31.3

1.4 4.5 0.0 33.3 11.9 7.8 9.3 4.6

0.3 1.5 0.0 0.0 2.4 1.6 0.0 0.4

12.9

29.0

38.7

9.7

9.7

61.5 50.0

15.4 26.5

15.4 20.7

7.7 2.3

0.0 0.5

33.9 47.5

30.0 27.0

32.7 22.6

3.1 2.4

0.3 0.5

Services Transport Finance,real estate, and business All services

28.4 83.3 45.7

31.9 15.8 24.9

36.9 0.8 26.2

2.8 0.0 2.7

0.0 0.0 O.5

AUsmall enterprises

46.6

25.8

24.3

2.8

0.5

Sector Mamnfartaring Food,beverage, and tobaccoproduction Textile, wearingapparel, andleather production Woodand wood processing Paper, printing,and publishing Chemicalsand plastics Nontnetallicmineral processing metal production Fabricated Other manufacturing AUlmanufacturing Construction Trade Wholesale Retail Restaurants,hotels, bars, andshebeens AU trade

Source:GEMI (1990).

The obvious reason for this stagnationis that womenhave dual domesticand productive responsibilitiesand lack time to investin the growthof their business.Nonetheless,their businessesplay an importantrole in providingfor family welfare.They are an important source of investmentsmade in the education,health, and welfareof children and family - 16 -

members.They also contributeto the survivalof familieswho are living on the margin. These female-runenterprisesdo not have to be dynamicand large in order to play a critical role in contributingto overall householdincome. Table3-6. MonthlyTurnoverin SouthAfrica, by Typeof Enterprise,1992 (percent) Amount finrand) Less than 300 301-600 601-1,000 1,001-2,000 2,001 and above Numberof enterprses responding

Retail Nonfood Food 24.19 16.57 17.71 22.86 18.29

20.56 18.89 19.44 20.00 21.11

175

180

Production Engineering Soft 6.67 18.67 18.69 25.33 30.67 75

25.00 27.78 19.44 19.44 8.33 72

Services 30.30 21.21 17.17 18.18 13.13 99

Note:At the timeof the survey. RI wasequal to $0.36. Source:World Bank(1992).

In the World Banksurveyof 632 microenterprisescarried TURNOVER ANDPROFiTABILrrY. out in ten municipalities,the meanmonthlyturnoveris Rl,502 (US$540)and the median turnover is R800 (US$288).A sectoralbreakdownrevealsthe concentrationof low levelsof turnover in the traditional,easy-entryactivitiesin whichfemaleenterprisesare concentrated, especiallysoft production(see table 3-6). Engineeringproductionhas more enterprisesin the high quintilesof turnover: 55 percentof engineeringenterpriseshave turnoverof Rl,000 (US$360)or more, comparedwith about 40 percentof retail enterprisesand 31 percent of service enterprises.Soft productionhas the lowest concentrationsin the top two quintiles: only 18 percent of enterpriseshave monthlyturnoverin excessof RI,000, while52 percent have turnoverof R600 or less (aboutUS$200). Table3-7. Age of BlackMicroenterprisesin South Africa, 1992 Age (in years)

Percentoffirms

Missing data More than 10 5-10 2-4 Less than1

0.3 15.3 20.5 51.4 13.0

Source:World Bank(1992).

- 17 -

SUSTAINABILITY. Most microenterprisesidentifiedby the WorldBank surveyhave a comparativelyrecent history:45 percentof the respondentsstartedtheir businessesbetween 1990and 1992,and 64 percentof the tirms are less than four years old (see table 3-7). Engineeringactivitieshavethe longestlife span: 48 percentare five years old or more. Retail and food activitiestend to be more recent, with 54 percenthavingoperatedfor three years or less. These results reflectthe high death rate of these enterprises.They also reflect the recent spurt of growthof small enterprisesas the businessenvironmenthas becomemore liberalized and more supportive. AGE, EDUCATiON, AND ENTREPRENEURIAL BACKGROUND OF PROPRIETORS.Owners of

microenterprisestend to be concentratedin the lower age brackets,with 35 percent being less than thirty years of age (see table 3-8). Unemploymenttends to be high amongthis age group, which reinforcesthe connectionbetweenunemploymentand the creationof microenterprises. Table 3-8. Age of Black Macroentrepreneursin South Africa, 1992

Age (in years) 16-20 21-30 31-40 41-50 51-60 61 and older Total number

Percent of owners

Cwnlative percent

2.0 33.2 32.9 18.2 8.6 5.1 637

2.0 35.2 68.1 86.3 94.9 100.0 637

Source: World Bank (1992).

As with age and gender, the educationallevel of microentrepreneursindicatesthe alternatives open to them, as well as the abilityof individualsto managetheir businessproperly. About 30 to 40 percent have too little education(less than Standard4) to be functionallyliterate (see table 3-9). Dependingon the qualityof education,the level of functionalliteracy couldbe even lower. On the positiveside, abouttwo-thirdsof the microentrepreneurssurveyedare functionallyliterate and could,therefore, potentiallykeep records and receiveformal training. A strong positivecorrelationexists betweeneducationand turnover.Microentrepreneurswho have achieveda Standard10 level of educationhave averageturnovernearly twice that of those who have completedonly Standard8-the status of 80 percentof microentrepreneurs. Remedialeducationin basic numeracyand literacythus has a potentiallystrong role to play in improvingthe capacityof microenterprisesand shouldform the basis for furtherbusiness training.

- 18 -

Microentrepreneurswho have receivedpostsecondaryschoolinghave less turnover than uneducatedones. Internationalexperiencetells us that in the absenceof the work opportunities that would normallybe availableto well-educatedpersons,runninga small businessis often a short-termsurvivalstrategyand, as such, producesrelativelylittle income. Table 3-9. Educa:ki'nalLevel and Mont/sly Turnover of Black Micrventrepreneurs in South Africa. 1992

Educational level No education Less than Standard 4 Standards 4-6 Standards 7-9 Standard 10 Post-school qualifiers

Percent of owners

Cwnuikive percent

8.5 18.7 33.8 29.8 7.6 1.6

8.5 27.2 61.0 90.8 98.4 100.0

Monthly turnover (rand) 1,106.38 1,111.96 1,237.00 1,540.52 2,484.55 985.55

NAwnberof firms 48 102 185 163 42 9

NVote:The sample size is 549 firns. On average, children are ten years old when they enter Standard 4 in South Africa: they have completed five years of schooling and are functionally literate. On completing Standard 8, children are sixteen years old. Standard 10, also called Matric, represents the cornpletion of formal education. Source: World Bank (1992).

As would be expectedgiventhe history of blackbusinessesin South Africa,the respondents to the survey and their familieshave little entrepreneurialhistory. The vast majorityare operating their first business,and their fathershave never owneda business.The absenceof a lengthypersonalor family experiencewith runninga businessand the lack of managerial experienceimply that manyblack entrepreneursmust be at or near the bottomof a steep learning curve where technicaland managerialskills are concerned.Moreover,the survey data suggest that only 10 percenthave had accessto any type of specializedbusinesstraining or to privatelyor publiclyprovidedbusinesssupportservices. INSl TUTIONAL SUPPORT. Table 3-10 indicateswhich supportagencieshave been contactedby

the few respondents(10 percent)who have contactedan agency.The most common explanationsgivenfor failure to contacta supportagencyare that they have not heard of any organization(50 percent)and that organizationsare difficultto contact(39 percent). These results highlightthe narrow reachof supportorganizationsin the blackbusinesscommunity and suggest that the potentialexists for muchgreater use of such services.They also show that the agenciesthat have achievedthe highestlevels of contactare those that have been discreditedby their associationwith apartheidpolicies.The reach of organizationsbased in the communityseems to be especiallylimited. A positive relationshipexists betweeneducationalachievementand contactwith a support organization(see table 3-11). Of the entrepreneurswho have no education,only 6 percent have contacteda supportorganization.In contrast,nearly 16 percentof entrepreneurswho have achievedStandard10 have done so. The averageturnoverof firms who have made contact is R3,230.17 a monthcomparedwith R 1,305.28amongthose who have not. Owners - 19

-

with the highestlevel of incomeand educationhave more initialaccessto support organizations.This is further confirmedby the correlationbetweenlevel of employment, turnover, and contact(see table 3-12). Table3-0. SupportAgenciesContactedby Microenterprisesin SouthAfrica, 1992 Percentof all contacts

Supportagency Small Business Development Corporation KwaZulu Training Trust KwaZulu Finance Corporation Bophuthatswana National Development Corporation Urban Foundation Get Ahead Foundation FABCOS/NAFCOC

Independent Development Trust

30.8 20.3 28.6 10.4 9.7 14.8 3.3 5.1

Source: World Bank (1992).

Tablk3-11. EducationalLevel and Percentageof BlackMicroenterprisesContactingand ReceivingAssistancefrom a Support Agencyin South Africa, 1992

!dwcationallevel None Less than Standard 4 Standard 4-6 Standard 7-9 Slandard 10 Pbst-school qualifiers

Percentoffinms ihathave contacted a supportagency 6.4 5.9 8.2 10.5 15.6 11.1

Finmsthat have receivedassistance Pezcent Nwnber 50.0 40.0 31.8 40.0 18.2 0.0

4 5 22 20 11 1

Note:The sample size is 549 frms. Source: World Bank (1992).

More interestingis the positiveimpactthat contactseems to have on the viabilityof the firm. Of those that have had contact,41 percent haveactuallyreceivedassistance,and their average monthlyturnover is R3,604.67comparedwith R2,114.81for firms that have made contact but have not receivedassistance.

- 20 -

Table3-12. Size and Turnoverof Black MicroenterprisesContactinga SupportAgency in Soath4frica, 1992 Size of firm

Monthlyturnover (rand)

Nonberof employees

Percentcontactedby a support agency

308.61 1,050.73 3,912.76

1.5 1.6 2.7

9.1 5.5 16.6

SmaUl Medium Large VNote: The sample size is 605 firms. Source: World Bank(1992).

An importantrelationexists amonglevel of education,age of the firm, and assistance received.First, firms whoseownershavesix to nine years of education,which is enoughto ensure basic literacyand numeracy,receivethe most assistance.The same is true of finns that have been in existencebetweenfive and nine years (see table 3-13). Half of firms whose ownershave no educationreceiveassistanceif they have run the businessat least four years and therefore have a track record. Oncethe owner has achievedat least nine years of educationor has had the firm at least ten years, the percentagereceivingassistancefalls. This is consistentwith the contentionthat owners with more educationtend to use microenterprises as a short-termmeasureand that older, very small enterprisestend to be stagnantand therefore less attractiveto supportagencies.Internationalexperiencesupportsthe contention that assistanceis more likely to be givento firms with a track record and with an owner who has basic literacy and numeracyand that supportis more effectivewhen given to this group of entrepreneurs. and Rece0itof Table3-13. Age of BlackMicroenterprises Assistancefroma SupportAgency in Sout Africa Percentthat have receivedassistance from a support agency

Ageof firm Less than I year 1 year 2-4 /,ears 5-9 years 10 years or more

42.9 23.1 29.6 50.7 30.0

Note: The samplesize is 605 firms. Source:World Bank(1992).

The geographicrelationshipamongeducation,turnover,and contactwith a support agency is also strong (see table 3-14). As mentioned,the WorldBank microenterprisesurvey covered ten districts. Umlazi (the black townshipnear Durban)and Soweto(the black townshipnear Johannesburg)are formal settlementsand growth poles that are developingstrongly. They are

- 21 -

Table3-14. Level of Education,Average Turnover,and Contactwith a SupportAgency in SouthAfrica, by GeographicLocation, 1992

Location Besters Boksburg Durban central business district Inanda M

Month4y turnover (rand)

Percentage of firms contacting a support agency

None

Less than Standard 4

1,516.71 1,644.93

16.2 6.6

9.2 7.7

23.5 15.4

34.7 33.3

1,310.00 1,008.08

9.6 8.3

14.0 10.0

17.5 16.0

35.1 56.0

Mafikeng

Nqutu Soweto Umlazi Total Sample size

-

1,285.96 1,270.87 1,712.72 n.a. n.a.

- Not available. n.a. Not applicable. Note: The sample size is 50 firms. Source: World Bank (1992).

-

-

-

Educational level Standards Standards 4-6 7-9

-

Standard 10

Post-school qualifications

27.6 35.9

4.1 7.7

1.0 0.0

24.6 18.0

5.3 0.0

33.5 0.0

-

-

-

8.1 25.8 17.9 n.a.

6.1 7.3 7.5 8.6

24.5 22.0 8.4 18.4

40.8 26.0 28.5 33.6

24.5 28,7 40.2 29.5

4.1 12.0 15.0 8.4

0.0 4.0 0.0 1.6

n.a.

47

101

185

162

46

9

relativelywell served by rail and highwaysand have relativelyeasy accessto markets. Inanda and Bestersare informalshack settlementswith little infrastructure.Durban and Boksburgare central businessdistricts in whichmost black businessesare street hawkers. Mafikeng,the capital of the independenthomelandgovernmentof Bophuthatswana,has supportservices related to the homelandgovernment,and the incomesof the homelandcivil service workers are relativelyhigh. Nqutu in KwaZuluis a typicalrural village. Averageturnover in Umlazi's black microenterprisesis substantiallyabove average, as is the level of educationalachievement:55 percentof microentrepreneurshave attainedStandard7 and above, comparedwith the surveyaverageof slightlyless than 40 percent. BecauseUmlazi is also favoredby above-averagelevelsof infrastructureand marketaccess, it is an attractive locationfor entrepreneurswith above-averagelevelsof education.Umlazialso has a high percentageof light manufacturingfirms, which have relativelyhigh turnover. Sowetoand Boksburgalso have manyhighlyeducatedmicroentrepreneurs(about43 percent have attained Standard7 or above),probablybecausejobs in the formaleconomyare scarce in these areas. In contrast, Durban and Inanda-the Durban-basedshack settlement-have a preponderanceof street traders with low turnoverand low levelsof education. LINKAGESWITHTHE FORMALECONOMY.SeveralSouth Africancase studies have found that

linkageswith the formalsector come largelyin the form of backwardlinkages-purchase of inputs, marketingnetworksas dependentor commissionsellers, investmentof capital earned as wages in the formal sector (Krige 1988;Wellingsand Sutcliff 1984).Few forward linkages exist, however, becauselittle capitalis drawn into the informalsector from the formalsector and few goods and servicesproducedby the informalsector are sold to the formal sector. Nonetheless,the growthof the formal sectorcreatesa host of opportunitiesfor the informal sector to expand. For example,the generationof newjobs in South Africa's formal economy would create a range of additionalor expandedincomeopportunitiesfor informalsector enterprisesand participants(Rogerson1988b).Krigeadds that the size of the market is ultimatelydeterminedby the extent of wage employmentand thus varies with it. In the relationshipbetweenthe informaland formalsectors, marketdominationof South African firms has propagatedboth a dependencyand a barrier to the developmentof indigenous marketingand productionsystems.It is unlikelythat this relationshipwill change, effectively constrainingthe dynamic potentialof the sector. Constraints What are the major problemsand constraintsreportedby the microentrepreneurs?To answer this question,we draw first on the GEMINIsurvey, which administereda secondary questionnaire(a close-endedsurvey)to a small sampleof 256 firms that were representative of the firms in the baselinestudy. Once again, this surveywas conductedin just two South Africantownshipsand can be appliedonly looselyto South Africaas a whole. Despitethis limitation,its findings containvaluableinformationon a recentand largely unresearched segmentof the black businesscommunityand echo the findingsof World Bank surveys - 23 -

administeredin a wider geographicarea. The supplementarysurveyprovidedinformation about the most importantproblemfacedby businessesduring three distinct periods in the firm's life: at start-up, during periodsof growth(if any), and at the time of the survey. These problems, identifiedby the entrepreneursas their most serious constraints,are summarizedin table 3-15. Table3-15. Major ConstraintsFacingBlackMicroenterprisesin Mamelodiand KwazakheleTownships,SouthAfrica, 1990 (percent) Constraint Financing Governmentpolicy Inputs Labor Market Miscellaneous Spaceor location Toolsand equipmnent Transport

At start-up

Duringperiod of growth

At time of the survey

28.8 10.9 3.2 1.3 34.6 5.1 5.1 4.5 6.4

20.4 6.8 2.9 4.8 31.1 8.7 9.7 5.8 9.7

27.8 10.2 2.2 1.7 26.7 8.0 10.8 2.8 9.7

Source:GEMN(1990).

Problemsinvolvingfinancesas well as those involvingmarketdifficultiesare prevalentduring each of the three periods of a firm's life, althoughproblemsinvolvingmarket issuesbecome less constrainingas time passes. Problemswith inadequacyor unavailabilityof shop space seem, however, to affect more firms over time. We also use the WorldBank surveyof 632 microenterprises,which is based the entrepreneurs'own assessmentof the importanceof constraints.It gatheredtheir responsesin two ways: in an open-endedquestion,it askedrespondentsto name the most important constraint they faced on starting up and whileoperatingtheir business;it also asked them to use a ranked scale to indicatethe relativeseverityof a list of predef£nedconstraintsin a variety of areas. This survey, with its broad coveragein ten districts,revealeda pattern of constraintssimilar to that foundby the OEMINIsurvey: finance(no capital)and market-related issues (too few customers)are the first and secondprincipalconstraintsaffectingroughly the same share of enterprisesin both surveys.Spaceand locationalconstraints(premisestoo small, no shelter, sun ruins fruits and vegetables)are third in importanve.Unlikethe respondentsto the GEMIm survey, however, less than 3 percentof the dirmsview regulation (governmentpolicy) as a problem. In some conservativemunicipalities,however, being arrested too often affects up to 30 percent of enterprises.

- 24 -

FINANCIAL CONSTRAINTS. In the GEMINIstudy, 17percent of the problemsat start-upinvolve a lack of operating funds(workingcapital).The percentageof proprietorslisting a shortageof operating funds as the primaryproblemof the firm falls to 11 percent during periods of growth and to 10 percentat the time of the survey. On the other hand, lack of investment funds (fixedcapital)seems to becomemore importantas time passes. Some7.7 percentof the firms listed this as their majorproblemat start-upcomparedwith 7.8 percent during periods of growth and 10.8 percent whenthe surveywas conducted. About20 percent of the microbusinessessurveyedhave receivedcredit, a relativelyhigh proportioncomparedwith that of a similarpopulationin Lesotho,where only 7 percent have receivedcredit. Similarlylow percentagesare evidentin other parts of the world. In fact, the smallest firms in the world have extremelylimitedaccessto financingfrom the formal bankingsector. By and large, thesesmall firms reporttheir own savingsand friends and family as the major sources of financing.Levy (1993)and Little, Mazumdar,and Page (1987) report evidencethat accessto financialresourcesfrom banks, suppliers, and so forth does not become commonuntil the firm exceedsfive employeesand has been in existencefor three to five years. Table3-16. FinancialConstraintsFacingBlackMicroenterprlsesin Mamneladi and KwazaklheleTownships,SouthAfrica, 1990 (percent)

AFnancial

constraint Lack of credit Lack of i-hvestmnent funds Lack of operational funds All funding and credit problens Source:

At start-up

Duringperiod of growth

At time of the survey

4.5 7.7 16.7

1.9 7.8 10.7

6.8 10.8 10.2

28.8

20.4

27.8

BEMIN (1990).

Nonetheless,the findingspoint to the existenceof a substantialunmet demandfor financing and to variationsin the type of financingneededover the life of the enterprise(see table 316). The credit needs of the 20 percent who havereceivedcredit are servicedby revolving savings groups, knownas stokvels.The averagemember's monthlycontributionis R88.35, which amountsto RI,060.20 a year (approximatelyUS$425.00).Just under 80 percentof stokvels receive monthlycontributionsfrom their members,althoughsome contributeas often as daily and some do so only once a year. Stokvelfundsare receivedonce a year by over half of the proprietorsinterviewed.Almosttwo-thirdsof stokvelmembersuse the funds for businesspurposes;the rest use the fundsfor personalpurposes,such as funeralexpenses. The average stokvelsocietyhas almosttwenty-sevenmembersand has been in existencefor just over five years. These findingssuggestthat a viable indigenousstructureexists to meet at - 25 -

least some of the credit needsof blackmicroenterprises.The deficienciesare that stokvels meet only a limited part of these firms' needs for financingand offer only a limitedarray of financialservices(for example,they cannotprovidelong-terminvestmentcredit, whichseems to be most in demandduring periodsof growth). A lack of customersis the most frequentlycited market-related MARKETCONSTRAINTS. problem at both start-up(t5 percent) and at the time of the survey(13 percent;see table 317). Not surprisingly,this percentagedips to only 3 percentof proprietorsduring periods of growth. The increasingnumberof competitorsis anotheroft-citedproblem,with 5 percent of proprietorsconsideringthis to have beentheir business's primaryproblemat start-up, 8 percent during periodsof growth, and 7 percentat the time of the survey. In the WorldBank survey, the rising cost of supplies is the dominantmarketproblem identifiedby the respondents. Table3-17. Market Constraints Facing Black Microenterprises in Mametodi and Kwazakhele Townsh/ps, SoW/aAfrica, 1990

(percent) Market constraint

Baddebt from credit Don't know what customers want Illegalcompetition Lackof productpublicity Not enoughcustomers Numberof competitors increasing Shoplifting AlUmarketproblems

At start-up

During period of gromth

At time of the survey

6.4

7.8

2.8

3.2 0.0 4.5 14.7

2.9 1.0 4.9 2.9

1.7 0.0 1.1 12.5

5.1 0.6 34.5

7.8 3.9 31.2

7.4 1.1 26.6

Source: asMIM(1990).

Market constraintsexistbecausemost microenterprisesare competingwithin small, locationspecific, low-incomeniche markets. Newentrepreneursnowface few legal barriers to enteringbusinessand tend to do so as unemploymentincreases.As competitionwithin a given niche intensifies,markets in the broadereconomybecomevirtuallyclosedgiven the location of the new enterprise, qualityfactors, and the difficultyof competingwith mass-produced products availablefrom South Africanproducersin the well-developed,formalsector. Indeed, over 75 percent of firms reportedthat in the past five years the overall demandfor products like theirs increased,as did the numberof firms in their line of activity. Only55 percent reported that their own volumeof businessincreasedover the same period. Apparently,new firms are meetingmuchof the increaseddemand.Whencompetitivepressureskeep prices -

26 -

down in a low-income,price-sensitivemarket, microentrepreneursquicklyfeel the rising cost of supplies. In an inflationaryenvironment,prices cannotbe adjustedeasily. Presumably, firms in the light manufacturingindustries,wherethe concentrationof firms is low and skills representa natural barrier to entry, face less extremecompetition,which allows them to grow at relativelyhigher rates. Blackmicroenterprisesare facingdifficultstructuralconstraintsin SouthAfrica. On the one hand, they havethe extremelydifficulttask of identifyingnew, more broadlydefinedmarkets and of gaining the skills neededto enter new nichesand competewith long-established businessesin the formalsector. On the other hand, until general economicgrowth offers them opportunitiesto enter employmentin the formalsector and to satisfy increaseddemandfor their products, competitionwithinlimitedmarketnicheswill continueto depress the income and welfareof the informalsector. BUSINESS PREMISES ANDTENURE ARRANGEMENTS. The vast majority-71 percent-of microenterprisesin the two townshipssurveyedby GEMINI are operatedfrom the home, far from commercialtraffic (see table 3-18). In general, commercialpremiseslocatednear the source of marketdemandare difficultto obtain. Half of the microenterprisesoperatingoutside the home do not have permissionto occupytheir sites. Table3-18.Locationof BlackMicroenterprisesin Mamnelodi and Kwazakhek Townships,SouthAfrica, 1990 Locationof thefinn

Percentoffirns

Commercial district Home or homestead Mobile Roadside Traditional market

7.0 71.1 9.0 10.7 2.2

Source:GEMINI(1990).

The World Bank survey, which includeda broaderdistributionof locations(township, homeland,urban centralbusinessdistrict, and so forth) than the GEMINI survey, revealedthat two-thirdsof respondentswho operate outsidethe homeoccupytheir businesspremises withoutsecuretenure: half occupythem Vwithoutpermission-almosthalf operate from open sites on the street-and a further 15 percentbase their occupancyonly on the permissionof the land owner. These results are, in part, a legacyof apartheidplanning,whichstrictly restrictedblacks from establishingbusinessesin whiteurban areasand centralbusinessdistricts.Today, few emergingblack enterprisescan afford spacein town, and appropriatelysized and priced - 27 -

premises are simplynot available.Credibleattemptshavebeen made (notablyby the Small BusinessDevelopmentCorporation)to remedythe problemby establishingsmall business "hives.' Unfortunately,this space is oftenon the city fringesaway from the bulk of commercialtraffic and, as such, does not satisfy the need to be near markets. REGULATIONS.The World Bank surveyasked whetherregulationis a serious constraintfor today's black microenterprises.The results are boundto be controversialbecause it is difficult to determinethe numberof businessesthat nevergot startedbecauseof the perceived importanceof regulations.Althoughboth the WorldBank and the GEMINIsurveys indicate that existingentrepreneursattributelittle importanceto regulatoryissues,the World Bank survey offers further insights.

Despitethe extensivederegulationof businessactivity,severalpracticesand laws continueto pose actual or potentialconstraintsfor microenterprises: Municipalrules concerningstreettrading. Some municipalitiesmaintainstrict controls,declaringlarge portionsof the city centerout-of-boundsto street traders. Althoughthis situationwill be affectedby the BusinessesAct, in more conservative areas harassmentof traders is and will undoubtedlyremain a problem. H Health, safety, and labor codesfor the workplace.Althoughrarely enforcedin the black enterprisesector, numeroushealth, safety,and labor laws are on the books and imposecosts of compliancethat are potentiallyprohibitivefor very small businesses. *

Taxation.Regulationsunder the new value addedtax law imposehigh compliance costs on very small businesses.

Nonetheless,when asked to name spontaneouslythe most importantconstraintfaced at the start-upof their business,only 12 percent of respondentsto the WorldBank survey mentioned factors relatedto regulation(see table 3-19). Mostof their responsesrelate to beingarrested too often, althougha very small number(about3 percentof all firms surveyed)concernfines and confiscationof goods or difficultygettinga license.Regulatoryproblemsfigure even less prominentlyin the day-to-dayoperationsof their business:7 percentof the respondentscited regulatoryfactors as their most importantproblem.Again, arrests are the dominantissue (6 percent). If problemsin these areas are regardedas relativelyunimportantby most entrepreneurs, theyare likely to becomeeven less so as a resultof the BusinessesAct, which will abolishlicensingfor most categoriesof businesses,prohibitconfiscationof traders' merchandise,and generallyreduce opportunitiesfor officialharassment.Marketconditions and lack of financingare far and away regardedas the most bindingconstraints(appendix I presents the entire range of spontaneousresponsesto questionsaboutconstraints). To evaluatethe extent to which enforcementof regulationsinterfereswith the day-to-day operationsof microentrepreneurs,respondentswere asked to reporton the frequencyof visits by governmentofficials-police officersand otherofficials-over the past three months. - 28 -

Again, the data suggestthat microentrepreneursare not overlyburdenedby regulatory matters. Well over 90 percentof respondentssaid they had not had any encounterswith governmentofficials in the past three months. Morethan three-quartersof the visits made to the small minorityof firms that had been visitedwere relatedto the enforcementof licenses and the confiscationof goods, activitiesthat will no longerbe sanctionedunder the Businesses Act (with some exceptionson licensing).A further indicationof the limitedimpactthat regulationhas on microentrepreneursis the small numberwho seek to obtain trading licenses. Only 12 percent of respondentssaid they had acquiredlicenseswhen starting their business. Table 3-19. Percentage of Respondents Citing Regilation as Their Most Important Problemn,by Pliase of Operation, in South Africa, 1992

Type of problem Arrested too often Fines and confiscation of merchandise Don't know how to get a license Takes too long to get a license All types of regulation

At start-up

At tine of the survey

9.0 1.5 1.4 0.4 12.3

5.5 1.1 0.2 0.0 6.8

Source: Schacter (1992).

These surveys indicatethat the majorityof encounterswith governmentofficials regarding regulationare with the South Africanpolice, municipalpolice, and homelandpolice, which stronglysuggeststhat police, as opposedto the officialschargedwith enforcingtaxation, labor, health, and other businessregulations,actuallyregulatethe daily activitiesof many small-scaleblack businessesin SouthAfrica. The reasonsfor encounterswith the police vary across subsector. In the case of retail microenterprises,the absenceof a license is the principalmotivation.In the case of taxi cabs, it is aggressiveenforcementof traffic laws-fines and stoppingof taxis for overloading,for the conditionof the vehicle,or for failure to obey traffic signs. Taxi operatorssee this as beinglargely raciallymotivated harassment,even thoughthere is, in fact, evidenceof traffic violations. The microenterprisesurvey revealedsome interestingregionaldifferencesin how black microbusinessesinteractwith law enforcementand other authorities.The data tend to confirm that althoughcentral governmentpoliciestoward blackenterpriseshave changeddramatically in recent years, old attitudesand practicesdie hard, and pocketsof resistanceto the official, more liberal attitudetoward black enterprisesremainwell entrenchedat the local level. In conservativeareas, microentrepreneurscontinueto experienceharsh forced removals,arrests, fines, and confiscationof goods.Table 3-20, which is extractedfrom respondents'rankings of predefinedconstraints,shows the proportionwho rate harassmentby officials as an important problem. It also shows the share of surveyrespondentswho have been forcedto move.

- 29 -

As indicatedin the discussionof businesspremises,harassmentproblemsare aggravatedby the absenceof securebusinesspremises.Half of the respondentswho run businessesoutside the home occupytheir premiseswithoutpermission,undoubtedlybecausealmost half (48 percent) run their businessesfrom open sites in the street, and a further 15 percent base their occupancyonly on the permissionof the landowner. Table 3-20. Regional Variation of Enprcement Problems in Soath Afriaa, 1992 (percent) Location

Harasnen

lby officials

Forced removal

Besters Boksburg Durban Inanda Mafikeng Nqutu Soweto Umiazi

18.0 46.3 22.4 10.4 26.1 16.3 18.1 5.5

4.0 17.0 29.0 0.0 10.0 10.0 0.0 6.0

Al areas

18.2

7.0

Note: Boksburg is a conservative white municipaGty; Mafikeng is a city in the black homeland of Bophuthatswana, which has been identified by the African Council of Hawkers and Informal Businesses as having some of South Africa's toughest policies toward microentrepreneurs. Even Durban, a relatively liberal white municipality by South African standards, has diligently limited strcet trading to the fringes of the central business district. Microentrepreneurs are especially vulnerable to this type of official intervention. Source: Schacter (1992).

The findingson perceivedconstraintsare relevantfor four reasons. First, entrepreneursdo not considerregulationto be as importantan impedimentas issuesof financeand markets. Second, the problem appearsto be the legacyof racialbias, representedby police harassment, which varies with the attitudeof the municipality,rather than the enforcementof regulations per se. Third, the absenceof appropriatelylocatedmarketinfrastructure(marketplacesfor legal rental of space)apparentlycontributesto the harassmentof informalvendors. Finally, to the extent that a new constitutionalsettlementmay create more powerfulregionalauthorities, certain local authoritiesare muchmore likelythan othersto adoptharsh policies toward entrepreneurs,particularlythe smallestand weakest. Policy Implications Simplyput, South Africa's microenterprisesectoris highlyconstrainedby the restrictionsthat apartheidplaced on the establishmentof black businesses,on black skilledemployment,on - 30 -

black educationalopportunities,and on the spatialarrangementsof SouthAfricancities, which separatedblacks and their businessesfrom the whiteurban areas where marketsare concentrated.Even in the townships,commercialpremisesare inadequate. The ex ante expectationof this researchwas that giventhese constraints,the research would find the black microenterprisesector to be withoutdynamismand to be principallya residual source of employment(not a dynamicemployer)for manyyears to come. However,the research results indicatethat despitesevere constraints,cautiousoptimismis justified. First, dynamic growth is foundamongsmall light manufacturingenterprisesin which firms are slightlylarger and have a longerhistory, indicatingsomedegree of sustainability.Second, althoughthey are low, incomesin the sector(especiallyamongwomen)make important contributionsto householdincomesoverall, even thoughthey are not the principalsource of income. Thus achievingdynamicgrowth in employmentis not as critical as improvingthe contributionthat these businessesmake to householdincomeand welfare. Considerablecautionmust be taken, however,whendiscussingthe sector's potential dynamism. Althoughmore firms are growingin South Africathan in similar African countries,this is due in large part to a spurt of growthfollowingthe removalof apartheid restrictions.Growth is concentratedin the youngestfirms with the smallestbase of employment.Internationalexperiencetells us that the survivalrate of new firms tends to be quite low. In Asia, Latin America, and WestAfrica, rates at which survivingfirms graduate from microenterprisesto becomedynamicsmall and mediumenterprisesis, on average, 50 percent; in Eastern and SouthernAfrica, it is only about 10 percent (Liedholm1992). Given this experience,it wouldbe unwiseto assumethat the growthand pocketsof dynamism observed in the early days followingderegulationcan be sustainedover time. Indeed,given the constraintsfacing South kfricanblack microenterprises,deregulationalone will not ensure long-termgrowth. For policy purposes,the black enterprisesectorhas two distinct roles that deserveto be supportedin any projector policy intervention:first, as a residualemployerwith an important role to play in improvingthe welfareand alleviatingthe povertyof black householdsin South Africaand, second, as a source of some dynamicand potentiallydynamicfirms that have a role to play in creating wealthand employment. Accordingto Liedholmand Mead's (1987)researchon productivity,as microenterprisesmake small increasesin employment,productivityimprovesdramaticallyand in fact exceedsthat of muchlarger enterprises.This is a powerfulresult thatjustifiessupport for efforts to develop the long-runpotentialof these enterprises.A furtherrationalefor above-averageefforts to provide support is that South Africa's microenterpriseclass is unique in that it has been virtuallycut off from the businessmainstream,through legislationand practice,for the better part of this century. Policy and project interventionsshouldfocuson alleviatingthe principalconstraintsidentified by the entrepreneursthemselves:competitivemarket conditionsand lack of accessto

- 31 -

financing. Moreover,an institutionalframeworkshould be designedthat supportsthe black microenterprisecommunitywith broaderaccessto financial,training, and technicalassistance. Issues relatedto marketsare largelya functionof excessive TO MARKETS. ACCESS competitionin low-entrysectors such as retail where microenterprisesare concentrated,on the one hand, and the difficultyof competingwith sophisticated,well-establishedSouth African businesses,on the other. The key is not to restrict competitionbut rather to expandthe range of market opportunitiesfor these businesses.Possibleoptions includethe following: *

To develop marketinfrastructurecloserto centralbusinessdistrictswhere purchasing power is concentrated.

*

To developskills and on-siteassistanceto improvethe qualityof products. This should be especiallyso for manufacturedgoodsthat, in the survey, show the highest degree of dynamismbecausethey createemploymentand generateturnover.

-

To reexaminethe conceptof buyer and productioncooperatives,which are supported by the AfricanNationalCongressand the Confederationof South AfricanTrade Unions. Althoughthey have achievedlimitedsuccess,these experimentshave the potentialto realizethe benefitsof bulk buying;to securea committedclientelefor marketing,commonmarketing,and administrativeoverhead;and to obtain coordinatedsupportfrom assistanceagencies.Theythus deservea second look.

SERVICES. Priority should be given to expanding the availability of ACCESSTO FINANCIAL

appropriatefinancialservices,perhaps buildingon the indigenousstokvelbase. Accessto financingis a tricky issue in that bank financingis not readilyavailableto microenterprisesin most of the world's financialsystems.Evidenceof financingconstraintsby small, short-lived firms need not implythat imperfectionsin financialmarketswarrantattentionby policymakers.However,notablesuccesseshavebeen achievedin countriessuch as Indonesia, for example,where microenterpriseshave broad accessto financingfrom banks that operate on purely commercial,profit-orientedprinciples.A key elementin the successof these schemeshas been the strong linkagebetweenmicroenterprisefinancingand the formal financialsystem, on the one hand, and the strong savingsassociatedwith the mobilization effort, on the other. Some of these schemeshave built successon group lendingas a :neansto reducethe risks and transactionscosts associatedwith small loans. Seriousefforts should be made to understandthe structureof these schemesand to see if it couldbe appliedto South Africa. INSTITUTIONALEFFECTIVENESS.The issue at hand is to designan institutionalframework that

accordsthe black microenterprisecommunitymuchbroaderaccessto financial,training, and technical assistance.Organizationscloselyassociatedwith apartheidhave more contact with microenterprisesthan other organizationsin the formalsector, and losingtheir resources - 32 -

altogetheris not feasible. Manynongovernmentalorganizationshave made laudableefforts that have won respect withinsmall communitiesof businesses,yet their efforts have had little impact. A possible approachto increasinginstitutionaleffectivenesswouldbe to devise financingand training programsin which larger organizationscouldeffectivelywholesale financial(guarantee,equity)and technicalassistanceservices(includingthe training of trainers and institutionalback-upsupport)to smaller, qualifiednongovernmentaland community-based organizationsthat wouldretail them, in turn, to the final beneficiary.

- 33 -

4. A DETAILEDLA)OKAT MOREESMABLISHED BLACKBUSINESSES

IN SOUTHAFRICA,MORE ESTABLISHED BLACKENTERPRISES are distinguishedfrom

microenterprisesless by their size, largelybecausethe legacyof apartheidhas ensuredthat virtuallyall black enterprisesare small, than by their base of financialand human resources, which prepare them better to play a dynamicrole in creatingemploymentand wealth. The surveytargeted the largest, most sophisticated,and mostwell-establishedfirms in order to take an in-depthlook at their characteristicsand constraints.These so-calledsmall and mediumenterprisesturnedout to have more assets, more training, more education,more skills, more ability to moveup-market,and higherprofitabilityand turnoverthan the average microenterprise.Thus they are consideredto be small and mediumenterpriseswith perhaps more short- to medium-termpotentialto be integratedintobroader SouthAfricanmarkets. Methodologyand Overview Data on more established,dynamic(or potentiallydynamic)blackfirms were gathered in four firm-levelsurveysconductedfor the WorldBank in 1992and are recordedin detailed reports. The followingparagraphssummarizethe constraintsthat entrepreneurswho run these firms feel affect their businessesthe most. The surveyscoveredthe country's three major urban areas and their environs:Cape Town, Durban, and Johannesburg.The five surveyinstruments,althoughnot uniform,used openended and closed questionsto obtaindetailedinformationon a varietyof constraints.All the questionnairesalso containeda summaryquestionthat asked respondentsto rank the relative importanceof a wide-ranginglist of constraintsintendedto approximatethe universeof significantobstaclesfacing blackentrepreneurs.The four subsectorsexamined(retail, taxi, construction,and garmentmanufacturing)were selectedfor two reasons:first, they are relativelyundemandingfrom a technologicalpoint of view, and second, with the exceptionof the taxi industry, they have modestrequirementsfor start-upcapital,thus makingthem well suited for small blackentrepreneurs,who often lack entrepreneurialexperienceand have limitedfinancialresources. Indeed,data on the South Africaninformalsector suggestthat retailing, constructiontrades, and garment manufacturingare amongthe leading areasof black enterpriseactivity. The taxi industryis particularlyinterestingbecauseit is perhaps the only sector of blackbusinessto have a significantimpacton the economyas a whole. Althoughthe surveytargetedthe largestand most well-establishedenterprises,different categoriesof enterprisesclearlyemergedbased on their demonstrateddynamism.Therefore, a separateanalysisattemptedto distinguishconstraintsfacingthe most dynamicfirms-those with the highestpotential-from those facingthe least dynamicfirms-those that most resemblethe microenterprisesdiscussedin the previoussection.The criteria for defininga businessas dynamicare turnover, profitability,sustainability,employment,and the replacementvalue of capitalinvestedin the businessas assets.The dynamicenterprises - 35 -

includefast laners, which are pushingahead and achievingever-higherlevelsof the indicators.A subsetof the fast lanersare the high flyers, which are the top 10 percent of firms in the survey. Middlelaners and slow lanersare potentiallydynamic;they have a lower level of achievementthan fast lanersand have reachedplateausfrom which they have not expandedbecauseof limited internalcapacityor externalconstraints.Survivalistsare enterprisesthat, despitemeetingthe minimumcriteria tor beingpotentiallydynamic, do not fall into any of the above categoriesand are simplysurviving. Only about 20 percent of the enterprisesin each of the subsectorscat, be consideredfast laners. and between8 and 14 percent are high flyers;that is, businessesthat are pushing aheadthrough a combinationof high turnover,profit, employmentgeneration,and assets (see table 4-1). The majority-about 60 percentof each of the subsectors-are survivalists.The remainderare not growing despitetheir potentialto do so. Table 41. Breakdown qf Black Small and MediumEnterprises, by Stubsector, in Cape Town, Durban, and

Johannesburg,SouthAfrica (percent)

Subsector Retail Construction Taxi

Survivalist 58.00 56.18 59.99

Potentiallydy-namic Slow laner Middle laner 14.00 17.98 6.32

7.00 6.74 14.74

Dvnamic FasJ laner High flyer 21.00 19.10 18.95

14.00 12.36 8.42

Total number 100 89 95

a. A subset of fast laner. Source: World Bank (1992).

CHARACTERISTICS OP THE OWNERS OF MORE ESTABLISHED ENTERPRISES.

Before turning to

the characteristicsof each subsector,a few generalcommentsare worth makingaboutthe ownersof small and medium enterprises.More establishedblackbusinessesare, on the whole, far less marginalizedfrom the mainstreameconomythan are microenterprises.The demographicprofile of their ownersstandsin stark contrastto that of ownersof microenterprises. *

In education,they averageten years of formalschoolingcomparedwith six years for microentrepreneurs,and about60 percentof those who own dynamicfirms have pursued post-schoolcertificatesor diplomas.

* In previouswork experience,about60-70 percent of constructionand retail owners had left employment,had served an apprenticeship,or both before openingtheir own business. The oppositeseems to be true of microentrepreneurs,many of whom began with no previousexperience. *

In motivation,most had entrepreneurial(rather thansurvival)motivationsfor starting a business.

- 36 -

*

The averageowner is forty to forty-fiveyears old, aboutten years older than the average microentrepreneur,who is betweenthirty and thirty-five.

The level of assets investedalso points to capitalaccumulationeven during the apartheid period, when most of these enterpriseswere established(the averageage is about seven years). These differencestranslateintosubstantiallyhigherlevelsof turnoverand profitability. Amongthe dynamicenterprises,fast lanershave particularlyhigh levelsof investment, althoughemployment(an averageof aboutfive employees)remainslow, even amongthe most dynamicfirms. In general, these enterprisesgeneratelittle employment. a constraintfor the most dynamicbusinesses,however,becausenew investmentscan be financedfrom earningsretainedas a result of high rates of profitability.For the potentiallydynamicslow and middle laners, however, financingis often an importantconstraintto expansion. CONSTRAINTS.Rates of bank use vary amongsubsectors.Financingis less of

Across all subsectors,market factors-that is, strong competition-are a major problem (see appendix1). This was somewhatunexpectedsince moreestablishedbusinessespresumably have accessto a broader range of marketsand opportunitiesto diversifythan less dynamic ones, even though they face limitationsfrom the top-from sophisticatedwhite South African businesses-as well as from the bottom-from blackmicroenterprises.Marketfactors are perceivedto be particularlydifficulttodaybecauseof the combinationof high inflationand recession,and they are givenhigh priority by the surveyparticipants.A variety of internal constraints(such as accessto skilledand reliablelabor and management)and structural constraints(such as accessto land for constructioncontractors)restrictsboth the accessthat even the most dynamicblackbusinesseshaveto broaderSouthAfricanmarketsas wellas their abilityto expand. Crime and violenceare also perceivedto be a substantialconstraint,especiallyby fast laners. As with microenterprises,these more establishedenterprisesdo not perceiveregulation,as definedby licensing,to be a problem,althoughthe most dynamicretailers and garment manufacturers,in particular, do considerlabor laws and administrationof the value added tax to be constraints. The Retail Subsector Throughoutthe 1960sand 1970s,the policyof deliberatelycontainingretailingin formal townshipsspurred the sustainedoperationand newdevelopmentof hiddeninformalretail activity. Duringthe 1980s,the numberof peopleenteringall sectorsof the informal economy, includingspazas, was swollenby the worseningrecession,rising unemployment, and the retrenchmentof workers. UntilJanuary 1, 1989,all spazas were illegaland operated contrary to laws prohibitingthe use of residentialpremisesfor businesspurpos-s. In 1989, new measuresallowedresidencesto be used for businesses(includingspazas) for the first time, albeitwith the caveatthat such activitiesmust be licensed. Today, homeenterprisesare estimatedto functionin at least one in everyfive households. The initialflurry of deregulatorymeasuresoccasionedmuchspeculationaboutthe potential - 37 -

contributionthat spazascould maketo development,with some observersseeingthem as logical steppingstones to the growth of larger retailenterprises.Optimismwas fueledby estimatesthat the nation had as many as 66,000 spazasin 1990, with an overall annual turnover in the range of R3 billion to R7 billion, whichwould have matchedthe combined turnover of the country's two leadingsupermarketchains.Contradictingthis favorable growth-orientedpicture is the realitythat spazasare part of the informaleconomyof survival in South Africa. Participantshave few skills to supporta business.Barriersto entry are low, and competitionkeeps returns low and near subsistencelevels. Moreover,prospects for the evolutionarygrowth and long-termviabilityof spazasare made even more bleak in the wake of new competitionfrom the increasingnumberof shoppingcomplexesbeingerected in or near townships. Both the formal and informalretail sectorsare dominatedby large numbersof small establishments(99 percent of the total); in economicterms, however,the formal retail sector is highly concentrated,with one operatingcompanyand two holdingcompaniesaccounting for nearly one-thirdof employmentin the formalsector. Retailtrade, togetherwith the catering and accommodationsectors, accountedfor approximately12 percent of formal sector cGDP during the 1980s.Growthin retail, catering,and accommodationsduring the latter part of the 1980slaggedbehindthe alreadysluggishgrowthof the economyas a whole. The outlookfor the 1990s,by most accounts,remainsgrim, given a weak economy. ICHARACTmRIsrcs. The majorityof the dynamicand potentiallydynamicblack retailers surveyed are registeredand, comparedwith the survivalistsand microenterprises,hold a privilegedpositionin terms of their turnover,profitability,and level of assetsheld at start-up. They also show a very high level of investments,in fact higherthan all other groups not only in retail but in other sectors as well (see table 4-2). A far larger proportionof the fast laners and high flyers in the retailsector operatespecialtyshops. Further, no firm in the high flyer group operatesa spaza, while27 percent of the survivalistsoperate one. The uniquenessof specialtyshops amongthe most dynamicenterprisesindicatesa promisingopportunityto diversify. Apparently,the spazamust evolveinto anotherform if the enterprise is to become dynamic. A relativelylarge portionof retailers(36 percent)havereceivedcredit in the past. Fast lane enterpriseshave receivedboth larger loansand more overdraftfacilitiesthan other groups of dynamic enterprises.Not surprisingly,morefast laneenterprisesthan less dynamicfirms hold property that they can use to secure loans. Very few survivalistshave propertythat they can use as security, and investmentsby survivalistsare very low comparedwith those of all other groups. The entrepreneur'sown savingsare a major source of financingfor 90 percent of all enterprises. At start-up, personalsavingswere the majorsource of financingfor 96 percent of the retail enterprises,and familyand friends were a major source for 43 percent. Currently, commercialbanks and the SmallBusinessDevelopmentCorporationare a major source of financingfor 15 and I I percent, respectively,of the enterprises.In general, financesare less of a constraintfor more dynamicenterprisesbecausetheir high profits and retainedearnings permit them to self-financeinvestmentsand growth.

-

38 -

Table 4-2. Characteristics of More Established Black Retail Enterprises in Cape Town, Durban, and Johannesburg,SoaIh Africa, by Subsecior

(percent) Subsecor Characteristics offinn Number of persons employed Age of the firm (years) Type of firm (percent) General dealer Spaza Specialist With property for security With electricity Characteristics oj owner Age (mean years) Education (years of schooling) Business experience (percent) Left employment to enter bus. .oss Has previous business experience Learned from another business Financial characteristics (rand) Turnover Profit Assets At time of start-up At timneof survey Investment Cost of supplies Value of own funds Value of bank loans Overdraft facility

Srirvivalist

Poienially dvnamic Stowlaner Middle laner

Dynamuc Fast laner High flye 1

1.85

4.00

5.00

4.81

4.30

6.23

10.07

5.00

7.76

5.60

33.90 27.40 38.70

78.57 7.14 14.29

85.71 0.00 14.29

57.14 4.76 38.10

69.20 0.00 30.80

11.30 90.30

21.43 100.00

28.58 100.00

42.86 90.48

30.80 84.60

47.53

47.64

39.71

46.57

46.00

8.38

8.21

8.00

9.10

9.70

37.10

57.14

42.86

61.90

38.50

17.70

28.57

0.00

33.33

46.20

12.90

7.14

14.29

i381

38.50

7,019.68 1,285.74

20,857.14 3,587.93

23,285.71 9,876.00

49,680.95 13,707.19

60,923.00 17,123.00

10,100.16 13,086.53 11,847.10 3,534.19 7,875.69 1,733.08 438.69

31,285.71 22,042.86 27,357.71 13,085.71 38,642.71 5,070.86 142.71

15,178.57 40,714.29 40,142.86 10,142.86 12,985.71 4,999.43 0.00

35,978.57 78,885.90 95,574.29 30,923.81 32,428.57 12,571.90 4,619.90

44,500.00 99,551.08 126,011.00 37,538.00 37,692.31 15,307.23 7,976.77

A

a. A subset of fast laner. Source: World Bank (1992).

Despitetheir relativelyhigh levelsof educationand experience,85 percent of the samplefeel that specializedtraining in businesswouldbe useful.

- 39 -

CONSTRAINTS. Table 4-3 indicatesthe constraintsfacedby the more established,dynamic and potentiallydynamicretail firms. The figures reflectthe meanof a weightedscore that ranges from 1 to 5, whereby I is low and 5 is high. The table presentsthe most strongly felt constraints-those that receiveda score above3.5-and importantbut secondary constraints-those that receiveda score between3.2 and 3.5. Data on the full range of constraintsare presentedin appendix 1. Table4-3. ConstraintsFacingMore Establisihed BlackRetailEnterprisesin Cape Town,Durban, and Johannesburg,SouthAfrica (score)

Subsecior

Survivalist

Potentiallydynamnic Slow laner Middle laner

Dynamic Fast laner

HighflyerA

Business enviromnent Gangsters

3.53

3.28

..

3.62

3.62

Theft violence

3.95 3.98

3.78 3.92

4.00

3.69

3.69

Finance Accessto loans

3.20

..

3.29

..

3.21

Market Competition Cost of equipment Costof materials

..

..

..

3.23

3.23

3.26

..

3.29

3.23

3.23

Cost of supplies

4.02

3.93

4.71

4.31

4.31

Regulation Company tax VAT administration

..

..

..

3.23

3.23

3.19

..

4.29

4.31

4.31

Accounting Calculatingcosts

..

3.29

..

..

3.14 3.14

Cost of labor Reliable labor

..

..

3.43

..

..

..

Skilled labor

..

..

..

3.46 3.62

3.46 3.62

Technical skills

..

..

3.43

3.23

3.23

Slls and labor

Not mentioned. a. A subsetof fast laner. Source:World Bank(1992).

The most strikingfeature of these scores is that dynamicenterprisesscore market-related issuesas high as survival-leveland microenterprisesdo. Ratherthan beingphrased as too few customersor too much competition,the issuesurfacesas the high cost of supplies (probably resultingfrom inflation),which squeezesmarginswhenmarketsare too competitiveto absorb increasesin price easily. The retail sector illustratesa broader issuethat recurs across sectors: the impactof deregulation.Until the recent deregulation,the numberof licensesissued for - 40 -

retail and liquor establishmentswas strictlycontrolled.The few enterprisesthat did exist were highly profitable.Whenretail licensesbecamefreely available,during the past five or six years, manyblack entrepreneursmade heavyinvestments,competitionincreased,and profits plummeted.Today, a frequentlyheard refrainamongblack SouthAfricanbusinessesis reflectedin the followingquote: For as long as the governmenthad the licensesfor itselfand its friends, there was strict controlon numbers. Now that ordinaryblacksare beingallowedin, the governmentis issuinglicenses like confetti,hoping that we willgo under and they can take over again. They never wantedus to succeed. Black retailersalso face competitionfrom above. With the scrappingof the GroupAreas Act, successfulwhiteand Indianretailers,along with big supermarkets,can now enter townships and directly challengeblack businessesthere. The second most strikingconstraintis relatedto the businessenvironmentand surfacesas lack of civil order: theft and violenceas well as gangsterism. Amongthe most dynamicenterprises,issuesrelatedto administeringthe value added tax come to the fore. The shortageof skilledlabor is highlyimportantto the high flyers, however, and accessto skilled labor is importantto all dynamicenterprises.The shortageof reliable labor is also a problemfor expandingenterprises. The TransportationSubsector (BlackTaxis) The presenceof racial zoningpolicieshas given SouthAfrica's black taxi industrya unique history. The apartheidpoliciesenshrinedin the Natives(Urban Areas)Act of 1923and the Group Areas Act of 1950forced most blacksto the fringesof urban areas. This artificially wide separationof homefrom workplacehas made commutinglong distancesan integral feature of life for South Africa's urban blackpopulation.(In 1985, 80 percentof black commnuters spent 2.5 hourstravelingto and from work daily.) In 1930, the governmentpassed the Motor Carrier TransportAct, which createda bus and rail transport monopolyin major cities and, in the absenceof competition,inflatedthe cost of transport. In 1952,the state beganto subsidizeurban transportfor black workerswith an emphasison trains, but independentbus operatorsand taxi servicescontinuedto emerge and flourish. Local taxi associationsfought the transportmonopoly,but their campaignswere weakenedby a lack of collectiveaction. It was only in the 1980sthat black tax. operators united under the South AfricanBlackTaxi Association(SABTA) and in some townshipsforged deliberate links with the mass democraticmovement. A major turning point in the fortunesof the blacktaxi industryoccurredwhen SABTA effectivelychallengeda 1983effort to ban the kombitaxi, whichthe WelgemoedCommission described as a "particularlystrong competitorfor the existingbus or train services." Followingpopularprotests led by SABTA and wagedby the mass democraticmovementand parts of the private sector, in 1985the governmentwithdrewthe restrictivedraft bill based on the WelgemoedCommissionreport. - 41 -

Today, the black kombitaxi (minibustaxi) industryis the dominantform of black entrepreneurshipin the South Africantransportsector. Few ownersare formally registered, but all are subject to a limiteddegreeof governmentregulationand to strict self-regulationby private industryassociations.Althoughseverelylimitedin their coverage,official data show that transportation(which is dominatedby kombitaxis) generatedone-tifthof the entire informalsector's contributionto GDP, which in turn translatedinto 1.7 percent of total recorded (formal sector)GDP in 1989.Black-ownedtransportfirms accountedfor virtually all-96 percent-of this activity. Table 44. Characteristics of More Establishied Black Taxi Enterprises in Durban and Johannesburg, South 4frica, by Subsector

(percent)

Sabsector Characteristics offirm Number of persons employed Age of the firm (years) T ype of firm (percent) Long haul Peak commute Feeder Number of vehicles Characteristicsof owner Age (mean years) Education (years of schooling) Working full time (percent) Business experience (percent) Father in taxi business Father in business F-inancialcharacteristics (rand) Turnover Profit Assets at time of survey Overhead Mean value of investment loans Mean value of working capital loans

Survivalist

Potentially dynainic Slow,laner Middle laner

Dynamic High.f'lye Fast laner

1.43 5.93

2.17 6.83

1.63 8.00

3.44 6.06

3.88 7.88

8.60 56.90 13.80 1.57

16.67 50.00 0.00 2.50

0.00 75.00 37.50 2.00

22.22 72.22 27.78 3.11

25.00 75.00 50.00 3.50

42.59 8.39 82.80

42.17 7.83 83.33

35.88 7.00 62.50

42.72 9.94 72.22

45.00 7.38 75.00

1.70 8.60

0.00 16.67

12.50 12.50

16.67 22.22

12.50 37.50

2,881.17 1,769.29 61,985.98 4,939.61

6.916.67 1,000.00 103,946.00 6,515.83

9,115.00 7,272.29 66,352.63 4.068.88

24,983.33 15,922.50 116,087.40 8,564.87

38,775.00 22,070.54 134,157.90 9,359.29

4,441.07

19,666.67

3,124.88

11,220.33

7,924.88

1,806.59

14,000.00

2,693.75

4,048.00

2,025.50

a. A subset of fast laner. Source:World Bank (1992).

The industry has been among the most lucrative: average monthly income CHARACTERISTICS.

among black taxi operatorswas R2,800 in 1989. As table 44 shows, the turnoverand profits of the dynamicand potentiallydynamicblackbusinessesare muchhigher. In its relatively - 42 -

short, fifteen-yearlife span, the industryhas managedto capture the single largest share of the black commutermarket, outpacingbus and train servicesand accountingfor about onethird of all trips taken by black commuters.The industrywas highlyregulatedthrough the mid-1980s,but the governmentimplementeda comprehensivederegulationin 1987, which producedlarge numbersof new entrants, fierce competitionthat took the form of often-violent taxi wars, and high entry costs. The industry, in an effort at self-regulation,began imposing an informalbut strictly enforcedsystemof joiningfees, sometimesas high as R15,OO0,that new operatorshad to pay for the right to work in specifiedmarkets. A 1989estimateput the numberof black-ownedkombitaxisat 50,000, representinga more than threefold increasesince 1980.The industryis highlyorganized;there are two major industryassociations,each with numerousaffiliatedroute associations.The bulk of operators, transport who ply short-distance,peak-hourcommuterroutes, are served by SABTA; enterprisesserving long-distanceroutes are representedby the SoLthAfrican Long Distance Transport Association(SALDTA). Much has been said about SABTA'S abilityto organizeits marketpower into alliancesbetween formal financialintermediaries.Lendingarrangementsare based on collectiveguarantees facilitatedby SABTA,which providesthe financialinstitutionwith adequatesecuritiesto allow normal credit requirementsto be relaxed. The researchindicates,however, that the guarantee arrangement,a large up-front deposit(15 to 30 percent that does not reducethe principal value of the loan), has beenas mucha hindrancefor some entrepreneursas it has been an assistancefor others. As vehicleprices havesoared, increasingmore than sevenfoldsince 1980, the amountof self-financinghas increasedas well. Only about 10 percentof the enterprisesinterviewedcurrentlyhave a bank loan. As in other sectors, employmentin the taxi industryis small. The majorityof taxi businesses consist of one or two taxis, and average employmentis abouttwo persons,althoughthe fast laners and high flyers have three or four taxis with three or four employees.The survey revealeda direct correlationbetweenthe numberof years the entrepreneurhas owned a businessand the size of the business:most personsowningthree or more taxis have owned the businessmore than ten years. Amongthe high flyers, about40 percent have fathers who have been in businessand another 12 percenthave fatherswho have been in the taxi business, which indicatesthe importanceof an entrepreneurialbackground. CONSTRAINTS. Taken as a whole, the top four problems-those rated 4 or 5-are the high cost of vehicles (cited by 69 percent), townshipviolence(68 percent), competitionfrom other taxis (58 percent), and taxi wars (50 percent).Table 4-5 indicatesthe constraintsfaced by taxi entrepreneursat all levels of development.The data are also presentedin detail in appendix1. The high price of vehiclesin SouthAfrica is, in part, the result of policiesthat protect the local motor vehicleindustry from foreigncompetition.Althoughthis issue is beyondthe scope of this study, accessto financingand competitivepressuresare closelyrelated constraints.Financingis neededto purchasethe large, bulky investmentrequired by a kombi taxi. Competitivepressuresmake it difficultfor individualsto accumulatecapital to purchase vehiclesor to repay short-termbank loans. Let us look at these issues. - 43 -

Table4-5. ConstraintsFacingMore EstablisihedBlack -.ai EnterpnsesIn Durbanand Johannesburg,Soude#ea (scoe)

St bsector Business environnent Competitionwith other taxis Law enforcement Politicaluncertainty Taxi wars

Townshipviolence

S"rvivalist 3.69

Potentiallydvnomic Slow laner Middk laner

_ ynamic Fastlaner Highflye

3.50

..

..

..

3.67

3.17 3.67

3.83

3.50

3.63 3.38 ..

..

3.25

3.88

3.67

4.10

Finance

Acces to financing

Market Difficultto get a route Difficultto increasefares Highcost of vehicles Inability to get more work Rankingfacilities Steep hire purchase payments

..

3.34 3.24 4.10

..

..

3.67 3.17 3.17

3.25 3.75 3.88

..

..

3.50

3.19

3.67

3.38

..

3.67

3.11

..

3.13

3.33

Skils and labor Business skills

..

..

Skilleddrivers

..

3.33

3.38

Not mentioned. a. A St: set of fast laner.

Source: World Bank (1992).

Kombitaxis have competedvery successfullywith privatelyownedbus companiesand railwaysthat are subsidizedby the government.The kombitaxi has filled a market niche among commuterswho are willingto pay more market-relatedfares for better and safer transport (trainshave been subjectto severepoliticallyinspiredviolence).However, as bus and rail companieshavehad escalatingoperatinglossesand begun cutting certainroutes, kombitaxis have increasinglycaptivemarketsand are under pressure to providean affordable service to customers,includingcommuterswho are used to using subsidizedtransportand who cannot afford to pay market-relatedtariffs. Tariffsfor a particularroute are decided not by each operator on the basis of costs but by the associationto which he belongs. The associationis subjectto communitypressure. As a result, fares are set at as little as 40 percent of what they should be. The result of the squeezeon profit marginsin the taxi industryis an increasein bad debts and repossessions.Depositsrequiredby financialinstitutionsfrom taxi operatorson new vehicles have increasedfrom 25 percentto around50 to 60 percent. Monthlyloan paymentscan reach as high as R3,200, whereasthe average taxi operatorcan afford to pay no more than R2.500. Indeed, half the survey respondentsbelievetheir fares are inadequateto remain profitable.

- 44 -

However, a large discontinuityin profitabilityexists betweenthe dynamicfast laners/high flyers, on the one hand, and the potentiallydynamicenterprises,on the other. Dynamic enterprisesreport annual turnoverof R25,000to R38,000comparedwith the potentially dynamic middle laners, whichhave averageannualturnoverof only R9,000. The preference given to better establishedfirms that are membersof taxi associationsaccountsin part for the difference. Long-establishedmemberscan obtain fare increasesand profitableroutes more easily. In some cases, older membersare already establishedin the most profitableroutes. As a consequence,the cost of vehiclesand accessto financing(rankedless than 3.5) are less severe constraintsfor fast laners and high flyers than for other levelsof enterprise, which ranked the cost of vehiclesnearly 4.0. Other market issues (difficultto increasefares, difficultto get a route, inabilityto get more work, rankingfacilities)also figureprominentlyfor survivalistsand slow and middle laners, who have difficultygetting a footholdin a restrictedand already saturatedmarket. These are low-priorityissuesfor fast laners and high flyers. Althoughthe scarcity of rankingfacilities is a tractable infrastructureproblem, excessivecompetitionis the root issue. The low rate at which firms diversifyout of the kombitaxi market and into bus, freight, and other transportsectors is determined,in part, by continuedregulation.For example,tendering in the subsidizedlong-haulbus sector requiresindividualsto negotiatecomplicatedforms and applicationsand to provide detailedinformation.Mini-busesmust be a maximumof two years old to qualifyand have at least sixteenseats, thus excludingmanyexistingoperators.Severe barriers to entry and constraints-in the form of permits-on freight operationsbegan to be phased out in July 1992. Trade associationsof black taxi ownersare making notableefforts to train owner drivers to clinch freightand distributioncontractswith large corporations. Providingbusinesslinkagesto enableblacktransportoperationsto be involvedin the freight and bus subsectorwould ensure that these businesseshave broaderscope for expansionand are not limited to transportingblack passengersor goodswithinthe townships. The most dynamic enterprisescite townshipviolenceas their most severeconstraint,followed by market (competition)issues,such as taxi wars and the difficultyof increasingfares. It is unclear whetherthe most dynamicenterprisesare protectingmarketsin which they are already establishedor if their expansionis challengedby the threat of new entrantswho are prepared to fightto get a footholdin the market. In any case, taxi-warviolenceis one manifestationof the limitationsplacedon new entrantsto the market. Middleand slow laners indicatecost factors-the high cost of vehiclesand steephire purchase payments-as primary issues.It can be inferred,however,that these are an extensionof market issues, since competitionproduceshigh overheadsthat, in turn, squeezemarginsat a time when prices cannot t e raised. In addition,entrepreneursin these stages of development also cite issuesrelated to rcstrictedentranceto the market (difficultygetting a route, shortage of ranking facilities,taxi wars, and competitionwith other taxis). Survivalistsare concernedwith cost factors(the high cost of vehicles)and market factors (competitionwith other taxis, difficultygetting a route, and shortageof rankingfacilities). However, their concernsare distinguishedfrom those of fast laners in that their problemsare relatedto getting a footholdin a restrictedmarket, as is the case with the middle and slow laners, rather than to market competitionper se. - 45 -

Table 4-6 Charavteristicsof More EstablishedBlackConstructionEnterprisesin Cape Town.Durban, and Johannesburg.SouthAfrica, by Stubsector (percent) Subsector Characteristicsoffinn Numberof persons employed Age of the firn (years) Type of firm (percent) General contractor Specialistsubcontractor Labor-onlysubcontractor Characteristicsof owner Age (meanyears) Education(years of schooling)

Survivalist

P&Lenmiallv dynamic Slow laner Middle laner

Dynamnic Fast laner Highflyer'

2.20 7.50

5.81 6.63

4.67 6.00

4.53 5.47

5.50 6.90

20.00 16.00 64.00

62.50 18.75 18.75

40.00 40.00 20.00

56.25 12.75 25.00

63.64 18.18 18.18

40.86

41.88

38.17

39.35

41.18

8.14

8.06

8.17

9.01

9.45

42.00

76.92

60.00

50.00

54.50

6.00 18.00 78.00

37.50 18.75 87.50

33.33 0.00 100.00

29.41 5.88 82.35

9.10 9.10 72.70

78.00 50.00

68.75 46.43

100.00 50.00

64.71 70.59

54.50 72.70

5,849.47 7,798.61 2,097.92 4,559.72 17,374.44 8,166.67 10,577.56 -10,536.60 81.25 66.67

16,491.31 6,815.62 29,383.53 18,216.76 88.24

20,327.00 7,508.00 29,956.00 18,185.00 81.80

100.00 11.76 5.88

100.00 9.10 9.10

With diploma or

degree (percent) Buiness experience(percent) Father engagedin building Father in business Buildingas main income Has previous experience in building Has been an apprentice Financialcharacteristics (rand)

Tumover Profit Assetsat time of survey Investment Has financialresources Major source of financing Savings Bank Developmentinstitution

1,941.90 944.51 10,242.96 6,980.96 56.00 82.00 0.00 4.00

75.00 18.75 6.25

83.33 0.00 0.00

a. A subset of fast laner. Source: World Bank(1992).

The Construction Subsector The constructionsubsector(see table 4-6) illustratesthe issuesfaced in the policy debate over how to kick-startthe SouthAfricaneconomywhilesimultaneouslysatisfyingthe backlogof basic social needs, especiallythe massiveprovisionof housing.The provisionof low-income housing is seen as a catalystto the developmentprocessbecauseit stimulatesthe construction - 46 -

sector. In termsof policy, housingformerlyprovidedby the state is nowbeing developedby the private sector. In turn, private enterprises,after obtainingaccessto a blockof land, put out work to subcontractors.Throughthe stimulationof entrepreneurshipand township purchasingpower, it is hoped that a subeconomybased on small enterpriseswill develop. This subeconomywill, it is claimed,use labor-intensiveproductionmethodsto producegoods that, when retailed, will be paid for with funds initiallygeneratedby the incomeof subcontractors. The policy of usingthe constructionof low-incomehousingas a leadingsector receives support becausethe potentialdemandfor low-incomehousingis large and the overall labor componentinvolvedin constructingit is high. It has been estimatedthat the constructionof 300,000 housescould createan additional900,000 long-termemploymentopportunities.For these reasons the report of the President's Council(1987)on employmentcreationand laborintensivedevelopmentproposedto stimulatethe developmentof low-incomehousing. Others cite the wealth effect of rising propertyprices as a source of increasedeffectivedemand amongblack homeowners.Implicitalso is the hope that blackconstructioncontractorswill participatein such a housingboom. The researchindicates,however,that important constraintscouldsubstantiallylimitthe participationof eventhe more establishedand dynamic black businesscontractors. 'Table4-7. ConstraintsFacingMore EsoablihedBlackConstructwnEnterprisestn Cape Town,Durban, and Johannesburg,SotWhAfiica (score) EPtentialdvnainic

Subsector Finance Access to loans Cash flow

Survivawist

3.72 3.44

Slow laner

Middletaner

..

4.33

..

3.17

..

3.33

Dynamic

Fastlaner

HighAera

..

3.18

3.06

3.00

Market Cost of materials Competition

3.22 3.20

3.19

Regulation Access to land Tax legislation

..

..

..

..

..

3.50

..

3.63

3.33

..

3.19 3.19 3.00

3.67

Skills and labor Cost of labor Preference given to white contractors Reliable labor Skilled labor Technical skills

..

3.12 3.08

..

Not mentioned. a. A subset of fast laner. Source: World Bank (1992).

-47 -

3.17

CONSTRAINTS. The body of researchsuggeststhat the black constructionindustryis beset by

fundamentalproblemsrelatedto both internalmanagementweaknessesand the external businessenvironment(see table 4-7). The majorityof black enterprisesin the SouthAfricanbuildingindustryoperate at the bottom end of the contractingmarket, undertakingcontracts(generallyto constructand alter homes for individualsin the townshipsand informalsettlements)that are not attractiveto mediumand large-scaleenterprises.Thesemarketsare unsophisticatedand reflectthe lack of sophisticationof the firms that usuallyoperate in them. Mostof the firms surveyed had entered the businessvia employmentas workersrather than as foremenor managers.As a result, black contractorslack supervisoryand managerialexperienceand tend to have had relativelylittle employmentexperiencebeforestartingtheir business.Only 14 percent have been employedin more than one capacity,and 88 percentfeel that they need further training in businessmanagement(the abilityto estimatea job properlyand to maintainproper records), in productionmanagement(the abilityto managethe buildingprocess, plan materialsand productionschedules,and understanddrawingsand specifications),and in trade skills. This lack of training and skills contributesto the generalreputationthat black contractorshave for performingpoor-qualitywork. About60 percent of the dynamicand potentiallydynamicfirms are involvedin general contractingcomparedwith only 20 percentof the survivalists(table 4-6). Few black entrepreneursare preparedfor the increaseddemandsthat steppingup to general contracting places on managementof the firm. For the most part, firms in the survey havegrown slowly and displayedlittle potentialfor further growthunlessthe fundamentalproblemsrelatedto their managementhave been addressedfirst. Lateralexpansion(the abilityto take on additionaljobs) is similarlydifficultbecausemost lack accessto skilledmanagementand are reluctantto take on partners.Upwardmovementis difficultbecausethe technicaldemandsof larger contracts increase,which requireslarger labor poolsand more intenseoutput. Notwithstandingthese internalweaknesses,the businessenvironmentposes a dauntingset of obstacles,most notablythe effectivemonopolythat whitecontractorshold over the housing market. Governmentpolicieshave led to an acute shortageof land availablefor development in South Africa. Mostavailableland goes to whitedevelopers,becauseblack contractors seldommeet the formalfinancialrequirementsfor site allocation.Blackcontractorsagree that only large whitedevelopersreceiveaccessto landfor developingblacktownships. Accessto financingis anotheroft-cited,criticalproblemfor black-ownedconstruction enterprises.The nature of cash flow in a normalconstructionproject-high up-front costs followedby partialpaymentsto the contractoras the work progresses-means that obtaining bridgingfinancingto cover the initialcosts of land, labor, and materialsis essential. Overall, the survey results are consistentwith the literature(see appendix 1). In both, the most serious problemsfacingblack contractors(and the most frequentlycited underlying reasons for them) are the following: * Access to loans. Becauseof politicalunrest in the townships,bond boycotts,and the difficultiesof foreclosingon propertiesownedby blacks,financialinstitutionsare loathto financeblack housing. Moreover,they view black contractorsas a high-risk - 48 -

becausetheir overall performanceis poor. In the absenceof mortgagesto construct black-ownedhomes-the principalmarketfor black contractors-bridging finance arrangementsthat can be securedagainstmortgagesare not possible nor is credit generallyavailablefrom firms that supplymaterials.Therefore, a large unmet demand exists for workingcapital, and black contractorsexperiencefrequentperiods of inactivity.Only 34 percentof the surveyrespondentswere activeduring all of 1990 and 1991.

* High cost of materials.Smallcontractorslack accessto economiesof scale, which limits their abilityto take advantageof discountsassociatedwith bulk buying. As a result, they would have difficultycompetingwith larger white contiactorson the basis of cost even if quality standardscouldbe equalized.A strikingilluscrationis that large contractorssay they need a turnoverof approximatelytwenty-fourhouses a month before constructionfor the low-incomehousingmarketbecomesviable. By contrast, black contractorsare limitedto betweensix and eighteenhousesa year under the various developmentprograms.

* Shortageof skilled and reliablelabor. Skilledworkerswill not work for small black contractorsbecausejobs are small, pay is poor, and jobs are not secure. As a consequence,most blackcontractorshire unskilledworkerswho learn skills on the job: the World Bank surveyfound that 76 percentof the individualswho perform skilled work for black firms are not qualifiedartisans. *

Accessto land and competition.An acute shortageof land is availablefor developmentin South Africa, largelydue to land allocationpoliciesof the government.In blackcontractingcircles, the perceptionis that only large white developersgain accessto land for the developmentof black townships.This is a functionof allocationpoliciesin whichblack contractorsseldommeet the financial requirementdemandedfor large sites. Insteadthey becomesubcontractorsor acquire a small numberof sites from a local authority,contractors'association,or individual.In larger developments,even black generalcontractorsmust work as employeesfor whitedevelopers.Competitionis fierce amongthe numeroussmall contractorswho work in the retail constructionmarketand have no outlet to the wholesaleland developmentmarket.

* Preferencegiven to white contractors.The complaintthat the market for construction is biased toward whitecontractorsis largely a functionof issuesmentionedabove (especiallystandardsof quality). In addition,whitecontractorshave established themselvesin the housingmarketand are better organizedand have more resources to undertake large contracts. Blackcontractorshave majorobstaclesto overcomeif they are to prove themselvesand aggressivelymarkettheir capabilitiesin this area. The Garment Subsector Unlike muchof South Africa's manufacturingsector, ownershipin the garment industry is diffuse, with the country's largestgarmentoperationaccountingfor no more than 15 percent - 49 -

of total output, the next three firms togetheraccountingfor an additional15 percent, and the remaining70 percent dividedamongmorethan 1,000firms of diversesizes.

Table4-8. Chiaracteristics of More EstablishedGannentEnterprisesin SoutilArica, 1991 (numberof firms) Size and ownershlip offirms Mediwn-sizefirns owned by non-Africans Expanding Stagnant

Has accessto large has received Has receivedloans from firns. worksas sone technical Development Total subcontractor assistance Banks agencies" Both

Not registered

6 3

5 3

2 1

2 1

3 0

0 0

0 0

Expanding Stagnant

15 3

9 2

4 2

4 1

2 1

1 0

3 1

Small-size firms owned by Africans Expanding Stagnant

8 6

2 1

7 3

2 0

4 1

2 0

6 2

4 6

0 0

2 4

0 0

0 4

0 0

3 4

51

22

25

10

15

3

19

Smatl-sizefirns owned by non-Africans

Microenterprises and cooperativesowned by Africans

Potentialto expand Stagnant AUIfirms

Note: Amongfirms ownedby non-Africans,medium-sizefirmsemployedmore than fifty workers,while smallsize firms employedan avcrageof twentyworkersin 1991. Amongsmall-sizefirms, the smallestemployedfive workers, while the largest employedforty. Amongsmall-sizeAfrican-ownedfims, aDllocatedin Johannesburg, the smallestemployedfive persons,while the largestemployedsixteen.Moststarted with one or two employees and never reduced their number; all the stagnantfirmsownedby Africansexpandedquite rapidlyinitiallyand subsequentlyleveledoff or decreasedtheir employment.The microenterprisesowned by Africans,all locatedin Durbanand its environs,were recentlyestablishedand employedtwo personseach. The African-owned cooperativeswere operatedby ethnicZulu womenwho receivedfinancialand technicalsupport from religioi.s organizations. a. Includesthe Small BusinessDevelopmentCorporation,the KwaZuluFinancialCorporation,and nongovemmentalorganizations. Source: World Bank (1992).

Blackownershipin the industryappearsto be marginal:African-ownedfirms are relatively few in number and tend to be smallerand less well-developedthan firms havingwhite, Asian,

-

50

-

or coloredproprietors(see table 4-8).1This is largelya functionof the legacyof apartheid laws. Most of the non-Africanownersof firms had beenemployedas skilled workersin textile or garment factoriesprior to startingtheir own business.Noneof the Africanowners have such experiencedue largelyto Job ReservationLaws, whichexisted until 1979 and which permittedskilledjob categoriesto be filled by Indiansand coloreds,but not blacks. The WorldBank surveydid not find any African-ownedfirms in Cape Town that were larger than microenterprises(thoseemployingfewer than ten workers)and found only with great difficultysome small, African-ownedfirms in Durbanand Johannesburg.All African-owned garment firms were very small. Althoughthe garmentindustryis geographicallyconcentrated in Durban and Cape Town-approximately70 percentof the industry's 140,000workers are locatedin and around those two cities-the majorityof the African-ownedenterprisesare in the Johannesburgarea. It did, however, find severalIndianand coloredfirms in Cape Town that employedfifty and more workers. Two-thirdsof the firms owned by non-Africansseek subcontractingrelationshipswith retail stores as their main marketingstrategy.Only one-eighthof the African-ownedfirms have developedthe quality and timelydeliverystandardsnecessaryto becomesubcontractors. Having low subcontractorstatus meansthat Africangarmentmanufacturershave little access to new productiontechniques. More than half of the Africangarment firms are not registered.Only two of the twenty-four Africanfirms surveyedpay their workersat or abovethe legal wage establishedby the IndustrialCouncil (whichappliesto unions).The rest of the firms pay well below the IndustrialCouncilrequirements,whetherthey are registeredor not. CONSTRAINTS. All categoriesof entrepreneursperceivelack of accessto financingas a major constraint:non-African,medium-sizefirms rank it 0.72, while small Africanfirms rank it the highest: 0.86 (see table 4-9). SmallerAfricanfirms wouldnot be expectedto have accessto bank financing, yet it is somewhatsurprisingto find that lack of accessto financingis also ranked highlyby non-African,medium-sizefirms. Nonetheless,firms that have subcontracting arrangementswith biggerfirms see lack of financingas a slightlyless importantconstraint (0.61) than firms that dependon direct marketsales (0.76; see table 4-10). This occurs even though half of the firms surveyedhave accessto financing.Alsoimportantacross all categoriesof firms are cost factors (cost of financingand cost of textiles).

8. Thesurveymadea concertedeffortto identifydynamicfirmsownedby Africansthathad at leasttenemployees.In CapeTown,no firmsemployedmorethantenworkers,whileonly a veryfew did in DurbanandJohannesburg. AllAfrican-owned firmsfoundwereincludedin thesample,which thusresemblestheuniverseof blackenterprisesin thesethreelocations.In all, fifty-onesmalland mediumcut, make,and trimoperationsandothermicroleveland smallgarmentfinrnswere interviewedin CapeTown,Durban,andJohannesburg. All interviewscontainedopen-endedand survey approaches.Thisis the firstsurveyto includeIndiansandcoloredsas wellas blacks,and its findings emphasizetheimportanceofjob skillsattainedthroughemployment and theireffecton the individual's subsequent abilityto establishand run firnms. - 51 -

Managerialand skill problemstouch Africangarmentfirms heavily:scarcity of competent workersis rated 0.75 by the Africanfirms in Durban, and lack of managementis rated 0.85 by Africanfirms in Johannesburg.Scarcityof competentworkersis also rankedhighly by non-African,medium-sizefirms (0.63), as is politicaluncertainty(0.82). m CapeTown,Durban,andJohannesburg, Table4-9. ConstraintsFacingMore EstablishedGannentEnterprises SowthAfrica

Non-African Mediwnsize' Snall sizeb

Constraints

Afican Smaasize All sizegd

Financialmarketconstraints Lack of aess

to financing

0.71

0.56

0.85

0.57

0.21 0.63 0.35 0.17 0.50

0.41 0.40 0.37 0.41 0.30

0.17 0.20 0.35 0.14 0.85

0.21 0.75 0.46 0.11 0.17

0.37 0.38 0.55 0.50

0.46 0.52 0.63 0.52

0.42 0.18 0.37 0.00

0.25 0.00

0.42 0.12

0.27 0.09

0.25 0.06

0.46 0.21

0.44 0.82

0.27 0.42

0.24

0.43

0.73 0.57 0.59

0.66 0.80 0.32

0.70 0.49 0.36

0.72 0.67 0.25

9

18

14

10

Constraints on accessto nonfinancialinputs Lack of access to textiles Scarcity of competent workers Lack of technical skills Not enough domestic buyers Lack of mnanagemnent

Laborconstraints Uncertainty of future wages Threat or risk of work stoppages Industrial Council issues Restrictive retrenchment rules

Regulatoryconstraints Tax implcations Government non-labor regulations

Politicalconstraints Inhibiting effect of sanctions Uncertainty of politics and policy

Costconstraints Cost of financing Cost of textiles Cost of wages Total number of finns .. Not mentioned.

Note: Based on a sample of fifty-one small and medium enterprises. Scores based on a scale of I to S are normalized on a scale of 0 to I in which constraints ranked close to 0 are the least severe and those ranked close to I are the most severe. a. Cape Town and Durban. b. Cape Town, Durban. and Johannesburg. c. Johannesburg. d. Durban. Source: World Bank (1992).

- 52 -

IndustrialCouncil(wage and terms of employment)issuesaffect medium-size,non-African firms, whose relativelylarge employmentbase subjectsthem to strikes and wage demands. They rank this issue with a 0.55. Small-size,non-Africanfirms also rank IndustrialCouncil issueswith a 0.63. Tabke4-10 Obstaclesto &pansion Facing More EstablishedBSkik Garment Enterprisesin Cape Town, Durban, and Johannesburg,SouthAfrica

Subcontracts to largerJfims

Direct

0.61

0.76

Lack of access to textiles Scarcityof competentworkers Lack of technicalskills Not enough domesticbuyers Lack of managemnent

0.24 0.36 0.42 0.26 0.51

0.26 0.46 0.28 0.27 0.52

Labor constraints Uncertaintyof futurewages Threator risk of work stoppages IndustrialCouncil issues Restrictiveretrenchmentrules

0.45 0.34 0.55 0.50

0.48 0.27 0.53 0.27

0.33 0.07

0.35 0.12

0.53 0.45

0.30 0.42

0.63 0.75 0.35

0.82 0.59 0.44

19

32

Obstacles

sales

Financiatmnarketconstraints Lack of access to financing Constraintson accessto nonfinancia inputs

Regulatoryconstraints

Tax implications Governmentnon-laborregulations Polirical constraints

Inhibitingeffect of sanctions Uncertainpoliticsand policy Cost constraints

Cost of financing Cost of textiles Cost of wages Total number of firms

Note: Based on a sample of fifty-one small and medium frms. Scores arenormalized by the size of the firm, the industrial district, and the race of the entrepreneur. Source:World Bank(1992).

Policy Implications Within the more establishedblack businesssector,a subgroupof potentiallydynamicblack enterprises exists that shouldbe fosteredby a targetedattemptto removethe internal - 53 -

(capacity)and external(structural)impedimentsto their expansion.The prominenceof market and skill factorsas importantconstraintssuggeststhat these entrepreneursneedto be integratedmore closely with the whiteeconomy,where markets,purchasingpower, and stateof-the-artmanagementand technicalskills are concentrated.The followingpoliciesfocus on buildingcontract linkagesbetweenthe tormnalprivate sectorana qualifiedblack businesses,on the one hand, and betweenpublicprocurementand black businesses,on the other. The next steps in preparinga programto supportthesebusinessesare as follows: *

An operationaldefinitionshouldbe developedof the type of firms that will receive support withineach subsectorand of the type of supportthey will receive. For example,if dynamicblack businessesface different constraintsthan potentially dynamicbusinesses,interventionswill haveto target them differently.The sameholds true for black enterprisesgenerally.For example,dynamicblack businessesface constraintsdifferentfrom those facingdynamicfirms run by Indiansor coloreds(as shown by the data on garment manufacturing),and interventionsshouldthus target a definedgroup of businessesand its particularlimitations.This complexityrequires operationaldefinitionsthat recognizedifferencesamongdisadvantagedfirms.

*

Incentivesshouldencouragebig businessto buy from qualifiedsmall and medium enterprises.Having larger enterprisesprovidetechnicaladvice and training to smaller black firms is essentialto achievingthe quality necessaryfor procurement arrangementsto be voluntaryand mutuallybeneficial.This recommendationappliesto manufacturingand retail enterprisesin particular.

*

The governmentshouldmake a committedeffort to procurefrom small businesses.A special case can be madefor the constructionof housingand schools,where large public constructionefforts shouldincludea strongpresenceof Africancontractors. Such procurementeffortsshouldalso includestrong training, technicalassistance,and even financingcomponents.

*

Accessto land is a key issuefor smaller contractorsand developersand couldbe easily addressedby decreasingthe size of land allocationsto allowsmaller developers to submitbids. Moreover,financingshouldbe made more availableto black businessesof all sizes so that they are better able to accumulatecapital, increase employment,and competewith larger firms.

*

Coveteddiversificationoptionsexist withinthe transportationindustrythat are limited by existingregulationsand publicownership.Arrangementsthat maintainpublic monopoliesof bus and rail transportationand regulationsthat limit new entrantsto freight haulageshouldbe examined.

*

The issue of how the value addedtax is administeredconcernsthe owners of dynamic retail enterprisesand should be exploredand addressed.

*

Police protectionand the enforcementof civil order must be extendedto black communitiesbecausea stable businessenvironmentfosterslong-terminvestmentand growth. - 54 -

9 EXPERIENCE FROMINTERNAT(IONAL 5. POLIcy: LESSoNS

THE MOSTPERSUASIVE CASE for strengtheningblack enterprisesis that they have the potential

to createjobs and wealth and to assist in rebalancingthe South Africaneconomy.To create a businessclimate conduciveto the developmentof such enterprises,broad participationin policymakingshould be encouragedand the focus shouldbe on cooperativeand competitive market mechanisms. Obviously,the policymakingprocessdoes not take place in a vacuum.It must be linked with other economicinitiativesas well as with politicaland socioeconomicdevelopmentsin the macro environment.Policiesgoverningthe developmentof small and mediumenterprises should mirror the efforts being madeto democratizeand restructureSouth Africansociety. This link is essentialto ensurethat macro and micro initiativescomplement,rather then undermine,each other. Politicalinterferencein such policiesmust also be avoided,although government,politicalparties, labor, business,and other organs of civil societyshould be includedin the policymakingprocess. Designingan OverallPolicy Framework Internationalexperienceoffers severalexamplesof an overallpolicy frameworkrelevantto South Africa. Of necessity,policywill be multifacetedand offer diverse, long-termsolutions becausethe problemsfacingthe South Africaneconomyare complexand deep-rooted. In 1970, Malaysiainitiateda twenty-yearNationalEconomicPolicythat aimed to restructure society and alleviatepovertyby developingentrepreneurshipand broadeningownership. Within a short period, this programhelped ease racialtensionsbetweenthe country's Chinese, Indian, and Bumiputerapopulations.In the mediumterm, it significantlybroadened the base of ownershipand managementand cut povertyin half, particularlyamongthe rural Bumiputeras.Althoughthe policyfailed to stimulatean entrepreneurialculture in its target group, its effects are stronglyevidentin second-generationentrepreneurs. The adoptionof an integrated,multifacetedpolicydoes not necessarilyrequire strong involvementby the state, however. In India, the state's concentratedefforts to bolster smallscale industry, which it sees as a symbolof independence,have, in manyways, stifled the dynamismof small and mediumenterprises.In Malaysia,the state's strong involvementin the National EconomicPolicychangedwhen economicgrowthturned negativein 1985, and the state beganto reevaluateits policiesand institutionalefficiencies. 9. This section is based on presentations given at a series of seminars held in Cape Town, Durban, and Johannesburg, where the research was presented in the context of international experience. Presentations were made by Judith Aidoo, David Cook, Peter Coyle, Pedro Jim6nez, Brian Levy, Carl Liedholm. Saha Meyanathan, Roger Robinson, Thyra Riley, and other experts at the seminars. See appendix 3 for the agenda.

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An integratedpolicy shouldalso avoidoverprotectingsmall and mediumblack enterprises, which breeds paternalismand tends to equate small with weak. Newness,rather than smallness,is the root of vulnerability.Thus, protectivemechanismsare usuallyappropriate when a small enterpriseis new but shouldbe phasedout as it becomesmore established. In India, small and mediumenterprisesare overprotectedin an already protectionisteconomy. This has produceda confusionof policiesthat has adverselyaffectedthe developmentof small and mediumenterprises.India has tried to mix policiesthat seek to alleviatepovertyand developbackwardareas with policiesthat developsmall-scaleindustries.As a result, in backwardareas, manysmall enterprisesoperatingout of speciallyconstructedindustrialparks are condemnedto restrictedmarkets. Furthermore,few small enterprisescan survive without the protectionof the state. Overprotectionhas also producedineffectiveand inconsistent concessions: *

Product reservation(836 productsare reservedfor small enterprises)has undermined the capacityof these enterprisesto becomedynamicand has inflatedconsumerprices.

* Tax exemptions,especiallyexcisetax exemptionsbased on sales figures, have encouragedsmallfirms to stay small or to create multipleshadowfirms. *

Input subsidieshave createdinefficienciesof supplyfor the resourcebeing subsidized (for example,power, special concessionsor price preferencesfor procurement,and allocationquotas for raw materials)and reducedcompetitiveness.

India has heavily institutionalizedthe financingof small and mediumenterprisesthrough eighteenstate financialcorporations,some of whichhave recoveryrates as low as 30 percent. Commercialbanksare requiredto financepriority sectors, and enforcementof this policy has destabilizedthe entire financialsystem and failed to strengthensmall-scaleindustry. Although small-scaleindustry has grown in the past forty years (from 400,000firms employing4 millionpersonsto 1.8 millionfirms employing11.9 millionpersonsand accountingfor 30 percent of exports), India's industrialstructurehas not changed,and 10 percent of firms are judged to be sick. Improving the Representation of Entrepreneurs in Policymaking Improvingthe representationof entrepreneursis importantfor several reasons: (1) the practical needs and concernsof entrepreneursshouldbe addressedin policy and strategy initiatives,(2) existinginstitutionsand nongovernmentalorganizationsinvolvedin developing small and mediumenterprisesshouldbe criticallyreassessed,and (3) entrepreneursbenefit considerablyfrom havingcontactand exchangingideasamongthemselves.Involving entrepreneursin the debate wouldensure that their needs are addressed. In South Africaand elsewhere,entrepreneursshouldbe involvedin long-termpolicymaking as well as in the current debateover the developmentof small and mediumenterprisesand microenterprises.An assessmentof existingstructures,includingthe role of nongovernmental organizations,is needed, as are forums exploringdevelopmentissues.Such examinations - 56 -

should ask whetherthese structuresare accountable,how they are pursuingthe interestsof the small enterprisesector, what is their representativestrengthas a whole, and how their efforts can be coordinated. In South Africa, increasingthe representationof black entrepreneursthemselvesencounters several problems. Althoughsmall entrepreneurshavedevelopedseveralorganizationsin the townships,these groupslack the confidenceto initiateor join the debate at a higher level. Microentrepreneursare even less organizedand could perhapsbe representedbest by nongovernmentalorganizationsworkingcloselywith them in their communities.Althougha bottom-uppolicy debate shouldbe welcomedand encouraged,entrepreneursare unlikely to find a voice at the nationalor regionallevel outsidethe mediumof existingforums. Representativebodies, nongovernmentalorganizations,and entrepreneursshould meet in each region to discuss how to strengthenthe lobby representingblack businesses.Entrepreneursin these sectors should considerappointinga powerfulexistinginstitutionto be their voice. Clearly, the representationof entrepreneurscan be improvedat many levelsand within many organizations.Industryassociations,parastatals,and developmentagenciescould, for example,open channelsof communicationby settingup desks for small and medium enterprisesand by seeingthat their own organizationsare more raciallyrepresentative.This would benefit both the enterpriseand the organizationsince loan officersand other agents who are close to the communitiesin whichmicroenterprisesoperate understandthe needs and constraintsof these entrepreneursand representthem withintheir organizationsbetter than loan officers who have no contact. Derining the Role of Institutions South Africa already has a well-developedinstitutionalframework,but the servicesoffereddo not adequatelymeet the needs of black entrepreneurs.For policy interventionsand institutions to be effective, a process is neededto identifymarket failures(suchas insufficientaccessto financingand markets, inadequateeducation,and scarcityof adequatebusinesspremises)and to address those failures, includingthe creationof appropriateinstitutions.The usefulnessof institutions(and other aspectsof policy)shouldbe constantlyreevaluated,in light of both their own efficiencyand politicaland economicdevelopments. South Africa couldbenefit from the experiencethat other countrieshave had with institutional approaches.Malaysia'sNationalEconomicPolicyinitiallyset up thirteen ministriesand thirty institutionsfor developingsmall and mediumenterprises.These focusedon equity, education, humanresources, agriculture,industry, and finance.The three or four institutionsthat proved to be truly effectivemonitoredthemselvesand continuouslytracked their progress. Recognizingits institutionaloverkill, Malaysiahas begunto merge and coordinateits institutions. India also offers valuablelessons.The maincauses of institutionalfailure in India include centralization,bureaucratization,politicalinterference(especiallythe politicallymotivated transferof funds), lack of accountability,and inadequateappraisalof projects, follow-up, or - 57 -

functionalalignment(for example,the personwho approvesa loan is not responsiblefor collectingit). India's industrialextensionserviceconsistsof a vast institutionalframeworkat the central and state level. Intendedto providetechnicaladvice,training, marketing,and infrastructural support, the service is ineffe:tive becauseit stretchesits resourcestoo far. Entrepreneurs,in effect, receive advice from bureaucratswhodo not understandtheir practical needs. Institutionsare far more effectivewhen their administrationis flexible,that is, when they are specializedby subsectoror when they work at the local level. In India, the informal sector extendscredit to small enterprisesthat are neglectedby the officialsystem or that prefer to borrow from an informalsource evenat higher interestrates. Informalloans have a 98 percent recovery rate becausethey are based in the local communityand on local contact. Indonesia,Japan, and Korea haveoptedfor a minimalistinstitutionalapproachthat works well. Their institutionsare most effectivein catalyzingprivate networksand harnessing marketingand technologicalskills. Eftectiveinterventionsuse, rather than substitute, capabilitiesin the private market. Entrepreneursparticularlyvalue interventionssuch as participationin trade fairs; subsidiesfor obtainingtechnicalexpertisefrom abroad; short, targetedcourses led by technicalspecialists;and the use of publicagenciesand industry associationsfor sharing technicalskills and creatinglinks amongfirms. This does not mean that public interventionhas no place. In Indonesia,for example,collective channelsare essentialto helping Pribumientrepreneursmake exportcontacts. In Japan, local governmenthelps developsmall and mediumenterprises,as do industryassociationsin Colombia, Indonesia,and Korea. Autonomous,specializedpublicagencieshave been successfulin Korea. The commonpattern is that centralizedbureaucraciesdo not work. In South Africa, appointingthe state as entrepreneuris a less than ideal approach.Institutional functionsshould be specializedand devolvedto regionaland local agenciescapableof focusingon the needs of the private sector and the community.Given the size of South Africa's market, taking a minimalistinstitutionalapproachwouldgive nongovernmental organizationsa greater role in improvingaccessto financingand training as well as in creatingmarket links. Supporting Market Links Links amongmicroenterprises,smalland mediumenterprises,the large corporatesector, and the public sector would clearlyboost small enterprisein South Africa. Effectivelinks would contributesignificantlyto the creationof jobs and wealthwhilebeginningto align quality and productivityin the formal and informalsectors. Althoughsubcontractingis critical for establishinglinks, the preconditionsfor effective subcontractingare not yet presentin SouthAfrica's market. The preconditionsinclude incentivesfor big businessto subcontractwork, the abilityof supplierfirms to meet the standardsand needs of other sectors, and the existenceof practicalopportunitiesfor small enterprisesto becomesubcontractors. - 58 -

Ireland, Korea, and Singaporehave introducedvariousmethodsof linkingsmall enterprises with multinationalcorporationsthat play an importantrole in the nationaleconomy.Korea introducedmandatorylinks by requiringthat 1,200 items in forty industrialsectors be suppliedby 2,200 subcontractors.Mandatorylinks have been effectivebecausethey work hand-in-handwith other programs, includingdrives to imparttraining and ensure quality. In Korea today, 98 percent of all businessesfall withinthe small and mediumenterprise sector and accountfor 66 percentof all jobs and 40 percentof all exports. By contrast,product reservationpolicies in India have not had a positiveimpact:the choice of products is arbitrary, policy criteria are lacking,and productreservationis not linked with other policy objectives. Singapore's effort to improvelinks focuseson upgradinglocal industry, includingtraining special consultantsand assigningmanagersfrom multinationalcorporationsto small and medium enterprises.The programis successfulpartly becausemultinationalcorporationsare extensivelyinvolvedand partly becauseit occurs withinthe contextof a package of policies to developsmall and medium enterprises. In Ireland, linkageprograms are coordinatedby a twenty-personteam that focuseson building relationshipsbetweensmall enterprisesand multinationalcorporationsas well as on researchingmarket opportunities.On the demandside, this researchseeks to discover what, when, and how much the companybuysand at what cost and to determineits technical requirementsfor products. On the supplyside, it seeks to discoverwhich enterpriseshave the capacityto supply the productand what upgradingis needed.Finally, it seeks to devisea strategy for matchingthe capabilitiesof the purchaserand the supplier. As a result of this eight-yearprogram,the valueof purchasessuppliedby local small enterpriseshas increasedRI billion,the market share of smallfirms within large companies has risen one-third, manynewjobs have been created,and the overall quality of productshas improved. More than 250 multinationalcorporationsare involvedin the program,which attracts additionalforeign investmentfrom companiesconfidentthat their supply needs can be met within Ireland. Malaysiahas also enjoyedsome success,mainly in long-termsubcontracting.Large corporations(such as Intel)or umbrellaorganizations(suchas those in the furniture industry) supply technicalskills, training, and other supportto smallenterprisesand buy back their investmentin the form of the product. In South Africa, the first step in implementinga successfullinkageprogramwould be for nongovernmentalorganizationsand developmentagenciesto intensifynetworkingbetween their clients and big businessor government.Existingmechanisms,such as business opportunitycenters, industryhives, matchmakerfairs, and small businessdirectories, should be encouraged,but additionalprojects,such as the compilationof a nationaldata base, must be undertakenas well. Providingaccessto programsthat train entrepreneursand upgrade the capacityof small enterpriseswill form an importantpart of the functionperformedby nongovermnentalorganizations.Theseefforts shouldbe supportedby nationalpolicy initiatives.

-

59

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Other importantpolicy issuesincludegainingthe supportof unionsfor linkageprograms and providing incentivesthat encouragebig businessto subcontractmicroenterprisesand small and medium enterprises. An effectivelobby wouldobviouslyimprovethe chancesthat such initiativeswouldbe successful. Making FinancingAvailable Black microentrepreneursin South Africaface significantfinancialconstraints,includingthe lack of working capital, equitycapital, and long-termcredit. Existingfinancialinstitutions, includingparastatalssuch as the DevelopmentBankof South Africaand the Small Business DevelopmentCorporationare not gearedto meet the credit needs of small entrepreneurs. Commercialbanks rarely hold informationaboutentrepreneursand continueto require a level of collateraland documentationthat placessmallfirms at a disadvantage.These banks seek to maximizeprofit and minimizerisk, whileentrepreneursseek to gain rapid access to capital requiring reduced collateraland simpleterms and conditions.Evenwhen bank managershave agreed to help develop small and mediumenterprises,these policydecisionsrarely reach the sts.ffwho deal directlywith the entrepreneur.That is, a backlashagainstexecutivedecisions occurs at the level of mid-management. Alternativefinancialoptions are developingin the SouthAfricanmarket, but none are satisfactoryas yet. Stokvels,for example,satisfy some of the financialneeds of about 20 percent of microentrepreneurs,but their rangeof options is limited. Despitethis limitation, stokvels have the trust and respectof their communitiesand will, it is hoped, acquire more leverage as they adopta more organizedapproach.Corporateequity fundsexist (Anglo American, Gencor, Icdsupplyfunds, for example),but they are new in the market and have no network as yet. Nongovernmentalorganizationsrepresentan emergingsource of financing, but they are still grapplingwith their own problems,includinglack of fundingfor infrastructuralcosts, lack of expertise,limitedmarketcoverage, lack of clear mission statements,and lack of focus. Parastatalshave negativeassociationsas instrumentsof apartheidand operate in the shadows.They have no outlets closeto their marketsand pose problemssimilar to those of commercialbanks. In South Africa, black entrepreneursseek accessto credit, rather than subsidies,and ready access to repeat loans. The principalchallengeis thereforeto developnon-bankfinancial institutionsthat financethe small and mediumenterprisesectoror form a bridge between black enterprisesand the traditionalfinancialsector. A panoplyof mechanisms,products, and actors will probablyhave a role to play. Optionsto be exploredincludecommercialbank windowsor special departmentsfor lendingto the microsector,credit unions,finance companies, stokvels, specializedbanks and mechanismsalongthe lines of the Women's World Bank, small and mediumbusinessinvestmentcorporations,nongovernmentalorganizations, and communitydevelopmentbanks. Microenterprisesand small and mediumenterpriseshave separateand distinct financialneeds. Nongovernmentalorganizations,with their closeclientrelationships,loyalties,and local base, represent one of the best optionsfor makingloans accessibleto the microsector.In addition to networkingwith donors, nongovernmentalorganizationscouldestablishcooperative relationshipswith parastatalsand commercialbanks that allowthem to make loans more - 60 -

efficiently.This effort would be enhancedby reevaluatingthe presenttax policy, which classifiesthe surplus of nongovernmentalorganizationsas profits. Many countrieshave supportedlendingto priority sectors in an effort to boost small enterprisesand agriculture.Their experienceshows, however,that South Africa should approachthis option with caution. In India, 40 percentof commercialbank lendingis directed to small-scaleindustry, and this has put an enormousstrain on the entire financialsystem. In Malaysia,20 percent of loans have beendirectedto smalland mediumenterprises, agriculture,and low-costhousing, with only limitedsuccess.Becauseinterest rates have been peggedto the marketplace,the harmfuleffectsof this policy have been minimal. In Indonesia,directed credit programshave followedthe pattern typicalin most developing countries:they operate on the basis of relativelylow repaymentrates, and strong political pressure is exerted to determinewho receivescredit. Ultimately,cheap credit for small and medium enterpriseshas not beensustainable,and manycredit programshave been dismantled. Korea and Japan providetwo rare examplesof successfuldirectedcredit programs, largely becausetheir rates of repaymentwere set high; start-upfinancingwas avoided, although working capitalwas available;interest rate subsidiesremainedmodest(Japan's was half a percent below the prime lendingrate), and the credit system was viewedas a complementto, not a substitutefor, the commercialbankingsystem. Nongovernmentalorganizationsattemptingto provideloansto microenterprisesshould emphasizesoundcommercialpractices. In the DominicanRepublic,ADEMI, which has financed22,000 enterprisessince it was createdin 1983,has donejust that. ADEMI extends approximately1,500 loans a monthat an averageamountof $900. Recoveryrates average 98 percent, repaymentrates are set higherthan market rates, and the rate of repaymentincreases as the size of the loan decreases.AlthoughADEMI has not beenparticularlysuccessfulin graduatingits clients to commercialbanks, it has graduatedthe organizationitselfto the formal lendingsector in order to make loans to entrepreneurs. ADEMIattributes its successto

specialization,a commercialapproach,and a commitmentto affectingthe country's socioeconomy.Based in the community,the organizationis present in twentyof the country's twenty-sixprovinces,and its loan officerswork in their own communities.The organizationuses three principalcriteria in assessinga loan: the applicant's character, experience,and abilityto repaythe amountrequested.For successfulapplicants, ADEMI opens a line of credit for life. StrengtheningMarketsand BusinessInfrastructure In South Africa, marketsand businessinfrastructureface numerousand complexconstraints. Microenterprisesand other businessesin the informalsector have limitedaccessto markets becausebusinesspremisesare scarceand poorly located.Entrepreneursthemselvesare hampered by poor educationand lack of skills or technicalexpertise.They also face a range of institutionalbarriers, includinglimitedinstitutionaloutreach, lack of understandingof their needs and problems, and lack of accessto financing.Mostof these enterpriseshave difficulty - 61 -

growingor improvingtheir servicesbecausethey do not have accessto broader markets or network opportunitiesin the formalsector. To counter these constraints,policyand legislationmust be changedat the national, regional, and even the local level. An effectivelobby representingthe sector of black enterprises is neededto articulatethe concernsof entrepreneursto policymakers.This can be done in diverse nationaland regionalforumson economic,housing,educational,and other issues. DevelopingTraining and Skills Lack of educationand skills is one of the most hamperingconstraintslimitingthe developmentof black enterprises.Internationally,educationhas been identifiedas one of the key factors in entrepreneurialsuccess. Malaysia,for example,has supportedinternational scholarshipprograms and institutionaltraining. In South Africa,the provisionof skills will have to be tackledboth in the contextof the overall restructuringof South Africaneducationand in the marketplace.Creating an entrepreneurialculture throughthe educationalsystemrequiresa paradigmshift. Individuals must be educatedin lateral thinkingand risk assessmentbeginningat the primary level. At the tertiary level, vocationaland occupationaltraining must be linkedto the needs of business, althoughnot so rigidlythat individualscannotdeveloppersonally. In the short term, developingthe skills of entrepreneursposes formidablechallengesfor South Africa. A fundamentalmismatchexists betweenthe trainingofferedand the skills needed in the marketplace.Institutionsand nongovernmentalorganizationsdo not offer enough assistancein this regard. Additionalfinancing,research,and developmentare neededfrom government,the private sector, and other donorsto developcomplementarytraining programs and technical expertise. Initial training drives should concentrateon basiccognitiveskills such as literacy and numeracy, basic accountancy,and basic technicaltraining. Simpleextensionefforts-a public netwerk for providingtechnicaladvice, training, and direct infrastructuralsupport-may also be neededto equip individualswith the capacityto continueimprovingtheir skills. To be successful,these training drives willhave to moveout of the classroomand into actual businesses. Researchand assessmentof the availableresourcesshouldbe undertaken:what financial resources and training resourcesexist? How can thesebe coordinatedand matchedwith needs or linked with existing initiatives?How can trainingpartnershipsamonggovernment,training institutions,the private sector, nongovernmentalorganizations,and entrepreneursbe encouragedand developed?What regionalcenters, includingnongovernmentalorganizations, are available to help mobilizefinancialresources? Conclusion

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In many countries,programsthat encouragethe developmentof small enterpriseshave been introducedwith muchexpenseand effort, only to fail outrightor be drasticallymodified. Clearly, South Africa cannotand shouldnot adopt anothercountry's model for its own use. Evaluatingthe mistakesof others, in conjunctionwith assessingits own needs and priorities, can, however, help South Africaformulatepoliciesand strategiesfor strengtheningblack enterprises. An effectivelobby for small and mediumenterprisesis an essentialcomponentof this process and should draw attentionto the followingkey policy issues: * The policymakingprocessmust haveas broad participationas possible and must seek diverse, long-termsolutionstor complex,deep-rootedproblems. *

Institutionalsupport is vital. Governmentmust make adequateresourcesavailablefor public sector institutions,but functionsand responsibilitiesshouldbe devolvedas much as possibleto specialized,local, flexibleagenciesthat work with a range of other partners(formal business,nongovernmentalorganizations,and community organizations,amongothers).

*

Existingstate institutionsmust be reevaluatedand their usefulnessreassessed.Many of them have accumulatedexperienceand knowledgebut havebeen tainted by apartheid.

e

Nongovernmentalorganizationshave an importantrole to play in building relationshipsbetweenblack enterprisesand the formaland public sectors. They can also be instrumentalin makingtraining and financingaccessibleto small enterprises. They must, however, streamlinetheir focus, infrastructure,and operationalefficiency.

3

Accessto financingis vital, and new financialinstrumentsand intermediariesmust be developed.The provisionof information,skills, and market infrastructureis just as important.An integratedapproachto policy and strategy-one that addressesall aspects of the problem-is essential.Suchan approachmust work at manylevels: local, regional, national;short, medium,and long term; and others.

-

Determiningthe focus is problematic.Shouldattentionbe focusedprimarilyon businessesin the informaleconomythat alreadyhave a track record and demonstrate an immediatepotentialfor becomingintegratedintothe formal economy?Is it justifiable to regarddevelopmentof the microsectoras primarilya functionof social developmentor the alleviationof poverty?Will this attitudestifle the potential dynamismof the microsector?How can a balancein focus be ensured?

The need to developblack enterprisesis urgentin South Africa.These businessesoffer a real potentialfor creatingjobs and wealthand for redistributingwealth in South Africa's economy. They also offer an avenueof opportunityand achievementfor a large sectionof South Africa's too-long-frustratedhumanpotential.

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6. CONCLUDING REMARKS

CAN BLACKBUSINESSESPLAYA DYNAMICROLEin creating employment and rebalancing

income and wealth in a post-apartheid South Africa? The potential exists, but the obstacles are tremendous and will require more than quick fixes. Deregulation alone is not enough. Dismantling the regulations of apartheid is, to be sure, an essential step toward creating a climate in which black businesses can expand and prosper in South Africa. It is not the most important step, however, as the research presented here shows. Regulations are no longer a major impediment to the creation or expansion of black businesses, and the deregulation that began in the 1980s has not eliminated the constraints that are. Policymakers and implementing agencies alike should focus their activities on the constraints identified by the entrepreneurs themselves. Despite the recent move to eliminate the restrictions on black enterprises, significant constraints continue to limit the ability of even the most dynamic businesses to grow, create employment, accumulate assets, and generally prosper in either the formal or the informal economy. Black entrepreneurs-owners of both microenterprises and larger, more dynamic firms-clearly identify both internal and external constraints that adversely affect their businesses. The principal internal constraints, which are the direct legacy of apartheid, include the lack of adequate technical, administrative, and managerial skills and the lack of access to financing, which is a result of the inability to own land that can be used for collateral. The principal external constraints include highly competitive markets, lack of market infrastructure, and a politically unstable and often violent business envirotnent. Deregulation and market-based solutions are a step in the right direction, but they must be accompanied by measures that directly eliminate the constraints that prevent blacks from starting businesses or from running businesses capable of playing a dynamic role in the formal economy. As is evident from the profiles of small and medium enterprises presented in this report, black businesses have the potential to be dynamic, productive players in South Africa's economy.

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Schacter, Mark. 1992. "Microentrepreneurship in SouthAfrica: The Impactof Regulationand SupportServices." WorldBank, Washington,D.C., July. Sebstad,Jennefer. 1992. "Get Ahead FoundationCredit Programsin SouthAfrica: The Effectsof Loans on Client Enterprises."GEMINI TechnicalReport45, June. South Africa. 1987. Privatizationand Deregulationin the Republicof South Africa. White Paper. Tomaselli,R., and K. S. G. Beavon. 1986."Johannesburg'sIndian Flower Sellers:Class and Circumstance."GeoJournal 12: 181-89. -69 -

Wellings, P., and M. Sutcliff. 1984. "Developingthe UrbanInformalSectorin South Africa: 'Me ReformistParadigmand Its Fallacies."Developmentand Change 15: 517-50. in South Africa." Researchpaperprepared for # ie World Bank. 1992. "Microeonerprises World Bankby Data ResearchAfrica,July.

- 70 -

APPENDIX 1. SUVEY OF MICROENTERPRISES

TableAl-L. Most ImportantProbkms FacingRlackMcroeute.prLsesla MaetlI and Kwazakhele,South4fca, Swary of Spontmoas Responses (percent) Phaseof operations and constraint Crimeand violeace Gettinga license Inadequatepremises Lack of finances Problemswith law enforcement authorities Unfavorablebusinessconditions Cost of doing business Poor marketconditions Other

At start-Wp

Al tuw of the survey

4.4 1.8 18.0 22.5

7.2 0.2 15.7 9.4

10.5 32.0 12.7 19.3 10.8

6.6 51.2 20.3 30.9 9.7

Source: BEMIn(1990).

- 71 -

% of businesses citing obstacle as major" O

oun

tn

Poor marketconditions

8

7.

88 ''I

Costsof doingbusiness

v

°

cn O W

.O

cCo

Inadequatepremises

I

_

O

Lack of finances Crimeandviolence

0

Lawenforcement Transport

(D

CD . n -0

Difficultto getassstants

(aQ

SD

Unskilledlabor

>

Insufficientstock

t C)

Difficultto produceand sell

3

C

Needelectricityandwater

Cfl(D

Smallprofit from smallitems

0O

Friendsandfamilytake stock i Usedmachinerybreaks

(D

Gettinga license Soutee: Wotd Bank 119921

% of businessesdcng obstledas o-& 0

najor*

0

a

-0

(I

Poormarketconditions Costs of doing business

gC

Inadequatepremises

_1

LackOffinances

O

0

a

Crimeand violence

0OD

Lawenforcement

cn

.

-1

1O

Transport

Difculttogt assistants Unskilledlabor

(D0O)b

I

Insufficient stock

Cl)~~0

I

!IO

Difficultto produceand sell ~~~~~~~~~~CD 0

I

Needelectricityand water

iQ

la

I

Small profitfrom smallitems

.

Friendsandfamilytake stock Used machinerybreak

'

Gettinga liconse 80um0s. WaddB~ 11_

W Cc (D

TableA1-2. ConstraintsMacingBlackRetailEnterprisesin CapeTown Durban.and Johannesburg,Soth Africa

Subsector

Survivalist

Potentiallydnamnic Slow laner Middlelaner

Dvnamgc Fastlaner HighAeuS

Business environment Gangsers Theft 'fownship violence

3.53 3.95 3.98

3.28 3.78 3.92

3.00 4.00 4.00

3.86 3.90 3.86

3.62 3.69 3.23

3.20 2.85

2.64 3.07

3.29 2.86

3.05 2.67

2.92 2.54

3.01 2.73 2.82 2.85 3.26 4.02

3.00 2.21 3.21 2.50 2.07 3.93

1.57 2.57 3.00 2.57 3.29 4.71

2.39 2.14 2.81 2.67 2.90 4.29

2.31 2.31 2.92 3.23 3.23 4.31

2.34 2.06 2.37 2.24 3.19

1.64 1.64 1.93 2.93 1.93

1.86 1.71 2.43 2.14 4.29

2.81 2.00 2.14 2.33 3.71

3.23 2.38 2.46 2.62 4.31

2.48 2.11 2.52 2.81 2.42 2.32

3.29 2.21 2.93 1.71 3.00 2.43

3.14 3.43 3.14 3.43 2.29 2.71

2.24 2.19 2.29 2.81 3.19 3.19

2.31 2.46 2.38 3.23 3.46 3.62

Finance Access to loans Repayment of loans

Market Access to premiscs Cash flow Competition Cost and access to equipment Cost of materials Cost of supplies

Reguakion Company tax Labor legislation Local govwrnment legislation Retail legislation vATadministration

SkilZsand labor Accounting Cost of labor Determining costs Lack of technical skills Reliability of labor Shottage of skilled labor a. A subset of fast laner. Source:World Bank (1992).

-

74 -

Table A 1-3. Constraints Facing Black TaxiEnterprises in Durban and Johannesburg, South Africa

Subsector

Survivalist

Polentiallydynamkc Slow laner Middlelaner

Dynanic Highft-e Fastlaner

Business envirownent

Drivers' strike Politicaluncertainty Taxi wars Violence Law enforcement

2.55 2.93 3.67 3.83 3.03

1.67 3.17 3.67 3.50 3.00

3.13 3.38 3.13 3.88 3.63

2.50 2.39 2.72 3.67 2.94

2.88 2.38 3.25 4.00 2.37

Finance Lackof access to fnancing

3.05

2.83

3.00

3.11

2.88

2.38 2.79 3.69 2.50 3.34 3.24 4.10 3.14 2.38 2.59 3.19 2.81 2.79

1.50 1.67 3.50 1.67 3.67 3.17 3.17 2.67 2.50 2.00 3.67 2.33 3.67

2.50 3.00 3.00 2.63 3.25 3.75 3.88 3.50 2.75 3.50 3.38 3.00 2.75

2.56 2.61 3.06 2.56 2.61 2.89 3.33 2.83 2.28 2.55 2.22 2.78 2.72

2.63 2.63 2.00 2.50 2.25 3.13 3.00 2.63 2.2S 2.25 1.75 3.00 2.75

Laborregulations Tax regulations Other regulations

1.79 2.41 2.18

1.50 2.17 1.67

2.25 2.75 2.88

1.94 2.22 2.06

1.50 2.50 1.88

Skills and labor Businessmanagementskills Lack of skilleddrivers

3.09 2.66

2.17 3.33

3.38 2.63

2.50 2.00

2.75 2.13

Market

Commuterboycotts Competitionwith buses Competitionwith other taxis Competitionwith trains Difficultto get a route Difficultto inereasefares Highcost of vehicles High taxes High wages Inabilityto get work Lackof ranking facilities New operators Steep hire purchasepayments Regultxion

a. A subsetof fast laner. Source:World Bank(1992).

- 75 -

Tabk A 1-4. Constraints Facing Blaks Construction Contractors in Cape Town, Durban, and Johannesburg, South Africa

Subsector

Survivalist

Potentiallydynamic Slow loner Middlelaner

Dynamic Fast laner Highflyee

Business environment Preference given to white contractors

2.98

3.19

3.67

2.82

2.81

Finance Access to loans Cash flow Interest rate issues Repayment of loans

3.72 3.44 2.20 2.22

2.88 2.94 2.06

1.94

4.33 3.17 2.00 2.33

2.94 2.88 1.76 1.88

3.18 2.55 1.82 2.09

2.48 3.20

2.81 3.19

3.00 2.50

3.06 2.71

3.00 2.36

3.02 3.22 2.56 2.48

2.88 2.94 2.19 2.19

2.83 3.33 3.00 2.33

2.59 2.88 2.41 1.88

2.55 2.91 2.45 2.00

Labor legislation

2.22

2.00

2.17

2.41

Tax legislation Other legislation

2.73

2.68 2.00

2.56 1.56

3.50 2.17

2.53 1.94

2.45 2.09

Skils and labor Accounting Cost of labor

2.60 2.80

2.00 3.63

2.33 3.33

2.18 2.65

1.64 2.91

Determiningcosts Lack of technicalskills Reliabilityof labor Reliabilityof main contractor Reliabilityof subcontractor Shortageof skilled labor Worker action

2.52 3.08 2.92 2.74 2.36 3.12 2.36

2.38 2.75 3.19 2.13 2.00 3.00 2.25

2.17 3.00 2.33 3.00 2.33 3.17 2.00

1.47 2.82 2.53 2.47 1.71 2.59 1.94

1.45 2.82 2.55 2.73 1.36 2.55 2.00

Market Access to land Competition Cost of and access to equipment Cost of materials Erratic work Tender procedures Regulation

a. A subsetof fast laner. Source:World Bank(1992).

- 76 -

APPENDIX2. TiIE WAY FORWARD:REsoLuTIoNs OF THE PARTICIPANTS

AGREEDTHAT the seminars themselves could not provide solutions to the THE PARTICIPANTS

myriad problemsand issuesraised. It was felt that the most effectiveway to take these issues forward would be to have representativesappointedby the seminarparticipantsattend regional economicdevelopmentforums. Ownersof small and mediumenterprises,and other actors in their regions. It was agreed that a report would be compiledand distributedto all participantsin the seminarsand all committeesappointedby them. The committeeswill use this documentas a point of departure for developinga way forwardwithintheir own regions. The Cape Town seminarappointedthe followingcommitteeto take up the issuesidentifiedat the seminars, insofaras they relatedto the WesternCape, EasternCape, and Border regions: •

Zohra Ebrahimof ConsultativeBusinessMovement

*

Representativeof the DevelopmentBankof SouthAfrica

3

Representativeof FABCOS

3

Representativeof KagisoTrust

v

WolfgangThomasof Small BusinessDevelopmentCorporation

3

Representativeof WEPCOC

*

Nicky Morganof uwc.

The committeewill establishcontactwith the WesternCape RegionalEconomicand DevelopmentForum, especiallywith the Small EnterprisesTask Groupof the Regional Economicand DevelopmentForum. It is hopedthat the forum will then pursuethe issues with other regionalforumsand at the level of the NationalEconomicForum. The committee will monitorand evaluateprogressand developmentsand report backto the plenary in six months. This plenarymeetingand any other meetingsconsideredappropriatewill be convened and advisedby the committee. The Durban seminarappointedthe followingcommittee: * S. Soni of ConsultativeBusinessCorporation e

J. Negoya of FABCOS

- 77 -

*

L. Grewanof NEI

*

Representativeof InyandaChamberof Commerce.

The committeewill convenea caucusof small and mediumentrepreneursin the Natal region with the likely assistanceof a facilitator(uDw GraduateSchoolof Businesswas suggested). This caucuswill hold a workshopchargedwith determininga way forward. It may interact with a Natal RegionalEconomicDevelopmentForumonce such a forum has been established. The lohannesburgseminarappointedthe SunnysideGroup, with the assistanceof Ascos, as convenorof an informalmeetingof representativesof organizationspresentat the event. The steering committeeappointedby this meetingwiJlcarry out the following: *

Establisha networkbetweennongovernmentalorganizationsand others involvedin developingmicroenterprisesand small and mediumenterprises.

*

Set up a special workinggroup or task group withinthe Pwv RegionalEconomic DevelopmentForum on the developmentof microenterprisesand small and medium enterprises.

- 78 -

APPENDIX3. AGENDAAND LIST OF DELEGATES

Agenda:Small and MediumBusinessDevelopment in DisadvantagedSectionsof the SouthAfricanCommunity Day One 9:00 a.m.

Welcomeand Introduction David Cook, divisionchief, Energyand IndustryDivision,SouthernAfrica Department, WorldBank

9:15 a.m.

Presentationof WorldBank ResearchFindingson South AfricanBlack Business ThyraRiley, seniorprivatesector developmentspecialist, WorldBank Carl Liedholm,professor, MichiganState University

10:15a.m. Discussionof ResearchFindings 10:45a.m. Tea i 1:00 a.m. Panel Input and Discussionof InternationalCase Studies Case Study:India Roger Robinson,senioreconomist,WorldBank Case Study:Malaysia Saha Meyanathan,seniorindustrialeconomist,WorldBank Case Study:Indonesiaand Korea Brian Levy, seniorindustrialeconomist,WorldBank 1:00 p.m.

Lunch (moderators meet to identify issues raised in the morning session)

2:00 p.m.

Panel Discussion:ConstraintsFacingthe Developmentof Small and Medium Enterprisesin EconomicallyDisadvantagedSectionsof the South African Community:Learningfrom InternationalExperience Judith Aidoo, consultantandformer investmentbanker, GoldmanSachs Pedro Jimenez, director,IDEMA,a commerciallendingoperationto microenterprisesin the DominicanRepublic Peter Coyle, directorof market-linkageprogramnsin the Irish Development Authority

- 79 -

South Africanexpert on constraintsfacing the developmentof small and medium enterprises 3:00 p.m.

Discussion

3:30 p.m.

Tea (moderatorsidentifyworkgroups basedon the issuesraised in the course of the day and the profile of the seminardelegates)

4:00 p.m.

Reportby the moderatorsand discussionand identificationof issues for the work groups

5:00 p.m.

Close of the proceedingsfor day one

Day Two

8:30 a.m.

Work Groups Meet

10:30 a.m. Tea 10:45 a.m. Work GroupsReport Back 11:30 a.m. PlenaryDiscussionof EmergingIssues 12:30 p.m. Lunch (moderatorsmeet to structurea comprehensivesummaryof the seminar's findingsfor presentationto the plenary) 2:00 p.m.

Summarypresentationby the moderators

2:30 p.m.

Discussionof the way forward

3:30 p.m.

Close of the proceedings,followedby tea Ust of Delegates

World Bank Speakers(all telephonenumbersare coded091 unlessotherwisenoted) Judith Aidoo, Aidoo Group, 212-858-7572 David Cook, World Bank, 202473-3321 Peter Coyle, Irish DevelopmentAuthority,093-531-60-2244 Pedro Jimenez, ADEMI, 809-681-7094 BrianLevy, World Bank, 202-473-7488 Carl Liedholm,MichiganState University,517-355-1812 Saha Meyanathan,World Bank, 202-473-6376 John Page, World Bank, 202-473-7461 Thyra Riley, WorldBank, 2024734060 Roger Robinson,WorldBank, NewDelhi, 099-111461-7241 - 80 -

Diana Masone, World Bank, coordinator,202473-4385 Cape Town Delegates(all telephonenumbersare coded021 unlessotherwisenoted) S. Mukadam,ABASA, 638-5184 G. Kakora, ABASA, 959-6289 Z. Mtyeku, AfricanNationalCongress,041434025 R. Johannes, ANCYL, 041-55-2852 Z. Gxavu, ANCYL, 041-55-5703 S. McLean, BKDF, 0401-43-2270 S. Bhana,BSR (cPsA), 23-5936 A. Malunga,CACHIB, 041-55-2853 C. Gqwateka,CACHIB, 55-2853 C. McCarthy,CapeChamberof Industry,21-5180 E. Wessels, Cape ManufacturingEngineers,54-2112 C. Houston,ConsultativeBusinessMovement,658-2387 R. Olivier, ConsultativeBusinessMovement,658-2291 Z. Ebrahim, ConsultativeBusinessMovement,658-2387 R. Alberts, ConsultativeBusinessMovement,011-614-2213 V. Arries, CENCE UPE, 041-55-2555 L. Ramnewana,CiskeiSmall Business,0401-92-1167 P. Walker, CatholicWelfareand Development,25-2095 J. Matolengwe,CTJLP, 31-6105 J. Boulle, DevelopmentActionGroup, 448-7886 D. Zimu, DevelopmentBank of South Africa,011-313-3056 S. Matsebula,DevelopmentBank of South Africa,011-313-3056 J. Lange, Energos Foundation,403-4454 T. Mohapi, Engen,403-4654 M. Palmer, Engen, 4034770 S. Tuntubele,FABCOS, 21-5032 A. Simone, FCR, 47-1600 D. Falk, FEF/GAPI, Maputo 49-1505

N. Michaels,Foundationfor Peaceand Justice,948-9150 C. Manning, FreidrichEbert Stigtung,47-6033 F. Robertson,IndependentBusinessForum,47-6044 M. Kwenaite,Institutefor PastoralEducation,046-124115 D. Visser, Institutefor Small Business,959-2620 L. Huna, KagisoTrust, 696-8243 V. Simmers, KagisoTrust, 696-8243 S. Sizani, KagisoTrust, 041-57-1930 1. Abdulla,Labour ResearchServices,47-1677 S. Matebese,NAFCOC, 0473-3214 A. Pittier, NorwichLife, 658-2194 R. Martin, SACP, 448-7908 S. Swepu,SANCO, 041-66-2627 J. Naude, Small BusinessDevelopmentCorporation,462-1910 W. Thomas, Small Business Development Corporation, 462-1910 - 81 -

M. Brand, SouthernCross BusinessDevelopmentTrust, 797-3454 J. Ferreira, StutterheimDevelopmentFoundation,0436-32024 A. Volbrecht,SunflowerProjects,21-7633 K. Kennedy,Triple Trust, 448-7341 K. Cattell, UCT, 650-2452 N. Morgan, uwc, 959-2257 R. Allison, Urban ServicesGroupEC, 041-54-3895 G. MacMaster,wc PeaceCommittee,94-1072 Y. Pahad, WCTA, 75-8575 L. Kakana,WEPCOC, 633-9597 L. Mehlamakulu,WEPCOC, 638-1456 E. Gobolo, WEPCOC, 638-1456 T. Pasiwe, WEPCOC, 638-5179 S. Chikane, wEPCOC, 637-0771 T. Nompinga,WEPCOC, 6384265 M. Mapuruma, WEPCOC, 6384265 Durban Delegates (all telephonenumbersare coded031, unlessotherwiseindicated) M. E. Nyati, AlternativeEducationCentre, 041-54-3627 R. Nyandeni,BusinessOpportunitiesCentre, 361-7543 S. Soni, ConsultativeBusinessForum, 83-8253 G. Cullen, ConsultativeBusinessMovement,32-7784 R. Payne, ConsultativeBusinessMovement,011-614-2213 M. Sirenya,ConsultativeBusinessMovement,32-7784 Studies, 820-9111 J. Patel, Centre for Community-Labour N. Levy, Centre for Community-LabourStudies,820-9111 M. Mhlambo,CRTE, 309-3114 G. Coleman,Confederationof SouthAfricanTrade Unions,368-1902 R. Persad, Confederationof South AfricanTrade Unions,368-1902 J. May, Data ResearchAfrica,303-2756 J. Potloane, DevelopmentBankof South Africa,011-313-3430 N. Mvambo-Dandala,Diakonia,305-6001 C. Allan, Durban City Council,300-6911 M. Foster, Ernst & Young,3044456 C. van den Heever, FABCOS, 37-6433 C. Gwala, FABCOS, 37-6433 S. Collins, IDASA, 304-8893 G. Penxa, IsibaneResourceCentru,696-2028 P. Tichman,IndependentBusinessEnrichmentCentre,304-7375 D. Botha, InformalTradingOpportunitiesCentre, 32-5671 P. L. Booyens,KwaZuluFinance/Investment Corporation,902-8955 H. Ramharak,KagisoTrust, 305-3371 P. Cwazibe, KwaZuluTrainingTrust, 703-1155 S. Comninos, Khuphuka,307-1195 M. Davidson,KwaZuluGovernment,0358-20-2240 P. C. Le Roux, Natal Witness,0331-94-2011 -

82 -

N. Middletor. NACTU, 0331-94-7422 L. GreiAjn, NEI, 301-1706

D. Cood, Natal Parks Board, 0331-41-7961 P. Wakelin, Natal Rural Forum. 368-2633

R. F. Bates, South AfricaSugar Association,305-6161 M. S. Ntuli, SouthernAfricaTaxi Association,37-6433 C. Eckersdorff, Shell, 304-6311

A. Singh, Small BusinessDevelopmentCorporation,86-7130 D. Engelbrecht,Small BusinessDevelopmentCorporation,86-7130 R. Sinclair-Black,StandardBank SmallBusinessUnit, 366-3911 J. Mkhize, SANCONatal, 307-2245 G. Rust, Sunflower Projects, 902-9222

W. T. Mdunyelwa,TranskeiDevelopmentCorporation,037-727-1514 M. H. Comwell, Umgeni Water, 0331-454365 S. Dlamini, Unilever, 366-2911 E. Motala, UDW, 820-2865

Johannesburg Delegates (all telephonenumbersare coded011, unlessotherwisenoted) Linda Macun, ADRASA,484-1763 RichardTyrer, AngloAmericanSmall Business,6384300 Rich Kuhl, BusinessForum SmallBusinessResearch,483-1275 Cooperativefor AmericanReliefto Everywhere,29-9851 Frank Mlotshwva, V. Morake, CASE, 4034204 R. Hirschowitz,CASE, 403-4204 AndrewFeinstein,ConsultativeBusinessMovemen.,491-6461 Debra Marsden,ConsultativeBusinessMovement,614-2213 Terry Tselane, ConsultativeBusinessMovement,614-2213 Pinky Mashigo,CEC Pretoria, 01243-6590 Diana Mayne, Central JohannesburgPartnership,331-2851 Septi Bukula,Centre for DevelopingBusiness,643-3241 Mary Cobbett, Community Bank, 332-8179 Archie Hurdt, Community Bank, 332-8179

M. S. Aziz, C.ongressof Businessand Economics,29-1941 Keith Foster, Contractor Training Agency, 403-5500/337-8883

AnitaStadler, Coopersand Lybrand,4984115 Marius van Wyk, Coopersand Lybrand,4984102 MichaelJackson, Coopersand Lybrand,498-4125 Jacques Basson, DevelopmentBankof SouthAfrica,313-3529 Marie Kirsten, DevelopmentBank of SouthAfrica,313-3315 Nell Sapsford,DevelopmentBankof South Africa,313-3212 Vanessa Boshoff, Department of Finance, 012-315-5699 D. Janse van Rensburg, Department of Finance, 012-315-5699 Hermien Cohn, Eskom, 800-2846 David Moshapalo,FABCOS,832-1911 Sam Buthelezi,FABCOS,832-1911 P. Mabaso, Family Institute, 838-2330 - 83 -

MandyMoussouris,FEDSAL, 403-3115 Ali Mokoka, First NationalBank, 632-2791 Norbert Eichler, Friedrich Ebert Foundation,403-3546 Sharda Naidoo, FriedrichEbert Foundation,403-3546 Roger Mlotshwa,Future Bank, 337-8216 NapheusMokgoloboto,GazankuluDevelopmentCorporation,01523-63-17.1 Percy Nkuna, Get Ahead Foundation,012-342-2186/87 Sizwe Tati, Get Ahead Foundation,012-342-2186/87 Lin Anderson,Get Up LendingTrust, 702-1158 BrianKearney-Grieve,IBEC, 29-9851 Ivor Jenkins, IDASA,012-342-1676 Chris van der Merwe, IDC, 883-1600 Willa le Roux, IDC, 883-1600 Len Konar, IDT, 482-2180 E. Kharsamy,IslamicBank, 838-3254 Cleo Mtshali,Job CreationS. A., 394-2206 Max Coleman, KagisoTrust, 29-2441 Khaya Dlamini, KagisoTrust, 29-2441 Vincent Mogane, KagisoTrust, 29-2441 Eric Molobi, KagisoTrust, 29-2441 Peta Mphela, KagisoTrust, 29-2441 Yogesh Narsing, KagisoTrust, 29-2441 T. J. Mkhomazi,KangwaneEconomicDevelopment,01316-94-0223 Mr De Beer, KwaNdebeleGovernment,01215-2211 D. S. Malan, Malbak,783-4480 Trevor Joseph, MunchHut, 334-2931 Collin Joseph, MunchHut, 334-2931 VanessaGonsalves,MunchHut, 334-2931 MichaelLeaf, NAFCOC, 402-7591 BoginkoslNhlanga,PAC, 838-6463 MurphyMorobe, P. G. Bison,618-1640 Richard Bean, QwaQwaDevelopmentCorporation,05871-30911 MashuduRamano, Ramanoand Associates,484-7736 Thami Mogomane,RegionalPeaceCommittee,889-6294 Mofasi Lekota, Renwick,788-1812 J. W. Prinsloo, ReserveBank, 012-313-3758 M. G. Greyling,ReserveBank, 012-313-3685 Birgit Schroder, Royal DanishEmbassy,012-322-0595 Chris Hock, Rural FinanceFacility,337-6208 Jenny Hoffmann,Rural FinanceFacility,337-6208 Philip Phore, South AfricanBlackTaxi Association,832-1911 E. Kuhl, SACOB,794-3810 K. A. Lockwood,sACOB, 402-2524 George Mukhavi, SACP, 01215476-2004 Herbert Weicke,S. A. GermanChamber,482-1080 VincentPhawahla,S. A. HousingTrust, 889-0115 Pule Ganyane,Sasol One, 016-708-2195 Edwin Basson,Small BusinessDevelopmentCorporation,643-7351 - 84-

David Jeftha, Small BusinessDevelopmentCorporation,407-3111 Mandisa Maepa,Small BusinessDevelopmentCorporation,643-7351 Steve Ramasla,Shell, 441-7310 P. S. Thobela, Small BusinessAdvisoryService,P. 0. Box 845, KemptonPark MalcolmKietzman,StandardBank SmallBusinessUnit, 636-4600 Roy Polkinghorne,StandardBank Small BusinessUnit, 636-1977 Louise Mojela, StandardMerchantBank, 636-6481 Colleen McCall, StanwayEdwards,339-1516 Julian Drew, StanwayEdwards,339-1516 Chris Darroll, SunnysideGroup, 403-5500 Chris Rogerson,UF/PWV Economicand DevelopmentForum, 716-4203 Carl Jensen, UnitedStatesAgencyfor InternationalDevelopment,012-323-8869 Paul Neifert, UnitedStates Agencyfor InternationalDevelopment,012-323-8869 Dawn Radebe, UnitedStatesAgencyfor InternationalDevelopment,012-323-8869 Craig Stromme,UnitedStatesInformationService,012-323-8869 G. de C. Murray, Vaalgro,016-81066 Sello Morake, Vaalgro,016-81066 T. M. Dama, Venda DevelopmentCorporation,0159-23122 Gillian Godsell, Wits BusinessSchool,643-6641 Gill Noero, Women's NationalCoalition,486-1276

- 85 -