Why we really need to take South Africa’s informal entrepreneurs more seriously

South Africa’s informal economy is booming. However, the lack of reliable data and realistic policies from government means millions of people are without security and support on the one hand, while potential opportunities are wasted on the other.

If trends revealed by Leif Petersen from the Sustainable Livelihoods Foundation are to be taken seriously, townships are well on their way to becoming the future of the country’s cities and thus its economy. In Cape Town, a city home to about 4 million people for example, 38% of the population live on a minimum earning of R1 600 per month, supporting a family of four. The majority of these families live in one of the city’s 232 informal settlements — which have risen up as a result of mass urban migration coupled with a history of Apartheid’s segregation policies.

For both government and business to adequately leverage this sector, in favour of all parties involved, more reliable data, insight and a renewed approach are required. As pointed out in a recent Ventureburn article, Africa — with its young population and pressing need for infrastructure — is the frontier for impact investing. The need to fully understand potential opportunities in sectors like townships is thus a no-brainer.

Speaking at the Bandwidth Barn recently, Petersen found that the informal economy — though very large — is very poorly documented. Kitted with clipboards, GPS units and bicycles, this prompted the Foundation’s team to go on a mission and map eight townships in South Africa, which led them to recognise 9 500 informal businesses.

These figures are said to be much higher than what the state formally documents. For instance, the research found that one of these communities, Belhar in the Western Cape, consists of 45 000 people, 8 000 houses and 880 business activities. The City, on the other hand, is said to recognise only 125 business activities.

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“The key aim of this work is to help enhance government policy, because if government can have better policies it can bring more businesses into the fold and help support formal businesses find a way to get into the sector,” Petersen said.

In particular, the organisation focused on liquor retailers, spaza shops, child care, hair salons, traditional healers, street vendors and micro manufacturers, which make up an estimated 75% of all the micro enterprises found in the township economy.

“We’re not talking about enterprises that are necessarily going to skyrocket South Africa’s economy to the moon, but at the same time they are all important businesses that bring about livelihoods to the people,” he said.

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Current estimates put the total contribution of the informal economy to the gross domestic product (GDP) at around 5%, though Petersen believes that figure to be much bigger — over 10%.

“We have to look to the informal economy as part of the country’s future,” he added, pointing out the National Development Plan’s (NDP) over-ambitious vision of creating 11 million jobs between 2015 and 2030. “Within the last 10 years, we only managed to increase employment by 624 000.”

“Realistically, the idea that we’re going to create 11 million jobs in the next 15 years is not gonna happen. We can’t even keep our lights on,” Petersen continued.

Informal businesses emerge where opportunity presents itself. Government has little, if any, support structures in place for these entities. To the contrary, most of these businesses are naturally excluded from the formal economy because the barriers to entry are too high and unrealistic.

He referred to instances such as zoning rights which dictates that certain businesses are not allowed to operate within certain areas. For operations such as shebeens (informal liquor shops), which rely on their neighbourhood location, this law makes it impossible for them to formalise. These businesses tend to suffer from police who tend to take advantage of this broken system to easily collect bribes.

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“How do you formalise a business when the very place from which they work is breaking the law? The opportunities for them to formalise are not there,” he said. “We’ve criminalised these business and there are huge implications for that.”

“Even getting people into the banking system is difficult. Because as soon as you’re banked, your money can be found, and as soon as your money can be found, you can get taxed,” Petersen added.

While the state is missing out on taxation opportunities, informal businesses don’t have access to the security of financial services which would’ve given them access to loans and insurance. Instead these enterprises are forced to deal with large amounts of cash which, once stolen, could flatline the entire business.

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Informal business is entrenched. Government wants to get these businesses registered. But why would [informal businesses] want to do that? Frankly, I run an organisation that employs 12 people. I got FICCA’d the other day — a freaking nightmare. It really is. Realistically, why would you want to formalised? This is the problem. None of these businesses see any value in doing so. I don’t blame them. I actually wish I could informalise.

While we see pockets of government initiatives trying to tap into this sector, a different approach is certainly needed — one which addresses the barriers to entry. As recently reiterated in a Ventureburn article, the costs of compliance is simply too high for small businesses (not to mention the informal businesses) to meet the goals set out by the NDP.