AbtrI qq3

DISCUSSION PAPER

South Africa

Characteristics of and ConstraintsFacing Black Businesses

in South Africa: Survey Results

Thyra A. Riley

THE WORLD BANK INFORMAL DISCUSSION PAPERSSOUTHERN AFRICA ON ASPECTS OF THEDEPARTMENT ECONOMY OF SOUTH AFRICA

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PREVIOUS WORLD BANK PAPERS

Previously published In the World Bank series of Informal discussion papers on South Africa:

Levy, B. January 1992. "How Can South African Manufacturing Efficiently CreateEmployment? An Analysis of the Impact of Trade and Industrial Policy."

Kahn, B., Abdel, S. and Walton, M. May 1992. "South Africa: MacroeconomicIssues for the Transition."

Fallon, P. October 1992. "An Analysis of Employment and Wage Behavior InSouth Africa."

Belli, P., Finger, M., and Ballivian, A. August 1993. "South Africa: A Review ofTrade Policies."

In addition, "An Economic Perspective on South Africa" was published by the World Bank inMay 1993. A number of technical papers prepared by the World Bank staff and South Africancounterparts in key sectors are currently being discussed in the country.

Copyright 0 1993The Wodd Bank Southr Afica Depun1818 *H" SUret, N.W. Ihc Wodd BankWaiton, D.C. 20433, U.S.A. November 1993

The Wle in ths paer arm *e of te auhor and ShU not be aeibued so the World Bank, to As qOatlaed organizaolns, or tonme of 11 Board of &EWw Dikeors or the cowuns they represu.

FOREWC

THIS DISCUSSION PAPER IS THE FIFTH IN A SERIES of informal studies on different aspects ofthe South African economy prepared by staff members of the World Bank and South Africanassociates. The studies have been discussed with a wide range of South Africans and havebenefited from South African ideas and inputs. The Bank's study program aims to support theongoing effort by South Africans across the institutional spectrum to understand theweaknesses and potential of their economy and to identify options that may be available in apost-apartheid era. These options focus on restoring economic growth, increasingemployment, finding affordable ways to improve the distribution of incomes andinfrastructural and social services, and generally alleviating poverty.

This report documents th3 characteristics and constraints facing small black businesses inSouth Africa and evaluates realistically their potential to play the dynamic role expected ofthem. Current government policy relies on deregulation and market-based solutions.Deregulation has begun to create a climate in which black businesses can expand and prosperin South Africa. Significant constraints remain, however, and continue to limit the ability ofeven the most dynamic businesses to grow, create employment, accumulate assets, andgenerally prosper in either the formal or the informal economy. Black entrepreneurs clearlyidentify both internal and external constraints that adversely affect their businesses. Theprincipal internal constraints, which are the direct legacy of apartheid, include the lack ofadequate technical, administrative, and managerial skills and the lack of access to financing.The principal external constraints include highly competitive markets, lack of marketinfrastructure, and a politically unstable and often violent business environment.

Deregulation and market-based solutions must be accompanied by measures that directlyeliminate these constraints. As is evident from the profiles presented in this report, blackbusinesses have the potential to be dynamic, productive players in South Africa's economy.

The preliminary version of this report was presented at seminiars held in Cape Town, Durban,and Johannesburg, South Africa, during the last week of May and first week of June 1993. Atthe seminars, participants discussed the experience that other countries have had withsupporting small- and medium-scale enterprises in general and in the context of disadvantagedracial groups. The seminars served to initiate a dialogue on the development of blackbusinesses among the World Bank, South African enterprises, policymakers, and practitionerorganizations involved in developing black businesses in South Africa. The content of theseminars is summarized in section 5: Policy Lessons from International Experience. Theresolutions of the participants are presented in appendix 2. and the agenda and list ofparticipants are presented in appendix 3.

ACKNoWLEDGMENTS

THE INFORMATION CONTAINED IN THIS REPORT is based on research carried out for the WorldBank during 1992. I would like to thank Julian May and the other researchers at DataResearch Africa, the survey research firm that conducted all the interviews, as well as CarlosMartin Calcopietro, K. S. Cattell, Colleen McCaul, Nicoli Nattrass, C. M. Rogerson, andMark Schacter, whose detailed reports were invaluable.

Information on the black microenterprise sector relies heavily on research carried out by theGrowth and Equity through Microenterprise Investments and Institutions (GEMINI) groupunder contract to the United States Agency for International Development. Carl Liedholm andMichael McPherson wrote the report presenting GEMINI'S research findings.

I would like to thank the following individuals for their help on this project: David Cook,managing chief, and Stephen Denning, director of the Southern Africa Department of theWorld Bank, for supporting this research; Brian Levy, the lead advisor, for lending hisexpertise and guiding the research; Ataman Aksoy and Mark Schacter, for contributingextremely useful comments on early drafts; Ashley Symes, executive assistant for theConsultative Business Movement, for attending the conference, taking notes at the seminars,and writing a most useful report summarizing the presentations and the ensuing discussion;and Elizabeth Forsyth, for doing a masterful job as editor.

I would also like to thank the Consultative Business Movement, the Kagiso Trust, theDevelopment Bank of Southern Africa, the Federation for African Business and ConsumerServices, and the National African Federated Chamber of Commerce for hosting the seminars.Through these seminars, they offered the World Bank a most useful forum for discussing theresearch findings in the context of international experience.

Thyra RileySenior Private Sector Development Specialist

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CONTENTS

TABLES AND FIGURES Vii

ExEcuTivE SUMMARY xiThe Growing Black Microenterprise SectorMore Established Small and Medium Black BusinessesPolicy Directions

1. INTRODUCTION IMethodologyOrganization

2. BLACK BUSINESSES IN SoUTH AFRICA: HIsToRICAL CoNTEXr AND PREsENTCIRCUMSTANCES 5Legal Restrictions Placed on Black BusinessesEfforts to Deregulate Black EnterpriseThe Informal Secto: and the South African Economy

3. AN IN-DEPTH LooK AT SOUTH AFRICA'S BLACK MICROENTERPRISE SECTOR 11CharacteristicsConstraintsPolicy Implications

4. A DETAILED LOOK AT MoRE ESTABLISHED BLACK ENTERPRIMES 35Methodology and OverviewThe Retail SubsectorThe Transportation Subsector (Black Taxis)The Construction SubsectorThe Garment SubsectorPolicy Implications

5. POLICY: LESSONS FROM INTERNATIONAL EXPERIENCE 55Designing an Overall Policy FrameworkImproving the Representation of Entrepreneeurs in PolicymakingDefining the Role of InstitutionsSupporting Market LinksMaking Financing AvailableStrengthening Markets and Business InfrastructureDeveloping Training and SkillsConclusion

6. CONCLUDING REMARKS 65

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REFERENCES 67

APPENDIX 1. SURVEY OF MICROENTERPRISES 71

APPENDIX 2. THE WAY FORWARD: RESOLUTIONS OP THE DELEATES 77

APPENDIX 3. AGENDA AND LIsT OF DELEGATES 79

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TABLES AND FIGuRES

Tables

Table 2-1. Potential Labor Force and Formal Employment Opportunities in South Africa,1960-90 8

Table 2-2. Changing Absorption Capacity of Formal Employment in South Africa,1960-90 8

Table 2-3. Estimated Proportions of the Labor Force Not Engaged in Wage Employment inSouth Africa, by Race, 1960-90 9

Table 24. Absorption Capacity of the Formal Sector in South Africa, by DevelopmentRegion, 1980-90 10

Table 3-1. Sectoral Distribution of Microenterprises in Mamelodi and Kwazakhele Townships,South Africa, 1990 12

Table 3-2. Amount and Type of Workers Employed in Microenterprises in Mamelodi andKwazakhele Townships, South Africa, 1990 13

Table 3-3. Average Annual Growth of Employment in Mamelodi and Kwazakhele Townships,South Africa, by Age of the Firm, 1990 13

Table 3-4. Growth Rates and Gender of the Proprietor of Firms, by Sector, in Mamelodi andKwazakhele Townships, South Africa, 1990 15

Table 3-5. Distribution of Microenterprises in Mamelodi and Kwazakhele Townships, SouthAfrica, 1990, by Number of Employees and Sector, 1990 16

Table 3-6. Monthly Turnover in South Africa, by Type of Enterprise, 1992 17

Table 3-7. Age of Black Microenterprises in South Africa, 1992 17

Table 3-8. Age of Black Microentrepieneurs in South Africa, 1992 18

Table 3-9. Educational Level and Monthly Turnover of Black Microentrepreneurs in SouthAfrica, 1992 19

Table 3-10. Support Agencies Contacted by Microenterprises in South Africa, 1992 20

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Table 3-l 1. Educational Level and Percentage of Black Microenterprises Contacting andReceiving Assistance from a Support Agency in South Africa, 1992 20

Table 3-12. Size and Turnover of Black Microenterprises Contacting a Support Agency inSouth Africa, 1992 21

Table 3-13. Age of Black Microenterprises and Receipt of Assistance from a Support Agencyin South Africa, 1992 21

Table 3-14. Level of Education, Average Turnover, and Contact with a Support Agency inSouth Africa, by Geographic Location, 1992 22

Table 3-15. Major Constraints Facing Black Microenterprises inr Mamelodi and KwazakheleTownships, South Africa, 1990 24

Table 3-16. Financial Constraints Facing Black Microenterprises in Mamelodi andKwazakhele Townships, South Africa, 1990 25

Table 3-17. Market Constraints Facing Black Microenterprises in Mamelodi and KwazakheleTownships, South Africa, 1990 26

Table 3-18. Location of Black Microenterprises in Mainelodi and Kwazakhele Townships,South Africa, 1990 27

Table 3-19. Percentage of Respondents Citing Regulation as Their Most Important Problem,by Phase of Operation, in South Africa, 1992 29

Table 3-20. Regional Variation of Enforcement Problems in South Africa, 1992 30

Table 4-1. Breakdown of Black Small and Medium Enterprises, by Subsector, in Cape Town,Durban, and Johannesburg, South Africa 36

Table 4-2. Characteristics of More Established Black Retail Enterprises in Cape Town,Durban, and Johannesburg, South Africa, by Subsector 39

Table 4-3. Constraints Facing More Established Black Retail Enterprises in Cape Town,Durban, and Johannesburg, South Africa 40

Table 4-4. Characteristics of More Established Black Taxi Enterprises in Durban andJohannesburg, South Africa, by Subsector 42

Table 4-5. Constraints Facing Mori Established Black Taxi Enterprises in Durban andJohannesburg, South Africa 44

Table 4-6. Characteristics of More Established Black Construction Enterprises in Cape Town,Durban, and Johannesburg, South Africa, by Subsector 46

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Table 4-7. Constraints Facing More Established Black Construction Enterprises in CapeTown, Durban, and Johannesburg, South Africa 47

Table 4-8. Characteristics of More Established Garment Enterprises in South Africa,1991 50

Table 4-9. Constraints Facing More Established Garment Enterprises in Cape Town, Durban,and Johannesburg, South Africa 52

Table 4-10. Obstacles to Expansion Fac.ng More Established Black Garment Enterprises inCape Town, Durban, and Johannesburg, South Africa 53

Table A-i. Most Important Problems Facing Microenterprises in Mamelodi and Kwazakhele,South Africa, Summary of Spontaneous Responses 71

Table A-2. Constraints Facing Black Retail Enterprises in Cape Town, Durban, andJohannesburg, South Africa 74

Table A-3. Constraints Facing Black Taxi Enterprises in Durban and Johannesburg, SouthAfrica 75

Table A-4. Constraints Facing Black Construction Contractors in Cape Town, Durban, andJohannesburg, South Africa 76

Figures

Figure Al-I. Obstacles to Starting a Black-owned Business in South Africa, SpontaieousResponses 72

Figure A 1-2. Obstacles to Operating a Black-owned Business in South Africa, SpontaneousResponses 73

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EXECUTIVE SUMMARY

THE BLACK ENTERPRISE SECTOR IN SOUTH AFRICA has, despite a long history of exclusionand restriction, substantial potential to help distribute employment, income, and wealth moreequitably between whites and blacks. This report summarizes research on the subject andattempts to evaluate realistically the potential role that black enterprise can play in this effort.

The research differentiates between microenterprises and more established small and mediumenterprises. Traditionally, microenterprises emnploy fewer than 10 employees, while small andmedium enterprises employ 10 to 200 employees. In South Africa, however, the legacy ofapartheid has ensured that virtually all black enterprises are small. They, therefore, aredistinguished less by their size than by their ability-that is, their preparation, financial assets,and human resources-to play a dynamic role in the generation of employment and wealth.Both categories employ few persons, but small and medium enterprises have more assets,more training, more education, more skills, more ability to move up-market, and higherprofitability and turnover than microenterprises. This research effort expected to find thatdynamism and potential dynamism existed only among small and medium enterprises butdiscovered, instead, elements of dynamism in both groups.

The Growing Black Microenterprise Sector

Since apartheid began unraveling in 1990, the formal sector has stagnated, while themicroenterprise sector has grown dramatically (half of microenterprises are less than threeyears old, and employment among surviving firms is growing an estimated 24 percent a year).The following characteristics profile black firms in the microenterprise sector:

* Most new firms are not registered and were created not because the owner wasattracted by the pulls associated with entrepreneurship-independence, prospects ofhigher income, and so forth-but rather because he or she was unemployed. Personswho are not employed create microenterprises principally as a survival strategy.

* These businesses are, by and large, one-person operations (average employment is 2.1workers, including the proprietor) that rely on unpaid family labor.

* Employment growth is related to the age of the firm. Firms created in the past yearare growing an average of 46 percent, wi- ile those in existence two or three years aregrowing 25 to 29 percent. Though growing more slowly, older firms (those at leasteleven years old) are still growing a respectable 7 percent.

* Women operate 62 percent of all microenterprises, and their firms tend to be locatedin the home and concentrated in sectors with the lowest levels of profitability andgrowth in employment.

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* Black microenterprises are heavily concentrated in commerce and trade (70 percent),where the barriers to entry, such as the amount of capital employed and skills needed,are low and where other microenterprises exert tremendous pressures. Street vendorsaccount for half of black microenterprises, while manufacturers-most of whommanufacture soft goods-account for only 17 percent. They are squeezed into thesehighly competitive market niches because they cannot compete with the mass-produced goods supplied by South Africa's well-established formal sector.

* The majorit" of black microenterprises earn net monthly incomes below theestablished subsistence level of R650 and thus offer little potential for retainingearnings and accumulating assets. This is particularly true in the production of softgoods, which is dominated by women.

* The owners of microenterprises tend to be young (35 percent are less than thirty yearsold) and have a median educatiouial level of six years of formal schooling; 30 to 40percent lack basic literacy skills. Few have worked in the formal sector aad thus havefew skills and virtually no supervisory or managerial experience.

CONSTRAINTS. The principal constraints identified by the microentrepreneurs themselves arelack of access to tinancing, tremendously competitive market conditions, including the highcost of inputs, and inadequate premises from which to operate their businesses. Recentderegulation measures have effectively removed regulation as a primary constraint on theestablishment and growth of black businesses, although microenterprises continue to be highlyconstrained by the legacy of apartheid, which limited the ability of blacks to gain skilledemployment, establish businesses, and receive good education.

Financial constraints. Lack of operating funds (working capital) is a problem whenmicroenterprises are created but becomes less important as time passes. The oppositeis true of the lack of investment funds, which becomes more important as time passes.Although 20 percent of microenterprises have received credit, the owner's ownsavings and friends and family are still the major sources of funding. Access tofinancial resources from banks, suppliers, and other formal lenders is scarce until thefirm exceeds five employees and has been in existence lbree to five years. The unmetdemand for financing is substantial, especially among young firms.

* Market constraints. The lack of customers, the increasing number of competitors, andthe rising cost of supplies are dominant market problems facing microenterprises,which compete within small, location-specific, low-income niche markets. Whilecom,petition within a given niche intensifies, broader markets are virtually closed.

* Business premises and tenure arrangements. Most microenterprises (71 percent) areoperated in the home, far from commercial traffic; half of the firms operating outsidethe home do not have permission to occupy their sites. Few emerging black businessescan afford space in town, and appropriately sized and priced premises are simply notavailable near markets.

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* Regulations. Microentrepreneuars attribute little importance to regulatory issues,although several practices continue to pose actual or pott.atial constraints: municipalrules concerning street trading; iealth, safety, and labor codes for the workplace; andtaxation, especially the new value added tax. Black microentrepreneurs see raciallymotivated enforcement of regulations by the police, rather than regulations per se, asa constraint.

South Africa's black microenterprise sector is highly constrained by the restrictions thatapartheid placed on the establishment of businesses, on the opportunities for skilledemployment, and on educational opportunities for blacks as well as by the restrictionsaffecting the spatial arrangements of cities. Despite severe constraints, evidence of dynamicgrowth does exist, notably among small light manufacturing enterprises, whose incomes andemployment are above the averages for the sector. Also, the incomes of even the mostsurvival-level businesses are critical to the survival of many households. The blackmicroenterprise sector has (wo distinct roles that deserve to be supported in any project orpolicy intervention: it is a residual employer with an important role to play in improvingwelfare and alleviating poverty, and it is a source of dynamic and potentially dynamic firmsthat create wealth and generate employment.

INTERvENTiONS. To raise incomes and improve the quality of life for this sector, albeitgradually, interventions should support efforts that seek to accomplish the following:

* Increase the sector's access to financial resources, perhaps building on thedemonstrated potential for group lending

* Develop s!- , and on-site assistance to improve the quality of products produced byblack firms

* Build appropriate market infrastructure located within urban areas and near marketdemand

* Reexamine the concept of buyer and production cooperatives, which have the potertialto achieve the benefits of bulk buying; to create a committed clientele for marketing,common marketing, and administrative overhead; and to coordinate support fromassistance agencies.

The challenge facing South Africa is to design an institutional framework that accords blackmicroenterprises much broader access to financial, training, and technical assistance.Organizations clo. ; associated with apartheid have more contact with microenterprises thanother organizations in the formal sector, and losing their resources altogether is not feasible.Many nongovernrnental organizations have made laudable efforts, but they have had littleimpact. A possible approach to increasing institutional effectiveness would be to devisefinancing and training programs in which larger organizations effectively wholesale financialand technical assistance services to smaller, qualified nongovernmental and community-basedorganizations that retail them, in turn, to the final beneficiary.

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More Established Small and Medium Black Businesses

The owners of more established black businesses have more education, prior businessexperience, and income than owners of microenterprises:

* They average ten years of formal schooling compared with six years formicroentrepreneurs, and more than half have pursued post-school certificates ordiplomas.

* About 60-70 percent of construction and retail owners had left employment, served asan apprentice, or both before opening their own businiess; few microentrepreneurshave such experience.

* Most had entrepreneurial, rather than survival, motivations for starting a business.

* They are about ten years older than the average microentrepreneur, being forty toforty-five years of age.

Their firms also have fewer internal disadvantages, although they were constrained byapartheid from becoming integrated with the formal South African economy:

* Many were launched during the apartheid period; the average age of the firm is sevenyears.

* Despite severe restrictions on business licenses, a few black businesses were allowedto exist and to function as virtual monopolies in the townships. Black businesses werealso established in the homelands, where they were, in some areas, effectivelysupported by training, access to finance, and subsidized inputs.

* They have higher levels of turnover and profitability than microenterprises, althoughemployment remains low, even among the most dynamic firms.

The analysis of the largest and most well-established black enterprises in the retail, taxi,constn:xtion, and garment manufacturing subsectors revealed categories of enterprises that areclearly distinguished by their dynamism, which is defined by growth in turnover, profitability,employment, and assets. Only about 20 percent of the more established enterprises can bedefined as dynamic (fast laners, including high flyers, which are the top 10 percent of firms).Another 20 percent are potentially dynamic but constrained from growing by various internaland external constraints (slow laners and middle laners). The remaining 60 percent, althoughbetter off than the average microenterprise, function at the survival level (survivalists).

RETAIL ENTERPRISEs. In the formal sector, retail enterprises, together with the catering andaccommodation sectors, accounted for approximately 12 percent of gross domestic product(GDP) during the 1980s. Most dynamic and potentially dynamic black retail businesses areregistered, have only a few employees (an average of 4.3 employees for high flyers), andhave relatively high levels of turnover, profitability, assets at start-up, and investments. Nofirm in the high flyer group operates a home-based spaza, although 27 percent of survivalists

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do. A relatively large portion of retailers have received credit since starting their business.Fast lane enterprises have received both larger loans and more overdraft facilities than othergroups of dynamic enterprises, yet the owner's own savings and family and friends are stillthe major sources of financing tor 96 and 43 percent of retailers, respectively.

Dynamic retailers score market-related issues as high as survival-level and microenterpriseretailers do, although they cite the high cost of supplies rather than the lack of customers orthe strain of competition. The second most striking constraint is the lack of civil order thatadversely affects the business environment. Theft, violence, and gangsterism are majorconstraints facing more established retail businesses. The most dynamic enterprises confrontissues related to administering the value added tax. All businesses confront labor issues,including access to skilled labor; high flyers hive difficulty finding skilled labor, whileexpanding firms have difficulty finding reliable labor.

TRANSPORTATION. The kombi taxi industry is the dominant form of black entrepreneurship inthe South African transport sector. Few owners are formally registered, but all are subject toa limited degree of government regulation and to strict self-regulation by private industryassociations. In 1989, transportation generated one-fifth of the entire informal sector'scontribution to GDP, or 1.7 percent of total GDP. Black-owned transport firms accounted forvirtually all this activity. The industry was highly regulated through the mid-1980s, but thecomprehensive deregulation that occurred in 1987 produced many new entrants, increasedcompetition, which took the form of taxi wars, and raised entry costs. In 1989, the estimated50,000 kombi taxis in operation represented more than a threefold increase since 1980.

Most taxi businesses consist of one or two taxis, and average employment is about twopersons. Most persons owning three or more taxis have been in business more than ten years.Among high flyers, about 40 percent have fathers in business and 12 percent have fathers inthe taxi business. Only 10 percent of taxi operators have a bank loan, and most rely on self-financing. Average monthly income was R2,800 in 1989, and the turnover and profits of thedynamic and potentially dynamic taxi businesses were much higher.

The top four constraints among taxi operators are the high cost of vehicles, townshipviolence, competition from other taxis, and taxi wars. Access to financing and competition areclosely related constraints: operators need financing to purchase expensive vehicles, andcompetition depresses prices, making it difficult for them to accumulate capital or repay short-term bank loans. The squeeze on profit margins has resulted in an increase in bad debts andrepossessions. Many operators feel that fares are too low to be profitable, although dynamicfirms have much higher turnover than potentially dynamic firms and are less concerned withthe cost of vehicles and access to financing. The same is true of entry-getting a foothold in arestricted, saturated market-which concerns less dynamic firms more than larger, moredynamic ones. The most dynamic enterprises cite township violence as their most severeconstraint, followed by competition.

CONSTRUCTION. The construction of low-income housing is seen as a leading sector of theeconomy because the potential demand for such housing is large and the overall laborcomponent involved in constructing it is high. Nevertheless, South Africa's black construction

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industry is beset by fundamental problems related to internal management (lack of skills) andthe external business environment (effective monopoly of white contractors over the housingmarket).

Most black contractors operate either as informal subcontractors working for white contractorsin the formal sector or as general contractors in the informal sector. Significant differencesexist, however, between the least and the most dynamic firms. Three-fifths of survivalists arelabor-only subcontractors, while three-fifths of high flyers are general contractors. Moreover,high flyers have more employees than survivalists do (5.5 and 2.2 persons, respectively).Most black contractors operate at the bottom end of the market and lack supervisory andmanagerial experience. This lack of training and skills contributes to the general reputationthat black contractors have for poor-quality work: 88 percent feel they need further training inbusiness management, production management, and trade skills. Most firms have been inexistence between six and seven years, and about half of all groups had experience working inconstruction or as an apprentice before opening their business. Yet, the shortage of skilled andreliable labor is critical. Access to loans and the high cost of materials are major constraintsbecause contractors must obtain bridging financing to cover the initial costs of land, labor,and materials. Access to land for development, competition, and the preference given to whitecontractors are external constraints that keep black firms small.

GARMIENT MANUFACTURING. The Job Reservation Laws, which existed until 1979, permittedskilled jobs to be filled by Indians and coloreds, but not blacks. In garment manufacturing,firms owned by blacks are scarce and tend to be smaller and less well-developed than firmsowned by whites, Asians, or coloreds. None of the black owners had been employed asskilled workers in textile or garment factories before starting their own business, while mostof the non-African owners had. Blacks thus have little training in this area, and only one-eighth of black-owned firms have developed the quality and timely delivery standards neededto become subcontractors, which would give them access to new production techniques. Morethan half of all black garment firms are not registered, and most pay salaries well below therequirements of the Industrial Council.

Lack of access to financing is a major constraint facing all garment manufacturers, althoughfirms that have subcontracting arrangements with larger firns rank it less highly than thosethat do not. Half of the firms surveyed have access to some financing, yet financialconstraints continue to be a major concern because the cost of materials, especially textiles,and of financing is high. Managerial and skill problems touch black garment firms heavily,especially the scarcity of competent workers, lack of management skills, and scarcity ofcompetent workers. These constraints are the legacy of former restrictions rather than ofcurrent legislation. Political uncertainty, which affects the business environment, is also aconcern.

INTERVENTIONS. Although even the dynamic and potentially dynamic enterprises generatelittle employment (they average five employees), they offer the potential for more growth inthe future. They currently face important market constraints, however, and must be integratedmore closely with the white economy, where markets and purchasing power are concentrated.

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* An operational definition shoulu be developed that details the type of firms that willreceive support within each subsector and the type of support they will receive.Dynamic black businesses face constraints ditferent from those facing dynamic firmsrun by Indians or cokreds, and interventions should target a defined group ofbusinesses and its particular limitatiorns. This complexity requires operationaldefinitions that recognize differences among disadvantaged firms.

* Incentives should be designed to encourage big businesses to buy from qualified smalland medium enterprises. These incentives should recognize that having largerenterprises provide technical advice and training to smaller black firms is essential toachieving the quality necessary for procurement arrangements to be voluntary andmutually beneficial. This recommendation applies to manufacturing and retailenterprises in particular.

* The South African government should make a committed effon to procure from smallblack businesses, especially in the public construction of housing and schools. Suchprocurement efforts should include strong training, technical assistance, and evenfinancial components.

* The size of land allocations should be decreased to allow smaller developers to submitbids. Also, the tendering procedures should be simplified.

* Coveted diversification options within the transportation industry exist and should beexamined with the aim of loosening the regulations that maintain public monopolies ofbus and rail transportation as well as hauling freight.

T The administration of the value added tax, which is of particular concern to dynamicretail businesses, should be explored and addressed.

- Police protection and the enforcement of civil order must be extended to blackcommunities because a stable business environment fosters long-term investment andgrowth.

Policy Directions

Black businesses can play a dynamic role in creating employment and rebalancing income andwealth in post-apartheid South Africa, but the obstacles are tremendous and will require morethan quick fixes.

Deregulation is not enough. Dismantling the regulations of apartheid is, to be sure, anessential step toward creating a climate in which black businesses can expand and prosper. Itis not the most important step, however, as the research presented here shows. Regulationsare no longer a major impediment to the creation or expansion of black businesses, and thederegulation that began in the 1980s has not eliminated the constraints that are. Policymakersand implementing agencies alike should focus their activities on the constraints identified bythe entrepreneurs themselves.

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Despite the recent move to eliminate the restrictions on black enterprises, significantconstraints continue to limit the ability of even the most dynamic businesses to grow, createemployment, accumulate assets, and generally prosper in either the formal or the informaleconomy. Black entrepreneurs-owners of both microenterprises and larger, more dynamicfirms-clearly identify both internal and external constraints that adversely affect theirbusinesses. The principal internal constraints, which are the direct legacy of apartheid, includethe lack of adequate technical, administrative, and managerial skills and the lack of access tofinancing, which is a result of the inability to own land that can be used for collateral. Theprincipal external constraints include highly competitive markets, lack of marketinfrastructure, and a politically unstable and often violent business environment.

Deregulation and market-based solutions are a step in the right direction, but they must beaccompanied by measures that directly eliminate the constraints that prevent blacks fromstarting businesses or from running businesses capable of playing a dynamic role in the formaleconomy. Clearly, South Africa cannot and should not adopt another country's model for itsown use. Evaluating the mistakes of others, in conjunction with assessing its own needs andpriorities, can, however, help South Africa formulate policies and strategies for strengtheningblack enterprises.

An effective lobby for small and medium enterprises will be an essential component of thisprocess and should draw attention to the following key policy issues:

* The policymaking process must have as broad participation as possible and must seekdiverse, long-term solutions for complex, deep-rooted problems.

* Institutional support is vital. Government must make adequate resources available forpublic sector institutions, but functions and responsibilities should be devolved asmuch as possible to specialized, local, flexible agencies that work with a range ofother partners (fornal business, nongovernmental organizations, and communityorganizations, among others).

* Existing state institutions must be reevaluated and their usefulness reassessed. Manyof them have accumulated experience and knowledge but have been tainted byapartheid.

* Nongovernmental organizations have an important role to play in buildingrelationships between black enterprises and the formal and public sectors. They canalso be instrumental in making training and financing accessible to small enterprises.They must, however, streamline their focus, infrastructure, and operational efficiency.

* Access to financing is vital, and new financial instruments and intermediaries must bedeveloped. The provision of information, skills, and market infrastructure is just asimportant. An integrated approach to policy and strategy-one that addresses allaspects of the problem-is essential. Such an approach must work at many levels:local, regional, national; short, medium, and long term; and others.

* Determining the focus is problematic. Should attention be focused primarily onbusinesses in the informal economy that already have a track record and demonstrate

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an immediate potential for becoming integrated into the formal economy? Is itjustifiable to regard development of the microsector as primarily a function of socialdevelopment or the alleviation of poverty? Will this attitude stifle the potentialdynamism of the microsector? How can a balance in focus be ensured?

As is evident from the profiles of small and medium enterprises presented in this report, blackbusinesses have the potential to be dynamic, productive players in South Africa's economy.They also offer an avenue of opportunity and achievement for a large section of SouthAfrica's too-long-frustrated human potential.

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1. INTRODUCTION

SOUJTH AFRICA'S CHALLENGE is to achieve a stable, growing post-apartheid economy. To thisend, the country must devise and implement policies and incentives that encourage thecreation and growth of employment and balance the economic participation of the black andwhite populations. Inevitably, emphasis has been placed on the resumption of labor-demanding growth in the white-dominated industrial sector. The black business sector also hasa role to play, however, and the research on black enterprises has identified the characteristicsof and constraints on their ability to create employment and to forward a strategy of growthwith redistribution.t This report presents the findings of that research and poses twoquestions:

* Do the characteristics and constraints facing black businesses permit them tocontribute dynamically in both the short and long terms to the creation of employmentand the balancing of economic activity, income, and wealth?

- What policies and programs could enhance the capacity of the sector to contribute tothese goals in post-apartheid South Africa, and is deregulation an adequate strategy?

The research in South Africa was predicated on the notion that, as in many other developingcountries, small enterprises could be divided roughly into two categories: (a) marginallyprofitable, survival-oriented microenterprises and (b) dynamic (or potentially dynamic) firms.Microenterprises are firms operated by individuals whose main motivation is to generateincome rather than to grow aud operate an enterprise. A typical microenterprise would beowned by a woman who is seeking to supplement her family's household income or abusiness run by someone forced into self-employment by a weak labor market. By contrast,the dynamic, or potentially dynamic, firms are owned by individuals motivated by the classicentrepreneurial desire to own and exoand a firm. Key questions guiding this research were (a)Does dynamic business activity take place in the black-owned private sector? (b) If dynamic(or potentially dynamic) firms exist, what are their characteristics and what constraints dothey face? How do these characteristics and constraints differ from those of firms that are notdynamic?

It is important to note that the status of black firms indicated by the research findings isconditioned in part by the worst recessionary period in South African history. The dynamicpotential of all businesses, including black businesses, could be very different if growth wereresumed.

1. The surveys included in this study were of enterprises involving black South Africans, excludingcoloured and Indian enterprises.

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Methodology

This report is based on three principal data sets.

First, macroeconomic data on employment are used to establish relationships betweenemployment trends and the growth of the microenterprise sector, which is typically called theinformal sector in South Africa.2

Second, the results of a survey by the Growth and Equity through MicroenterpriseInvestments and Institutions (GEMINI) group are reported to provide general information aboutthe black enterprise sector. In October and November 1990, GEMINI conducted a survey ofsmall enterprises with up to fifty employees, including the proprietor, in two black SouthAfrican townships: Mamelodi and Kwazakhele. The surveys consisted of a complete census oftownship businesses as well as two supplementary questionnaires administered to a subsampleof businesses. These additional questionnaires sought to identify the nature of overallconstraints and financial issues. Although useful, the GEMINI survey was based on only 2 outof 100 townships, which makes applying its results to the entire country risky. Nevertheless,it constitutes perhaps the most complete survey of microenterprises in South Africa to date(having surveyed 5,000 firms in the two townships) and is thus useful for indicating thecharacteristics and constraints facing black enterprises generally.

Third, World Bank surveys are used to examine specific subsectors of economic activity inSouth Africa's black community. The World Bank contracted a multisectoral survey ofmicroenterprises that focused on whether regulatory issues continue to constrain theestablishment and growth of black enterprises now that significant deregulatory measures havebeen enacted.3 The research focused on the retail, garment manufacturing, construction, andtransport subsectors, where it was thought that the proportion of dynamic enterprises wouldbe substantial. Within each subsector, data were disaggregated to differentiate characteristicsand constraints facing enterprises at various levels of operation, from the most dynamic to themost basic or survival level. By differentiating the constraints facing microenterprises fromthose facing more established enterprises and then separately identifying constraints unique togiven subsectors, it is hoped that the survey results will enhance the capacity of policymakersand assistance agencies to provide cost-effective, targeted interventions in a way that generalstudies cannot. Because the methodology of the research identifies the proprietors' perceptionsof the problems facing their firms, it may or may not capture the underlying causes of those

2. The tenn informal defines the sector by its legal characteristics; that is, it includes businesses thatare not registered or licensed. t he term microenterprise avoids the legalistic interpretation and focuseson the fundamentals of the business, such as employment, tunover, and profitability. Since the microsurveys presented here are based on the fundamental characteristics of the sector rather than on its legalstatus, the terms informal sector and microenterprises are used interchangeably.

3. This survey was multisectoral and focused on firms that operate in one or more of the followingways: (a) rely mainly on cash transactions and infornal credit markets, (b) use very basic technicalknowledge and extremely simple production and management systems, (c) serve highly localizedmarkets through simple marketing channels, and (d) operate in a market geared primarily toward low-income groups.

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problems. The responses do, however, identify the entrepreneurs' perception of constraintsand thus offer a basis for placing a priority on interventions in the future.

TMe research findings confirmed ex ante expectations alhout the two classes of enterprise.Firms in the microenterprise sector had, on average, smaller turnover than firms in thesectoral surveys, were more likely not to be legally registered (that is, to be functioning in theso-called informal sector), were more likely to have a proprietor with five or fewer years ofeducation, and were predominantly pushed into operating a business for survival reasons (thatis, because of inadequate household income or unemployment). All of these factors contrastsharply with the characteristics of the more established businesses. Largely because of thelegacy of apartheid, both microenterprises and more established businesses employ fewpersons. Even among black microenterprises, there are, however, important signs ofdynamism and potential dynamism, although this dynamism is characterized and constrainedin different ways than it is among the more established firms. In this respect, the researchfindings differed from the ex ante expectations. For both groups, despite the high death rateof small firms, the economy-wide recession, and the legacy of apartheid, significant signs ofdynamism were evident.

Organization

This report is divided into four principal sections. Section 2 frames the historical and presentrelationship between the black business sector and the South African economy. Section 3provides an overview of the characteristics of and constraints facing microenterprises, alongwith a general indication of possible policy and intervention options. Section 4 focuses on thecharacteristics of and constraints facing the more established black enterprises in the garmentmanufacturing, construction, retail, and transportation subsectors as well as policy options.Section 5 examines the experience that countries with similar circumstances have had inimplementing programs to support and promote racially based small and medium enterprises.This section, in particular, reflects discussions that took place in the workshops and plenarysessions of the seminars held in South Africa in May and June 1993. The resolutions passedby the individuals participating in those seminars are presented in appendix 2.

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2. BLACK BUSINESSES IN SOUThI AFRICA:l{IST'ORICAL CONTEXT AND PRESENT CIRCUNISTANCES

BLACK BUSINESSES IN SOUTH AFRICA are very inuch the product of historical circumstances,and South Africa has a long history of denying opportunities to black entrepreneurs. Thesystem of apartheid with its complex set of restrictions limited the existence of blackbusinesses as well as their ability to grow and become part of the tormal economy. Evenduring the apartheid period (pre-1990), however, sonme scope existed tor the establishment ofblack businesses. Indeed, most of today's more estahlished black firms were created duringthe period of apartheid restrictions, which effectively permitted them to operate monopoliesover the supply of a restricted list of goods to the black community. Black businesses werealso a significant presence in the homelands, where, in some areas, they recei-ed support inthe 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 businesseswas the notion that blacks were temporary residents in so-called white urban areas and werethere solely to provide labor for white industry and commerce. This doctrine denied the needto encourage the emergence of a group of black entrepreneurs in urban areas, and any seriousprospects of such a group emerging and thriving were killed by the Land Act of 1913, whichprohibited blacks from purchasing land outside the so-called na&ive art.as. With the strokt. of apen, restrictions on black ownership of land excluded blacks from financial markets, and thusfrom becoming entrepreneurs, by denying them the means to provide sound security toprospective lenders.

Based on the notion that blacks were "temporary sojourners" in white cities, a large apparatusof controls was constructed to suppress black entrepreneurship and to defend and support theinterests of white business. This was the basis of the Influx Control Act, which denied blacksthe right to move freely around the country. White authorities controlled the allocation of allformal business sites in urban black townships. The only formal small businesses permitted tooperate in these areas under the Native (Urban Areas) Act No. 21 of 1923 (subsequentlyreplaced by the Natives [Urban Areasi Consolidation Act No. 25 of 1945) were those thatprovided 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, orpharmacies were denied. These activities and all other kinds of businesses satisfying morethan the barest daily necessities remained the defended preserve of white entrepreneurs andwere located in white urban areas.

The legislation that controlled and denied opportunities to black small business entrepreneursbecame even more restrictive after 1948. Under the Group Areas Act, the few blackentrepreneurs who had managed to secure a business site in white areas were forced either to

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close up their operations or to relocate into township areas. The apartheid government wasparticularly responsive to complaints that competition from black entrepreneurs threatened thewhite standard of living. When the new National Party government was elected, officialsupport for white enterprise was strengthened, and further controls were placed on theformation and expansion of formal black small business activities in South Africa's cities.

Hostility toward black small-scale business culminated in an important policy document thatwas circulated in 1963 to all local authorities charged with township affairs. In what becameknown as the 'one man-one business" policy, black entrepreneurs were limited to runningonly one business and were prevented from forming companies and partnerships with theobjective of initiating larger business ventures. In addition, the 1963 legislation blocked thecreation of black-controlled financial institutions, manufacturing industries, and wholesalebusinesses in white areas and decreed that all buildings necessary for business activities wereto be erected by local authorities, not blacks. The new legislation also sought to persuadeblack entrepreneurs to move their activities away from urban townships and to establishbusiness ventures in the homelands instead. It did so by issuing blacks licenses to operateformal small businesses in township areas only as grocers, butchers, fish fryers, greengrocers,dairy owners, and wood and coal dealers. Such activities offered limited prospects forexpansion. Black businesses that were not confined to meeting daily essential needs of theblack community were prohibited; this control extended to such activities as garages, servicestations, and dry cleaners in township areas. Prior to 1976, blacks were only allowed toparticipate in a limited range of twenty-five trades, businesses, and professions in urban areas.In 1976, tb" was enlarged to some fifty-two types of activities, and during the 1980s allrestrictions were finally removed.

The new controls were designed partly to defend white businesses by ensuring that blacksshopped in white areas and partly to provide a legal basis for evicting persons whose serviceswere deemed not essential to the white population. These persons could therefore be requiredto return or be relocated to a Bantustan. Ironically, black entrepreneurs who were successfulin a formal business venture in urban townships ran the risk of being pressured into relocatingto the rural Bantustans. Such a prospect was scarcely an inducement to growth and successamong black small businesses in the 1960s.

Closely related policies were those of Bantu education and job reservation (in effect until1979), which restricted blacks from being given apprenticeships and jobs in certain skilledtrades. These trades were reserved for whites and generally restricted the build-up ofindustrial skills in the black community. As a result, the supply of black entrepreneurs withthe technical and managerial skills necessary to operate their own businesses is severelyconstrained and so, too, is the foundation needed to subcontract work from large enterprisesto smaller concerns. Because of this, South Africa lacks one of the fundamental requirementsfor growth of a flexible manufacturing subcontracting culture.

Efforts to Deregulate Black Enterprise

During the 1980s, the policy climate surrounding small-scale industry began to shift fromoutright repression to new initiatives for the promotion of black businesses, albeit withinlimits defined by the state and big capital. Beginning in 1980, under the leadership of the

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newly founded Small Business Development Corporation, a joint state-private sector agency,efforts to galvanize small-scale black manufacturers were gradual'y consolidated as part of thewider growth strategy. In addition, several private sector initiatives actively began to promotethe development (mostly along market lines) of small-scale businesses. The 1987 governmentwhite paper on Privatization and Deregulation in the Republic of South Africa reiterated theimperative of encouraging entrepreneurship and stressed that "the approach to regulation musttherefore emphasize the promotion of economic activities and be less directed towards theircontrol."

The abolition of apartheid legislation, which included the abolition of the Influx Control Actin 1986 and culminated in 1991 with the repeal of the Group Areas Act, the Black Land Act,the Development Trust and Land Act, and the Population Registration Act, removed much ofthe legal framework that the government had, for decades, used to control and restrict blackbusiness activity. In 1991, the government passed through parliament the Businesses Act,which eliminated many of the remaining regulatory burdens on black small businesses. TheAct also denied municipalities the right to declare certain areas off-limits to street trading, apractice common in many South African towns. The force of this restriction was, however,mitigated by another provision empowering municipal authorities to apply to the provincialadministrator for permission to close areas to street trading. Moreover, municipal regulations,health, safety, and labor codes, and taxation administration related to the value added taxcontinue to affect small businesses.

From 1986 to the present, deregulation has been the watchword of government strategy andthe chief tactic for stimulating small business and the informal economy. To date, proactiveinterventions to relieve the constraints facing black business have been limited andinadequately coordinated and targeted.

The Informal Sector and the South African Economy

Quite distinct from the more established black enterprise sector is the increasingly visibleblack microenterprise sector, which is typically referred to in South Africa as the peripheralor informal sector. This section discusses the emergence of black microenterprises in relationto the declining capacity of the South African economy to absorb labor. Thesemicroenterprises are created largely by the unemployed as a matter of basic economicsurvival. In numbers, they represent the great majority of black businesses.

Due to a lack of data, precisely estimating the growth of the informal sector is not possible.Nevertheless, the existence, growth, and prospects of today's black microenterprises seem tobe closely related to the dramatically declining capacity of the formal South African economyto absorb labor. Between 1960 and 1990, the percentage of the population without formalemployment increased from 33 percent (2.2 million people) to 51 percent (8.4 million people;see tables 2-1 and 2-2).4 The average annual increase (incremental) in formal employmentopportunities between 1985 and 1990 (33,000) was less than onequarter of the average annual

4. The work force consists of all men and half of all women between the ages of nineteen and sixty-four years old, according to the President's Council (1987) report on employment creation.

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increase in the period between 1960 and 1965 (157,600). By the 1985-90 period the formaleconomy was only absorbing 8 percent of the entrants to the labor market compared with an81 percent absorption rate in the 1960-65 period. As shown in table 2-3, unemployment hasfallen increasingly on Africans.

Table 2-1. Potential Labor Force and Fornal Employment Opportunities in South Africa, 1960-90

Potential Fonnal employment Population withoutlaborforce opportuniuies formal employment

Year (number) Numnber Percent Nunber Percent

1960 6,901,000 4,652,000 67.4 2,249,000 32.61965 7,875,000 5,440,000 69.1 2,435,000 30,91970 8,985,000 6,164,000 68.6 2,82',000 31.41975 10,576,000 6,942,000 65.6 3,634,000 34.41980 12,453,000 7,450,000 59.8 5,003,000 40.21985 14,377,000 7,788,000 54.2 6,589,000 45.81990 16,340,000 7,953,000 48.7 8,387,000 51.3

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

The inability of the formal South African economy to match the high growth of the potentiallabor force has escalated growth in the peripheral sector, a term used by the DevelopmentBank of South Africa to describe activity in the informal economy and the subsistenceagricultural sector.

Table 2-2. Changing Absorption Capacity of Fornal Enploymneni in South Africa, 1960-90

Average annual increase Average annual increase Average annualin workforce in fornal employment absorption capacity

Year (nu,nber) (nunber) (percent)

1960-65 194,800 157,600 80.91965-70 222,000 144,800 65.21970-75 318,200 155,600 48.91975-80 375,400 101,600 27.11980-85 384,800 67,600 17.71985-90 392,600 33,000 8.4

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

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The formal sector constitutes between 8 and 12 percent of recorded gross domestic product(GDP).5 In 1990 terms, this represents R18,036 million-R27,070 million. Althoughsubstantial, the value of this contribution to economic activity must be seen in light of the factthat this amount-approximately 12 percent of GDP-is the principal source of income of themajority of the population. Indeed, Ligthelm and Kritzinger-van Niekerk (1990), usinghousehold surveys, estimate that 80 percent of nonwhites involved in informal activitiesreceive a monthly income below the R650 regarded as a minimum standard of living.

Table 2-3. Estimated Proportions of die Laor Force Not Engaged in WageEmnployment in South Africa, by Race, 1960-90

(percent)

Year Africans Asians and coloreds Whites

1960 28 29 151970 27 21 is1980 37 Is 161985 43 29 181990 50 30 19

Source: Fallon (1992).

Table 2-4 shows the regional incidence of labor absorption and informal sector employment inSouth Africa. The absorption capacity of the formal sector is closely related to the migrationof the black population from the homelands to urban metropolitan areas. This capacity variedbetween 22 and 59 percent in 1990. The development regions (as defined by the DevelopmentBank of South Africa) that recorded the lowest labor absorption cap-rcities were Durban/Natal(35 percent), the Eastern Cape (34 percent), the Northern Transvaal (22 percent), and theNorthern Cape (45 percent). The regions that recorded high labor absorptioncapacities-namnely the Western Transvaal (51 percent), the Eastern Transvaal (52 percent),the Orange Free State (54 percent), The Cape (57 percent), and Pwv (59 pei .ent)-wereunable to supply adequate formal employment opportunities either to their own potential laborforce or to the migrant workers from other development regions.

Consistent with the statistics on unemployment, some studies show a direct correlationbetween unemployment and growth of the informal sector. A study by May and Stavrou(1988) on the growth of unemployment and the informal sector in the Durban metropolitanarea shows that push factors-mainly the lack of employment opportunities in the formalsector-are the predominant reasons (57 percent of respondents) given for starting an informal

5. These estimates also take into account the estimates of the Central Statistics Service, whichindicate that the informal sector is about 8 percent of recorded GDP. However, those figures probablysubstantially underestimate the extent of informal activities by excluding (a) the "independent"Bantustans of Bophuthatswana, Ciskei, Transkei, and Venda; and (b) nonwhite informal activity inwhite urban areas. Estimates based on money in circulation, which estimate that the informal sectorcontributes 40 percent of GDP, should be treated with consWerable suspicion.

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business. This contrasts with the more typical reasons related to independence, opportunity toincrease incomes, and so forth that are given by persons who have alternative employmentopportunities. By and large, the informal sector is a residual employer in an otherwisestagnant economy. Projecting increases in the population and in the labor market and growthin formal sector employment, May and Stavrou estimate that the proportion of participants inthe informal sector will increase as a consequence of unemployment: that is, push factors.Thus the importance of the informal economy as a residual employer will increase in thefuture unless employment opportunities in the formal sector increase dramatically.

Table 2-4. Absorption Capacity of the Fornal Sector in South Africa, by Development Region, 1980-90

(percent)

Developmnent 1980 1985 1990region Migration Fornal Infornal MigraJion Formal Infornal Migration Formal informal

The Cape 0.0 72.6 27.4 0.0 63.8 36.2 0.0 57.4 42.6Northern Cape 0.8 59.3 39.9 2.2 49.2 48.6 2.8 45.2 51.9Orange Free State 0.0 67.9 32.1 0.0 61.1 38.9 0.0 54.1 45.9Eastern Cape 18.9 38.0 43.1 17.3 35.7 47.0 16.3 33.7 50.0Durban/Natal 11.2 42.7 46.1 13.4 38.1 48.4 12.6 35.2 52.2Eastern Transvaal 0.0 65.0 35.0 0.0 58.7 41.3 0.0 51.7 48.3Northern

Transvaal 21.5 28.6 49.9 25.1 25.5 49.3 24.4 22.4 53.2PWV 0.0 74.8 25.2 0.0 65.9 34.1 0.0 58.6 41.4Western Transvaal 0.0 63.3 36.7 0.0 57.2 42.8 0.0 50.6 49.4

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

This finding is consistent with Fallon's conclusion that, "as even the most optimistic scenarioindicates that the formal sector will mop up unemployment quite slowly, informal sectorgrowth provides the only plausible route to fill the gap for many years to come" (Fallon1992). Fallon concludes, however, that the informal sector is providing a sustainable sourceof income to a substantial portion of South Africa's labor force. The sustainability of incomesin the informal sector and the potential of these enterprises to generate employment andopportunities are analyzed in the following section.

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3. AN IN-DEPTH LOOK AT SouTH AFRiCA'S BLACKMICROENTERPRISE SECTOR

THE INFORMAL SECTOR DESERVES to be given policy attention because it is a residualemployer and has the potential to alleviate poverty and help redress the inequities of wealthand income that divide the white and black populations. Moreover, it is the recourse ofindividuals and families who are functioning on a survival level and have no other options.Also, the sector has an unexpected potential for growth.

Characteristics

The following paragraphs use information obtained in two major surveys. The GEMINI surveydescribes the black informal sector and identifies the disadvantages that constrain its dynamicpotential in the short term.6 This survey was administered to 5,000 enterprises in 2 out of100 townships, which makes it a virtually complete census in those two areas. The WorldBank survey is a national survey of 632 firms, and its findings largely confirm those obtainedby the GEMINI survey. Taken together, these surveys describe the circumstances of blackenterprises nationally. Their findings certainly indicate the types of constraints facing suchfirms.

SECTORAL DlSrRIBUTION. Approximately 70 percent of black businesses are concentrated incommerce and trade (wholesale and retail trade, restaurants, and hotels; see table 3-1). Streetvendors account for half of microenterprises; manufacturers account for only 17 percent.Dressmaking, shoe production and repair, and beer brewing-called the manufacture of softgoods-are the only manufacturing activities found in any abundance. So-called hardmanufacturing (such as wood and wood processing; paper, printing, and publishing; chemicalsand plastics; fabricated metal production; and mineral processing) is much more rare. Theconcentration of microenterprise activities in retail and commerce is a typical pattern found ininformal sectors in other parts of Africa. However, the percentage of manufacturing activityin South Africa is substantially smaller than that found in other African countries. In Maradi,Niger, and in Maseru, Lesotho, for example, the share of manufacturing activity among smallenterprises is, respectively, 32 and 36 percent, about twice the rate in South Africa. The verysmall importance of transportation is especially notable given the prominent position thatblack-owned taxis have in businesses run by South African blacks. It is unclear whether this

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

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represents a bias in the particular population surveyed or whether it accurately represents therelatively greater importance of other sectors.

Table 3-1. Sectorat Distribution of Microenterprises in Manetodi and Kwazakhele Townships, South 4frica, 1990

Percent of Namber ofBusiness sector small firms smallfirms

Mwa.vfawrigFood, beverage, tobacco production 3.6 187Textile, wearing apparel, and leather production 6.9 360Wood and wood processing 1.3 67Paper, printing. and publishing Loss than 0.1 1Chemicals and plastics 0.1 6Nonmetaic mineral processing 0.8 42Fabricated metal production 1.2 64Other manufacturing 3.1 162Al manufactunng 16.9 889

Consution 0.6 31

TdeWholesale 0.2 13RPail 59.0 3,101All trade 70.3 3,698

ServcesTranpoit 2.7 141Fnancial, real estaw, and buiness services 2.3 120AlU sevic 7.1 374

AMl Jm enterprises 100.0 5,253

Sowrce: G3M3IJ (1990).

EMPLoYMENT. Nearly all the enterprises in the two townships are extremely small. Based onthe number of workers (including the proprietor, family workers, and trainees), the averagefirm employs 2.1 workers, which resembles the results found in similar studies conducted inAfrica and elsewhere. Size, however, varies by business. Construction firms have the mostworkers (an average of 4.94 persons), followed by manufacturing firms with 2.39 workers.Trade employs the fewest workers: an average of 2.06 workers per firm. Among theenterprises surveyed, 47 percent have only one worker (the proprietor), 26 percent have two,24 percent have three to five, 3 percent have six to ten, and only 0.5 percent have eleven tofifty. In Lesotho, 76 percent employ only one person, and 3 percent employ from eleven tofifty workers. In South Africa, more enterprises employ between two and ten workers than istrue in similar countries. In Eastern and Southern Africa, the middle range is missing, withfew firms faJling in the range of II to 100 employees. Nevertheless, even in these areas, theshare of small enterprises that employ eleven to fifty workers rarely falls below I percent. Ifwe compare the size of firms in South Africa's black enterprise sector with that of middle- orhigh-income countries (like South Africa), the results are striking. Fully 97 percent of South

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Africa's black enterprises have five or fewer workers, while in the average middle-incomecountry (with a GDP per capita of US$ 1,000 to US$2,000), about I I percent of firms employI ;ween one and four workers. In the average high-income country (with a GDP per capitau,tween US$2,000 and US$5,000), a mere 8 percent of firms employ between one and fouremployees.

Table 3-2. Amount and Type 4!f Workers Emnployed in Microenterprises in Matnelodiand Kwazakhele Townsihips, Southl Africa, 19990

73pe of A verage number of Percent ofworker workersperfinn all workers

Proprietor 1.06 50.0Unpaid family member 0.63 29.7Hired employee 0.40 18.9Trainee 0.03 1.4

Total 2.12 100.0

Source: GEMINI (1990).

Table 3-3. Average Annaual Growth of Einployment in Mamelodi andKwazakhek Townships, Sowhlt Africa, by Age of th e Firm, 1990

(percent)

Age of Average annual growththe firn of employment

I year and kss 46.22 years 28.83 years 24.74-10 years 17.111 years and older 6.5

All ages 23.9

Source: GEMnIN (1900).

The proprietor and unpaid family members account for about 80 percent of the laboremployed in black microenterprises (see table 3-2). Put another way, the average of twoworkers per firm is composed of 1.7 parts the proprietor and unpaid family members andonly 0.3 parts paid labor.

GROWrH IN EMPLOYMENT. Overall, surviving enterprises in South Africa's townships aregrowing vibrantly at almost 24 percent a year, a rate significantly higher than that in

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comparable areas elsewhere (see table 3-3).7 This aggregate figure masks the relatively largeproportion of firms (48 percent) that are increasing their employment; in Nairobi, Kenya, forexample, only 38 percent of firms are growing. Nonetheless, international experience tells usthat a small proportion of firms accounts for the bulk of new employment creation, leavingthe great majority stagnant. Further data must be collected and analyzed before we canindicate more precisely the patterns followed by firms that are growing, as well as the patternof firm deaths. In the meantime, the following observations can be made:

* Growth is strongest among the youngest firms. Since apartheid restrictions have beenlifted, firms have grown to meet potential market demand. Most of the firms in thetownships are quite young. In the GEMiNi survey, more than half of all firms werecreated in the past three years, and firms created in the past year are growing anaverage of 46 percent (table 3-3). Firms in existence two or three years are growingon average 25 to 29 percent. On the other hand, firms with a longer track record,having been in existence more than four years, are growing at 17 percent. The oldestfirms, which have been in existence eleven years or more, are growing at less than 7percent. Even these growth rates are higher than employment growth in the formaleconomy.

* Employment growth is greatest in firms that began with only one worker. These firmsare growing an impressive 26 percent a year. Firms that began with eight or moreworkers are actually decreasing in size at an annual rate of almost 8 percent.

* Employment growth is concentrated in certain subsectors that can be characterized aslight manufacturing (see table 34). The highest growth rates are found in wood andwood processing (43 percent), fabricated metal processing (38 percent), construction(33 percent), and chemicals and plastics (129 percent). The lowest growth rates arefound in textiles, wearing apparel, and leather production (13 percent); food,beverage, and tobacco production (19 percent); and financial, real estate, and businessservices (2 percent).

* The sectors with the highest average growth rates are also more likely to have themost workers (see table 3-5). For example, whereas firms across all sectors have anaverage of two employees, with 72 percent of all finns falling into that category. 54percent of wood and wood processing firms, 47 percent of fabricated metal processingfirms, and 52 percent of nonmetallic metal processing firms employ between threeand five workers. The size of firm is related, in part, to the characteristics of thesector, although the correlation between growth and firm size cannot be denied.

These numbers untierstate the growth in employment in the microenterprise sector. A largeamount of employment is created by the proliferation of new enterprises. Studies show animportant positive relationship between the growth in unemployment and the growth in new

7. Averale annual growth rates are caJculated as follows: [(A - B) / Bi I C, whereA - number of workers at the time of the survey, B = number of workers at the time of start-up ofthe firm, and C = number of years the firm has been in existence.

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microenterprises. This accounts for the prevalent constraint, which is described as too muchcompetition and inadequate number of customers, and translates into low rates of profitability.

Table 3-4. Growth Rates and Gender ofJzhe Proprietor of Firns. by Sector, inMamelodi and Kwazakhele Townships, Souaa Africa. 1990

Percent offirns SectoralBusiness sector run by women growth rate

ManufacturingFood, beverage, and tobacco production 72.2 19.4Textile, wearing apparel, and leather production 63.1 13.0Wood and wood processing 13.4 43.3Paper, printing, and publishing 100.0 27.3Chemicals and plastics 16.7 129.0Nonmetallic mineral processing 0.0 23.8Fabricated metal production 6.3 38.1Other manufacturing 4.3 20.2All manufacturing 43.2 21.1

Construction 0.0 33.1

TradeWholesale 69.2 11.2Retail 69.9 25.1Restaurants, hotels, bars, and shebeens 62.2 28.6All trade 68.7 25.6

ServicesTransport 11.3 21.8Financial, real estate, and business services 60.8 2.0All services 66.8 21.9

All enterprises 62.1 23.9

Source: GEMIN (1990).

GENDER. Women operate 62 percent of all informal sector businesses, and enterprises ownedby women tend to be concentrated in the sectors with the lowest levels of profitability: food,beverage, tobacco, textiles and garments (dressmaking, knitting, crocheting), and retail (table34). Men are more evenly distributed among these subsectors as well as in sectors withhigher profitability and growth such as fabricated metal production, other manufacturing,construction, transport, and services. Employment growth tends to be lower in sectorsdominated by women than in sectors dominated by men. Even within a particular subsector,businesses operated by men tend to have more employees and more employment growth thanbusinesses operated by women.

Data on access to credit and training, combined with data on the growth of firms, show thatrelatively equal access-or relatively equal lack of access-has not translated into increases inemployment for female-owned enterprises to the extent that it has for male-owned enterprises.

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Although small enterprises tend to be based in the home, more microenterprises owned bymen are located in commercial business districts than are those owned by women. Mostevidence indicates that home-based enterprises have lower growth rates and lower profits thanmarket-based firms. Although home locations have the advantage of allowing women tocombine their domestic responsibilities with their businesses, they have the disadvantage oflimiting the firm's access to customers, at least compared with a market locatior. Theincomes earned by the majority of women who own businesses represent less than half of thefamily's income.

Table 3-5. Distribution of Microenterprises in Mamelodi and Kwazakhele Townships, South Africa, 1990, byNunber of Employees and Sector, 1990

(percent of all firns)

three to Six to Eleven andSector One Two five ten more

MamnfartaringFood, beverage, and tobacco production 51.9 21.4 23.5 3.2 0.0Textile, wearing apparel,and leather production 51.4 22.5 24.4 1.4 0.3

Wood and wood processing 19.4 20.9 53.7 4.5 1.5Paper, printing, and publishing 0.0 0.0 100.0 0.0 0.0Chemicals and plastics 33.3 33.3 0.0 33.3 0.0Nontnetallic mineral processing 19.0 14.3 52.4 11.9 2.4Fabricated metal production 26.6 17.2 46.9 7.8 1.6Other manufacturing 32.1 23.5 35.2 9.3 0.0AUl manufacturing 42.1 21.6 31.3 4.6 0.4

Construction 12.9 29.0 38.7 9.7 9.7

TradeWholesale 61.5 15.4 15.4 7.7 0.0Retail 50.0 26.5 20.7 2.3 0.5Restaurants, hotels, bars,and shebeens 33.9 30.0 32.7 3.1 0.3

AU trade 47.5 27.0 22.6 2.4 0.5

ServicesTransport 28.4 31.9 36.9 2.8 0.0Finance, real estate, and business 83.3 15.8 0.8 0.0 0.0All services 45.7 24.9 26.2 2.7 O.5

AU small enterprises 46.6 25.8 24.3 2.8 0.5

Source: GEMI (1990).

The obvious reason for this stagnation is that women have dual domestic and productiveresponsibilities and lack time to invest in the growth of their business. Nonetheless, theirbusinesses play an important role in providing for family welfare. They are an importantsource of investments made in the education, health, and welfare of children and family

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members. They also contribute to the survival of families who are living on the margin. Thesefemale-run enterprises do not have to be dynamic and large in order to play a critical role incontributing to overall household income.

Table 3-6. Monthly Turnover in South Africa, by Type of Enterprise, 1992

(percent)

Amount Retail Productionfin rand) Nonfood Food Engineering Soft Services

Less than 300 24.19 20.56 6.67 25.00 30.30301-600 16.57 18.89 18.67 27.78 21.21601-1,000 17.71 19.44 18.69 19.44 17.171,001-2,000 22.86 20.00 25.33 19.44 18.182,001 and above 18.29 21.11 30.67 8.33 13.13

Number ofenterprses responding 175 180 75 72 99

Note: At the time of the survey. RI was equal to $0.36.Source: World Bank (1992).

TURNOVER AND PROFiTABILrrY. In the World Bank survey of 632 microenterprises carriedout in ten municipalities, the mean monthly turnover is Rl,502 (US$540) and the medianturnover is R800 (US$288). A sectoral breakdown reveals the concentration of low levels ofturnover in the traditional, easy-entry activities in which female enterprises are concentrated,especially soft production (see table 3-6). Engineering production has more enterprises in thehigh quintiles of turnover: 55 percent of engineering enterprises have turnover of Rl,000(US$360) or more, compared with about 40 percent of retail enterprises and 31 percent ofservice enterprises. Soft production has the lowest concentrations in the top two quintiles:only 18 percent of enterprises have monthly turnover in excess of RI,000, while 52 percenthave turnover of R600 or less (about US$200).

Table 3-7. Age of Black Microenterprises in SouthAfrica, 1992

Age (in years) Percent offirms

Missing data 0.3More than 10 15.35-10 20.52-4 51.4Less than 1 13.0

Source: World Bank (1992).

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SUSTAINABILITY. Most microenterprises identified by the World Bank survey have acomparatively recent history: 45 percent of the respondents started their businesses between1990 and 1992, and 64 percent of the tirms are less than four years old (see table 3-7).

Engineering activities have the longest life span: 48 percent are five years old or more. Retailand food activities tend to be more recent, with 54 percent having operated for three years orless. These results reflect the high death rate of these enterprises. They also reflect the recentspurt of growth of small enterprises as the business environment has become more liberalizedand more supportive.

AGE, EDUCATiON, AND ENTREPRENEURIAL BACKGROUND OF PROPRIETORS. Owners ofmicroenterprises tend to be concentrated in the lower age brackets, with 35 percent being lessthan thirty years of age (see table 3-8). Unemployment tends to be high among this agegroup, which reinforces the connection between unemployment and the creation ofmicroenterprises.

Table 3-8. Age of Black Macroentrepreneurs in SouthAfrica, 1992

Age (in Percent of Cwnlativeyears) owners percent

16-20 2.0 2.021-30 33.2 35.231-40 32.9 68.141-50 18.2 86.351-60 8.6 94.961 and older 5.1 100.0Total number 637 637

Source: World Bank (1992).

As with age and gender, the educational level of microentrepreneurs indicates the alternativesopen to them, as well as the ability of individuals to manage their business properly. About30 to 40 percent have too little education (less than Standard 4) to be functionally literate (seetable 3-9). Depending on the quality of education, the level of functional literacy could beeven lower. On the positive side, about two-thirds of the microentrepreneurs surveyed arefunctionally literate and could, therefore, potentially keep records and receive formal training.

A strong positive correlation exists between education and turnover. Microentrepreneurs whohave achieved a Standard 10 level of education have average turnover nearly twice that ofthose who have completed only Standard 8-the status of 80 percent of microentrepreneurs.Remedial education in basic numeracy and literacy thus has a potentially strong role to play inimproving the capacity of microenterprises and should form the basis for further businesstraining.

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Microentrepreneurs who have received postsecondary schooling have less turnover thanuneducated ones. International experience tells us that in the absence of the work opportunitiesthat would normally be available to well-educated persons, running a small business is often ashort-term survival strategy and, as such, produces relatively little income.

Table 3-9. Educa:ki'nal Level and Mont/sly Turno ver of Black Micrventrepreneurs in South Africa. 1992

Educational Percent of Cwnuikive Monthly turnover NAwnber oflevel owners percent (rand) firms

No education 8.5 8.5 1,106.38 48Less than Standard 4 18.7 27.2 1,111.96 102Standards 4-6 33.8 61.0 1,237.00 185Standards 7-9 29.8 90.8 1,540.52 163Standard 10 7.6 98.4 2,484.55 42Post-school qualifiers 1.6 100.0 985.55 9

NVote: The sample size is 549 firns. On average, children are ten years old when they enter Standard 4 in SouthAfrica: 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 expected given the history of black businesses in South Africa, the respondentsto the survey and their families have little entrepreneurial history. The vast majority areoperating their first business, and their fathers have never owned a business. The absence of alengthy personal or family experience with running a business and the lack of managerialexperience imply that many black entrepreneurs must be at or near the bottom of a steeplearning curve where technical and managerial skills are concerned. Moreover, the surveydata suggest that only 10 percent have had access to any type of specialized business trainingor to privately or publicly provided business support services.

INSl TUTIONAL SUPPORT. Table 3-10 indicates which support agencies have been contacted bythe few respondents (10 percent) who have contacted an agency. The most commonexplanations given for failure to contact a support agency are that they have not heard of anyorganization (50 percent) and that organizations are difficult to contact (39 percent). Theseresults highlight the narrow reach of support organizations in the black business communityand suggest that the potential exists for much greater use of such services. They also showthat the agencies that have achieved the highest levels of contact are those that have beendiscredited by their association with apartheid policies. The reach of organizations based inthe community seems to be especially limited.

A positive relationship exists between educational achievement and contact with a supportorganization (see table 3-1 1). Of the entrepreneurs who have no education, only 6 percenthave contacted a support organization. In contrast, nearly 16 percent of entrepreneurs whohave achieved Standard 10 have done so. The average turnover of firms who have madecontact is R3,230. 17 a month compared with R 1,305.28 among those who have not. Owners

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with the highest level of income and education have more initial access to supportorganizations. This is further confirmed by the correlation between level of employment,turnover, and contact (see table 3-12).

Table 3-0. Support Agencies Contacted byMicroenterprises in South Africa, 1992

Percent ofSupport agency all contacts

Small Business DevelopmentCorporation 30.8

KwaZulu Training Trust 20.3KwaZulu Finance Corporation 28.6Bophuthatswana National

Development Corporation 10.4Urban Foundation 9.7Get Ahead Foundation 14.8FABCOS/NAFCOC 3.3Independent Development Trust 5.1

Source: World Bank (1992).

Tablk 3-11. Educational Level and Percentage of Black Microenterprises Contacting and Receiving Assistancefroma Support Agency in South Africa, 1992

Percent offinms Finms that haveihat have contacted received assistance

!dwcational level a support agency Pezcent Nwnber

None 6.4 50.0 4Less than Standard 4 5.9 40.0 5Standard 4-6 8.2 31.8 22Standard 7-9 10.5 40.0 20Slandard 10 15.6 18.2 11Pbst-school qualifiers 11.1 0.0 1

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

More interesting is the positive impact that contact seems to have on the viability of the firm.Of those that have had contact, 41 percent have actually received assistance, and their averagemonthly turnover is R3,604.67 compared with R2,114.81 for firms that have made contactbut have not received assistance.

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Table 3-12. Size and Turnover of Black Microenterprises Contacting a Support Agency in Soath 4frica, 1992

Size of Monthly turnover Nonber of Percent contacted byfirm (rand) employees a support agency

SmaUl 308.61 1.5 9.1Medium 1,050.73 1.6 5.5Large 3,912.76 2.7 16.6

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

An important relation exists among level of education, age of the firm, and assistancereceived. First, firms whose owners have six to nine years of education, which is enough toensure basic literacy and numeracy, receive the most assistance. The same is true of finns thathave been in existence between five and nine years (see table 3-13). Half of firms whoseowners have no education receive assistance if they have run the business at least four yearsand therefore have a track record. Once the owner has achieved at least nine years ofeducation or has had the firm at least ten years, the percentage receiving assistance falls. Thisis consistent with the contention that owners with more education tend to use microenterprisesas a short-term measure and that older, very small enterprises tend to be stagnant andtherefore less attractive to support agencies. International experience supports the contentionthat assistance is more likely to be given to firms with a track record and with an owner whohas basic literacy and numeracy and that support is more effective when given to this group ofentrepreneurs.

Table 3-13. Age of Black Microenterprises and Rece0it ofAssistancefrom a Support Agency in Sout Africa

Percent that haveAge of received assistancefirm from a support agency

Less than I year 42.91 year 23.12-4 /,ears 29.65-9 years 50.710 years or more 30.0

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

The geographic relationship among education, turnover, and contact with a support agency isalso strong (see table 3-14). As mentioned, the World Bank microenterprise survey coveredten districts. Umlazi (the black township near Durban) and Soweto (the black township nearJohannesburg) are formal settlements and growth poles that are developing strongly. They are

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Table 3-14. Level of Education, Average Turnover, and Contact with a Support Agency in South Africa, by Geographic Location, 1992

Month4y Percentage of Educational levelturnover firms contacting Less than Standards Standards Standard Post-school

Location (rand) a support agency None Standard 4 4-6 7-9 10 qualifications

Besters 1,516.71 16.2 9.2 23.5 34.7 27.6 4.1 1.0Boksburg 1,644.93 6.6 7.7 15.4 33.3 35.9 7.7 0.0Durban central

business district 1,310.00 9.6 14.0 17.5 35.1 24.6 5.3 33.5Inanda 1,008.08 8.3 10.0 16.0 56.0 18.0 0.0 0.0

M Mafikeng - - - - - - - -Nqutu 1,285.96 8.1 6.1 24.5 40.8 24.5 4.1 0.0Soweto 1,270.87 25.8 7.3 22.0 26.0 28,7 12.0 4.0Umlazi 1,712.72 17.9 7.5 8.4 28.5 40.2 15.0 0.0Total n.a. n.a. 8.6 18.4 33.6 29.5 8.4 1.6

Sample size n.a. n.a. 47 101 185 162 46 9

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

relatively well served by rail and highways and have relatively easy access to markets. Inandaand Besters are informal shack settlements with little infrastructure. Durban and Boksburg arecentral business districts in which most black businesses are street hawkers. Mafikeng, thecapital of the independent homeland government of Bophuthatswana, has support servicesrelated to the homeland government, and the incomes of the homeland civil service workersare relatively high. Nqutu in KwaZulu is a typical rural village.

Average turnover in Umlazi's black microenterprises is substantially above average, as is thelevel of educational achievement: 55 percent of microentrepreneurs have attained Standard 7and above, compared with the survey average of slightly less than 40 percent. Because Umlaziis also favored by above-average levels of infrastructure and market access, it is an attractivelocation for entrepreneurs with above-average levels of education. Umlazi also has a highpercentage of light manufacturing firms, which have relatively high turnover. Soweto andBoksburg also have many highly educated microentrepreneurs (about 43 percent have attainedStandard 7 or above), probably because jobs in the formal economy are scarce in these areas.In contrast, Durban and Inanda-the Durban-based shack settlement-have a preponderance ofstreet traders with low turnover and low levels of education.

LINKAGES WITH THE FORMAL ECONOMY. Several South African case studies have found thatlinkages with the formal sector come largely in the form of backward linkages-purchase ofinputs, marketing networks as dependent or commission sellers, investment of capital earnedas wages in the formal sector (Krige 1988; Wellings and Sutcliff 1984). Few forward linkagesexist, however, because little capital is drawn into the informal sector from the formal sectorand few goods and services produced by the informal sector are sold to the formal sector.Nonetheless, the growth of the formal sector creates a host of opportunities for the informalsector to expand. For example, the generation of new jobs in South Africa's formal economywould create a range of additional or expanded income opportunities for informal sectorenterprises and participants (Rogerson 1988b). Krige adds that the size of the market isultimately determined by the extent of wage employment and thus varies with it. In therelationship between the informal and formal sectors, market domination of South Africanfirms has propagated both a dependency and a barrier to the development of indigenousmarketing and production systems. It is unlikely that this relationship will change, effectivelyconstraining the dynamic potential of the sector.

Constraints

What are the major problems and constraints reported by the microentrepreneurs? To answerthis question, we draw first on the GEMINI survey, which administered a secondaryquestionnaire (a close-ended survey) to a small sample of 256 firms that were representativeof the firms in the baseline study. Once again, this survey was conducted in just two SouthAfrican townships and can be applied only loosely to South Africa as a whole. Despite thislimitation, its findings contain valuable information on a recent and largely unresearchedsegment of the black business community and echo the findings of World Bank surveys

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administered in a wider geographic area. The supplementary survey provided informationabout the most important problem faced by businesses during three distinct periods in thefirm's life: at start-up, during periods of growth (if any), and at the time of the survey. Theseproblems, identified by the entrepreneurs as their most serious constraints, are summarized intable 3-15.

Table 3-15. Major Constraints Facing Black Microenterprises in Mamelodi andKwazakhele Townships, South Africa, 1990

(percent)

At During period At time ofConstraint start-up of growth the survey

Financing 28.8 20.4 27.8Government policy 10.9 6.8 10.2Inputs 3.2 2.9 2.2Labor 1.3 4.8 1.7Market 34.6 31.1 26.7Miscellaneous 5.1 8.7 8.0Space or location 5.1 9.7 10.8Tools and equipmnent 4.5 5.8 2.8Transport 6.4 9.7 9.7

Source: GEMN (1990).

Problems involving finances as well as those involving market difficulties are prevalent duringeach of the three periods of a firm's life, although problems involving market issues becomeless constraining as time passes. Problems with inadequacy or unavailability of shop spaceseem, however, to affect more firms over time.

We also use the World Bank survey of 632 microenterprises, which is based theentrepreneurs' own assessment of the importance of constraints. It gathered their responses intwo ways: in an open-ended question, it asked respondents to name the most importantconstraint they faced on starting up and while operating their business; it also asked them touse a ranked scale to indicate the relative severity of a list of predef£ned constraints in avariety of areas. This survey, with its broad coverage in ten districts, revealed a pattern ofconstraints similar to that found by the OEMINI survey: finance (no capital) and market-relatedissues (too few customers) are the first and second principal constraints affecting roughly thesame share of enterprises in both surveys. Space and locational constraints (premises toosmall, no shelter, sun ruins fruits and vegetables) are third in importanve. Unlike therespondents to the GEMIm survey, however, less than 3 percent of the dirms view regulation(government policy) as a problem. In some conservative municipalities, however, beingarrested too often affects up to 30 percent of enterprises.

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FINANCIAL CONSTRAINTS. In the GEMINI study, 17 percent of the problems at start-up involvea lack of operating funds (working capital). The percentage of proprietors listing a shortage ofoperating funds as the primary problem of the firm falls to 11 percent during periods ofgrowth and to 10 percent at the time of the survey. On the other hand, lack of investmentfunds (fixed capital) seems to become more important as time passes. Some 7.7 percent of thefirms listed this as their major problem at start-up compared with 7.8 percent during periodsof growth and 10.8 percent when the survey was conducted.

About 20 percent of the microbusinesses surveyed have received credit, a relatively highproportion compared with that of a similar population in Lesotho, where only 7 percent havereceived credit. Similarly low percentages are evident in other parts of the world. In fact, thesmallest firms in the world have extremely limited access to financing from the formalbanking sector. By and large, these small firms report their own savings and friends andfamily as the major sources of financing. Levy (1993) and Little, Mazumdar, and Page (1987)report evidence that access to financial resources from banks, suppliers, and so forth does notbecome common until the firm exceeds five employees and has been in existence for three tofive years.

Table 3-16. Financial Constraints Facing Black Microenterprlses in Mamneladi andKwazaklhele Townships, South Africa, 1990

(percent)

AFnancial At During period At time ofconstraint start-up of growth the survey

Lack of credit 4.5 1.9 6.8Lack of i-hvestmnent funds 7.7 7.8 10.8Lack of operational funds 16.7 10.7 10.2All funding and credit

problens 28.8 20.4 27.8

Source: BEMIN (1990).

Nonetheless, the findings point to the existence of a substantial unmet demand for financingand to variations in the type of financing needed over the life of the enterprise (see table 3-16). The credit needs of the 20 percent who have received credit are serviced by revolvingsavings groups, known as stokvels. The average member's monthly contribution is R88.35,which amounts to RI,060.20 a year (approximately US$425.00). Just under 80 percent ofstokvels receive monthly contributions from their members, although some contribute as oftenas daily and some do so only once a year. Stokvel funds are received once a year by over halfof the proprietors interviewed. Almost two-thirds of stokvel members use the funds forbusiness purposes; the rest use the funds for personal purposes, such as funeral expenses. Theaverage stokvel society has almost twenty-seven members and has been in existence for justover five years. These findings suggest that a viable indigenous structure exists to meet at

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least some of the credit needs of black microenterprises. The deficiencies are that stokvelsmeet only a limited part of these firms' needs for financing and offer only a limited array offinancial services (for example, they cannot provide long-term investment credit, which seemsto be most in demand during periods of growth).

MARKET CONSTRAINTS. A lack of customers is the most frequently cited market-relatedproblem at both start-up (t5 percent) and at the time of the survey (13 percent; see table 3-17). Not surprisingly, this percentage dips to only 3 percent of proprietors during periods ofgrowth. The increasing number of competitors is another oft-cited problem, with 5 percent ofproprietors considering this to have been their business's primary problem at start-up, 8percent during periods of growth, and 7 percent at the time of the survey. In the World Banksurvey, the rising cost of supplies is the dominant market problem identified by therespondents.

Table 3-17. Market Constraints Facing Black Microenterprises in Mametodi andKwazakhele Townsh/ps, SoW/a Africa, 1990

(percent)

Market At During period At time ofconstraint start-up of gromth the survey

Bad debt from credit 6.4 7.8 2.8Don't know what customerswant 3.2 2.9 1.7

Illegal competition 0.0 1.0 0.0Lack of product publicity 4.5 4.9 1.1Not enough customers 14.7 2.9 12.5Number of competitorsincreasing 5.1 7.8 7.4

Shoplifting 0.6 3.9 1.1AlU market problems 34.5 31.2 26.6

Source: asMIM (1990).

Market constraints exist because most microenterprises are competing within small, location-specific, low-income niche markets. New entrepreneurs now face few legal barriers toentering business and tend to do so as unemployment increases. As competition within a givenniche intensifies, markets in the broader economy become virtually closed given the locationof the new enterprise, quality factors, and the difficulty of competing with mass-producedproducts available from South African producers in the well-developed, formal sector. Indeed,over 75 percent of firms reported that in the past five years the overall demand for productslike theirs increased, as did the number of firms in their line of activity. Only 55 percentreported that their own volume of business increased over the same period. Apparently, newfirms are meeting much of the increased demand. When competitive pressures keep prices

- 26 -

down in a low-income, price-sensitive market, microentrepreneurs quickly feel the rising costof supplies. In an inflationary environment, prices cannot be adjusted easily. Presumably,firms in the light manufacturing industries, where the concentration of firms is low and skillsrepresent a natural barrier to entry, face less extreme competition, which allows them to growat relatively higher rates.

Black microenterprises are facing difficult structural constraints in South Africa. On the onehand, they have the extremely difficult task of identifying new, more broadly defined marketsand of gaining the skills needed to enter new niches and compete with long-establishedbusinesses in the formal sector. On the other hand, until general economic growth offers themopportunities to enter employment in the formal sector and to satisfy increased demand fortheir products, competition within limited market niches will continue to depress the incomeand welfare of the informal sector.

BUSINESS PREMISES AND TENURE ARRANGEMENTS. The vast majority-71 percent-ofmicroenterprises in the two townships surveyed by GEMINI are operated from the home, farfrom commercial traffic (see table 3-18). In general, commercial premises located near thesource of market demand are difficult to obtain. Half of the microenterprises operating outsidethe home do not have permission to occupy their sites.

Table 3-18. Location of Black Microenterprises in Mamnelodi andKwazakhek Townships, South Africa, 1990

Location of thefinn Percent offirns

Commercial district 7.0Home or homestead 71.1Mobile 9.0Roadside 10.7Traditional market 2.2

Source: GEMINI (1990).

The World Bank survey, which included a broader distribution of locations (township,homeland, urban central business district, and so forth) than the GEMINI survey, revealed thattwo-thirds of respondents who operate outside the home occupy their business premiseswithout secure tenure: half occupy them Vwithout permission-almost half operate from opensites on the street-and a further 15 percent base their occupancy only on the permission ofthe land owner.

These results are, in part, a legacy of apartheid planning, which strictly restricted blacks fromestablishing businesses in white urban areas and central business districts. Today, fewemerging black enterprises can afford space in town, and appropriately sized and priced

- 27 -

premises are simply not available. Credible attempts have been made (notably by the SmallBusiness Development Corporation) to remedy the problem by establishing small business"hives.' Unfortunately, this space is often on the city fringes away from the bulk ofcommercial traffic and, as such, does not satisfy the need to be near markets.

REGULATIONS. The World Bank survey asked whether regulation is a serious constraint fortoday's black microenterprises. The results are bound to be controversial because it is difficultto determine the number of businesses that never got started because of the perceivedimportance of regulations. Although both the World Bank and the GEMINI surveys indicatethat existing entrepreneurs attribute little importance to regulatory issues, the World Banksurvey offers further insights.

Despite the extensive deregulation of business activity, several practices and laws continue topose actual or potential constraints for microenterprises:

Municipal rules concerning street trading. Some municipalities maintain strictcontrols, declaring large portions of the city center out-of-bounds to street traders.Although this situation will be affected by the Businesses Act, in more conservativeareas harassment of traders is and will undoubtedly remain a problem.

H Health, safety, and labor codes for the workplace. Although rarely enforced in theblack enterprise sector, numerous health, safety, and labor laws are on the books andimpose costs of compliance that are potentially prohibitive for very small businesses.

* Taxation. Regulations under the new value added tax law impose high compliancecosts on very small businesses.

Nonetheless, when asked to name spontaneously the most important constraint faced at thestart-up of their business, only 12 percent of respondents to the World Bank survey mentionedfactors related to regulation (see table 3-19). Most of their responses relate to being arrestedtoo often, although a very small number (about 3 percent of all firms surveyed) concern finesand confiscation of goods or difficulty getting a license. Regulatory problems figure even lessprominently in the day-to-day operations of their business: 7 percent of the respondents citedregulatory factors as their most important problem. Again, arrests are the dominant issue (6percent). If problems in these areas are regarded as relatively unimportant by mostentrepreneurs, they are likely to become even less so as a result of the Businesses Act, whichwill abolish licensing for most categories of businesses, prohibit confiscation of traders'merchandise, and generally reduce opportunities for official harassment. Market conditionsand lack of financing are far and away regarded as the most binding constraints (appendix Ipresents the entire range of spontaneous responses to questions about constraints).

To evaluate the extent to which enforcement of regulations interferes with the day-to-dayoperations of microentrepreneurs, respondents were asked to report on the frequency of visitsby government officials-police officers and other officials-over the past three months.

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Again, the data suggest that microentrepreneurs are not overly burdened by regulatorymatters. Well over 90 percent of respondents said they had not had any encounters withgovernment officials in the past three months. More than three-quarters of the visits made tothe small minority of firms that had been visited were related to the enforcement of licensesand the confiscation of goods, activities that will no longer be sanctioned under the BusinessesAct (with some exceptions on licensing). A further indication of the limited impact thatregulation has on microentrepreneurs is the small number who seek to obtain trading licenses.Only 12 percent of respondents said they had acquired licenses when starting their business.

Table 3-19. Percentage of Respondents Citing Regilation as Their Most ImportantProblemn, by Pliase of Operation, in South Africa, 1992

At At tine ofType of problem start-up the survey

Arrested too often 9.0 5.5Fines and confiscation of merchandise 1.5 1.1Don't know how to get a license 1.4 0.2Takes too long to get a license 0.4 0.0All types of regulation 12.3 6.8

Source: Schacter (1992).

These surveys indicate that the majority of encounters with government officials regardingregulation are with the South African police, municipal police, and homeland police, whichstrongly suggests that police, as opposed to the officials charged with enforcing taxation,labor, health, and other business regulations, actually regulate the daily activities of manysmall-scale black businesses in South Africa. The reasons for encounters with the police varyacross subsector. In the case of retail microenterprises, the absence of a license is theprincipal motivation. In the case of taxi cabs, it is aggressive enforcement of trafficlaws-fines and stopping of taxis for overloading, for the condition of the vehicle, or forfailure to obey traffic signs. Taxi operators see this as being largely racially motivatedharassment, even though there is, in fact, evidence of traffic violations.

The microenterprise survey revealed some interesting regional differences in how blackmicrobusinesses interact with law enforcement and other authorities. The data tend to confirmthat although central government policies toward black enterprises have changed dramaticallyin recent years, old attitudes and practices die hard, and pockets of resistance to the official,more liberal attitude toward black enterprises remain well entrenched at the local level. Inconservative areas, microentrepreneurs continue to experience harsh forced removals, arrests,fines, and confiscation of goods. Table 3-20, which is extracted from respondents' rankings ofpredefined constraints, shows the proportion who rate harassment by officials as an importantproblem. It also shows the share of survey respondents who have been forced to move.

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As indicated in the discussion of business premises, harassment problems are aggravated bythe absence of secure business premises. Half of the respondents who run businesses outsidethe home occupy their premises without permission, undoubtedly because almost half (48percent) run their businesses from open sites in the street, and a further 15 percent base theiroccupancy only on the permission of the landowner.

Table 3-20. Regional Variation of Enprcement Problems in Soath Afriaa, 1992

(percent)

Location Harasnen lby officials Forced removal

Besters 18.0 4.0Boksburg 46.3 17.0Durban 22.4 29.0Inanda 10.4 0.0Mafikeng 26.1 10.0Nqutu 16.3 10.0Soweto 18.1 0.0Umiazi 5.5 6.0

Al areas 18.2 7.0

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

The findings on perceived constraints are relevant for four reasons. First, entrepreneurs donot consider regulation to be as important an impediment as issues of finance and markets.Second, the problem appears to be the legacy of racial bias, represented by police harassment,which varies with the attitude of the municipality, rather than the enforcement of regulationsper se. Third, the absence of appropriately located market infrastructure (marketplaces forlegal rental of space) apparently contributes to the harassment of informal vendors. Finally, tothe extent that a new constitutional settlement may create more powerful regional authorities,certain local authorities are much more likely than others to adopt harsh policies towardentrepreneurs, particularly the smallest and weakest.

Policy Implications

Simply put, South Africa's microenterprise sector is highly constrained by the restrictions thatapartheid placed on the establishment of black businesses, on black skilled employment, on

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black educational opportunities, and on the spatial arrangements of South African cities,which separated blacks and their businesses from the white urban areas where markets areconcentrated. Even in the townships, commercial premises are inadequate.

The ex ante expectation of this research was that given these constraints, the research wouldfind the black microenterprise sector to be without dynamism and to be principally a residualsource of employment (not a dynamic employer) for many years to come. However, theresearch results indicate that despite severe constraints, cautious optimism is justified. First,dynamic growth is found among small light manufacturing enterprises in which firms areslightly larger and have a longer history, indicating some degree of sustainability. Second,although they are low, incomes in the sector (especially among women) make importantcontributions to household incomes overall, even though they are not the principal source ofincome. Thus achieving dynamic growth in employment is not as critical as improving thecontribution that these businesses make to household income and welfare.

Considerable caution must be taken, however, when discussing the sector's potentialdynamism. Although more firms are growing in South Africa than in similar Africancountries, this is due in large part to a spurt of growth following the removal of apartheidrestrictions. Growth is concentrated in the youngest firms with the smallest base ofemployment. International experience tells us that the survival rate of new firms tends to bequite low. In Asia, Latin America, and West Africa, rates at which surviving firms graduatefrom microenterprises to become dynamic small and medium enterprises is, on average, 50percent; in Eastern and Southern Africa, it is only about 10 percent (Liedholm 1992). Giventhis experience, it would be unwise to assume that the growth and pockets of dynamismobserved in the early days following deregulation can be sustained over time. Indeed, giventhe constraints facing South kfrican black microenterprises, deregulation alone will not ensurelong-term growth.

For policy purposes, the black enterprise sector has two distinct roles that deserve to besupported in any project or policy intervention: first, as a residual employer with an importantrole to play in improving the welfare and alleviating the poverty of black households in SouthAfrica and, second, as a source of some dynamic and potentially dynamic firms that have arole to play in creating wealth and employment.

According to Liedholm and Mead's (1987) research on productivity, as microenterprises makesmall increases in employment, productivity improves dramatically and in fact exceeds that ofmuch larger enterprises. This is a powerful result that justifies support for efforts to developthe long-run potential of these enterprises. A further rationale for above-average efforts toprovide support is that South Africa's microenterprise class is unique in that it has beenvirtually cut off from the business mainstream, through legislation and practice, for the betterpart of this century.

Policy and project interventions should focus on alleviating the principal constraints identifiedby the entrepreneurs themselves: competitive market conditions and lack of access to

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financing. Moreover, an institutional framework should be designed that supports the blackmicroenterprise community with broader access to financial, training, and technical assistance.

ACCESS TO MARKETS. Issues related to markets are largely a function of excessivecompetition in low-entry sectors such as retail where microenterprises are concentrated, on theone hand, and the difficulty of competing with sophisticated, well-established South Africanbusinesses, on the other. The key is not to restrict competition but rather to expand the rangeof market opportunities for these businesses. Possible options include the following:

* To develop market infrastructure closer to central business districts where purchasingpower is concentrated.

* To develop skills and on-site assistance to improve the quality of products. Thisshould be especially so for manufactured goods that, in the survey, show the highestdegree of dynamism because they create employment and generate turnover.

- To reexamine the concept of buyer and production cooperatives, which are supportedby the African National Congress and the Confederation of South African TradeUnions. Although they have achieved limited success, these experiments have thepotential to realize the benefits of bulk buying; to secure a committed clientele formarketing, common marketing, and administrative overhead; and to obtaincoordinated support from assistance agencies. They thus deserve a second look.

ACCESS TO FINANCIAL SERVICES. Priority should be given to expanding the availability ofappropriate financial services, perhaps building on the indigenous stokvel base. Access tofinancing is a tricky issue in that bank financing is not readily available to microenterprises inmost of the world's financial systems. Evidence of financing constraints by small, short-livedfirms need not imply that imperfections in financial markets warrant attention bypolicymakers. However, notable successes have been achieved in countries such as Indonesia,for example, where microenterprises have broad access to financing from banks that operateon purely commercial, profit-oriented principles. A key element in the success of theseschemes has been the strong linkage between microenterprise financing and the formalfinancial system, on the one hand, and the strong savings associated with the mobilizationeffort, on the other. Some of these schemes have built success on group lending as a :neans toreduce the risks and transactions costs associated with small loans. Serious efforts should bemade to understand the structure of these schemes and to see if it could be applied to SouthAfrica.

INSTITUTIONAL EFFECTIVENESS. The issue at hand is to design an institutional framework thataccords the black microenterprise community much broader access to financial, training, andtechnical assistance. Organizations closely associated with apartheid have more contact withmicroenterprises than other organizations in the formal sector, and losing their resources

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altogether is not feasible. Many nongovernmental organizations have made laudable effortsthat have won respect within small communities of businesses, yet their efforts have had littleimpact. A possible approach to increasing institutional effectiveness would be to devisefinancing and training programs in which larger organizations could effectively wholesalefinancial (guarantee, equity) and technical assistance services (including the training of trainersand institutional back-up support) to smaller, qualified nongovernmental and community-basedorganizations that would retail them, in turn, to the final beneficiary.

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4. A DETAILED LA)OK AT MORE ESMABLISHED BLACK BUSINESSES

IN SOUTH AFRICA, MORE ESTABLISHED BLACK ENTERPRISES are distinguished frommicroenterprises less by their size, largely because the legacy of apartheid has ensured thatvirtually all black enterprises are small, than by their base of financial and human resources,which prepare them better to play a dynamic role in creating employment and wealth. Thesurvey targeted the largest, most sophisticated, and most well-established firms in order totake an in-depth look at their characteristics and constraints. These so-called small andmedium enterprises turned out to have more assets, more training, more education, moreskills, more ability to move up-market, and higher profitability and turnover than the averagemicroenterprise. Thus they are considered to be small and medium enterprises with perhapsmore short- to medium-term potential to be integrated into broader South African markets.

Methodology and Overview

Data on more established, dynamic (or potentially dynamic) black firms were gathered in fourfirm-level surveys conducted for the World Bank in 1992 and are recorded in detailed reports.The following paragraphs summarize the constraints that entrepreneurs who run these firmsfeel affect their businesses the most.

The surveys covered the country's three major urban areas and their environs: Cape Town,Durban, and Johannesburg. The five survey instruments, although not uniform, used open-ended and closed questions to obtain detailed information on a variety of constraints. All thequestionnaires also contained a summary question that asked respondents to rank the relativeimportance of a wide-ranging list of constraints intended to approximate the universe ofsignificant obstacles facing black entrepreneurs. The four subsectors examined (retail, taxi,construction, and garment manufacturing) were selected for two reasons: first, they arerelatively undemanding from a technological point of view, and second, with the exception ofthe taxi industry, they have modest requirements for start-up capital, thus making them wellsuited for small black entrepreneurs, who often lack entrepreneurial experience and havelimited financial resources. Indeed, data on the South African informal sector suggest thatretailing, construction trades, and garment manufacturing are among the leading areas ofblack enterprise activity. The taxi industry is particularly interesting because it is perhaps theonly sector of black business to have a significant impact on the economy as a whole.

Although the survey targeted the largest and most well-established enterprises, differentcategories of enterprises clearly emerged based on their demonstrated dynamism. Therefore, aseparate analysis attempted to distinguish constraints facing the most dynamic firms-thosewith the highest potential-from those facing the least dynamic firms-those that mostresemble the microenterprises discussed in the previous section. The criteria for defining abusiness as dynamic are turnover, profitability, sustainability, employment, and thereplacement value of capital invested in the business as assets. The dynamic enterprises

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include fast laners, which are pushing ahead and achieving ever-higher levels of theindicators. A subset of the fast laners are the high flyers, which are the top 10 percent offirms in the survey. Middle laners and slow laners are potentially dynamic; they have a lowerlevel of achievement than fast laners and have reached plateaus from which they have notexpanded because of limited internal capacity or external constraints. Survivalists areenterprises that, despite meeting the minimum criteria tor being potentially dynamic, do notfall into any of the above categories and are simply surviving.

Only about 20 percent of the enterprises in each of the subsectors cat, be considered fastlaners. and between 8 and 14 percent are high flyers; that is, businesses that are pushingahead through a combination of high turnover, profit, employment generation, and assets (seetable 4-1). The majority-about 60 percent of each of the subsectors-are survivalists. Theremainder are not growing despite their potential to do so.

Table 41. Breakdown qf Black Small and Medium Enterprises, by Stubsector, in Cape Town, Durban, andJohannesburg, South Africa

(percent)

Potentially dy-namic Dvnamic TotalSubsector Survivalist Slow laner Middle laner FasJ laner High flyer number

Retail 58.00 14.00 7.00 21.00 14.00 100Construction 56.18 17.98 6.74 19.10 12.36 89Taxi 59.99 6.32 14.74 18.95 8.42 95

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

CHARACTERISTICS OP THE OWNERS OF MORE ESTABLISHED ENTERPRISES. Before turning tothe characteristics of each subsector, a few general comments are worth making about theowners of small and medium enterprises. More established black businesses are, on thewhole, far less marginalized from the mainstream economy than are microenterprises. Thedemographic profile of their owners stands in stark contrast to that of owners ofmicroenterprises.

* In education, they average ten years of formal schooling compared with six years formicroentrepreneurs, and about 60 percent of those who own dynamic firms havepursued post-school certificates or diplomas.

* In previous work experience, about 60-70 percent of construction and retail ownershad left employment, had served an apprenticeship, or both before opening their ownbusiness. The opposite seems to be true of microentrepreneurs, many of whom beganwith no previous experience.

* In motivation, most had entrepreneurial (rather than survival) motivations for startinga business.

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* The average owner is forty to forty-five years old, about ten years older than theaverage microentrepreneur, who is between thirty and thirty-five.

The level of assets invested also points to capital accumulation even during the apartheidperiod, when most of these enterprises were established (the average age is about sevenyears). These differences translate into substantially higher levels of turnover and profitability.Among the dynamic enterprises, fast laners have particularly high levels of investment,although employment (an average of about five employees) remains low, even among themost dynamic firms. In general, these enterprises generate little employment.

CONSTRAINTS. Rates of bank use vary among subsectors. Financing is less of a constraint forthe most dynamic businesses, however, because new investments can be financed fromearnings retained as a result of high rates of profitability. For the potentially dynamic slowand middle laners, however, financing is often an important constraint to expansion.

Across all subsectors, market factors-that is, strong competition-are a major problem (seeappendix 1). This was somewhat unexpected since more established businesses presumablyhave access to a broader range of markets and opportunities to diversify than less dynamicones, even though they face limitations from the top-from sophisticated white South Africanbusinesses-as well as from the bottom-from black microenterprises. Market factors areperceived to be particularly difficult today because of the combination of high inflation andrecession, and they are given high priority by the survey participants. A variety of internalconstraints (such as access to skilled and reliable labor and management) and structuralconstraints (such as access to land for construction contractors) restricts both the access thateven the most dynamic black businesses have to broader South African markets as well astheir ability to expand.

Crime and violence are also perceived to be a substantial constraint, especially by fast laners.As with microenterprises, these more established enterprises do not perceive regulation, asdefined by licensing, to be a problem, although the most dynamic retailers and garmentmanufacturers, in particular, do consider labor laws and administration of the value added taxto be constraints.

The Retail Subsector

Throughout the 1960s and 1970s, the policy of deliberately containing retailing in formaltownships spurred the sustained operation and new development of hidden informal retailactivity. During the 1980s, the number of people entering all sectors of the informaleconomy, including spazas, was swollen by the worsening recession, rising unemployment,and the retrenchment of workers. Until January 1, 1989, all spazas were illegal and operatedcontrary to laws prohibiting the use of residential premises for business purpos -s. In 1989,new measures allowed residences to be used for businesses (including spazas) for the firsttime, albeit with the caveat that such activities must be licensed.

Today, home enterprises are estimated to function in at least one in every five households.The initial flurry of deregulatory measures occasioned much speculation about the potential

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contribution that spazas could make to development, with some observers seeing them aslogical stepping stones to the growth of larger retail enterprises. Optimism was fueled byestimates that the nation had as many as 66,000 spazas in 1990, with an overall annualturnover in the range of R3 billion to R7 billion, which would have matched the combinedturnover of the country's two leading supermarket chains. Contradicting this favorablegrowth-oriented picture is the reality that spazas are part of the informal economy of survivalin South Africa. Participants have few skills to support a business. Barriers to entry are low,and competition keeps returns low and near subsistence levels. Moreover, prospects for theevolutionary growth and long-term viability of spazas are made even more bleak in the wakeof new competition from the increasing number of shopping complexes being erected in ornear townships.

Both the formal and informal retail sectors are dominated by large numbers of smallestablishments (99 percent of the total); in economic terms, however, the formal retail sectoris highly concentrated, with one operating company and two holding companies accountingfor nearly one-third of employment in the formal sector. Retail trade, together with thecatering and accommodation sectors, accounted for approximately 12 percent of formal sectorcGDP during the 1980s. Growth in retail, catering, and accommodations during the latter partof the 1980s lagged behind the already sluggish growth of the economy as a whole. Theoutlook for the 1990s, by most accounts, remains grim, given a weak economy.

ICHARACTmRIsrcs. The majority of the dynamic and potentially dynamic black retailerssurveyed are registered and, compared with the survivalists and microenterprises, hold aprivileged position in terms of their turnover, profitability, and level of assets held at start-up.They also show a very high level of investments, in fact higher than all other groups not onlyin retail but in other sectors as well (see table 4-2). A far larger proportion of the fast lanersand high flyers in the retail sector operate specialty shops. Further, no firm in the high flyergroup operates a spaza, while 27 percent of the survivalists operate one. The uniqueness ofspecialty shops among the most dynamic enterprises indicates a promising opportunity todiversify. Apparently, the spaza must evolve into another form if the enterprise is to becomedynamic.

A relatively large portion of retailers (36 percent) have received credit in the past. Fast laneenterprises have received both larger loans and more overdraft facilities than other groups ofdynamic enterprises. Not surprisingly, more fast lane enterprises than less dynamic firms holdproperty that they can use to secure loans. Very few survivalists have property that they canuse as security, and investments by survivalists are very low compared with those of all othergroups. The entrepreneur's own savings are a major source of financing for 90 percent of allenterprises. At start-up, personal savings were the major source of financing for 96 percent ofthe retail enterprises, and family and friends were a major source for 43 percent. Currently,commercial banks and the Small Business Development Corporation are a major source offinancing for 15 and I I percent, respectively, of the enterprises. In general, finances are lessof a constraint for more dynamic enterprises because their high profits and retained earningspermit them to self-finance investments and growth.

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

(percent)

Poienially dvnamic DynamucSubsec or Srirvivalist Stow laner Middle laner Fast laner High flye 1 A

Characteristics offinnNumber of persons

employed 1.85 4.00 5.00 4.81 4.30Age of the firm

(years) 6.23 10.07 5.00 7.76 5.60Type of firm (percent)

General dealer 33.90 78.57 85.71 57.14 69.20Spaza 27.40 7.14 0.00 4.76 0.00Specialist 38.70 14.29 14.29 38.10 30.80With property for

security 11.30 21.43 28.58 42.86 30.80With electricity 90.30 100.00 100.00 90.48 84.60

Characteristics oj ownerAge (mean years) 47.53 47.64 39.71 46.57 46.00Education (years of

schooling) 8.38 8.21 8.00 9.10 9.70Business experience (percent)

Left employment to enterbus. .oss 37.10 57.14 42.86 61.90 38.50

Has previous businessexperience 17.70 28.57 0.00 33.33 46.20

Learned from anotherbusiness 12.90 7.14 14.29 i3 81 38.50

Financial characteristics(rand)

Turnover 7,019.68 20,857.14 23,285.71 49,680.95 60,923.00Profit 1,285.74 3,587.93 9,876.00 13,707.19 17,123.00Assets

At time of start-up 10,100.16 31,285.71 15,178.57 35,978.57 44,500.00At timne of survey 13,086.53 22,042.86 40,714.29 78,885.90 99,551.08

Investment 11,847.10 27,357.71 40,142.86 95,574.29 126,011.00Cost of supplies 3,534.19 13,085.71 10,142.86 30,923.81 37,538.00Value of own funds 7,875.69 38,642.71 12,985.71 32,428.57 37,692.31Value of bank loans 1,733.08 5,070.86 4,999.43 12,571.90 15,307.23Overdraft facility 438.69 142.71 0.00 4,619.90 7,976.77

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

Despite their relatively high levels of education and experience, 85 percent of the sample feelthat specialized training in business would be useful.

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CONSTRAINTS. Table 4-3 indicates the constraints faced by the more established, dynamic andpotentially dynamic retail firms. The figures reflect the mean of a weighted score that rangesfrom 1 to 5, whereby I is low and 5 is high. The table presents the most strongly feltconstraints-those that received a score above 3.5-and important but secondaryconstraints-those that received a score between 3.2 and 3.5. Data on the full range ofconstraints are presented in appendix 1.

Table 4-3. Constraints Facing More Establisihed Black Retail Enterprises in Cape Town, Durban, andJohannesburg, South Africa

(score)

Potentially dynamnic DynamicSubsecior Survivalist Slow laner Middle laner Fast laner High flyerA

Business enviromnentGangsters 3.53 3.28 .. 3.62 3.62Theft 3.95 3.78 4.00 3.69 3.69violence 3.98 3.92

FinanceAccess to loans 3.20 .. 3.29

MarketCompetition .. 3.21Cost of equipment .. .. .. 3.23 3.23Cost of materials 3.26 .. 3.29 3.23 3.23Cost of supplies 4.02 3.93 4.71 4.31 4.31

RegulationCompany tax .. .. .. 3.23 3.23VAT administration 3.19 .. 4.29 4.31 4.31

Slls and laborAccounting .. 3.29 3.14Calculating costs .. .. 3.14Cost of labor .. .. 3.43Reliable labor .. .. .. 3.46 3.46Skilled labor .. .. .. 3.62 3.62Technical skills .. .. 3.43 3.23 3.23

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

The most striking feature of these scores is that dynamic enterprises score market-relatedissues as high as survival-level and microenterprises do. Rather than being phrased as too fewcustomers or too much competition, the issue surfaces as the high cost of supplies (probablyresulting from inflation), which squeezes margins when markets are too competitive to absorbincreases in price easily. The retail sector illustrates a broader issue that recurs across sectors:the impact of deregulation. Until the recent deregulation, the number of licenses issued for

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retail and liquor establishments was strictly controlled. The few enterprises that did exist werehighly profitable. When retail licenses became freely available, during the past five or sixyears, many black entrepreneurs made heavy investments, competition increased, and profitsplummeted. Today, a frequently heard refrain among black South African businesses isreflected in the following quote:

For as long as the government had the licenses for itself and its friends, there was strictcontrol on numbers. Now that ordinary blacks are being allowed in, the government isissuing licenses like confetti, hoping that we will go under and they can take over again.They never wanted us to succeed.

Black retailers also face competition from above. With the scrapping of the Group Areas Act,successful white and Indian retailers, along with big supermarkets, can now enter townshipsand directly challenge black businesses there. The second most striking constraint is related tothe business environment and surfaces as lack of civil order: theft and violence as well asgangsterism.

Among the most dynamic enterprises, issues related to administering the value added taxcome to the fore. The shortage of skilled labor is highly important to the high flyers,however, and access to skilled labor is important to all dynamic enterprises. The shortage ofreliable labor is also a problem for expanding enterprises.

The Transportation Subsector (Black Taxis)

The presence of racial zoning policies has given South Africa's black taxi industry a uniquehistory. The apartheid policies enshrined in the Natives (Urban Areas) Act of 1923 and theGroup Areas Act of 1950 forced most blacks to the fringes of urban areas. This artificiallywide separation of home from workplace has made commuting long distances an integralfeature of life for South Africa's urban black population. (In 1985, 80 percent of blackcommnuters spent 2.5 hours traveling to and from work daily.)

In 1930, the government passed the Motor Carrier Transport Act, which created a bus andrail transport monopoly in major cities and, in the absence of competition, inflated the cost oftransport. In 1952, the state began to subsidize urban transport for black workers with anemphasis on trains, but independent bus operators and taxi services continued to emerge andflourish. Local taxi associations fought the transport monopoly, but their campaigns wereweakened by a lack of collective action. It was only in the 1980s that black tax. operatorsunited under the South African Black Taxi Association (SABTA) and in some townships forgeddeliberate links with the mass democratic movement.

A major turning point in the fortunes of the black taxi industry occurred when SABTA

effectively challenged a 1983 effort to ban the kombi taxi, which the Welgemoed Commissiondescribed as a "particularly strong competitor for the existing bus or train services."Following popular protests led by SABTA and waged by the mass democratic movement andparts of the private sector, in 1985 the government withdrew the restrictive draft bill based onthe Welgemoed Commission report.

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Today, the black kombi taxi (minibus taxi) industry is the dominant form of blackentrepreneurship in the South African transport sector. Few owners are formally registered,but all are subject to a limited degree of government regulation and to strict self-regulation byprivate industry associations. Although severely limited in their coverage, official data showthat transportation (which is dominated by kombi taxis) generated one-tifth of the entireinformal sector's contribution to GDP, which in turn translated into 1.7 percent of totalrecorded (formal sector) GDP in 1989. Black-owned transport firms accounted for virtuallyall-96 percent-of this activity.

Table 44. Characteristics of More Establishied Black Taxi Enterprises in Durban and Johannesburg, South 4frica,by Subsector

(percent)

Potentially dynainic DynamicSabsector Survivalist Slow, laner Middle laner Fast laner High.f'lye

Characteristics offirmNumber of persons employed 1.43 2.17 1.63 3.44 3.88Age of the firm (years) 5.93 6.83 8.00 6.06 7.88T ype of firm (percent)

Long haul 8.60 16.67 0.00 22.22 25.00Peak commute 56.90 50.00 75.00 72.22 75.00Feeder 13.80 0.00 37.50 27.78 50.00

Number of vehicles 1.57 2.50 2.00 3.11 3.50

Characteristics of ownerAge (mean years) 42.59 42.17 35.88 42.72 45.00Education (years of schooling) 8.39 7.83 7.00 9.94 7.38Working full time (percent) 82.80 83.33 62.50 72.22 75.00Business experience (percent)

Father in taxi business 1.70 0.00 12.50 16.67 12.50Father in business 8.60 16.67 12.50 22.22 37.50

F-inancial characteristics(rand)

Turnover 2,881.17 6.916.67 9,115.00 24,983.33 38,775.00Profit 1,769.29 1,000.00 7,272.29 15,922.50 22,070.54Assets at time of survey 61,985.98 103,946.00 66,352.63 116,087.40 134,157.90Overhead 4,939.61 6,515.83 4.068.88 8,564.87 9,359.29Mean value of

investment loans 4,441.07 19,666.67 3,124.88 11,220.33 7,924.88Mean value of working

capital loans 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).

CHARACTERISTICS. The industry has been among the most lucrative: average monthly incomeamong black taxi operators was R2,800 in 1989. As table 44 shows, the turnover and profitsof the dynamic and potentially dynamic black businesses are much higher. In its relatively

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short, fifteen-year life span, the industry has managed to capture the single largest share ofthe black commuter market, outpacing bus and train services and accounting for about one-third of all trips taken by black commuters. The industry was highly regulated through themid-1980s, but the government implemented a comprehensive deregulation in 1987, whichproduced large numbers of new entrants, fierce competition that took the form of often-violenttaxi wars, and high entry costs. The industry, in an effort at self-regulation, began imposingan informal but strictly enforced system of joining fees, sometimes as high as R15,OO0, thatnew operators had to pay for the right to work in specified markets.

A 1989 estimate put the number of black-owned kombi taxis at 50,000, representing a morethan threefold increase since 1980. The industry is highly organized; there are two majorindustry associations, each with numerous affiliated route associations. The bulk of operators,who ply short-distance, peak-hour commuter routes, are served by SABTA; transportenterprises serving long-distance routes are represented by the SoLth African Long DistanceTransport Association (SALDTA).

Much has been said about SABTA'S ability to organize its market power into alliances betweenformal financial intermediaries. Lending arrangements are based on collective guaranteesfacilitated by SABTA, which provides the financial institution with adequate securities to allownormal credit requirements to be relaxed. The research indicates, however, that the guaranteearrangement, a large up-front deposit (15 to 30 percent that does not reduce the principalvalue of the loan), has been as much a hindrance for some entrepreneurs as it has been anassistance for others. As vehicle prices have soared, increasing more than sevenfold since1980, the amount of self-financing has increased as well. Only about 10 percent of theenterprises interviewed currently have a bank loan.

As in other sectors, employment in the taxi industry is small. The majority of taxi businessesconsist of one or two taxis, and average employment is about two persons, although the fastlaners and high flyers have three or four taxis with three or four employees. The surveyrevealed a direct correlation between the number of years the entrepreneur has owned abusiness and the size of the business: most persons owning three or more taxis have ownedthe business more than ten years. Among the high flyers, about 40 percent have fathers whohave been in business and another 12 percent have fathers who have been in the taxi business,which indicates the importance of an entrepreneurial background.

CONSTRAINTS. Taken as a whole, the top four problems-those rated 4 or 5-are the high costof vehicles (cited by 69 percent), township violence (68 percent), competition from other taxis(58 percent), and taxi wars (50 percent). Table 4-5 indicates the constraints faced by taxientrepreneurs at all levels of development. The data are also presented in detail in appendix 1.

The high price of vehicles in South Africa is, in part, the result of policies that protect thelocal motor vehicle industry from foreign competition. Although this issue is beyond thescope of this study, access to financing and competitive pressures are closely relatedconstraints. Financing is needed to purchase the large, bulky investment required by a kombitaxi. Competitive pressures make it difficult for individuals to accumulate capital to purchasevehicles or to repay short-term bank loans. Let us look at these issues.

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Table 4-5. Constraints Facing More Establisihed Black -.ai Enterpnses In Durban and Johannesburg, Soude #ea

(scoe)

Potentially dvnomic _ ynamicSt bsector S"rvivalist Slow laner Middk laner Fast laner High flye

Business environnentCompetition with other taxis 3.69 3.50Law enforcement .. .. 3.63Political uncertainty .. 3.17 3.38Taxi wars 3.67 3.67 .. .. 3.25Township violence 3.83 3.50 3.88 3.67 4.10

Finance

Acces to financing .. .. .. 3.11

MarketDifficult to get a route 3.34 3.67 3.25Difficult to increase fares 3.24 3.17 3.75 .. 3.13High cost of vehicles 4.10 3.17 3.88 3.33Inability to get more work .. .. 3.50Ranking facilities 3.19 3.67 3.38Steep hire purchase payments .. 3.67

Skils and laborBusiness skills .. .. 3.38Skilled drivers .. 3.33

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

Kombi taxis have competed very successfully with privately owned bus companies andrailways that are subsidized by the government. The kombi taxi has filled a market nicheamong commuters who are willing to pay more market-related fares for better and safertransport (trains have been subject to severe politically inspired violence). However, as busand rail companies have had escalating operating losses and begun cutting certain routes,kombi taxis have increasingly captive markets and are under pressure to provide an affordableservice to customers, including commuters who are used to using subsidized transport andwho cannot afford to pay market-related tariffs. Tariffs for a particular route are decided notby each operator on the basis of costs but by the association to which he belongs. Theassociation is subject to community pressure. As a result, fares are set at as little as 40percent of what they should be.

The result of the squeeze on profit margins in the taxi industry is an increase in bad debts andrepossessions. Deposits required by financial institutions from taxi operators on new vehicleshave increased from 25 percent to around 50 to 60 percent. Monthly loan payments can reachas high as R3,200, whereas the average taxi operator can afford to pay no more than R2.500.Indeed, half the survey respondents believe their fares are inadequate to remain profitable.

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However, a large discontinuity in profitability exists between the dynamic fast laners/highflyers, on the one hand, and the potentially dynamic enterprises, on the other. Dynamicenterprises report annual turnover of R25,000 to R38,000 compared with the potentiallydynamic middle laners, which have average annual turnover of only R9,000. The preferencegiven to better established firms that are members of taxi associations accounts in part for thedifference. Long-established members can obtain fare increases and profitable routes moreeasily. In some cases, older members are already established in the most profitable routes. Asa consequence, the cost of vehicles and access to financing (ranked less than 3.5) are lesssevere constraints for fast laners and high flyers than for other levels of enterprise, whichranked the cost of vehicles nearly 4.0.

Other market issues (difficult to increase fares, difficult to get a route, inability to get morework, ranking facilities) also figure prominently for survivalists and slow and middle laners,who have difficulty getting a foothold in a restricted and already saturated market. These arelow-priority issues for fast laners and high flyers. Although the scarcity of ranking facilities isa tractable infrastructure problem, excessive competition is the root issue.

The low rate at which firms diversify out of the kombi taxi market and into bus, freight, andother transport sectors is determined, in part, by continued regulation. For example, tenderingin the subsidized long-haul bus sector requires individuals to negotiate complicated forms andapplications and to provide detailed information. Mini-buses must be a maximum of two yearsold to qualify and have at least sixteen seats, thus excluding many existing operators. Severebarriers to entry and constraints-in the form of permits-on freight operations began to bephased out in July 1992. Trade associations of black taxi owners are making notable efforts totrain owner drivers to clinch freight and distribution contracts with large corporations.Providing business linkages to enable black transport operations to be involved in the freightand bus subsector would ensure that these businesses have broader scope for expansion andare not limited to transporting black passengers or goods within the townships.

The most dynamic enterprises cite township violence as their most severe constraint, followedby market (competition) issues, such as taxi wars and the difficulty of increasing fares. It isunclear whether the most dynamic enterprises are protecting markets in which they arealready established or if their expansion is challenged by the threat of new entrants who areprepared to fight to get a foothold in the market. In any case, taxi-war violence is onemanifestation of the limitations placed on new entrants to the market.

Middle and slow laners indicate cost factors-the high cost of vehicles and steep hire purchasepayments-as primary issues. It can be inferred, however, that these are an extension ofmarket issues, since competition produces high overheads that, in turn, squeeze margins at atime when prices cannot t e raised. In addition, entrepreneurs in these stages of developmentalso cite issues related to rcstricted entrance to the market (difficulty getting a route, shortageof ranking facilities, taxi wars, and competition with other taxis).

Survivalists are concerned with cost factors (the high cost of vehicles) and market factors(competition with other taxis, difficulty getting a route, and shortage of ranking facilities).However, their concerns are distinguished from those of fast laners in that their problems arerelated to getting a foothold in a restricted market, as is the case with the middle and slowlaners, rather than to market competition per se.

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Table 4-6 Charavteristics of More Established Black Construction Enterprises in Cape Town. Durban, andJohannesburg. South Africa, by Stubsector

(percent)

P&Lenmiallv dynamic DynamnicSubsector Survivalist Slow laner Middle laner Fast laner High flyer'

Characteristics offinnNumber of persons

employed 2.20 5.81 4.67 4.53 5.50Age of the firn (years) 7.50 6.63 6.00 5.47 6.90Type of firm (percent)

General contractor 20.00 62.50 40.00 56.25 63.64Specialist subcontractor 16.00 18.75 40.00 12.75 18.18Labor-only subcontractor 64.00 18.75 20.00 25.00 18.18

Characteristics of ownerAge (mean years) 40.86 41.88 38.17 39.35 41.18Education (years

of schooling) 8.14 8.06 8.17 9.01 9.45With diploma or

degree (percent) 42.00 76.92 60.00 50.00 54.50Buiness experience (percent)

Father engaged in building 6.00 37.50 33.33 29.41 9.10Father in business 18.00 18.75 0.00 5.88 9.10Building as main income 78.00 87.50 100.00 82.35 72.70Has previous experience

in building 78.00 68.75 100.00 64.71 54.50Has been an apprentice 50.00 46.43 50.00 70.59 72.70

Financial characteristics(rand)

Tumover 1,941.90 5,849.47 7,798.61 16,491.31 20,327.00Profit 944.51 2,097.92 4,559.72 6,815.62 7,508.00Assets at time of survey 10,242.96 17,374.44 8,166.67 29,383.53 29,956.00Investment 6,980.96 10,577.56 -10,536.60 18,216.76 18,185.00Has financial resources 56.00 81.25 66.67 88.24 81.80Major source of financing

Savings 82.00 75.00 83.33 100.00 100.00Bank 0.00 18.75 0.00 11.76 9.10Development institution 4.00 6.25 0.00 5.88 9.10

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

The Construction Subsector

The construction subsector (see table 4-6) illustrates the issues faced in the policy debate overhow to kick-start the South African economy while simultaneously satisfying the backlog ofbasic social needs, especially the massive provision of housing. The provision of low-incomehousing is seen as a catalyst to the development process because it stimulates the construction

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sector. In terms of policy, housing formerly provided by the state is now being developed bythe private sector. In turn, private enterprises, after obtaining access to a block of land, putout work to subcontractors. Through the stimulation of entrepreneurship and townshippurchasing power, it is hoped that a subeconomy based on small enterprises will develop.This subeconomy will, it is claimed, use labor-intensive production methods to produce goodsthat, when retailed, will be paid for with funds initially generated by the income ofsubcontractors.

The policy of using the construction of low-income housing as a leading sector receivessupport because the potential demand for low-income housing is large and the overall laborcomponent involved in constructing it is high. It has been estimated that the construction of300,000 houses could create an additional 900,000 long-term employment opportunities. Forthese reasons the report of the President's Council (1987) on employment creation and labor-intensive development proposed to stimulate the development of low-income housing. Otherscite the wealth effect of rising property prices as a source of increased effective demandamong black homeowners. Implicit also is the hope that black construction contractors willparticipate in such a housing boom. The research indicates, however, that importantconstraints could substantially limit the participation of even the more established and dynamicblack business contractors.

'Table 4-7. Constraints Facing More Esoablihed Black Constructwn Enterprises tn Cape Town, Durban, andJohannesburg, SotWh Afiica

(score)

EPtentialdvnainic DynamicSubsector Survivawist Slow laner Middle taner Fast laner High Aera

FinanceAccess to loans 3.72 .. 4.33 .. 3.18Cash flow 3.44 .. 3.17

MarketCost of materials 3.22 .. 3.33Competition 3.20 3.19

RegulationAccess to land .. .. .. 3.06 3.00Tax legislation .. .. 3.50

Skills and laborCost of labor .. 3.63 3.33Preference given to

white contractors .. 3.19 3.67Reliable labor .. 3.19Skilled labor 3.12 3.00 3.17Technical skills 3.08 ..

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

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CONSTRAINTS. The body of research suggests that the black construction industry is beset byfundamental problems related to both internal management weaknesses and the externalbusiness environment (see table 4-7).

The majority of black enterprises in the South African building industry operate at the bottomend of the contracting market, undertaking contracts (generally to construct and alter homesfor individuals in the townships and informal settlements) that are not attractive to medium-and large-scale enterprises. These markets are unsophisticated and reflect the lack ofsophistication of the firms that usually operate in them. Most of the firms surveyed hadentered the business via employment as workers rather than as foremen or managers. As aresult, black contractors lack supervisory and managerial experience and tend to have hadrelatively little employment experience before starting their business. Only 14 percent havebeen employed in more than one capacity, and 88 percent feel that they need further trainingin business management (the ability to estimate a job properly and to maintain properrecords), in production management (the ability to manage the building process, planmaterials and production schedules, and understand drawings and specifications), and in tradeskills. This lack of training and skills contributes to the general reputation that blackcontractors have for performing poor-quality work.

About 60 percent of the dynamic and potentially dynamic firms are involved in generalcontracting compared with only 20 percent of the survivalists (table 4-6). Few blackentrepreneurs are prepared for the increased demands that stepping up to general contractingplaces on management of the firm. For the most part, firms in the survey have grown slowlyand displayed little potential for further growth unless the fundamental problems related totheir management have been addressed first. Lateral expansion (the ability to take onadditional jobs) is similarly difficult because most lack access to skilled management and arereluctant to take on partners. Upward movement is difficult because the technical demands oflarger contracts increase, which requires larger labor pools and more intense output.

Notwithstanding these internal weaknesses, the business environment poses a daunting set ofobstacles, most notably the effective monopoly that white contractors hold over the housingmarket. Government policies have led to an acute shortage of land available for developmentin South Africa. Most available land goes to white developers, because black contractorsseldom meet the formal financial requirements for site allocation. Black contractors agree thatonly large white developers receive access to land for developing black townships.

Access to financing is another oft-cited, critical problem for black-owned constructionenterprises. The nature of cash flow in a normal construction project-high up-front costsfollowed by partial payments to the contractor as the work progresses-means that obtainingbridging financing to cover the initial costs of land, labor, and materials is essential.

Overall, the survey results are consistent with the literature (see appendix 1). In both, themost serious problems facing black contractors (and the most frequently cited underlyingreasons for them) are the following:

* Access to loans. Because of political unrest in the townships, bond boycotts, and thedifficulties of foreclosing on properties owned by blacks, financial institutions areloath to finance black housing. Moreover, they view black contractors as a high-risk

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because their overall performance is poor. In the absence of mortgages to constructblack-owned homes-the principal market for black contractors-bridging financearrangements that can be secured against mortgages are not possible nor is creditgenerally available from firms that supply materials. Therefore, a large unmet demandexists for working capital, and black contractors experience frequent periods ofinactivity. Only 34 percent of the survey respondents were active during all of 1990and 1991.

* High cost of materials. Small contractors lack access to economies of scale, whichlimits their ability to take advantage of discounts associated with bulk buying. As aresult, they would have difficulty competing with larger white contiactors on the basisof cost even if quality standards could be equalized. A striking illuscration is that largecontractors say they need a turnover of approximately twenty-four houses a monthbefore construction for the low-income housing market becomes viable. By contrast,black contractors are limited to between six and eighteen houses a year under thevarious development programs.

* Shortage of skilled and reliable labor. Skilled workers will not work for small blackcontractors because jobs are small, pay is poor, and jobs are not secure. As aconsequence, most black contractors hire unskilled workers who learn skills on thejob: the World Bank survey found that 76 percent of the individuals who performskilled work for black firms are not qualified artisans.

* Access to land and competition. An acute shortage of land is available fordevelopment in South Africa, largely due to land allocation policies of thegovernment. In black contracting circles, the perception is that only large whitedevelopers gain access to land for the development of black townships. This is afunction of allocation policies in which black contractors seldom meet the financialrequirement demanded for large sites. Instead they become subcontractors or acquire asmall number of sites from a local authority, contractors' association, or individual. Inlarger developments, even black general contractors must work as employees forwhite developers. Competition is fierce among the numerous small contractors whowork in the retail construction market and have no outlet to the wholesale landdevelopment market.

* Preference given to white contractors. The complaint that the market for constructionis biased toward white contractors is largely a function of issues mentioned above(especially standards of quality). In addition, white contractors have establishedthemselves in the housing market and are better organized and have more resources toundertake large contracts. Black contractors have major obstacles to overcome if theyare to prove themselves and aggressively market their capabilities in this area.

The Garment Subsector

Unlike much of South Africa's manufacturing sector, ownership in the garment industry isdiffuse, with the country's largest garment operation accounting for no more than 15 percent

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of total output, the next three firms together accounting for an additional 15 percent, and theremaining 70 percent divided among more than 1,000 firms of diverse sizes.

Table 4-8. Chiaracteristics of More Established Gannent Enterprises in Soutil Arica, 1991

(number of firms)

Has access to large has received Has received loans fromSize and ownershlip firns. works as sone technical Development Notoffirms Total subcontractor assistance Banks agencies" Both registered

Mediwn-sizefirns ownedby non-Africans

Expanding 6 5 2 2 3 0 0Stagnant 3 3 1 1 0 0 0

Smatl-size firns ownedby non-Africans

Expanding 15 9 4 4 2 1 3Stagnant 3 2 2 1 1 0 1

Small-size firms ownedby Africans

Expanding 8 2 7 2 4 2 6Stagnant 6 1 3 0 1 0 2

Microenterprises andcooperatives ownedby Africans

Potential to expand 4 0 2 0 0 0 3Stagnant 6 0 4 0 4 0 4

AUI firms 51 22 25 10 15 3 19

Note: Among firms owned by non-Africans, medium-size firms employed more than fifty workers, while small-size firms employed an avcrage of twenty workers in 1991. Among small-size firms, the smallest employed fiveworkers, while the largest employed forty. Among small-size African-owned fims, aDl located in Johannesburg,the smallest employed five persons, while the largest employed sixteen. Most started with one or two employeesand never reduced their number; all the stagnant firms owned by Africans expanded quite rapidly initially andsubsequently leveled off or decreased their employment. The microenterprises owned by Africans, all located inDurban and its environs, were recently established and employed two persons each. The African-ownedcooperatives were operated by ethnic Zulu women who received financial and technical support from religioi.sorganizations.a. Includes the Small Business Development Corporation, the KwaZulu Financial Corporation, andnongovemmental organizations.Source: World Bank (1992).

Black ownership in the industry appears to be marginal: African-owned firms are relativelyfew in number and tend to be smaller and less well-developed than firms having white, Asian,

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or colored proprietors (see table 4-8).1 This is largely a function of the legacy of apartheidlaws. Most of the non-African owners of firms had been employed as skilled workers intextile or garment factories prior to starting their own business. None of the African ownershave such experience due largely to Job Reservation Laws, which existed until 1979 andwhich permitted skilled job categories to be filled by Indians and coloreds, but not blacks.

The World Bank survey did not find any African-owned firms in Cape Town that were largerthan microenterprises (those employing fewer than ten workers) and found only with greatdifficulty some small, African-owned firms in Durban and Johannesburg. All African-ownedgarment firms were very small. Although the garment industry is geographically concentratedin Durban and Cape Town-approximately 70 percent of the industry's 140,000 workers arelocated in and around those two cities-the majority of the African-owned enterprises are inthe Johannesburg area. It did, however, find several Indian and colored firms in Cape Townthat employed fifty and more workers.

Two-thirds of the firms owned by non-Africans seek subcontracting relationships with retailstores as their main marketing strategy. Only one-eighth of the African-owned firms havedeveloped the quality and timely delivery standards necessary to become subcontractors.Having low subcontractor status means that African garment manufacturers have little accessto new production techniques.

More than half of the African garment firms are not registered. Only two of the twenty-fourAfrican firms surveyed pay their workers at or above the legal wage established by theIndustrial Council (which applies to unions). The rest of the firms pay well below theIndustrial Council requirements, whether they are registered or not.

CONSTRAINTS. All categories of entrepreneurs perceive lack of access to financing as a majorconstraint: non-African, medium-size firms rank it 0.72, while small African firms rank it thehighest: 0.86 (see table 4-9). Smaller African firms would not be expected to have access tobank financing, yet it is somewhat surprising to find that lack of access to financing is alsoranked highly by non-African, medium-size firms. Nonetheless, firms that have subcontractingarrangements with bigger firms see lack of financing as a slightly less important constraint(0.61) than firms that depend on direct market sales (0.76; see table 4-10). This occurs eventhough half of the firms surveyed have access to financing. Also important across allcategories of firms are cost factors (cost of financing and cost of textiles).

8. The survey made a concerted effort to identify dynamic firms owned by Africans that had atleast ten employees. In Cape Town, no firms employed more than ten workers, while only a very fewdid in Durban and Johannesburg. All African-owned firms found were included in the sample, whichthus resembles the universe of black enterprises in these three locations. In all, fifty-one small andmedium cut, make, and trim operations and other micro level and small garment finrns wereinterviewed in Cape Town, Durban, and Johannesburg. All interviews contained open-ended and surveyapproaches. This is the first survey to include Indians and coloreds as well as blacks, and its findingsemphasize the importance of job skills attained through employment and their effect on the individual'ssubsequent ability to establish and run firnms.

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Managerial and skill problems touch African garment firms heavily: scarcity of competentworkers is rated 0.75 by the African firms in Durban, and lack of management is rated 0.85by African firms in Johannesburg. Scarcity of competent workers is also ranked highly bynon-African, medium-size firms (0.63), as is political uncertainty (0.82).

Table 4-9. Constraints Facing More Established Gannent Enterprises m Cape Town, Durban, and Johannesburg,Sowth Africa

Non-African Af icanConstraints Mediwn size' Snall sizeb Smaa size All sizegd

Financial market constraintsLack of aess to financing 0.71 0.56 0.85 0.57

Constraints on access tononfinancial inputs

Lack of access to textiles 0.21 0.41 0.17 0.21Scarcity of competent workers 0.63 0.40 0.20 0.75Lack of technical skills 0.35 0.37 0.35 0.46Not enough domestic buyers 0.17 0.41 0.14 0.11Lack of mnanagemnent 0.50 0.30 0.85 0.17

Labor constraintsUncertainty of future wages 0.37 0.46 0.42 0.25Threat or risk of work stoppages 0.38 0.52 0.18 0.00Industrial Council issues 0.55 0.63 0.37Restrictive retrenchment rules 0.50 0.52 0.00

Regulatory constraintsTax implcations 0.42 0.27 0.25 0.46Government non-labor regulations 0.12 0.09 0.06 0.21

Political constraintsInhibiting effect of sanctions 0.44 0.27Uncertainty of politics and policy 0.82 0.42 0.24 0.43

Cost constraintsCost of financing 0.73 0.66 0.70 0.72Cost of textiles 0.57 0.80 0.49 0.67Cost of wages 0.59 0.32 0.36 0.25

Total number of finns 9 18 14 10

.. Not mentioned.Note: Based on a sample of fifty-one small and medium enterprises. Scores based on a scale of I to S arenormalized on a scale of 0 to I in which constraints ranked close to 0 are the least severe and those ranked closeto I are the most severe.a. Cape Town and Durban.b. Cape Town, Durban. and Johannesburg.c. Johannesburg.d. Durban.Source: World Bank (1992).

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Industrial Council (wage and terms of employment) issues affect medium-size, non-Africanfirms, whose relatively large employment base subjects them to strikes and wage demands.They rank this issue with a 0.55. Small-size, non-African firms also rank Industrial Councilissues with a 0.63.

Tabke 4-10 Obstacles to &pansion Facing More Established BSkik GarmentEnterprises in Cape Town, Durban, and Johannesburg, South Africa

Subcontracts DirectObstacles to largerJfims sales

Financiat mnarket constraintsLack of access to financing 0.61 0.76

Constraints on access tononfinancia inputs

Lack of access to textiles 0.24 0.26Scarcity of competent workers 0.36 0.46Lack of technical skills 0.42 0.28Not enough domestic buyers 0.26 0.27Lack of managemnent 0.51 0.52

Labor constraintsUncertainty of future wages 0.45 0.48Threat or risk of work stoppages 0.34 0.27Industrial Council issues 0.55 0.53Restrictive retrenchment rules 0.50 0.27

Regulatory constraintsTax implications 0.33 0.35Government non-labor regulations 0.07 0.12

Polirical constraintsInhibiting effect of sanctions 0.53 0.30Uncertain politics and policy 0.45 0.42

Cost constraintsCost of financing 0.63 0.82Cost of textiles 0.75 0.59Cost of wages 0.35 0.44

Total number of firms 19 32

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

Policy Implications

Within the more established black business sector, a subgroup of potentially dynamic blackenterprises exists that should be fostered by a targeted attempt to remove the internal

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(capacity) and external (structural) impediments to their expansion. The prominence of marketand skill factors as important constraints suggests that these entrepreneurs need to beintegrated more closely with the white economy, where markets, purchasing power, and state-of-the-art management and technical skills are concentrated. The following policies focus onbuilding contract linkages between the tormnal private sector ana qualified black businesses, onthe one hand, and between public procurement and black businesses, on the other.

The next steps in preparing a program to support these businesses are as follows:

* An operational definition should be developed of the type of firms that will receivesupport within each subsector and of the type of support they will receive. Forexample, if dynamic black businesses face different constraints than potentiallydynamic businesses, interventions will have to target them differently. The same holdstrue for black enterprises generally. For example, dynamic black businesses faceconstraints different from those facing dynamic firms run by Indians or coloreds (asshown by the data on garment manufacturing), and interventions should thus target adefined group of businesses and its particular limitations. This complexity requiresoperational definitions that recognize differences among disadvantaged firms.

* Incentives should encourage big business to buy from qualified small and mediumenterprises. Having larger enterprises provide technical advice and training to smallerblack firms is essential to achieving the quality necessary for procurementarrangements to be voluntary and mutually beneficial. This recommendation applies tomanufacturing and retail enterprises in particular.

* The government should make a committed effort to procure from small businesses. Aspecial case can be made for the construction of housing and schools, where largepublic construction efforts should include a strong presence of African contractors.Such procurement efforts should also include strong training, technical assistance, andeven financing components.

* Access to land is a key issue for smaller contractors and developers and could beeasily addressed by decreasing the size of land allocations to allow smaller developersto submit bids. Moreover, financing should be made more available to blackbusinesses of all sizes so that they are better able to accumulate capital, increaseemployment, and compete with larger firms.

* Coveted diversification options exist within the transportation industry that are limitedby existing regulations and public ownership. Arrangements that maintain publicmonopolies of bus and rail transportation and regulations that limit new entrants tofreight haulage should be examined.

* The issue of how the value added tax is administered concerns the owners of dynamicretail enterprises and should be explored and addressed.

* Police protection and the enforcement of civil order must be extended to blackcommunities because a stable business environment fosters long-term investment andgrowth.

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5. POLIcy: LESSoNS FROM INTERNAT(IONAL EXPERIENCE 9

THE MOST PERSUASIVE CASE for strengthening black enterprises is that they have the potentialto create jobs and wealth and to assist in rebalancing the South African economy. To create abusiness climate conducive to the development of such enterprises, broad participation inpolicymaking should be encouraged and the focus should be on cooperative and competitivemarket mechanisms.

Obviously, the policymaking process does not take place in a vacuum. It must be linked withother economic initiatives as well as with political and socioeconomic developments in themacro environment. Policies governing the development of small and medium enterprisesshould mirror the efforts being made to democratize and restructure South African society.This link is essential to ensure that macro and micro initiatives complement, rather thenundermine, each other. Political interference in such policies must also be avoided, althoughgovernment, political parties, labor, business, and other organs of civil society should beincluded in the policymaking process.

Designing an Overall Policy Framework

International experience offers several examples of an overall policy framework relevant toSouth Africa. Of necessity, policy will be multifaceted and offer diverse, long-term solutionsbecause the problems facing the South African economy are complex and deep-rooted.

In 1970, Malaysia initiated a twenty-year National Economic Policy that aimed to restructuresociety and alleviate poverty by developing entrepreneurship and broadening ownership.Within a short period, this program helped ease racial tensions between the country'sChinese, Indian, and Bumiputera populations. In the medium term, it significantly broadenedthe base of ownership and management and cut poverty in half, particularly among the ruralBumiputeras. Although the policy failed to stimulate an entrepreneurial culture in its targetgroup, its effects are strongly evident in second-generation entrepreneurs.

The adoption of an integrated, multifaceted policy does not necessarily require stronginvolvement by the state, however. In India, the state's concentrated efforts to bolster small-scale industry, which it sees as a symbol of independence, have, in many ways, stifled thedynamism of small and medium enterprises. In Malaysia, the state's strong involvement in theNational Economic Policy changed when economic growth turned negative in 1985, and thestate began to reevaluate its policies and institutional efficiencies.

9. This section is based on presentations given at a series of seminars held in Cape Town, Durban, andJohannesburg, where the research was presented in the context of international experience. Presentations weremade 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 integrated policy should also avoid overprotecting small and medium black enterprises,which breeds paternalism and tends to equate small with weak. Newness, rather thansmallness, is the root of vulnerability. Thus, protective mechanisms are usually appropriatewhen a small enterprise is new but should be phased out as it becomes more established.

In India, small and medium enterprises are overprotected in an already protectionist economy.This has produced a confusion of policies that has adversely affected the development of smalland medium enterprises. India has tried to mix policies that seek to alleviate poverty anddevelop backward areas with policies that develop small-scale industries. As a result, inbackward areas, many small enterprises operating out of specially constructed industrial parksare condemned to restricted markets. Furthermore, few small enterprises can survive withoutthe protection of the state. Overprotection has also produced ineffective and inconsistentconcessions:

* Product reservation (836 products are reserved for small enterprises) has underminedthe capacity of these enterprises to become dynamic and has inflated consumer prices.

* Tax exemptions, especially excise tax exemptions based on sales figures, haveencouraged small firms to stay small or to create multiple shadow firms.

* Input subsidies have created inefficiencies of supply for the resource being subsidized(for example, power, special concessions or price preferences for procurement, andallocation quotas for raw materials) and reduced competitiveness.

India has heavily institutionalized the financing of small and medium enterprises througheighteen state financial corporations, some of which have recovery rates as low as 30 percent.Commercial banks are required to finance priority sectors, and enforcement of this policy hasdestabilized the entire financial system and failed to strengthen small-scale industry. Althoughsmall-scale industry has grown in the past forty years (from 400,000 firms employing 4million persons to 1.8 million firms employing 11.9 million persons and accounting for 30percent of exports), India's industrial structure has not changed, and 10 percent of firms arejudged to be sick.

Improving the Representation of Entrepreneurs in Policymaking

Improving the representation of entrepreneurs is important for several reasons: (1) thepractical needs and concerns of entrepreneurs should be addressed in policy and strategyinitiatives, (2) existing institutions and nongovernmental organizations involved in developingsmall and medium enterprises should be critically reassessed, and (3) entrepreneurs benefitconsiderably from having contact and exchanging ideas among themselves. Involvingentrepreneurs in the debate would ensure that their needs are addressed.

In South Africa and elsewhere, entrepreneurs should be involved in long-term policymakingas well as in the current debate over the development of small and medium enterprises andmicroenterprises. An assessment of existing structures, including the role of nongovernmentalorganizations, is needed, as are forums exploring development issues. Such examinations

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should ask whether these structures are accountable, how they are pursuing the interests of thesmall enterprise sector, what is their representative strength as a whole, and how their effortscan be coordinated.

In South Africa, increasing the representation of black entrepreneurs themselves encountersseveral problems. Although small entrepreneurs have developed several organizations in thetownships, these groups lack the confidence to initiate or join the debate at a higher level.Microentrepreneurs are even less organized and could perhaps be represented best bynongovernmental organizations working closely with them in their communities. Although abottom-up policy debate should be welcomed and encouraged, entrepreneurs are unlikely tofind a voice at the national or regional level outside the medium of existing forums.

Representative bodies, nongovernmental organizations, and entrepreneurs should meet in eachregion to discuss how to strengthen the lobby representing black businesses. Entrepreneurs inthese sectors should consider appointing a powerful existing institution to be their voice.

Clearly, the representation of entrepreneurs can be improved at many levels and within manyorganizations. Industry associations, parastatals, and development agencies could, forexample, open channels of communication by setting up desks for small and mediumenterprises and by seeing that their own organizations are more racially representative. Thiswould benefit both the enterprise and the organization since loan officers and other agentswho are close to the communities in which microenterprises operate understand the needs andconstraints of these entrepreneurs and represent them within their organizations better thanloan officers who have no contact.

Derining the Role of Institutions

South Africa already has a well-developed institutional framework, but the services offered donot adequately meet the needs of black entrepreneurs. For policy interventions and institutionsto be effective, a process is needed to identify market failures (such as insufficient access tofinancing and markets, inadequate education, and scarcity of adequate business premises) andto address those failures, including the creation of appropriate institutions. The usefulness ofinstitutions (and other aspects of policy) should be constantly reevaluated, in light of boththeir own efficiency and political and economic developments.

South Africa could benefit from the experience that other countries have had with institutionalapproaches. Malaysia's National Economic Policy initially set up thirteen ministries and thirtyinstitutions for developing small and medium enterprises. These focused on equity, education,human resources, agriculture, industry, and finance. The three or four institutions that provedto be truly effective monitored themselves and continuously tracked their progress.Recognizing its institutional overkill, Malaysia has begun to merge and coordinate itsinstitutions.

India also offers valuable lessons. The main causes of institutional failure in India includecentralization, bureaucratization, political interference (especially the politically motivatedtransfer of funds), lack of accountability, and inadequate appraisal of projects, follow-up, or

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functional alignment (for example, the person who approves a loan is not responsible forcollecting it).

India's industrial extension service consists of a vast institutional framework at the central andstate level. Intended to provide technical advice, training, marketing, and infrastructuralsupport, the service is ineffe:tive because it stretches its resources too far. Entrepreneurs, ineffect, receive advice from bureaucrats who do not understand their practical needs.

Institutions are far more effective when their administration is flexible, that is, when they arespecialized by subsector or when they work at the local level. In India, the informal sectorextends credit to small enterprises that are neglected by the official system or that prefer toborrow from an informal source even at higher interest rates. Informal loans have a 98percent recovery rate because they are based in the local community and on local contact.

Indonesia, Japan, and Korea have opted for a minimalist institutional approach that workswell. Their institutions are most effective in catalyzing private networks and harnessingmarketing and technological skills. Eftective interventions use, rather than substitute,capabilities in the private market. Entrepreneurs particularly value interventions such asparticipation in trade fairs; subsidies for obtaining technical expertise from abroad; short,targeted courses led by technical specialists; and the use of public agencies and industryassociations for sharing technical skills and creating links among firms.

This does not mean that public intervention has no place. In Indonesia, for example, collectivechannels are essential to helping Pribumi entrepreneurs make export contacts. In Japan, localgovernment helps develop small and medium enterprises, as do industry associations inColombia, Indonesia, and Korea. Autonomous, specialized public agencies have beensuccessful in Korea. The common pattern is that centralized bureaucracies do not work.

In South Africa, appointing the state as entrepreneur is a less than ideal approach. Institutionalfunctions should be specialized and devolved to regional and local agencies capable offocusing on the needs of the private sector and the community. Given the size of SouthAfrica's market, taking a minimalist institutional approach would give nongovernmentalorganizations a greater role in improving access to financing and training as well as increating market links.

Supporting Market Links

Links among microenterprises, small and medium enterprises, the large corporate sector, andthe public sector would clearly boost small enterprise in South Africa. Effective links wouldcontribute significantly to the creation of jobs and wealth while beginning to align quality andproductivity in the formal and informal sectors.

Although subcontracting is critical for establishing links, the preconditions for effectivesubcontracting are not yet present in South Africa's market. The preconditions includeincentives for big business to subcontract work, the ability of supplier firms to meet thestandards and needs of other sectors, and the existence of practical opportunities for smallenterprises to become subcontractors.

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Ireland, Korea, and Singapore have introduced various methods of linking small enterpriseswith multinational corporations that play an important role in the national economy. Koreaintroduced mandatory links by requiring that 1,200 items in forty industrial sectors besupplied by 2,200 subcontractors. Mandatory links have been effective because they workhand-in-hand with other programs, including drives to impart training and ensure quality. InKorea today, 98 percent of all businesses fall within the small and medium enterprise sectorand account for 66 percent of all jobs and 40 percent of all exports. By contrast, productreservation policies in India have not had a positive impact: the choice of products isarbitrary, policy criteria are lacking, and product reservation is not linked with other policyobjectives.

Singapore's effort to improve links focuses on upgrading local industry, including trainingspecial consultants and assigning managers from multinational corporations to small andmedium enterprises. The program is successful partly because multinational corporations areextensively involved and partly because it occurs within the context of a package of policies todevelop small and medium enterprises.

In Ireland, linkage programs are coordinated by a twenty-person team that focuses on buildingrelationships between small enterprises and multinational corporations as well as onresearching market opportunities. On the demand side, this research seeks to discover what,when, and how much the company buys and at what cost and to determine its technicalrequirements for products. On the supply side, it seeks to discover which enterprises have thecapacity to supply the product and what upgrading is needed. Finally, it seeks to devise astrategy for matching the capabilities of the purchaser and the supplier.

As a result of this eight-year program, the value of purchases supplied by local smallenterprises has increased RI billion, the market share of small firms within large companieshas risen one-third, many new jobs have been created, and the overall quality of products hasimproved. More than 250 multinational corporations are involved in the program, whichattracts additional foreign investment from companies confident that their supply needs can bemet within Ireland.

Malaysia has also enjoyed some success, mainly in long-term subcontracting. Largecorporations (such as Intel) or umbrella organizations (such as those in the furniture industry)supply technical skills, training, and other support to small enterprises and buy back theirinvestment in the form of the product.

In South Africa, the first step in implementing a successful linkage program would be fornongovernmental organizations and development agencies to intensify networking betweentheir clients and big business or government. Existing mechanisms, such as businessopportunity centers, industry hives, matchmaker fairs, and small business directories, shouldbe encouraged, but additional projects, such as the compilation of a national data base, mustbe undertaken as well. Providing access to programs that train entrepreneurs and upgrade thecapacity of small enterprises will form an important part of the function performed bynongovermnental organizations. These efforts should be supported by national policyinitiatives.

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Other important policy issues include gaining the support of unions for linkage programs andproviding incentives that encourage big business to subcontract microenterprises and small andmedium enterprises. An effective lobby would obviously improve the chances that suchinitiatives would be successful.

Making Financing Available

Black microentrepreneurs in South Africa face significant financial constraints, including thelack of working capital, equity capital, and long-term credit. Existing financial institutions,including parastatals such as the Development Bank of South Africa and the Small BusinessDevelopment Corporation are not geared to meet the credit needs of small entrepreneurs.Commercial banks rarely hold information about entrepreneurs and continue to require a levelof collateral and documentation that places small firms at a disadvantage. These banks seek tomaximize profit and minimize risk, while entrepreneurs seek to gain rapid access to capitalrequiring reduced collateral and simple terms and conditions. Even when bank managers haveagreed to help develop small and medium enterprises, these policy decisions rarely reach thests.ff who deal directly with the entrepreneur. That is, a backlash against executive decisionsoccurs at the level of mid-management.

Alternative financial options are developing in the South African market, but none aresatisfactory as yet. Stokvels, for example, satisfy some of the financial needs of about 20percent of microentrepreneurs, but their range of options is limited. Despite this limitation,stokvels have the trust and respect of their communities and will, it is hoped, acquire moreleverage as they adopt a more organized approach. Corporate equity funds exist (AngloAmerican, Gencor, Icd supply funds, for example), but they are new in the market and haveno network as yet. Nongovernmental organizations represent an emerging source of financing,but they are still grappling with their own problems, including lack of funding forinfrastructural costs, lack of expertise, limited market coverage, lack of clear missionstatements, and lack of focus. Parastatals have negative associations as instruments ofapartheid and operate in the shadows. They have no outlets close to their markets and poseproblems similar to those of commercial banks.

In South Africa, black entrepreneurs seek access to credit, rather than subsidies, and readyaccess to repeat loans. The principal challenge is therefore to develop non-bank financialinstitutions that finance the small and medium enterprise sector or form a bridge betweenblack enterprises and the traditional financial sector. A panoply of mechanisms, products, andactors will probably have a role to play. Options to be explored include commercial bankwindows or special departments for lending to the microsector, credit unions, financecompanies, stokvels, specialized banks and mechanisms along the lines of the Women's WorldBank, small and medium business investment corporations, nongovernmental organizations,and community development banks.

Microenterprises and small and medium enterprises have separate and distinct financial needs.Nongovernmental organizations, with their close client relationships, loyalties, and local base,represent one of the best options for making loans accessible to the microsector. In addition tonetworking with donors, nongovernmental organizations could establish cooperativerelationships with parastatals and commercial banks that allow them to make loans more

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efficiently. This effort would be enhanced by reevaluating the present tax policy, whichclassifies the surplus of nongovernmental organizations as profits.

Many countries have supported lending to priority sectors in an effort to boost smallenterprises and agriculture. Their experience shows, however, that South Africa shouldapproach this option with caution. In India, 40 percent of commercial bank lending is directedto small-scale industry, and this has put an enormous strain on the entire financial system. InMalaysia, 20 percent of loans have been directed to small and medium enterprises,agriculture, and low-cost housing, with only limited success. Because interest rates have beenpegged to the marketplace, the harmful effects of this policy have been minimal.

In Indonesia, directed credit programs have followed the pattern typical in most developingcountries: they operate on the basis of relatively low repayment rates, and strong politicalpressure is exerted to determine who receives credit. Ultimately, cheap credit for small andmedium enterprises has not been sustainable, and many credit programs have beendismantled.

Korea and Japan provide two rare examples of successful directed credit programs, largelybecause their rates of repayment were set high; start-up financing was avoided, althoughworking capital was available; interest rate subsidies remained modest (Japan's was half apercent below the prime lending rate), and the credit system was viewed as a complement to,not a substitute for, the commercial banking system.

Nongovernmental organizations attempting to provide loans to microenterprises shouldemphasize sound commercial practices. In the Dominican Republic, ADEMI, which hasfinanced 22,000 enterprises since it was created in 1983, has done just that. ADEMI extendsapproximately 1,500 loans a month at an average amount of $900. Recovery rates average 98percent, repayment rates are set higher than market rates, and the rate of repayment increasesas the size of the loan decreases. Although ADEMI has not been particularly successful ingraduating its clients to commercial banks, it has graduated the organization itself to theformal lending sector in order to make loans to entrepreneurs.

ADEMI attributes its success to specialization, a commercial approach, and a commitment toaffecting the country's socioeconomy. Based in the community, the organization is present intwenty of the country's twenty-six provinces, and its loan officers work in their owncommunities. The organization uses three principal criteria in assessing a loan: the applicant'scharacter, experience, and ability to repay the amount requested. For successful applicants,ADEMI opens a line of credit for life.

Strengthening Markets and Business Infrastructure

In South Africa, markets and business infrastructure face numerous and complex constraints.Microenterprises and other businesses in the informal sector have limited access to marketsbecause business premises are scarce and poorly located. Entrepreneurs themselves arehampered by poor education and lack of skills or technical expertise. They also face a rangeof institutional barriers, including limited institutional outreach, lack of understanding of theirneeds and problems, and lack of access to financing. Most of these enterprises have difficulty

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growing or improving their services because they do not have access to broader markets ornetwork opportunities in the formal sector.

To counter these constraints, policy and legislation must be changed at the national, regional,and even the local level. An effective lobby representing the sector of black enterprises isneeded to articulate the concerns of entrepreneurs to policymakers. This can be done indiverse national and regional forums on economic, housing, educational, and other issues.

Developing Training and Skills

Lack of education and skills is one of the most hampering constraints limiting thedevelopment of black enterprises. Internationally, education has been identified as one of thekey factors in entrepreneurial success. Malaysia, for example, has supported internationalscholarship programs and institutional training.

In South Africa, the provision of skills will have to be tackled both in the context of theoverall restructuring of South African education and in the marketplace. Creating anentrepreneurial culture through the educational system requires a paradigm shift. Individualsmust be educated in lateral thinking and risk assessment beginning at the primary level. At thetertiary level, vocational and occupational training must be linked to the needs of business,although not so rigidly that individuals cannot develop personally.

In the short term, developing the skills of entrepreneurs poses formidable challenges for SouthAfrica. A fundamental mismatch exists between the training offered and the skills needed inthe marketplace. Institutions and nongovernmental organizations do not offer enoughassistance in this regard. Additional financing, research, and development are needed fromgovernment, the private sector, and other donors to develop complementary training programsand technical expertise.

Initial training drives should concentrate on basic cognitive skills such as literacy andnumeracy, basic accountancy, and basic technical training. Simple extension efforts-a publicnetwerk for providing technical advice, training, and direct infrastructural support-may alsobe needed to equip individuals with the capacity to continue improving their skills. To besuccessful, these training drives will have to move out of the classroom and into actualbusinesses.

Research and assessment of the available resources should be undertaken: what financialresources and training resources exist? How can these be coordinated and matched with needsor linked with existing initiatives? How can training partnerships among government, traininginstitutions, the private sector, nongovernmental organizations, and entrepreneurs beencouraged and developed? What regional centers, including nongovernmental organizations,are available to help mobilize financial resources?

Conclusion

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In many countries, programs that encourage the development of small enterprises have beenintroduced with much expense and effort, only to fail outright or be drastically modified.Clearly, South Africa cannot and should not adopt another country's model for its own use.Evaluating the mistakes of others, in conjunction with assessing its own needs and priorities,can, however, help South Africa formulate policies and strategies for strengthening blackenterprises.

An effective lobby for small and medium enterprises is an essential component of this processand should draw attention to the following key policy issues:

* The policymaking process must have as broad participation as possible and must seekdiverse, long-term solutions tor complex, deep-rooted problems.

* Institutional support is vital. Government must make adequate resources available forpublic sector institutions, but functions and responsibilities should be devolved asmuch as possible to specialized, local, flexible agencies that work with a range ofother partners (formal business, nongovernmental organizations, and communityorganizations, among others).

* Existing state institutions must be reevaluated and their usefulness reassessed. Manyof them have accumulated experience and knowledge but have been tainted byapartheid.

e Nongovernmental organizations have an important role to play in buildingrelationships between black enterprises and the formal and public sectors. They canalso be instrumental in making training and financing accessible to small enterprises.They must, however, streamline their focus, infrastructure, and operational efficiency.

3 Access to financing is vital, and new financial instruments and intermediaries must bedeveloped. The provision of information, skills, and market infrastructure is just asimportant. An integrated approach to policy and strategy-one that addresses allaspects of the problem-is essential. Such an approach must work at many levels:local, regional, national; short, medium, and long term; and others.

- Determining the focus is problematic. Should attention be focused primarily onbusinesses in the informal economy that already have a track record and demonstratean immediate potential for becoming integrated into the formal economy? Is itjustifiable to regard development of the microsector as primarily a function of socialdevelopment or the alleviation of poverty? Will this attitude stifle the potentialdynamism of the microsector? How can a balance in focus be ensured?

The need to develop black enterprises is urgent in South Africa. These businesses offer a realpotential for creating jobs and wealth and for redistributing wealth in South Africa's economy.They also offer an avenue of opportunity and achievement for a large section of SouthAfrica's too-long-frustrated human potential.

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6. CONCLUDING REMARKS

CAN BLACK BUSINESSES PLAY A DYNAMIC ROLE in creating employment and rebalancingincome and wealth in a post-apartheid South Africa? The potential exists, but the obstacles aretremendous and will require more than quick fixes.

Deregulation alone is not enough. Dismantling the regulations of apartheid is, to be sure, anessential step toward creating a climate in which black businesses can expand and prosper inSouth Africa. It is not the most important step, however, as the research presented hereshows. Regulations are no longer a major impediment to the creation or expansion of blackbusinesses, and the deregulation that began in the 1980s has not eliminated the constraints thatare. Policymakers and implementing agencies alike should focus their activities on theconstraints identified by the entrepreneurs themselves.

Despite the recent move to eliminate the restrictions on black enterprises, significantconstraints continue to limit the ability of even the most dynamic businesses to grow, createemployment, accumulate assets, and generally prosper in either the formal or the informaleconomy. Black entrepreneurs-owners of both microenterprises and larger, more dynamicfirms-clearly identify both internal and external constraints that adversely affect theirbusinesses. The principal internal constraints, which are the direct legacy of apartheid, includethe lack of adequate technical, administrative, and managerial skills and the lack of access tofinancing, which is a result of the inability to own land that can be used for collateral. Theprincipal external constraints include highly competitive markets, lack of marketinfrastructure, and a politically unstable and often violent business envirotnent.

Deregulation and market-based solutions are a step in the right direction, but they must beaccompanied by measures that directly eliminate the constraints that prevent blacks fromstarting businesses or from running businesses capable of playing a dynamic role in the formaleconomy. As is evident from the profiles of small and medium enterprises presented in thisreport, black businesses have the potential to be dynamic, productive players in South Africa'seconomy.

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REUFRENUS

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Calcopietro, Carlos Martin. 1992. 'Obstacles and Opportunities Facing African Small andMedium Enterprises in South African Manufacturing: Lessons from the GarmentsIndustry." World Bank, Washington, D.C., June.

Cattell, K. S. 1992. "Black-Owne# Small-Scale Construction Enterprises in the South AfricanBuilding Industry: Attributes;- Constraints to Growth, and Factors of Success." Universityof Cape Town, Cape Town, South Africa, September.

Christen, Robert, Elizabeth Rhyme, Doug Sallourm, and Jennefer Sebstad. 1992. "Get AheadFoundation Credit Programs in South Africa: Final Evaluation." GEMINI Technical Report45, June.

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Downing, Jeanne, and Lisa Daniels. 1992. "The Growth and Dynamics of WomenEntrepreneurs in Southern Africa." GEMINI Working Paper 47, August.

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Fallon, P. 1992. "An Analysis of Employment and Wage Behavior in South Africa." WorldBank, Washington, D.C., October.

GEMINI. 1990. "Small-Scale Enterprises in Mamelodi and Kwazakhele Townships, SouthAfrica, Survey Findings." GEMINI Technical Report 16.

Hansley, James F. 1992. "Applicability of the U.S. Minority Enterprise Small BusinessInvestment Company IMESBIC] Model for Developing Venture Capital Firms in SouthernAfrica." January.

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Krige, D. J. 1985. 'The Urban Informal Sector in South Africa: What Options forDevelopment?" Master's thesis, Social Sciences, University of Natal, Durban.

---. 1988. "The Prospects for Informal Small Business in Kwa Mashu." DevelopmentSouthern Africa 5: 168-85.

Levy, Brian. 1993. 'Obstacles to Developing Indigenous Small and Medium Enterprises: AnEmpirical Assessment." 7he World Bank Economic Review 7(1): 65-83.

Liedholm, Carl. 1990. "The Dynamics of Small-Scale Industry in Africa and the Role ofPolicy." GEMINI Working Paper 2, January.

---. 1992. "Small-Scale Industries: Dynamic Issues and the Role of Policy." In F.Stewart, S. Lal, and S. Wangive, eds., Alternative Development Strategies in SubsaharanAfrica. New York: Macmillan Press.

Liedholm, Carl, and Michael A. McPherson. 199i. "Small-Scale Enterprises in Mamelodiand Kwazakhele Townships, South Africa: Survey Findings," GEMINI Technical Report14, March.

Liedholm, Carl, and Donald Mead. 1987. "Small-Scale Industries in Developing Countries:Empirical Evidence and Policy Implications." International Development Paper 9.Michigan State University, East Lansing, Mich.

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Ligthelm, A. A., and L. Kritzinger-van Niekerk. 1990. "Unemployment: The Role of thePublic Sector in Increasing the Labor Absorption Capacity of the South AfricanEconomy." Development Southern Africa 7:4 (November).

ittle, Sam M. D., Dipak Mazumdar, and John M. Page, Jr. 1987. Small ManufacturingEnterprises: A Comparatve Analysis of India and Other Economies. New York: OxfordUniversity Press for the World Bank.

Luckin, Jeanne, Mike Lyne, and Julian May of Data Research Africa. 1992."Microenterprises in Rural Areas of South Africa: Results of a Survey in Farm and Non-Farm Enterprises in Bophuthatswana, Kwazulu, and Transkei." September.

Maasdorp, G. G., and J. F. Hofmneyr. 1991. 'Toward Industrialization: How Do We Get ItGoing?" Economic Research Unit, University of Natal, Durban.

Magill, John H. 1991. "Credit Unions: A Formal Sector Alternative for FinancingMicroenterprise Development." GEMINI Working Paper 22, September.

May, Julian. 1992. "Microenterprises in South Africa: Results of a Survey on Regulation."Data Research Africa, July.

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---. 1993. 'Constraints Facing Dynamic and Black-Owned Small and Medium Enterprisesin the Retail Construction and Transport Sectors." Data Research Africa, September.

May, I. D., and S. E. Stavrou. 1988. 'The Information Sector: Socio-Economic Dynamicsand Growth in the Greater Durban Metropolitan Regions." Centre for Social andDevelopment Studies Working Paper 18.

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APPENDIX 1. SUVEY OF MICROENTERPRISES

Table Al-L. Most Important Probkms Facing Rlack Mcroeute.prLses la MaetlIand Kwazakhele, South 4fca, Swary of Spontmoas Responses

(percent)

Phase of operations At Al tuw ofand constraint start-Wp the survey

Crime and violeace 4.4 7.2Getting a license 1.8 0.2Inadequate premises 18.0 15.7Lack of finances 22.5 9.4Problems with law enforcement

authorities 10.5 6.6Unfavorable business conditions 32.0 51.2Cost of doing business 12.7 20.3Poor market conditions 19.3 30.9

Other 10.8 9.7

Source: BEMIn (1990).

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% of businesses citing obstacle as major"

O tn oun 8 88

Poor market conditions cn O 7 . ''I W

Costs of doing business v ° .O

cCoInadequate premises _ I O

Lack of finances

Crime and violence 0 (D

Law enforcement CD . nTransport -0 (aQ

Difficult to get assstant s SD

Unskilled labor >

Insufficient stock C) t 3

Difficult to produce and sell C

Need electricity and water Cfl(D

Small profit from small items 0 O

Friends and family take stock i

Used machinery breaks (D

Getting a license

Soutee: Wotd Bank 119921

% of businesses dcng obstle das najor*

o-& -0 00 (I a

Poor market conditions

Costs of doing business gC

Inadequate premises _1 O0Lack Of finances a

Crime and violence 0 OD

Law enforcement cn . -1Transport O 1

Difculttogt assistants

Unskilled labor I (D0O )b

Insufficient stock !IOI Cl)~~0

Difficult to produce and sellI ~~~~~~~~~~CD 0

Need electricity and water la iQ

Small profitfrom small items I . WCc

Friends and family take stock (D

Used machinery break '

Getting a liconse

80um0s. Wadd B~ 11_

Table A1-2. Constraints Macing Black Retail Enterprises in Cape Town Durban. and Johannesburg, Soth Africa

Potentially dnamnic DvnamgcSubsector Survivalist Slow laner Middle laner Fast laner High AeuS

Business environmentGangsers 3.53 3.28 3.00 3.86 3.62Theft 3.95 3.78 4.00 3.90 3.69'fownship violence 3.98 3.92 4.00 3.86 3.23

FinanceAccess to loans 3.20 2.64 3.29 3.05 2.92Repayment of loans 2.85 3.07 2.86 2.67 2.54

MarketAccess to premiscs 3.01 3.00 1.57 2.39 2.31Cash flow 2.73 2.21 2.57 2.14 2.31Competition 2.82 3.21 3.00 2.81 2.92Cost and access to equipment 2.85 2.50 2.57 2.67 3.23Cost of materials 3.26 2.07 3.29 2.90 3.23Cost of supplies 4.02 3.93 4.71 4.29 4.31

ReguakionCompany tax 2.34 1.64 1.86 2.81 3.23Labor legislation 2.06 1.64 1.71 2.00 2.38Local govwrnment legislation 2.37 1.93 2.43 2.14 2.46Retail legislation 2.24 2.93 2.14 2.33 2.62vAT administration 3.19 1.93 4.29 3.71 4.31

SkilZs and laborAccounting 2.48 3.29 3.14 2.24 2.31Cost of labor 2.11 2.21 3.43 2.19 2.46Determining costs 2.52 2.93 3.14 2.29 2.38Lack of technical skills 2.81 1.71 3.43 2.81 3.23Reliability of labor 2.42 3.00 2.29 3.19 3.46Shottage of skilled labor 2.32 2.43 2.71 3.19 3.62

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

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

Polentially dynamkc DynanicSubsector Survivalist Slow laner Middle laner Fast laner High ft-e

Business envirownentDrivers' strike 2.55 1.67 3.13 2.50 2.88Political uncertainty 2.93 3.17 3.38 2.39 2.38Taxi wars 3.67 3.67 3.13 2.72 3.25Violence 3.83 3.50 3.88 3.67 4.00Law enforcement 3.03 3.00 3.63 2.94 2.37

FinanceLack of access to fnancing 3.05 2.83 3.00 3.11 2.88

MarketCommuter boycotts 2.38 1.50 2.50 2.56 2.63Competition with buses 2.79 1.67 3.00 2.61 2.63Competition with other taxis 3.69 3.50 3.00 3.06 2.00Competition with trains 2.50 1.67 2.63 2.56 2.50Difficult to get a route 3.34 3.67 3.25 2.61 2.25Difficult to inerease fares 3.24 3.17 3.75 2.89 3.13High cost of vehicles 4.10 3.17 3.88 3.33 3.00High taxes 3.14 2.67 3.50 2.83 2.63High wages 2.38 2.50 2.75 2.28 2.2SInability to get work 2.59 2.00 3.50 2.55 2.25Lack of ranking facilities 3.19 3.67 3.38 2.22 1.75New operators 2.81 2.33 3.00 2.78 3.00Steep hire purchase payments 2.79 3.67 2.75 2.72 2.75

RegultxionLabor regulations 1.79 1.50 2.25 1.94 1.50Tax regulations 2.41 2.17 2.75 2.22 2.50Other regulations 2.18 1.67 2.88 2.06 1.88

Skills and laborBusiness management skills 3.09 2.17 3.38 2.50 2.75Lack of skilled drivers 2.66 3.33 2.63 2.00 2.13

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

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

Potentially dynamic DynamicSubsector Survivalist Slow loner Middle laner Fast laner High flyee

Business environmentPreference given to

white contractors 2.98 3.19 3.67 2.82 2.81

FinanceAccess to loans 3.72 2.88 4.33 2.94 3.18Cash flow 3.44 2.94 3.17 2.88 2.55Interest rate issues 2.20 2.06 2.00 1.76 1.82Repayment of loans 2.22 1.94 2.33 1.88 2.09

MarketAccess to land 2.48 2.81 3.00 3.06 3.00Competition 3.20 3.19 2.50 2.71 2.36Cost of and access to

equipment 3.02 2.88 2.83 2.59 2.55Cost of materials 3.22 2.94 3.33 2.88 2.91Erratic work 2.56 2.19 3.00 2.41 2.45Tender procedures 2.48 2.19 2.33 1.88 2.00

RegulationLabor legislation 2.22 2.00 2.17 2.41 2.73Tax legislation 2.68 2.56 3.50 2.53 2.45Other legislation 2.00 1.56 2.17 1.94 2.09

Skils and laborAccounting 2.60 2.00 2.33 2.18 1.64Cost of labor 2.80 3.63 3.33 2.65 2.91Determining costs 2.52 2.38 2.17 1.47 1.45Lack of technical skills 3.08 2.75 3.00 2.82 2.82Reliability of labor 2.92 3.19 2.33 2.53 2.55Reliability of main contractor 2.74 2.13 3.00 2.47 2.73Reliability of subcontractor 2.36 2.00 2.33 1.71 1.36Shortageof skilled labor 3.12 3.00 3.17 2.59 2.55Worker action 2.36 2.25 2.00 1.94 2.00

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

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APPENDIX 2. TiIE WAY FORWARD: REsoLuTIoNs OF THE PARTICIPANTS

THE PARTICIPANTS AGREED THAT the seminars themselves could not provide solutions to themyriad problems and issues raised. It was felt that the most effective way to take these issuesforward would be to have representatives appointed by the seminar participants attend regionaleconomic development forums. Owners of small and medium enterprises, and other actors intheir regions.

It was agreed that a report would be compiled and distributed to all participants in theseminars and all committees appointed by them. The committees will use this document as apoint of departure for developing a way forward within their own regions.

The Cape Town seminar appointed the following committee to take up the issues identified atthe seminars, insofar as they related to the Western Cape, Eastern Cape, and Border regions:

• Zohra Ebrahim of Consultative Business Movement

* Representative of the Development Bank of South Africa

3 Representative of FABCOS

3 Representative of Kagiso Trust

v Wolfgang Thomas of Small Business Development Corporation

3 Representative of WEPCOC

* Nicky Morgan of uwc.

The committee will establish contact with the Western Cape Regional Economic andDevelopment Forum, especially with the Small Enterprises Task Group of the RegionalEconomic and Development Forum. It is hoped that the forum will then pursue the issueswith other regional forums and at the level of the National Economic Forum. The committeewill monitor and evaluate progress and developments and report back to the plenary in sixmonths. This plenary meeting and any other meetings considered appropriate will be convenedand advised by the committee.

The Durban seminar appointed the following committee:

* S. Soni of Consultative Business Corporation

e J. Negoya of FABCOS

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* L. Grewan of NEI

* Representative of Inyanda Chamber of Commerce.

The committee will convene a caucus of small and medium entrepreneurs in the Natal regionwith the likely assistance of a facilitator (uDw Graduate School of Business was suggested).This caucus will hold a workshop charged with determining a way forward. It may interactwith a Natal Regional Economic Development Forum once such a forum has been established.

The lohannesburg seminar appointed the Sunnyside Group, with the assistance of Ascos, asconvenor of an informal meeting of representatives of organizations present at the event. Thesteering committee appointed by this meeting wiJl carry out the following:

* Establish a network between nongovernmental organizations and others involved indeveloping microenterprises and small and medium enterprises.

* Set up a special working group or task group within the Pwv Regional EconomicDevelopment Forum on the development of microenterprises and small and mediumenterprises.

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APPENDIX 3. AGENDA AND LIST OF DELEGATES

Agenda: Small and Medium Business Developmentin Disadvantaged Sections of the South African Community

Day One

9:00 a.m. Welcome and IntroductionDavid Cook, division chief, Energy and Industry Division, Southern AfricaDepartment, World Bank

9:15 a.m. Presentation of World Bank Research Findings on South African Black BusinessThyra Riley, senior private sector development specialist, World Bank

Carl Liedholm, professor, Michigan State University

10:15 a.m. Discussion of Research Findings

10:45 a.m. Tea

i 1:00 a.m. Panel Input and Discussion of International Case StudiesCase Study: IndiaRoger Robinson, senior economist, World Bank

Case Study: MalaysiaSaha Meyanathan, senior industrial economist, World Bank

Case Study: Indonesia and KoreaBrian Levy, senior industrial economist, World Bank

1:00 p.m. Lunch (moderators meet to identify issues raised in the morning session)

2:00 p.m. Panel Discussion: Constraints Facing the Development of Small and MediumEnterprises in Economically Disadvantaged Sections of the South AfricanCommunity: Learning from International Experience

Judith Aidoo, consultant andformer investment banker, Goldman Sachs

Pedro Jimenez, director, IDEMA, a commercial lending operation tomicroenterprises in the Dominican Republic

Peter Coyle, director of market-linkage programns in the Irish DevelopmentAuthority

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South African expert on constraints facing the development of small and mediumenterprises

3:00 p.m. Discussion

3:30 p.m. Tea (moderators identify work groups based on the issues raised in the course ofthe day and the profile of the seminar delegates)

4:00 p.m. Report by the moderators and discussion and identification of issues for the workgroups

5:00 p.m. Close of the proceedings for day one

Day Two

8:30 a.m. Work Groups Meet

10:30 a.m. Tea

10:45 a.m. Work Groups Report Back

11:30 a.m. Plenary Discussion of Emerging Issues

12:30 p.m. Lunch (moderators meet to structure a comprehensive summary of the seminar'sfindings for presentation to the plenary)

2:00 p.m. Summary presentation by the moderators

2:30 p.m. Discussion of the way forward

3:30 p.m. Close of the proceedings, followed by tea

Ust of Delegates

World Bank Speakers (all telephone numbers are coded 091 unless otherwise noted)

Judith Aidoo, Aidoo Group, 212-858-7572David Cook, World Bank, 202473-3321Peter Coyle, Irish Development Authority, 093-531-60-2244Pedro Jimenez, ADEMI, 809-681-7094Brian Levy, World Bank, 202-473-7488Carl Liedholm, Michigan State University, 517-355-1812Saha Meyanathan, World Bank, 202-473-6376John Page, World Bank, 202-473-7461Thyra Riley, World Bank, 2024734060Roger Robinson, World Bank, New Delhi, 099-111461-7241

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Diana Masone, World Bank, coordinator, 202473-4385

Cape Town Delegates (all telephone numbers are coded 021 unless otherwise noted)

S. Mukadam, ABASA, 638-5184G. Kakora, ABASA, 959-6289Z. Mtyeku, African National Congress, 041434025R. Johannes, ANCYL, 041-55-2852Z. Gxavu, ANCYL, 041-55-5703S. McLean, BKDF, 0401-43-2270S. Bhana, BSR (cPsA), 23-5936A. Malunga, CACHIB, 041-55-2853C. Gqwateka, CACHIB, 55-2853C. McCarthy, Cape Chamber of Industry, 21-5180E. Wessels, Cape Manufacturing Engineers, 54-2112C. Houston, Consultative Business Movement, 658-2387R. Olivier, Consultative Business Movement, 658-2291Z. Ebrahim, Consultative Business Movement, 658-2387R. Alberts, Consultative Business Movement, 011-614-2213V. Arries, CENCE UPE, 041-55-2555L. Ramnewana, Ciskei Small Business, 0401-92-1167P. Walker, Catholic Welfare and Development, 25-2095J. Matolengwe, CTJLP, 31-6105J. Boulle, Development Action Group, 448-7886D. Zimu, Development Bank of South Africa, 011-313-3056S. Matsebula, Development Bank of South Africa, 011-313-3056J. Lange, Energos Foundation, 403-4454T. Mohapi, Engen, 403-4654M. Palmer, Engen, 4034770S. Tuntubele, FABCOS, 21-5032A. Simone, FCR, 47-1600D. Falk, FEF/GAPI, Maputo 49-1505N. Michaels, Foundation for Peace and Justice, 948-9150C. Manning, Freidrich Ebert Stigtung, 47-6033F. Robertson, Independent Business Forum, 47-6044M. Kwenaite, Institute for Pastoral Education, 046-124115D. Visser, Institute for Small Business, 959-2620L. Huna, Kagiso Trust, 696-8243V. Simmers, Kagiso Trust, 696-8243S. Sizani, Kagiso Trust, 041-57-19301. Abdulla, Labour Research Services, 47-1677S. Matebese, NAFCOC, 0473-3214A. Pittier, Norwich Life, 658-2194R. Martin, SACP, 448-7908S. Swepu, SANCO, 041-66-2627J. Naude, Small Business Development Corporation, 462-1910W. Thomas, Small Business Development Corporation, 462-1910

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M. Brand, Southern Cross Business Development Trust, 797-3454J. Ferreira, Stutterheim Development Foundation, 0436-32024A. Volbrecht, Sunflower Projects, 21-7633K. Kennedy, Triple Trust, 448-7341K. Cattell, UCT, 650-2452N. Morgan, uwc, 959-2257R. Allison, Urban Services Group EC, 041-54-3895G. MacMaster, wc Peace Committee, 94-1072Y. Pahad, WCTA, 75-8575L. Kakana, WEPCOC, 633-9597L. Mehlamakulu, WEPCOC, 638-1456E. Gobolo, WEPCOC, 638-1456T. Pasiwe, WEPCOC, 638-5179S. Chikane, wEPCOC, 637-0771T. Nompinga, WEPCOC, 6384265M. Mapuruma, WEPCOC, 6384265

Durban Delegates (all telephone numbers are coded 031, unless otherwise indicated)

M. E. Nyati, Alternative Education Centre, 041-54-3627R. Nyandeni, Business Opportunities Centre, 361-7543S. Soni, Consultative Business Forum, 83-8253G. Cullen, Consultative Business Movement, 32-7784R. Payne, Consultative Business Movement, 011-614-2213M. Sirenya, Consultative Business Movement, 32-7784J. Patel, Centre for Community-Labour Studies, 820-91 1 1N. Levy, Centre for Community-Labour Studies, 820-9111M. Mhlambo, CRTE, 309-3114G. Coleman, Confederation of South African Trade Unions, 368-1902R. Persad, Confederation of South African Trade Unions, 368-1902J. May, Data Research Africa, 303-2756J. Potloane, Development Bank of South Africa, 011-313-3430N. Mvambo-Dandala, Diakonia, 305-6001C. Allan, Durban City Council, 300-6911M. Foster, Ernst & Young, 3044456C. van den Heever, FABCOS, 37-6433C. Gwala, FABCOS, 37-6433S. Collins, IDASA, 304-8893G. Penxa, Isibane Resource Centru, 696-2028P. Tichman, Independent Business Enrichment Centre, 304-7375D. Botha, Informal Trading Opportunities Centre, 32-5671P. L. Booyens, KwaZulu Finance/Investment Corporation, 902-8955H. Ramharak, Kagiso Trust, 305-3371P. Cwazibe, KwaZulu Training Trust, 703-1155S. Comninos, Khuphuka, 307-1195M. Davidson, KwaZulu Government, 0358-20-2240P. C. Le Roux, Natal Witness, 0331-94-2011

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N. Middletor. NACTU, 0331-94-7422L. GreiAjn, NEI, 301-1706D. Cood, Natal Parks Board, 0331-41-7961P. Wakelin, Natal Rural Forum. 368-2633R. F. Bates, South Africa Sugar Association, 305-6161M. S. Ntuli, Southern Africa Taxi Association, 37-6433C. Eckersdorff, Shell, 304-6311A. Singh, Small Business Development Corporation, 86-7130D. Engelbrecht, Small Business Development Corporation, 86-7130R. Sinclair-Black, Standard Bank Small Business Unit, 366-3911J. Mkhize, SANCO Natal, 307-2245G. Rust, Sunflower Projects, 902-9222W. T. Mdunyelwa, Transkei Development Corporation, 037-727-1514M. H. Comwell, Umgeni Water, 0331-454365S. Dlamini, Unilever, 366-2911E. Motala, UDW, 820-2865

Johannesburg Delegates (all telephone numbers are coded 011, unless otherwise noted)

Linda Macun, ADRASA, 484-1763Richard Tyrer, Anglo American Small Business, 6384300Rich Kuhl, Business Forum Small Business Research, 483-1275Frank Mlotshwva, Cooperative for American Relief to Everywhere, 29-9851V. Morake, CASE, 4034204R. Hirschowitz, CASE, 403-4204Andrew Feinstein, Consultative Business Movemen., 491-6461Debra Marsden, Consultative Business Movement, 614-2213Terry Tselane, Consultative Business Movement, 614-2213Pinky Mashigo, CEC Pretoria, 01243-6590Diana Mayne, Central Johannesburg Partnership, 331-2851Septi Bukula, Centre for Developing Business, 643-3241Mary Cobbett, Community Bank, 332-8179Archie Hurdt, Community Bank, 332-8179M. S. Aziz, C.ongress of Business and Economics, 29-1941Keith Foster, Contractor Training Agency, 403-5500/337-8883Anita Stadler, Coopers and Lybrand, 4984115Marius van Wyk, Coopers and Lybrand, 4984102Michael Jackson, Coopers and Lybrand, 498-4125Jacques Basson, Development Bank of South Africa, 313-3529Marie Kirsten, Development Bank of South Africa, 313-3315Nell Sapsford, Development Bank of South Africa, 313-3212Vanessa Boshoff, Department of Finance, 012-315-5699D. Janse van Rensburg, Department of Finance, 012-315-5699Hermien Cohn, Eskom, 800-2846David Moshapalo, FABCOS, 832-1911Sam Buthelezi, FABCOS, 832-1911P. Mabaso, Family Institute, 838-2330

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Mandy Moussouris, FEDSAL, 403-3115Ali Mokoka, First National Bank, 632-2791Norbert Eichler, Friedrich Ebert Foundation, 403-3546Sharda Naidoo, Friedrich Ebert Foundation, 403-3546Roger Mlotshwa, Future Bank, 337-8216Napheus Mokgoloboto, Gazankulu Development Corporation, 01523-63-17.1Percy Nkuna, Get Ahead Foundation, 012-342-2186/87Sizwe Tati, Get Ahead Foundation, 012-342-2186/87Lin Anderson, Get Up Lending Trust, 702-1158Brian Kearney-Grieve, IBEC, 29-9851Ivor Jenkins, IDASA, 012-342-1676Chris van der Merwe, IDC, 883-1600Willa le Roux, IDC, 883-1600Len Konar, IDT, 482-2180E. Kharsamy, Islamic Bank, 838-3254Cleo Mtshali, Job Creation S. A., 394-2206Max Coleman, Kagiso Trust, 29-2441Khaya Dlamini, Kagiso Trust, 29-2441Vincent Mogane, Kagiso Trust, 29-2441Eric Molobi, Kagiso Trust, 29-2441Peta Mphela, Kagiso Trust, 29-2441Yogesh Narsing, Kagiso Trust, 29-2441T. J. Mkhomazi, Kangwane Economic Development, 01316-94-0223Mr De Beer, KwaNdebele Government, 01215-2211D. S. Malan, Malbak, 783-4480Trevor Joseph, Munch Hut, 334-2931Collin Joseph, Munch Hut, 334-2931Vanessa Gonsalves, Munch Hut, 334-2931Michael Leaf, NAFCOC, 402-7591Boginkosl Nhlanga, PAC, 838-6463Murphy Morobe, P. G. Bison, 618-1640Richard Bean, QwaQwa Development Corporation, 05871-30911Mashudu Ramano, Ramano and Associates, 484-7736Thami Mogomane, Regional Peace Committee, 889-6294Mofasi Lekota, Renwick, 788-1812J. W. Prinsloo, Reserve Bank, 012-313-3758M. G. Greyling, Reserve Bank, 012-313-3685Birgit Schroder, Royal Danish Embassy, 012-322-0595Chris Hock, Rural Finance Facility, 337-6208Jenny Hoffmann, Rural Finance Facility, 337-6208Philip Phore, South African Black Taxi Association, 832-1911E. Kuhl, SACOB, 794-3810K. A. Lockwood, sACOB, 402-2524George Mukhavi, SACP, 01215476-2004Herbert Weicke, S. A. German Chamber, 482-1080Vincent Phawahla, S. A. Housing Trust, 889-0115Pule Ganyane, Sasol One, 016-708-2195Edwin Basson, Small Business Development Corporation, 643-7351

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David Jeftha, Small Business Development Corporation, 407-3111Mandisa Maepa, Small Business Development Corporation, 643-7351Steve Ramasla, Shell, 441-7310P. S. Thobela, Small Business Advisory Service, P. 0. Box 845, Kempton ParkMalcolm Kietzman, Standard Bank Small Business Unit, 636-4600Roy Polkinghorne, Standard Bank Small Business Unit, 636-1977Louise Mojela, Standard Merchant Bank, 636-6481Colleen McCall, Stanway Edwards, 339-1516Julian Drew, Stanway Edwards, 339-1516Chris Darroll, Sunnyside Group, 403-5500Chris Rogerson, UF/PWV Economic and Development Forum, 716-4203Carl Jensen, United States Agency for International Development, 012-323-8869Paul Neifert, United States Agency for International Development, 012-323-8869Dawn Radebe, United States Agency for International Development, 012-323-8869Craig Stromme, United States Information Service, 012-323-8869G. de C. Murray, Vaalgro, 016-81066Sello Morake, Vaalgro, 016-81066T. M. Dama, Venda Development Corporation, 0159-23122Gillian Godsell, Wits Business School, 643-6641Gill Noero, Women's National Coalition, 486-1276

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