FOR OFFICIAL USE ONLY Document of THE WORLD BANK Report No. 24449 - ZA SOUTH AFRICA Constraints to Growth in Johannesburg's Black Informal Sector Evidence from the 1999 Informal Sector Survey June 2002 PREM1 Africa Region This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization CURRENCY EQUIVALENTS Currency Unit: South African Rand (ZAR) US$1.0 = ZAR 1.65 ZAR1.0 = US$0.09 (May 2002) FISCAL YEAR April 1 to March 31 Vice President: Callisto Madavo Country Director: Fayez Omar Country Program Coordinator: James Sackey Sector Manager: Philippe le Houerou Task Team Leader: Vandana Chandra TABLE OF CONTENTS Executive Summary ..........................,,., . ............. v 1. INTRODUCTION .............. ......................... 1 Motivation .1 Sampling and weighted indices ............................... , .,,, 2 Objectives of the report .............................. , 2 Outline of this report .................,............. 3 2. DEMOGRAPHS. 4 Introduction. 4 General Characteristics of an Informal Finn .......6........... 6 The Informal Intrepreneur .................. , .. 8 Motivation to Start an Informal Business - A Solution for African Unemployment ? .10 3. ECONOM4C AND BUSINESS ENVIRONENT FACING INFORMAL FIRMS IN JOHANNESBUlRG .14 Location, Ifrastructure and Access to Service and Transport .15 Economic and Business Environment - Perceptions of Entrepreneurs .20 Government's Contibution to the Growth of Informal Finns .......................................... 22 4. FINANCIAL CONSTRAINTS ..25 Introduction ...... 25 Sources of Finance for Start-up Capital and Other Business Needs .26 Access to Formal Credit .28 Financial and Business Record Keeping in Black Informal Fims .31 Some Policy Considerations .32 5. SKILLS, EMPLOYMENT AND WAGES IN THE INFORMAL SECTOR .36 Present Employment Levels and Patterns .36 Employment Trends in the Informal Sector .39 Remuneration in the Informnal Sector ..........................,. , , . , .............. 40 Skills and Training in the Informal Sector . 42 The Informal Sector - A Training Platform for New Black SMME Owners .45 6. PROCUSTION AND ASSETS ..47 Capital Assets .47 New Investment .................. 48 Inventory in Informal Firms .49 Length in Working Hours . ............................................................................. 49 Temporary Work Stoppages and coping in the Informal Sector ............ ................................. 50 7. RELATIONSHIP BETWEEN THE INFORMAL AND FORMAL SECTORS ......... ..................... 52 Economic Relationships and Linkages Between Informal and Formal Sectors ......... .................... 52 Competition .............................................................................. 55 Importance of Formal Sector ......................................................................... ..... 56 Pattern of Growth in the Informal Sector .56 Efforts to Formalize .58 8. POLICY ISSUES, INTERNATIONAL COMPARISONS AND AREAS FOR FURTHER RESEARCH 6 1 Johannesburg's Informal Sector .62 A Comparison of Johannesburg's Informal Sector with Informal Sectors in Other Countries . ........... 63 A Comparison of the Black Informal Sector with Non-Black SMME and Micro Firms Within Johannesburg - A Special Case ............................ 63 International Experience in Govermnent Support to the Informal Sector ....................... ..... 65 Issues for Further Research ............................ 72 Tables: 2.1 GJMA: Informal sector sample by sector and employment-size class. 4 2.2 Racial composition of Johannesburg's formal and Informal sector Sample 1999. 5 2.3 Income pooling in an informal entrepreneur's household ............................ ............... 12 2.4 Use of profits from an informal business .12 4.1 Informal firms access to formal bank loans .............................. 29 4.2 A comparison of black-owned informal and formal non-black and black SMME (micro) in Johannesburg, 1999 ............ 33 5.1 Employment trends in the informal employer-firms .3............................................9. 3 5.2 Wage paid in the informal sector (Rands per month) ................ ................................. 40 5.3 Comparisons of informal monthly wages with the national minima, 1999 ........ ................ 41 5.4 Benefits paid in the informal sector (percent of firms that pay) ................... ................. 42 5.5 Informal firm owner's highest level of vocational training ............ .............................. 43 7.1 Value of contracts given to informal firms in 1998 (Rands) ............................ 55 Charts: 2.1 Distribution of firms across sectors by gender ............................ .............................. 7 2.2 Activities of informal entrepreneurs before they started the business ......... ..................... 9 2.3 Motivation for starting a formal SMME, 1999 . ....................................................... 10 2.4 Motivation for starting an informal business SMME in GJMA ........... .............1............. 1 2.5 Main sources of household income for an informnal entrepreneur .......... ......................... 13 3.1 Location of informal businesses in GJMA . ............................................................ 15 3.2 Informal firms - access to basic services ................................................................ 16 3.3. Rankings of the main modes of transportation used for business .................................... 17 3.4 Types of crime experienced by infornal firms that were victimized 1 1998 ...............S....... 18 3.3 Key market-related problems facing informal businesses in GJMA ......... ....................... 19 3.6 Constraints to expand production capacity in the informal sector .......... ......................... 19 3.7 Infasucture and services constraints in the informal sector ............ ............................ 19 3.8 Govermnent support services and crime-related constraints ............ .............................. 21 3.9 Priority actions that Govermnent can take to promote informal business growth ....... .......... 22 3.10 Formal SM 1E owners views of what local authorities can do to promote SM EIs in Johannesburg, 1999 .................... .................................................. 23 3.11 Formal SMME owners views of what national authorities can do to promote SMMEs in Johannesburg, 1999 . ..................................................................... 24 4.1 Sources of financing for informal firms ........................... 27 4.2 Use of business loans in the informal sector .... ......................................................... 28 4.3 Reasons for failure in obtaining a bank loan . .......................................................... 30 4.4 Profile of record-keeping among informal business owners in Johannesburg ...................... 31 4.5 Reasons why 42 percent of business owners do not keep business records ........ ................ 32 5.1 Pattern of employment in informal employer-owned firms in Johannesburg, 1999 ....... ........ 37 5.2 Use of permnanent workers in the informal sector .38 5.3 Means of skills acquisition in the informal sector .................... ................................. 43 5.4 Sources of training and other assistance n the informal sector.......... ................. 44 6.1 Value of informal firms assets by sector (median 1999 Rands) ........... .......................... 48 6.2 Ratio of investment to fixed capital stock in informal firms (1998 Rands) ........ ................. 49 6.3 Reasons for work stoppages for at least 1 day in 1998 in the informal sector ...................... 50 7.1 informal firmn's input purchases from other tiers of the economy .......... ......................... 53 7.2 Sale of output from informal firms to various buyers ................. ................................ 54 7.3 Informal finn's competitor's across all tiers of industry ............... ............................... 56 7.4 Growth Patterns in informal firns since inception .................. .................................. 57 7.5 Informal firms that planned and undertook expansion in 1998 ........... .......................... 57 7.6 Informal owners most important business plans for 2000 - 2002 .......... ......................... 58 7.7 Motivation for joining the formal sector ..................... I ........................................... 59 Boxes: 3.1 Business support centers .2..................................................................... 21 4.1 Credit alone is not sufficient for informal sector growth - skills/training-enhanced credit will help .................35........ 3 5 8.1 Ten principles for sustainable lending to micro-entrepreneurs .................... ............... 68 8.2 Principles underlying best practice in training of rncro entrepTenews ......... .................. 72 References ............................................................................. 74 Annexes A. The Legacy of the Apartheid - Designed Distortions - Constraints to Black Employment Today .................................. ........................................... 80 B. Relationship Between Access to Bank Loan and Level of Investment .......... ........................ 85 1 Demographics ............................................................................. 87 2 Location and the Economic Environment in GJMA's lnformal Sector .......... ...................... 90 3 Financial Constraints in the Informal Sector ....................... I ....................................... 94 4 Employment and the Informal Sector ..................... .................................................. 99 5 Productive Assets Etc .............................................................................. 103 6 Formalizing the Infonnal Sector ............................................................................. 108 7 Relationships Between the Informal and Formal Sectors ............... ................................. 109 Acknowledgements: This report was prepared by Vandana Chandra (Task Manager), Jean-Pascal Nganou and Claire Marie-Noel (consultants). We are indebted to J. Ahmad (AFCOI) and K. Gordhan (City Manager, GJMC, 1999) for initiating the LED Project and thank M. Hallward-Dreimer (DECRG), G. Batra (PSD), D. Go, P.H. Le Houerou, P. Moll, J. Sackey, and F. Yagchi (AFTP1) for reviewing the report and giving us many helpful comments and suggestions. In South Africa, we appreciate the financial and logistical support provided by M. Maganlal and R. Seedat (Strategic Planning Unit, GJMC) and the GJMC. We extend a special note of thanks to Professor J. Martins, and D. Tustin (BMR) for expert survey management and to members of the survey team in South Africa who were drawn from RAU, University of Pretoria, UNISA, Wits, Vista and the BMR staff. We also thank B. Sibisi (Department of Trade and Industry), L. Kettledas and L. Seftel (Department of Labor), L. Lehutso-Phooko and R. Naidoo (Research Department, South Africa Reserve Bank), W. Nkhulu (Presidency), and the participants at the First DPRU conference on labor market issues. The views expressed here do not reflect those of the World Bank or its members and we accept responsibility for any remaining errors and omissions. Executive Summary This Report is the third in a series of reports' that evolved from a collaboration between the local government of the City of Johannesburg and the World Bank in 1999-2000 on the theme of local economic development. It presents the main findings of the 1999 GJMC2-World Bank informal sector survey which covered 499. mostly black informal firm owners across 11 manufacturing and service sectors. The findings in this Report are based on firm owners responses and firm level data and are summarized below. There are two objectives of this study. The first is to examine the characteristics and constraints facing informal firms in Johannesburg. Since 1994, government has rested its goal of poverty and inequality-reduction in South Africa on private sector-led job creation. Among other things, in its commitment to reduce racial inequality, the government has made a political commitment to black empowerment and allocated resources for credit and training, and other SMME promotion programs. A second objective of this study is to explore the policy implications of government assistance to the informal sector on grounds of poverty reduction and job creation for the poor. The merit of supporting the sector on the basis of apartheid-created racial inequality is also examined. Who are Johannesburg's informal firm owners? Unlike their formal counterparts, owners of Johannesburg's informal firms are not registered to pay VAT, nor are they subject to any other formal regulation or taxation. The informal firm owners are predominantly (97 percent) black Africans who, on average, generate 3 jobs per firm, the same number of jobs as formal micro firm owners. 50 percent of them were long term unemployed and only 36 percent had any previous work experience when they joined the informal sector. One third of them started as self-employed businesspersons; the remainder as small employers. With limited financial capital in the range of R 2000 - 10000 ( US $ 360 - 18003) and almost no vocational skills, most were motivated to join the informal sector because it provided a source of income. 63 percent of the firms are post-apartheid i.e. they were established in 1995 or after and are still in fledgling status. Even though 44 percent of the informal jobs are performed by family labor, 93 percent are fully remunerated, full time and permanent. Women constitute 38 percent of all business owners. Gender affects employment patterns -- female owners are most conspicuous in retail and hawking, shebeens, clothing and food. Though the size of the informal firms is micro, job creation has grown impressively in recent years. Trends indicate that during 1997-99, while formal job losses continued, informal firms expanded and the number of jobs per firm rose from 2 to 3. Similarly, the pattern of investment The other reports are "Constraints to Growth and Employment in South Africa: Report No. I - Evidence from the 1999 Large Manufactuning Firm Survey" by Chandra, Moorty, Rajaranm and Schaefer (2000), and " Constraints to Growth and Employment, Evidence of the SMME Firm Survey," WB Report No. 24330-ZA by Chandra, Moorty, Nganou, Rajaratnam and Schaefer, (2001). 2GJMC: Greater Johannesburg Metropolitan Council. 3 The exchange rate used is R 5.5 = $1 in 1999 - 2000 at the time of the Survey. v has been impressive at a time when overall growth is low. Compared to 33 percent of the SMMEs, 61 percent of the informal firms increased investment. There is a positive relationship between access to formal credit (bank loans and government assistance) and investment in the informal sector even after controlling for other types of credit (from private lenders and suppliers) and other determinants of investment such as profits from a proxy variable. In 1999, as a share of the fixed capital stock, the scale of investment averaged 0.50. Both employers and workers labor 26 days a month, 9 hours a day. In 1998, 55 percent of the firms had a work stoppage due to a holiday, marriage, funeral or sickness. But flexible work arrangements helped to build a resilience to temporary shocks. Only 28 percent of firm owners lost revenues and coped by substituting either their own or their family's unpaid labor time. Most firm owners are primary income earners in poor households but some are emerging entrepreneurs preparing to graduate to the formal sector. Though business profit income averages R1400 ($254) per month, low overheads allow informal businesses to provide a survival strategy for the entire household. Comparing income per informal household member, the average South African's income is 70 percent higher or the average Gauteng resident's income is 230 percent higher. Informal employee wages are even lower. At an average of R 700 ($ 127) per month, they range between 34 - 78 percent of the nationally negotiated minimum for semi- and unskilled workers. Constraints to growth In order of importance, firm owners indicated that growth of informal firms is constrained in the following ways: (1) lack of credit, (2) low demand, and variability in income/revenues, (3) high cost of infrastructure (public transport) and services (electricity, water and telephone), and poor access to business support centers, (4) poor access to training, and (5) lack of storage spaces/permanent stalls, (6) lack of transport facilities, and (6) inadequate business space. Constraint 2 reflects external factors such as low overall demand, competitive pressures from other informal firms and variable income streams. Even though these constraints were listed by firm owners, additional firm data associated with access to credit or poor training of owners validates these perceptions. Lack of credit For 80 percent of informal firms, the primary constraint is shortage of capital. Because of poor access and prohibitive interest rates, black informal firm owners use little formal and informal credit. The average amount of start-up capital is RI 800 ($327) and 73 percent of the black firm owners finance it from personal and family savings. Others use stokvels and retrenchment packages. Only 5 percent rely on private money lenders. Working capital too is financed informally by friends, relatives and stokvels. Fornal credit plays a minor role - less than 10 percent of the firm owners use banks. Only 12 percent have ever applied and 4 percent have obtained formal credit, mainly because of complex application procedures, lack of collateral and credit history and high costs. Empirically, survey data validates a statistically significant relationship between access to all types of credit - e.g. finance from banks, government, private lenders and suppliers - and investment while controlling for other investment determinants. While it may be argued that poor access to formal credit is a characteristic that could apply vi worldwide to the poor in any informal sector, it also reflects the effects of past inequities towards blacks in Johannesburg. Earlier in their lives, several generations of blacks were subject to apartheid's discriminatory polices that restricted them from lawfully engaging in business skills acquisition and business activity - production, investment and financial saving to acquire credit records, collaterals and financial wealth. Their poor access to credit is proof of apartheid- created inequality. Annex A provides a discussion of apartheid era laws pertaining to black business development and their effects. Infrastructure, services, transport and business space-related constraints Half the informal owners operate businesses out of their homes while the other half do not have fixed locations. Since business locations are dispersed, the challenge of upgrading informal business districts is inextricably linked with the upgrading of poor residential areas and their access to income opportunities. Some informal firms do not have adequate services and basic infrastructure. 70 percent have access to water, sanitation and electricity but only 40 percent are linked to postal services, telephones or public transport. So, while access to services is a key issue for those (30 percent ) not connected, the high cost of services is a constraint for many who have access. Public transport is a critical constraint. 40 percent of the business owners walk to work or operate from home. Over 70 percent of employees simply walk or use taxis. For informal firm owners, the historical separation of black townships from non-black markets with far greater purchasing power creates additional obstacles. For most informal firm owners poor transport, unaffordable business spaces and lack of storage facilities and theft pose yet other constraints. 30 percent of the business owners noted that they had been victims of crime on the street. Shortage of skills and training Apartheid's discriminatory polices such as the Bantu Education Act of 1953 also affected adversely the quality of basic education in black schools with natural implications for human capital accumulation and employment options. The Act legislated severe cuts in government expenditures on African education and designed a school curriculum premised on the belief that, unlike the white South Africans, blacks were not entitled to accumulate skills and jobs above certain standards. These discriminatory practices and the system of separate education and industrial training lingered until the 1980s. Survey data reveals that due to meager stocks of physical and human capital, labor productivity in informal firms is low and mirrored in correspondingly low wages. An encouraging fact is that 80 percent of informal firm owners have between grade 4 - matric education and so are 'trainable' for basic business skills. Only a third of them have had some type of informally imparted vocational training. 20 percent of the owners received some training in business opportunity identification and machinery/equipment use. Popular training providers are Small Business Development Centers (SBDCs), private firms, and Industrial Training Boards, used by 4 - 9 percent of owners. Informal business owners flagged their demand for training by showing their willingness to pay - about R 1000 ($182) for their own training and R 850 ($155) for their employees. vii Linkages between informal and formal firms The main channels of transactions between various formal tiers of industry and informal firms are examined in terms of the proportion of informal firms that purchase inputs from or sell outputs to other formal firms. Firm level data reveals that over 80 percent of the informal firms depend on formal large, small and government firms for their inputs. This strong complementary relationship between informal and formal firms can be informative in designing training programs for informal firms. The sales relationship suggests the presence of competition and substitution. 36 percent of the informal firms sell directly to formal firms, and over 50 percent compete with them for customers. Polices targeted for SMME promotion may not automatically support informal firm growth. Nevertheless, most informal firm owners consider the formal sector important for their business and 26 percent would like to formalize to take advantage of its higher and more stable income opportunities. Survey evidence suggests that as informal firms reach a critical minimum size, their credit and other needs provide a natural incentive for them to formalize. Given their poverty levels, govemment support conditional on their formalization and taxation is likely to discourage them. There is a delicate balance between the social and political pay offs from their voluntary graduation to SMME sector and their effort in shirking taxation and control. Policy implications for local and national governments Survey findings show that at the inter-country level, the characteristics of the informal sector in Johannesburg resemble those of an informal sector anywhere in Africa or South Asia, suggesting that black informal firms are not special. As in the case of informal firm owners in Africa or Asia, a rationale for government assistance on grounds of poverty reduction and job creation could also be made for Johannesburg's black informal firm owners. Earnings in the sector for firm owners and employees are below poverty level. Informal firms play a useful role in job creation by employing the bulk of the unemployed poor blacks who do not have the pre- requisites to enter the formal sector. However, there is one critical respect in which Johannesburg's informal sector is unique - at an intra-city level or within Johannesburg, its racial composition is lop-sided and reflects crucial constraints applicable primarily to black firm owners. Relative to the 75 percent share of blacks in the total South African population, the share of black firm owners is 97 percent in the informal sector but only 7 percent in the formal SMME sector. Access to credit is also marked by racial inequality. Survey data reveals that while 50 percent of formal, mostly white SMMEs had used bank loans in the previous 5 years, only 33 percent of the formal black micro firms who were fortunate to enter the SMME sector could do so. In contrast, only 4 percent of the black informal firms owners had ever obtained a loan for working capital. Hence, the reduction of racial inequities inherited from the past is an additional rationale that reinforces the case for govermnent assistance to the informal sector. If apartheid had never been, South Africa's informal sector, like any other informal sector, would have contained the poorest segments of the population of all its races - whites, coloreds, Asians and blacks. Instead, with minor exceptions for coloreds in the Westem Cape, South Africa's informal sector comprises primarily of black Africans. viii Survey data and the responses of firm owners both jointly indicate the set of govemment actions that can promote firm growth and job creation in the informal sector of Johannesburg. At the level of the local government of Johannesburg, the following are the top priority actions: (1) improved safety and security on the streets, (2) improved public transport to increase the proximity of firms to the lucrative input and goods markets in the north of the city; this will enable closer integration between the informal and formal sectors and promote outsourcing opportunities and growth; (3) improved infrastructure (road maintenance, network development, electricity, water); (4) provision of permanent market stores to improve storage and reduce theft; and (5) training for informal entrepreneurs. The remaining constraints in the areas of access to credit, training and skills development fall under the sphere of national government and raise several complex issues, especially those related to the viability of scaling up group monitoring and lending, public intervention, public provisions and their fiscal sustainability. These are discussed in the context of international experience and require further research. International experience and issues for further research International experience with microfinance research in the l990s shows that the long-standing and fundamental assumptions about the bankability of the poor has been overtumed. There is now available, well documented evidence from select developing countries which shows that low-income clients such as micro entrepreneurs can use small loans productively, repay fully and on time when there are incentives in place to do so and are willing to pay high real interest rates. Some examples of best practice and the basic principles of micro finance and training for micro entrepreneurs are presented from South Asia (Bangladesh, Indonesia) as well as West Africa (Burkina Faso, Guinea and Ghana). However, more research is warranted for effective adaptation of international experience to this sector. Issues which may benefit from further research include an assessment of the fiscal costs of supporting the black informal sector through micro credit and training programs; key elements in the design, adaptation and implementation of best practice in micro credit, and the feasibility of designing successful programs like PRIDE (West Africa) that based the availability of credit contingent on successful completion of small business training. Given that black firm owners in the informal and SMME sectors are deficient in both credit and skills development, this seems to be a useful concept for further research. ix INTRODUCTION MOTIVATION This report evolved out of a partnership between the city of greater Johannesburg and the World Bank during 1999-2000 on the theme of Local Economic Development (LED). The main motivation underlying the partnership was to identify constraints to investment, growth and job creation in the Greater Johannesburg Metropolitan Area (GJMA). A related objective was to use the LED studies as inputs for the Bank's ongoing sources of growth study. Since structural and real sector issues had not been systematically examined in post-1994 South Africa at either the regional, national or city level, it was necessary to use large-scale firm surveys to understand the nature of the structural constraints hindering growth in various tiers of Johannesburg's industrial economy. Five surveys and studies were undertaken with the goal of identifying key constraints and their policy implications for local (GJMC4) and national government.5 The report from the first study focused on the large manufacturing firms' tier.6 The second report addressed Small, Medium and Micro Enterprises (SMMEs) in the formal production and service sectors.7 This report is the third in the series and focuses on informal firms, 97 percent of which happened to have black owners in Johannesburg's main markets.8 The chapters of this report present findings from the 1999 GJMC-World Bank Informal Firm Survey of 499 firm owners interviewed in the Greater Johannesburg Metropolitan Area (GJMA). All interviewees were owners of survivor firms, i.e. firms that were able to wither the test of the market forces and stay in business as opposed to those that shut down within a few years of starting. The latter were not included in the sample. The Survey covered 11 production and service sectors.9 Typical examples include shebeens, retail, hawking, sale of prepared food and beverages, hair-salons. Informal firms are defined as firms that are not VAT-registered and are not subject to any type of government legislation such as taxation, labor market regulations, wage agreements, licensing laws, etc.. Since Johannesburg constitutes South Africa's largest industrial area and contains the largest black townships, it also houses some of the largest concentrations of informal markets. A study of its informal firms thus has larger implications for South Africa's black informal sector comprising the bulk of the urban poor. 4 Greater Johannesburg Metropoltan Council. 5 Since a national sample frame was available for the large firm survey, many of its findings are more widely applicable to the larger national economy. 6 'Fonnal' firns are defined as finns (with over employees) that are registered with the government and subject to government regulations including taxes. The survey covered 325 firms, such ttiat each finn represented every 7h. firm in Greater Johannesburg. See South Africa Discussion Paper No. 14, World Bank 2000. 7SMMEs were defined as formally VAT registered fnmns with 1 - 49 employees. The survey covered 800 firms in 4 production and 4 service sectors. See WB Report No. 24330-ZA, "South Africa Constraints to Growth & Employment - Evidence of the SMME Firrn Survey." 8 The remaining two reports cover the two frontier sectors of South Africa: tourism and IT. 9 Prepared food and beverages, clothing, furiture, metals, construction, retaiL food hawking, non-food hawking, shebeens, personal services and tourism. SAMPLING AND WEIGHTED INDICES The Survey was conducted at the firm level in the main markets of Johannesburg which have informal firms. These included the Central Business District (CBD), other markets close to the CBD, near the train station and the southern parts of the city including townships which have large market areas. Since there is no register of informal firms, enumerators counted the total number of informal firms in each sector in each market and then sampled proportionally to arrive at the total number of firms required for each sector in each market. For example, if a field enumerator was supposed to survey 10 firms in the clothing sector in Market A,. and after the total count she found that there were 100 firms in clothing in Market A, she would survey every 1011. firm to arrive at the total count of 10. Approximately 45 firms were surveyed in each of the 11 sectors with a total of 499 firms: prepared food and beverages, clothing and garments, furniture, metals, construction, retail, food-hawking, non-food-hawking, shebeens, personal services (hair salons, barbers, shoe shines etc.) and tourism. Survey data is typically presented in the form of charts or tables with cross-tabulated statistics. However, for questions that required some type of ranked responses, such as a factor being a 'major', 'moderate' problem or 'not a problem' and 'n/a.,' or options requiring a rating of first, second and third choices, it is useful to construct a weighted index. In most cases, weights are attached to the rankings. So 'Major' = 3, 'Moderate' = 2 and 'Not a problem' - 0 weight for example. Each firm's responses are multiplied by the appropriate weight and the sum of the total weighted responses or frequencies are calculated for all respondents for each question. The maximum score is normalized to 100 and the rest are divided by the maximum score and multiplied by 100 to obtain the index. Note this approach allows us to control for both high rankings assigned by a small number of respondents to some choices relative to others as well as a low rank assigned by many respondents to the more popular choices. Earlier tests of robustness with different weights such as 1, 2, 3 or 1, 3 5 showed that our results are fairly robust, their subjective weights notwithstanding. OBJECr1vES OF THE REPORT As in any other city, Johannesburg's informal firm owners and employees represent the poorest segments of the urban population. While this survey did not estimate the size of the informal sector in Johannesburg, it is reasonable to assume that since the mid-1990s, mounting job losses in the formal sector, especially manufacturing, have pushed a sizable and growing proportion of Johannesburg's black township population to rely on informally generated income. Furthermore, the slow pace of overall economic growth implies that at least in the medium term, the informal firms sector will continue to remain a critical source of livelihood for a large proportion of Johannesburg's poor black population. There are two objectives of this study: The first is to obtain an understanding of the characteristics and constraints facing the predominantly black informal firms in Johannesburg. While firm owners views were elicited 2 with respect to constraints, the validity of the latter was also compared with firm level data collected in the process of surveying the firms. Therefore the results in the surveys are not mere perceptions of firm owners. A note is made wherever the results pertain to only perceptions. The second objective is to understand the rationale and nature of government support to the informal sector. As in the case of the informal sector in many developing countries, South Africa's black informal sector also merits government intervention for distributive reasons such as poverty reduction and job creation. Since the economic effects of apartheid's racially discriminatory policies have a strong probability to surface in survey findings, a related objective is to investigate if there is a special case for black informal firm owners. This is achieved by comparing the predominantly black informal and mostly white SMME and micro firms sectors. The scope for government support is examined in terms of actions that local and national governments can take to promote growth and job creation in the informal sector. Since actions required on the part of local government are more likely to fall within the existing mandate of the authorities, issues regarding their feasibility are likely to be less problematic. However, actions pertaining to national government intervention are more likely to raise problems regarding their fiscal sustainability, implementation, public provision etc.. These are cast in the context of relevant intemational experience, but since they fall outside the scope of this report, they need further research. Issues for further research are outlined. OUTLINE OF THIS REPORT The chapters in this report cover the responses of 499 informal firms owners in 1999 in Johannesburg. Where relevant, comparisons with findings from the 1999 GJMC-World Bank SMME surveys are made. Chapter 2 presents the characteristics of informal firmrs and a profile of their owners. The third chapter discusses key constraints to business growth in informal firms, especially in the context of their peculiar location patterns and associated handicaps. The fourth chapter addresses financial issues in the context of constrained access to formal credit. Chapter 5 focuses on employment-related issues and evaluates the level of informal wages in the broader context of the formal labor market and poverty. Training related issues are also noted. Chapter 6 considers production-related issues while chapter 7 examines the economic relationships between informal and formal firms. Chapter 8 concludes. The annexes provide details with respect to the following firm categories where relevant: self-employed and employer firms, post- and pre- apartheid firms, and female and male-owned firms. In particular, Annex A presents a brief discussion of apartheid era laws and regulations that inhibited black economic activity and pertain to issues associated with access to credit and weak human capital in black firms today. Annex B presents statistical analysis pertaining to the relationship between access to formal credit and investment. 3 DEMOGRAPHICS LNTRoDUCrION The Johannesburg Informal Sector (IS) Survey covers a total of 499 informal firms'0 across 11 sectors in the City of Johannesburg. Informal firms are defined as firms that are not registered to pay VAT."' Like any other informal sector, Johannesburg's informal firms also have a high turnover rate. The firms surveyed in 1999 are representative of only those which survived competitive market forces. Surveyed firms are distributed across 4 production sectors'2 and 7 service sectors,13 and their distribution permits statistical analysis at the sectoral level. Approximately 45 firms were interviewed in each sector (Table 2.1). As a group, the service sectors cover 64 percent of the sample. Table 2.1: GJMA: Informal sector sample by sector and employment size-class Total Sectoral Self-employed Employer number of share (1 employee) (2+ employees) firms (%) (%) (%) interviewed Prepared Food and Beverages 42 8 24 76 Clothing 45 9 53 47 Furniture 45 9 11 89 Metals 49 10 24 76 Construction 44 9 18 82 Retail and Hawkers* 139 28 44 56 Shebeens 46 9 13 87 Personal Services 44 9 30 70 Tourism 45 9 69 31 Total 499 100 34 66 * Includes food hawkers, non-food hawkers and retail. Since firm size is likely to affect the behavior of an informal firm owner, the sample is further disaggregated into two employment size classes: (a) self-employed or one-employee firms, and (b) employer firms or firms with two or more employees. Roughly 33 percent of the sampled firm owners are self-employed. Furniture and shebeens have the least proportion of self- employed owners while clothing and tourism have the most (Table 2.1). 'Since the total number of informal firms in the GJMC area is unknown, the survey sampled a sufficiently large number of firms in each sector. 11 According to the ILO manual, there are several definitions of informal finns, depending upon the context. In the context of South Africa, the most appropriate definition was considered to be "firms that are not registered to pay VAT." 12 Prepared food and beverages, clothing, furniture and metals. 13 Construction, shebeens, personal services, tourism, retail, food hawkers and non-food hawkers. Because of the sirilarities in the nature of their activities, the retaiL food hawker and non-food hawker sectors have been collapsed into a unique sector (called retail and hawkers) in the analysis. 4 Racial profile - unique within Johannesburg's and South Africa's industrial structure Johannesburg's economy represents a disproportionately large share of South Africa's economy; for example, its share of large firms accounts for over 40 percent of all large firms in the national manufacturing sector and much higher proportions in many of the service sectors. While its large firms, at least in manufacturing, are mostly white-owned,14 and its middle-tier comprising of formal SMMEs is also predominantly white-owned, there is an overwhelming concentration of black ownership in its lowest tier - the informal sector. Such intra-city and indeed intra-country segregation in economic activity makes Johannesburg's informal sector unique relative to the informal sector in any other country. Although from a poverty perspective, Johannesburg's informal sector resembles the informal sector in other developing economies, its racially lop-sided profile mirrors distinctly the social distortions carved by apartheid policies within Johannesburg's, and indeed within South Africa's, industrial economy. (For a detailed discussion of these polices, readers are referred to Chapter 8 and Annex A.). Table 2.2 indicates the lumping of black owners (97 percent) in the informal sector. In the very~ next industrial tier comprised of formal SMEs, the share of black owners plummets to 7 percent. In comparison, the share of blacks in the national population is 77 percent. If apartheid had never been, Johannesburg's informal sector, like any other in the world, would have displayed a reasonably fair representation of the poor of all four racial groups in South Africa. Instead, the share of non-black (Asian, colored and white) informal firm owners is extremely small at 3.2 percent and contrasts sharply with their share of 23 percent in the general population. Table 2.2: Racial composition of Johannesburg's formal and informal sectors, sample 1999 Population Informa SMME - SMME - share I sector full post-1995 sample sample'5 _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _1 9 9 9 Black 77% 96.8 160/o 7% 13% Colored 9.4% 2% 2% 2% Asians 2.6% 0.2% 9% 10% Whites 11% 1% 56% 53% South African - no race n.a - 17% 15% indicated I Foreign n.a - 9% 7% 14 'Me share of non-white or Previously Disadvantaged Individuals' representation in large firms was only 14 percent in 1999. Most of this consisted of board membership. S The share of post-apartheid ( post-1995) SMMEs was 30 percent in the full sample of 799 firms in 1999. 16 About 10 percent of the Black entrepreneurs immigrated to South Africa from neighboring countries in Southern Africa and 2 percent came from West or East Afica. 5 Since our sample17 covers only 16 non-black informal firms, separate conclusions for non-black furms are not drawn in the remainder of this report, i.e. in essence, this is a report about black informal firms. GENERAL CHARACTERISTICS OF AN INFORMAL FIRM Employment in the Informal Sector - similarity between formal micro and informal firms In 1999, the 499 firms surveyed created a total of 1431 jobs. The economic case for policy intervention in the informal sector is often based on its ability to create jobs. The survey indicates that in 1999, Johannesburg's informal sector created the same number of jobs per firm as formal micro enterprises in Johannesburg's SMME sector. Both informal and formal VAT paying micro enterprises on average employed 3 workersl per firm (see Chandra et al., 2001); 9 this makes the challenge for policy makers interested in promoting sustainable employment creation quite comparable: for a formal micro firm, the policy challenge lies in enabling the firm to graduate to a small SMME with more employees; similarly, for an informal firm, the challenge lies in enabling the informal employer to graduate to a more efficient firm size, preferably in the formal sector. Informal firms in the construction and furniture sectors have slightly higher employment levels (4 workers per firm) while firms in the service sectors have lower levels (2 workers per firm). The relationship between employment and the physical age of a firm is quite consistent: informal firms that are two or fewer years of age employ 2 workers20 on average; firms between 3 - 10 years employ 3 workers; employment rises to 4 workers per firm only after an informal firm's age exceeds 10 years. Typically, informal female employers hire 2 workers while male employers hire 3 workers. Gender profile Women constitute 38 percent of all business owners. Gender affects the pattern of employment - only 56 percent of all female compared to 70 percent of all male entrepreneurs are employers. The remaining 44 percent of the female firm owners are self-employed. Typically, informal female entrepreneurs are most conspicuous in retail and hawking, shebeens, clothing and prepared food and beverages sectors (Chart 2.1). 17 In a random drawing of 499 informal finms in the congested markets of greater Johannesburg, 483 were found to be black, 10 Coloured, 5 hite and 1 Asian owned. 's Median levels are reported. '9 In a contemporaneous survey of households engaged in informal businesses in Soweto, Piazza-Georgi (2001) found that 68% of the businesses had no employees, 21% had less than 5 and 7% had 6-10. 20Tfe appropriate statistic in this case was median rather than mean level of employment. 6 Chart 2.1: Distribution of firms across sectors by gender . O Males M Female Tourism Personal Svcs Shebeens RetaihHawke*r_s= _ == m_ Construction Metals Fumiture Clothing_ Prepared Foo/Bev3 0 5 10 15 20 25 30 35 40 45 Percent ot firms Gender dominance Research on the South African informal sector shows that certain sectors tend to display gender dominance. For instance, Liedholm and McPherson (1991, p.12) write that "firms in sectors involving trade and commerce tend to be run predominately by female proprietors, as are service oriented textile manufacturing and food processing firms. On the other hand, metal production, wood processing and transportation firms tend to be run by males. In addition, it has been proposed that firms owned by women tend to grow at slower rates than those run by men (20% against 30% per annum). Finally, female managed enterprises tend to be more of a supplementary source of income for the family than male managed enterprises (World Bank, 1993a; Liedholm and McPherson, 1991). Age Age is an important marker of an informal firm's market experience and its survival capabilities. These factors, in turn, affect its ability to access credit markets and graduate to the next size class. Since South Africa's unique history stymied black entrepreneurship, an informal firm's vintage in terms of its post and pre-apartheid status is a more meaningful marker than its absolute age in years. Using 1995 as the benchmark, we found that 63 percent of the firms2l are post- apartheid i.e. they were established in 1995 or after. Characterized by little work experience, over 60 percent of the post-apartheid firm owners are concentrated in services confirming the relative ease of entry into these sectors relative to production. A little more than a third of the firms are pre-apartheid and 55 percent of these are 8 years or older. Most of them are concentrated in manufacturing. The latter raise at least two special issues. First, what factors have constrained these firms from graduating to the formal sector, 21 56 percent of all firms are less than 3 years old, and 7 percent are over 9 years old. 7 especially since 1994? Second, what incentives can help them to graduate to the next size-class, or register in the formal sector as micro SMEs ? Are most informal entrepreneurs immigrants? There is a perception in South Africa that most of the informal entrepreneurs are immigrants from other African nations exploiting South Africa's richer markets at the expense of its poor who are unable to do the same because they do not have comparable business skills. The survey does not validate this perception. About 87 percent of the informal entrepreneurs, and as many as 95 percent of the female entrepreneurs in the GJMA, were born in South Africa. Only about 10 percent of firm owners migrated from the neighboring countries in Southem Africa and about 2 percent came from West or East African nations. There is also a belief that the bulk of the informal entrepreneurs have moved into GJMA from Gauteng's neighboring rural provinces. But the survey reveals that for an overwhelming proportion of these entrepreneurs, Johannesburg's black suburbs have always been home! About 89 percent have always resided in one of its peripheral suburbs ,- Soweto, Alexandra, Tembisa etc.. Only 7 percent moved from Kwazulu Natal to take advantage of Johannesburg's growing economy and 5 percent moved from Zimbabwe (Annex 1, Table 1.2). Fixed capital assets in informal firms The value of the fixed capital stock in micro firms in South Africa draws the critical line between formal and informal firms. For example, while the bottom third of the formal micro SMMEs have a capital stock valued at less than R 50,000, the next third have stocks in the range of R 50,000 - 200,000. In contrast, the value of the capital stock in the top quartile of informal firms exceeds R 20,000. The median capital stock is R 10,000 in employer-owned firms and only R 2000 in firms with self-employed owners. Construction (R 31,500) and shebeens (R 27,500) have the largest stocks of capital while tourism (R 2500) and clothing (R 3000) have the smallest ones (Annex 1, Table 1.1) THE INFORA$L ENTREPRENEUR Understanding the firm owner's motivation for starting an informal business provides an important insight into a country's labor market dynamics. In many developing countries, the informal sector serves as the employer of the last resort for its poor. For some, it serves as a source of subsistence while they search for a formal sector job and graduate to it (Fields 1989). In some cases, workers who are qualified to work in the formal sector prefer to operate in the informal sector to evade taxes; in this instance, the informal sector serves as a tax haven for these illegal operators. This section looks at the black African entrepreneur's motivation for operating in Johannesburg's informal sector with a view to understanding how many are mere survivalists whose lifecycles begin and end in the informal sector, and how many are gradualists growing at a slow but positive pace, and preparing to join the formal sector. Business profile The informal sector in Johannesburg serves a variety of poor Africans. For the unemployed, it is the first or a new point of entry into economic activity, while for those fortunate to have some prior work experience or a small income, it is a source of income enhancement. 51 percent of the informal entrepreneurs in Johannesburg were unemployed before starting their own business. Another 20 percent were employees in non-mining businesses, 8 percent were partners in other businesses and 16 percent earned very small explicit or implicit incomes as retirees, students and unpaid family labor (Chart 2.2). Chart 2.2: Activities of informal entrepreneurs before they started the business Unpaid family Em.loyee of nonworker of other firm Partner of another Employee of non- 1% X enterprise 8% mining company \ / 19% Employee of mining companyStdn 2% 12% Pensioner 2% Disabled Unemployed .% 51%. D . Chart 2.4 in the next section sheds further light on what motivated informal entrepreneurs to start their own business. Gender differentials in the profile of past activity suggest that the informal sector plays a greater poverty reduction role for female entrepreneurs. Higher proportions of formerly unemployed female owners (58 percent compared to 48 percent for male owners) and lower proportions of former student female owners (7 percent as opposed to 15 percent for male owners) highlight the greater importance of the informal sector as an income-generating mechanism for female entrepreneurs. 9 Chart 2.3: Motivation for starting a formal SMME, 1999 black firms and full Johannesburg sample Ohr.. .. ............. .. ............. ... ............ ... ............ ... ............. .... ........... ... ............. Other Had similar bus.exper.in another counlty Joined the family business Got tired of long term unemployment Retrenched from informaljob Retrenched from non-imng.formaljob Retrenched from mining job Had formaljob exp.& saw opportunity 3 0 10 20 30 40 50 60 70 80 | *Black M ALL| Percent of fnms The relative ease of entry into the inform'al sector flagged by the statistics in Chart 2.2 contrasts sharply with the challenges faced by owners offormal black SMMEs (Chart 2.3). Among the latter, less than 5 percent were long term unemployed, and 75 percent had formal work experience before they started their own SME (Chandra et al, 2001). In comparison, adding across categories of those who had worked before, only 33 percent of the informal business owners had work experience when they started their businesses. 45 percent, as shown in Chart 2.4, felt they could make a profit. Clearly, if the stock of initial formal work experience that an entrepreneur has at the time of starting a business is a measure of human capital, then the poverty of informal firm owners compares starkly with formal SvMME owners. Although the pattern of the motivation displayed by black SM owners is quite similar to the remainder of the sample, the scarcity of human capital among them, a direct outcome of apartheid's discriminatory education, labor and job reservation policies (see Annex A for details) is underscored by the snall share of blacks in thefull sample of SMME owners - it was only 7percent in 1999. MOTIVATION TO START AN INFORMAL BUSINESS - A SOLUTION FOR AFuCAN UNEMPLOYMENT? As recently as 3 years ago, Johannesburg's Central Business District (CBD)'became an attractive location for half of its informal businesses that moved to it from neighboring suburbs. About 37 percent of the informal owners began operating in the CBD about 4 - 9 years ago. Interestingly, almost twice as many female (11 percent) compared to male (5 percent) entrepreneurs have been operating in the CBD for over 9 years but have been unable to graduate to the formal sector. 10 63 percent of the African entrepreneurs were motivated to start an informal business because they were unemployed for over six months. However, for the largest proportion of entrepreneurs (78 percent), the sector provided a break by offering a higher income or profit opportunity relative to their previous activity. Typical candidates for this category are household members who were unpaid employees, business partners or paid employees in other businesses. For retirees and students, the motivation was to supplement meager incomes. Even though more informal entrepreneurs in aggregate were motivated to join the sector to increase their income, the single 'most important' reason remains prolonged unemployment (and recent layoffs) indicating that Johannesburg's informal sector is still perceived as the temporary solution for the pervasive unemployment in South Africa. Chart 2.4: Motivation for starting an informal business in GJMA | Most important l Second most-imp. ED Third most-imp ........ ................... ... ,[............... ............. ................... ........... ............. .... Recently laid off 10% Other _ 11 % Family business 18 % Work trom home 34% Sieze business opportunity for profit . 1 45 % Unemployed more than 6 months 63% . 1 ~~~~~78 % Increase income 0 200 400 600 800 1000 1200 1400 Weighted responses of firms Note: the numbers next to each bar denote the percent offirms which pointed to a particular motivation. For a third of the entrepreneurs with poor access to transport or other home responsibilities, the main appeal of the informal sector lies in the convenience to operate from home. Others, mostly employer-owners, join the sector to continue the family business (Chart 2.4). The most important reason is an increase in income and unemployment. Earnings from an informal business Unlike many developing countries where informal businesses typically provide a source of secondary income, survey data indicates that approximately 93 percent of informal entrepreneurs in GJMA work full time. Among the part time entrepreneurs, 90 percent have a second job. If it is formal, then it is also the primary job and fetches more income than the present business, but if is informal, it fetches less income. There is a larger proportion of female firm owners among part time workers. Part time businesses are found mostly in clothing and garments, construction and metals and metal products. In these sectors, no more than 10-13 percent of the entrepreneurs operate part-time22 Table 2.3: Income Pooling in an informal entrepreneur's household (all income/earnings figures are in 1999 rands) Median Mean South Gauteng Africa ___ All firms A. Number of adults in household 2 2.77 B. Number of children in household 2 2.40 C. Number of people bringing in income (excluding 1 1.56 entrepreneur) D. Total monthly income of household R 2000 R 2623 E. Total monthly income contributed by your informal business R 1000 R 1437 F. 2000 Personal disposable income per capita R 6000 R 7869 R 13502 R 25,988 (annual)* __ *Source: Bureau of Mrket Research, UNISA, Report 276, 2001 In 1999, the monthly earnings from an informal enterprise averaged R 1400 (Table 2.3). Employers, especially male entrepreneurs, earned marginally more (Annex 1, Table 1.4). Earnings from an informal business comprise roughly 55 percent of the entrepreneur's total household income and are a key source of survival for its members. About 50 percent of the entrepreneurs save some of their business profits for reinvestment purposes, but the most important use of profits is to satisfy their family and personal needs (Table 2.4). Table 2.4 Use of profits from an informal business Others Personal savings Saved for business re-investment Spent on myself Spent on fanily needs 0 20 40 60 80 100 Weighted index of firm responses 22 In the set of part-time entrepreneurs, about 90 percent have a second job. Typically, the latter is a formal sector wage job for 50 percent; and some other informal job or business for the remaining entrepreneurs. In 75 percent of the cases, the second infonral activity provides less income than the prinmaiy informal business. 12 A survivalist's platform For 96 percent of the informal entrepreneurs, the main source of household income is their business (Chart 2.5). For a quarter, earnings from another household member's wage job are an important contribution. Income from rent2 or social pensions are other key sources of household income for under 20 percent of the entrepreneurs. A typical African informal entrepreneur's household earns a total income of just over R 2600 per month. For a four person household, this translates into R 7900 per household member per year. With incomes of less than R 8000 per year, African entrepreneurs operating informal businesses in the poor areas of GJMA compare quite unfavorably with the average South African who earns 70 percent more or the average Gauteng resident whose per capita income is 230 percent higher (Table 2.3). Chart 2.5 Main sources of household income for an informal entrepreneur Chasiy,schlarsips ,ther ^ ........................... .......... ... ....... . ........... ... ......... ... .......... ... .......... ... .......... . Charity,scholarships ,other My other wage job Social assistance/pension/other Other hh..nnter's wage job Rent/interest/other savings This business 0 10 20 30 40 50 60 70 80 90 100 Percent of entreprcneurs The use of business profits and the sources of household income in an informal entrepreneur's household reinforces the hypothesis that the sector serves as a haven for black African entrepreneurs who otherwise may not have a source of livelihood, thus underscoring the importance of informal businesses as a critical mechanism for poverty reduction in South Africa's black townships. Our findings confirm Post's (1992) comment that "the [informal] business should be seen as an element in the survival strategy of a household". Post (1992) goes on to write that "many small scale activities are by themselves not capable of guaranteeing the livelihood of an entire household. Nevertheless, they keep operating, on the one hand because overheads are minimal, and on the other hand because they make an indispensable contribution to the entire household income". 23 Income from renting out backyard shacks or rooms in the main house constitutes a key source of household earnings for many poor households. 13 ECONOMIC AND BUSINESS ENVIRONMENT FACING INFORMAL FIRMS IN JOHANNESBURG Efficient service delivery, good infrastructure and safety and security are three key factors that contribute to an attractive business location. In the informal sector, these factors acquire special importance since informal.businesses are least able to afford their private provision. Another key factor, frequently overlooked in general economic analysis is the physical location of a business, especially if it is informal. In Johannesburg, this is particularly pertinent because one of the key instruments that apartheid used to economic isolate blacks from market-led business activity was the physical separation of black residential areas from markets or growth nodes of economic activity. For the first time visitor to Johannesburg, the distinct divide formed by hills of exhausted and closed gold mine earth between the prosperous white business districts of central and northern Johannesburg and the poverty stricken southern townships (Soweto, Orange Farm etc.) inhabited by blacks present the obvious case for the economics of space and location factors. Factors like the size or the number of competitors in the local market assume particular significance because unlike larger formal firms, informal businesses are limited in their ability to directly penetrate white in-city local markets, and the larger regional or international markets to off-load their surplus. This chapter considers two issues: (i) factual information on informal firms' location and access to basic infrastructure, services and public transport, and (ii) business owners views regarding the local business environment. The key constraints to business as identified directly by informal firm owners are presented together with their ranking of the policy actions that the local authorities of the Greater Johannesburg Council can take to promote informal business growth. The main findings of this chapter indicate that about half the informal owners operate businesses out of their homes typically in the townships while, most of the remaining do not have a fixed location: 70 percent of the businesses have access to water, sanitation and electricity but only 40 percent are linked to postal services, telephones or public transport. So, while access to services is the pertinent issue for those not connected, the high cost of services is a constraint for many who have access. Public transport is a key constraint to informal business growth. While most business owners either walk to work or use personal cars and taxis, over 70 percent of employees only walk or use taxis. Due to the lack of storage facilities, goods and supplies are transported mostly on cars and taxis. The business environment facing informal entrepreneurs reflects survivalist businesses restrained by several factors: low market demand constrains 66 percent of the firms; lack of access to formal credit affects over 80 percent. These problems are further compounded by a shortage of skills and training for at least 50 percent24 of firms. Unlike formal SMMEs, only 30 percent of the informal firms (relative to 60 percent of SMMEs) were victims of crime in 1998. Also, unlike SMMEs, over 35 percent of the informal firms encountered problems in obtaining licenses to register as formal businesses. However, like SMEs, the bulk of the informal firms lacked access to small business promotion programs and centers. The top five priority actions for government identified by informal firms are: the restoration of safety and 24 As discussed later in this report the proportion of firms that identified lack of sldlls and training as a constraint appears low. One reason might be that unlike tangible factors like telephones or transport, many firm owners are either unaware that they are deficient in human capital or unaware of the benefits of business sllUs. 14 security on the streets, help with access to credit, improved infrastructure (road maintenance, network development, electricity, water), permanent market stores, and training. LOCATION, INFRATRUCTURE AND ACCESS TO SERVICES AND TRANSPORT Choice of location 47 percent25 of the informal entrepreneurs operate their businesses from home. Typically, they are engaged in either production activities such as the preparation of food and beverages or clothing, or services such as shebeens and retail. Significantly more female (57 percent) than male (44 percent) owners operate from home. For 53 percent of informal business owners who do not operate from home, business locations vary. A significantly larger proportion of employers than self-employed businessmen have a distinct business location away from home. A third of the employer-owned businesses are located in permanent structures away from home (Chart 3.1). In contrast, roughly a third of the self-employed owners engaged in retail or construction have no fixed business location, and only 15 percent have a temporary structure (Annex 2, Table 2.1). Chart 3.1: Location of informal businesses in GJMA a Self-employed M Employer Vehicle, cart, tefnporaly stall in a rnarket~. .......... ................... .......... ......... .......... .......... .......... ......... Vehicle, cart, teniporary stall in a market. Construction sites Fixd stal in a market E 3 I Penmnent building other than hone E Other temporaxy structure T No fbed Iocation/Imobie F X Hone 0 5 10 15 20 25 30 35 40 45 50 Percent of firms Availability of proper business space is an obstacle to growth, especially for employer-owned firms that have potential for growth relative to survivalist firms that can be operated out of a home. For over 66 percent of the entrepreneurs, the leading reason for locating a business in a particular area, i.e. home, is proximity to customers. Two other reasons that affect location decisions were owners' inability to afford rent for separate business premises and the attraction of being close to home. The absence of a distinction between the home and business and the lack of permanent and visible business locations leads to a dispersion of business activity across poor 25 In a survey of black households with infonnally employed members in Soweto in 1999, Piazza-Georgi (2001) found that 76 percent of the businesses did not have a separate business location. 15 residential areas where these entrepreneurs live.26 The challenge of upgrading informal business districts thus becomes inextricably linked with the upgrading of poor residential areas, making it difficult for local authorities to target informal business locations without addressing the larger problem of residential township-upgrading to improve infrastructure and service delivery. At least 84 percent of the informal business owners had never shifted their business location. Many revealed a strong preference to continue to remain where they are, even if they expand in the future. Over 64 percent indicated that when they expanded business, they would expand in the same premises and 20 percent would expand within the same neighborhood. Only 10 percent would move to other neighborhoods in Johannesburg in the event of expansion. Continued proximity to existing customers and a centralized location were the basic factors underlying these preferences. However, the geographical prospects for informal firm growth are very unequal in Johannesburg (Rogerson, 1994b) since growth is predicted to occur in the more developed formal market areas with strong economic potential and relatively high purchasing power (Falk, 1994). In light of these prospects, the location preferences of informal business owners reflect stickiness suggesting that, ceteris paribus, it will be a challenge for local authorities to plan for alternative market sites that are likely to be growth-inducing but far from present markets and homes of the informal business owners. Access to basic services Chart 3.2: Informal firms - access to basic services Post box Electronic media Fax Telephone/cellphone _ = Water - - -- I Gas Electricity _ _ Toilet _ Own transport 0 10 20 30 40 50 60 70 80 Percent of fsmMs Compared to their formal sector micro counterparts, informal firms are significantly constrained in access to some of the essential services and in the event of their availability, by their high costs. Around 70 percent of the informal firms in GJMA have access to water, electricity and 26 Our findings coincide with those of other reports: "the access to premises from which to work represents a serious constaint on the growth and stability of many enterprises, particularly manufacturers, whose operations require relatively developed infirtructure, such as telephones, electricity, storage facilities" (Iaskgro Report, 1993, p.22; Khan (1993)). 16 sanitation facilities but only about 40 percent have telephones and even fewer have access to postal services or even local transport (Chart 3.2; Annex 2, Table 2.2, 2.3). Besides reporting factual information, the survey also recorded the perceptions of informal business owners with respect to infrastructure and service constraints to business growth. There is a close correspondence between perceptions and facts. First, for the majority (60-70 percent) of informal businesses with access, the key issue is the high cost of basic services and public transport. However, for the 30-40 percent who do not have access, policy makers must still grapple with the provision of basic services and public transport. 60 percent of the business owners also pointed to storage problems that arise in the absence of permanent business structures (Chart 3.7). Since informal business locations are identical to the homes of their owners, the challenge of extending basic services and increasing the availability of well served business space to propel growth in the informal sector is a complex problem. In this instance, the welfare of the household is indistinguishable from the welfare of the firm, making the targeting of informal businesses a tricky problem. In comparison to informal firms, 100 percent of the formal SMMEs have access to almost all basic services except public transport. Hence, unlike informal firms, the key issue among SMMEs is the reliability and cost of services rather than access to services (Chandra et al., 2001). Access to transport During apartheid, discriminatory location practices. widened the racial divide in many ways. Black businesses developed in black townships that were physically separated from non-black centers of economic activity by vast stretches of land. Furthermore, poor access to public transport exacerbated the isolation of the black townships. black business districts thus developed in areas physically de-linked from Johannesburg's well-serviced business centers. Even today, weak access to public transport in Johannesburg continues to affect the growth of the predominantly black informal businesses and constrains their integration with better served formal business districts that are well connected to markets and offer better prospects for growth. Chart 3.3: Rankings of the main modes of transportation used for business * You * Your workers E To transport goods/supplies Bus Other Train Personal car __ _ . Taxi I Walk to wor_k 0 20 40 60 80 100 Weighted index of the mode oftransport used 17 In the townships of Johannesburg, very few informal businesses have access to public transport. The main modes of transport are private - business folk either walk to work or use personal cars and taxis. Generally, among business owners, 39 percent walk to work, 32 percent use personal cars and 24 percent use taxis. Taxis are the second-most popular mode of transport after walk to work. Among employers, especially of pre-apartheid businesses, personal cars are the more common mode of transport. Over 70 percent of the employees of informal businesses either walk to work or use taxis. Less than 12 percent use trains or buses. Goods and supplies are transported mostly by taxis and personal cars (Chart 3.3). The responses of firm owners are presented in a weighted index format. "First choice" is assigned a weight of 3, "second choice" a weight of 2 and "third choice" a weight of 1 to construct the index. Given the heavy reliance on private cars and taxis to transport goods and supplies, public provision of permanent stalls and storage spaces in markets should be an efficient intervention for local government to lower the transport burden on informal businesses (Annex 2, Table 2.4). Safety and security Survey statistics indicate that compared to SMMEvfs, informal businesses were less afflicted by crime. In 1998, 61 percent of the SMMEs relative to 30 percent of the informal businesses were victims of crime. The survey indicates that pre-apartheid informal firms experienced a slightly higher (38 percent ) crime rate. In 1998, break-ins and property theft were the most pervasive forms of crime experienced by these firms. This statistic can be attributed to the lack of permanent business locations and storage spaces and reinforces the case for their public provision (Chart 3.4). Chart 3.4: GJMA - Types of crime experienced by informal firms that were victimized in 1998 Assaults on employees Other Physical Attacks Employee theft Vandalism Break-ins and property theft 0 20 40 60 80 100 Chart 3.5: Key market-related problems facing informal businesses in GJMA a Major problem a Moderate problem U Not a problem Don't know what custoners want Proxinity to markets is poor - _ Lack of product pubicily (rnarkoting) Customers don't pay teir debts- Low overall demend _ Large variations in salesfincome -'d% -60% -40% -20% 0% 20% 40% 60% 80% Percentagp of firms Chart 3.6: Constraints to expand production capacity in the informal sector * Mbjor problem U Ibderate problem E3 Not a problem l Lack of silled labour Poor access to raw materials Lack too ls/mach Jrepair services Poor access to training Lackof funds/credit -80% -60% -40% -20% 0% 20% 40% 60% 80% Percentage of firms Chart 3.7: Infrastructure & services constraints in the informal sector I OlaJorproblem W Moderate problem E Nota problem Cost of eectricity. water & telephone Storage problems/no permnanent stall Inadequatb business space Expensive rent Cost of public transport Aiccess to electicity, water& telephone Access to public transport_ -80% -60% -40% -20% 0% 20% 40% 80% Percentage of firms 19 ECONOMIC AND BUSINESS ENVIRONMENT - PERCEPTIONS OF ENTREPRENEURS Key constraints Informal business owners in Johannesburg perceive a variety of problems related to market demand, financial capital, production capacity, infrastructure, and institutional and personal factors. These contribute to a weak economic environment in which entrepreneurs operate at poverty levels with low prospects of growth. 66 percent of the owners complained about the instability of business earnings and almost 60 percent noted low profits associated with too few customers, too many competitors, and low demand. The importance attributed to low market demand was also noted by the owners of formal SMiMEs in the 1999 SMME survey. Non- repayment of debt by customers and the absence of organized marketing channels for their produce are perceived as some of the other factors responsible for a low market demand and low investment (Chart 3.5). Several basic factors constrain the capacity of informal entrepreneurs from expanding their scale of production. For almost 80 percent of the business owners, lack of access to formal credit is the most important constraint to production. For 50 percent of the owners, the credit constraint is further exacerbated by lack of access to training and skills. Low skill may be an inherent feature of informal firms, but given that black business persons were prevented from operating businesses during apartheid and acquiring skills, it is possible that some informal business owners are also unaware of their human capital deficiency or its potential contribution to profits. Greater appreciation of the role of human capital in business growth would imply a higher statistic for this factor. In spite of the easy availability of tools and machinery in the South African market, over 40 percent of Johannesburg's informal business owners cannot afford the essential tools, machinery and repair services required to expand their businesses (Chart 3.6). These basic shortages in financial, physical and human capital confirm that the informal business owners are operating as survivalists rather than emerging business persons preparing to graduate to the formal niicro business sector.27 About 60 percent of the firms do not have access to small business support centers28 (Chart 3.8). Since 1996, although local and national governments have allocated substantial resources in establishing such centers, especially to target support to small businesses, these centers/programs have failed to reach and assist the bulk of the businesses. Among formal SMMEs too, awareness of these centers is limited to under 20 percent of the firms and usage to less than 10 percent (Chandra et al., 2001). This evidence makes a compelling point - a concerted government effort to re-orient the awareness, access and usage of small business support centers (see Box 3.1) will contribute to a better business environment for all tiers of business - informal and formal. 27 Our findings are supported by prior research. A USAID study in which 256 black township micro-entrepreneurs were investigated (Liedholm and McPherson, 1991) revealed that the primary problems involved finance, markets and competition. In particular, the results of Liedholm's and McPherson's study (1991) indicate that lack of credit and working capital as well as lack of markets and excessive number of competitors are central dilemmas. 28 Inadequacies of infrastructure support such as "local service centers" are also pointed out by Manning (1993d). 20 Chart 3.8: Government support services and crime-related constraints | * Mar problem * Mbderate problem B Not a problem Prejudice against my gender Prejudice against my race Treatment by local author'ity Cannot obtain a business license Lack of info.on new technology Theft 1-- Safety of w orkers/ow ners Lack of ow n transport Access to sfmll business certers -100% -80% -60% -40% -20% 0% 20% 40% 60% Percentage of firms Box 3.1 Business support centers Many researchers adopt the position that the lack of decentralized services is a major impediment to improving the working conditions of both survivalist and growing informal firms (Rogerson, 1993c, 1994b; Ruiters et al., 1994). This problem could be addressed through the supply of a range of industrial and trade extension services made accessible to infornal firms. Some observers suggest that the existing network of business hives performs the same function. However, the services offered by them and by similar "business opportunity centers" (Creamer, 1994) are very different from those offered by coherent and comprehensive organizational support structures such as SBDCs and those found in developed economies (Rogerson, 1993c; Manning, 1993d). The perception of 50 percent of firms regarding public transport is directly reinforced by the reality on the ground as noted earlier. This is not so with respect to crime. Perceptions of crime among informal businesses are far more pervasive than the reality. Crime and theft seem to constrain 50 percent of the informal businesses; and over 60 percent identified greater safety and security on the streets as the leading action required of local authorities for stronger business growth. In reality, only 30 percent of the firms were victimized by crime in 1998. A reason why the incidence of crime is lower among informal businesses could be that many owners operate from home and their physical presence is a deterrent to crime. Like SMMEs or larger firms, perceptions of crime and violence among informal businesses are pervasive and explain the urgency attributed to greater safety and security on the streets. About 35 percent of the existing informal business owners tried to register in the formal sector but failed because they had difficulties in obtaining business licenses. Compared to the formal sector where over 85 percent of the SMMEs reported that the bureaucratic requirements for obtaining a first-time license were fairly reasonable, the experience of informal businesses is very different and signals some of the complexities associated with the formalization of the sector. 21 Complaints from business owners (30 percent) of poor treatment by the local authorities of GJMC are far from unique to the informal sector - they echo the sentiments of small and large firm owners among whom a significantly larger proportion found the attitudes of the local authorities discouraging and unhelpful. Informal business owners were asked whether female owners faced discrimination in the market place. Interestingly, their index of weighted responses reveals that in general, gender discrimination is not perceived as an issue by firms,29 (Annex 2, Table 2.5). GOVERNMENT'S CONTRIBUTION TO THE GROWTH OF INFORMAL FIRMS Owners of informal business in Johannesburg believe that government can play a useful role in promoting business growth. The top five actions they identified for government are: (1) the restoration of safety and security on streets, (2) help with access to credit, (3) improved infrastructure (roads, network development, electricity, water), (4) training and (5) permanent market stores3 . This ranking is consistent with their listing of constraints to growth with one exception - although poor access to small business centers was listed by 60 percent of the informal firm owners as the key constraint to business growth, it appears as number 6 in their ranking of local government actions (Chart 3.9). In contrast to employers, males owners and pre- apartheid firm owners, owners of post-apartheid firms assigned a higher priority to permanent market stores while female owners gave greater importance to training (see Annex 2, Table 2.6). Chart 3.9: Priority actions that Government can take to promote informal business growth *Mst important M 2nd 1ost imporrant 0 3rd Mbst important Betts attitude of local officials Public tLanspot Small business caeters KIUDIIIIE, Penmnent nwket stores lm 1111111f Training JJfl m Roads, vatae dectricity etc. .1fl] DUDJUE = I-Wp uith acess to credit D l_ Il'l - Safety on the straets 0 10 20 30 40 50 60 70 Percent of finns 29 If the response "Not a problem at all" is assigned a rating of 100, the next response indicating that household chores leave little time for business, or assaults on females is a problem only receive rating of 35 or below. 30 Like Liedholm and McPherson, 1991, our survey identifies issues of space (storage and cost), location and infrastructure as important, although not primary constraints. A Taskgro study (1993, p. 23) identifies the need for a "broader conception of infrastructure" than the mere provision of premises and storage space. 22 In a 1999 survey of black households in Soweto, Piazza-Georgi (2001) probed household members for the three most important things that they perceived would improve their business. The responses are fairly similar to our findings at the firm level. 'Less crime" was noted by 62 percent, 'remove unfair competition' and 'further education and training' by 50 percent each, 'easier access to loans' by 42 percent and 'better infrastructure' by 32 percent. In this chapter, the predominantly black informal firm owners listed crime, lack of access to credit, access to services and need for training as the top four constraints (Annex 2, Table 2.6). As with other constraints, the particular issue of access to credit is likely the result of several factors in South Africa. For example, 50 percent of the owners identified lack of credit as a constraint and almost 60 percent noted low demand as a constraint to growth (Chart 3.5). The two factors are likely to be highly correlated; high credit risks are normally associated with informal firms because of their low and volatile nature of their demand/profitability as well as the lack of observable credit information from their informal operations and the difficulties of credit collection from this group. In addition however, the effect of past discrimination peculiar to South Africa is also very clear with regard to the racial composition of firm ownership - with black owners concentrated in the informal sector (see Table 2.2). When one compares the rankings of informal firm owners with those of the predominantly white SMME owners in Johannesburg, access to credit is clearly more of a problem for informal firms (see Chart 3: 10 and 3:11). The highly skewed distribution of racial ownership in both the population and in our sample of informal firms in Johannesburg also makes it impractical to control for firm type to further compare credit access among different types of owners within the informal sector (i.e. with sufficient representation in each firm type). The financial issue is examined carefully next. Chart 3.10: Formal SMME owners views of what local authorities can do to promote SMMEs in Johannesburg, 1999 | Ist priority ; 2nd priority 0 3rd priority Special incentives for female entrepreneurs Targeted financial incentives noved attitude of local officials Investment support Public transport Ethical standards of local officials Infrastructure i1 Safetylsecurity _ __ M 0 20 40 60 80 100 Percent of finm 23 Chart 3.11: Formal SMME owners views of what national authorities can do to promote SMMEs in Johannesburg, 1999 | 1st piorty [1 2nd pnority 0 3rd priority ..... ........................ ..... . ......... . .................... ......-..--------..-.--..1'-''''.--. Efficient and fledQble echange rate Business information 'I Efficient and flexible wages - Prormte SMM Ein public services i- Education and training Lowerinterest rates ' Policy stability I 'ii 'I i - 0 10 20 30 40 50 60 Pexent of fins 24 FINANCIAL CONSTRAINTS INTRODUCIION This chapter investigates how informal business owners finance their businesses and the problems they encounter. Special emphasis is given to factors that constrain their access to formal credit markets and the steps government can take to facilitate such access. Survey findings reveal that with the exception of stokvels, black informal firm owners make negligible use of informal credit lenders, a fact that contrasts sharply with evidence worldwide (Ho (1980), Bigsten, Collier, Dercon, Fafchamps, Gauthier, Gunning, Soderbom, Oduro, Oostendorp, Patillo, Teal and Zeufack (2000)). Because of poor access to formal credit sources and the weak use of informal ones, growth of South Africa's predominantly black informal firms sector seems to be dependent on the availability of personal savings. In a survey of black households in Soweto in 1999, Piazza-Georgi (2001) supports this hypothesis: only 39 percent of the informally self-employed ever took out a loan3' from either family members, friends, stokvels, banks or money lenders, so the main and default source of business capital was personal savings. In contrast, in most other countries, informal firms are known to have overcome the shortage of capital by resorting to informal creditors. Tang (1995) notes that informal credit markets are estimated to have financed more than a third of the total capital lent to private enterprises in Taiwan; of course, these include formal and informal firms. Similarly, in Peru, according to de Soto (1989), much of the informal sector's rise is attributable to the critical role played by informal credit markets. The main findings reveal that there is little use of credit from formal or informal sources, primarily because of weak business growth, limited access to formal credit and prohibitive interest rates. The average start-up capital required for an informal business is meager at R 1800.32 73 percent of the black informal business owners finance it from personal and family savings. Others use stokvels and retrenchment packages. Less than 10 percent use banks or other formal institutions and only 5 percent rely on private money lenders. Only 12 percent of the owners have ever applied for formal credit, and 4 percent have obtained it. The main reasons for poor access to formal credit are complex application procedures, lack of collateral and credit history and high costs. Undoubtedly, these reasons could apply to any informal sector worldwide. However, in South Africa, as discussed later in chapter 8 (and Annex A), until as late as the 1980s, blacks were subject to discriminatory polices that restricted them from engaging in most income generating business activity and accumulating financial savings. Since business records and financial savings are essential for establishing a credit history and acquiring financial wealth, the plight of black informal firm owners is a consequence of apartheid-created distortions that have resulted in poverty and racial inequality in South Africa, both of which pertain particularly to blacks in South Africa. 31 Among the 39 percent who did borrow, the majority of the loans were from family members (34%), friends (17%), bank (25%), stokvels (10 %/6), money lenders (8 %/6) and cooperatives etc. (6%), Piazza-Georgi (2001), pp. 17. 32 At an exchange rate of Rl l=$1 (December 2001), this is equivalent to approximately $164 . In 1999, at the time of the survey, R1800 was equal to about $ 360. 25 SOURCES OF FINANCE FOR START-UP CAP1TAL AND OTHER BUSINESS NEEDS Start-up capital The average33 scale of start-up capital required for an informal business is around R1800 ($360 at the 1999 exchange rate) with some firms reporting as little as R100.The maximum of R 50,000 is reported by only one firm. Typically, self-employed business owners need as little as R 800 while larger employer-firms require thrice as much. Similarly, female owners reported an average of R 1000 while their male counterparts reported twice as much. The nature of the business affects the scale of start-up capital required. To start a construction business, owners need R 5000 while a clothing and garments business is relatively easy to start with only R 900 (Annex 3, Table 3.1). Piazza-Georgi (2001) reports that in 1999, loans borrowed by informally self-employed Sowetans ranged between R 101 - 1000 for 35 percent, R 1001 - 10,000 for 34 percent and over R 10,000 for 23 percent (Annex 3, Table 3.1). Black informal firm owners make little use of either formal or informal credit. For start-up capital, no more than 5 percent of the firms had used any formal sources such as banks or government institutions. The main reason for this was lack of access to formal credit as well as high interest rates due to a high risk factor applicable to firms who qualified. Similarly, no more than 5 percent of the informal business owners use informal sources such as traditional money lenders. The main reason for this is the high cost of credit. The majority of the firm owners used their own capital and as many as 15 percent indicated that they did not need any financing. As reinforced by Piazza-Georgi (2001) too, private savings are, by far, the most popular source of start-up capital for informal firms. 73 percent of the firm owners use this source, 40 percent rely on assistance/borrowing from relatives or friends, and about 20 percent each initiate a business by investing their retrenchment packages or credit obtained from stokvels or other informal rotating credit arrangements within their community (Chart 4.1). Across sectors, this pattem is broken only by owners of shebeens who rely heavily on retrenchment packages, possibly because many are retrenched miners with non-transferable skills that are difficult to apply to any other sector (Annex 3, Table 3.2, 3.3). This pattem of informal finance mirrors the pattem prevalent among formal SMME owners. 78 percent of the latter also rely on private, and family savings. However, the distinguishing mark between formal and informal micro firms is that access to formal credit markets is available to at least 50 percent of the formal SMEMs but only about 5 percent of the informal firms (Chandra et al., 200 1).34 33 Medians rather than means are reported. 3Previous World Bank research (World Bank, 1993a) and other studies have identified the gaps between the need for and the supply of and access to financial services for infonnal firms (Liles, 1992; Manning and Mashigo, 1994; Ruiters et al., 1994). In particular, Falk (1994) highlights that very little supplier credit or buyer advances were available to informal manufacturers and builders. 26 Chart 4.1: Sources of financing for informal firms ............... . . .. ............ ...... .. .... ............ .. _. . ....... ......... ......... ......... Govt iias t Bmassx dm3 c ate.. P 4. . reyinx 1,bnrey iee& Swk5ttotredtd-t Re] ie/liends Raweslfiiezx_ _ ' Csn ___ sa , _ 0 10 2D 30 40 s7 8) Capital for other (non-start-up) purposes As with start-up capital, the use of credit for other business needs such as working capital is also quite limited in Johannesburg's informal sector. In the course of the previous 12 months, only 9 percent of all informal business owners had borrowed for business purposes. Less than 3 percent had borrowed for non-business or "other" reasons. Formal sources of finance such as banks meet the business capital needs of only 8-9 percent and the "other" non-business needs (such as housing finance) of 25 percent of the owners. The remainder of the borrowers' needs are satisfied either by their own savings or their families and friends. Considerably smaller proportions of informal owners fulfill their credit needs through customers, suppliers or contractors (16 percent), stokvels (9 percent) and private money lenders (7 percent35). Self-employed business owners appear to rely exclusively on friends, relatives and stokvels or other rotating credit schemes. In contrast, one fourth of the employers borrow from customers, contractors, or suppliers and another 10 percent of employers, exclusively female, use private money lenders as informal financiers of business loans (Annex 3, Table 3.4). Business loans predominantly finance the purchase of raw materials, supplies, stocks of goods and tools (Chart 4.2). A smaller proportion of business owners use them for other types of working capital (replacement or repair, machinery, business premises, wages and salaries, 35 One possible explanation for this could be the absence of historically strong informal networks that typically perform a useful monitoring function and facilitate the growth of private money lenders to meet the credit needs of the informal sector. Restrictions on business activity in the Black community during apartheid discouraged the rise of informal credit maikets in Johannesburg's townships. 27 vehicles and business debt). About 8 percent of the informal owners also use business loans for personal/consumption expenses related to a family sickness, marriage etc.. Self-employed owners use them for raw material purchase but employers use them for other types of working capital too (Annex 3, Table 3.5, 3.6) Chart 4.2: Use of business loans in the informal sector Special faimly needs(sickmess, nanriage, etc.) Cooperative mnembership Repayment of debts Wage/salay payments to hired workers Purchase of vehicLes/trans.equip. Repair/replacment of premises, rmach. Purchase of raw materiaL supplies,tools _ _ _ _ __ 0 10 20 30 40 50 60 70 80 90 100 Weighted index of uses The average amount borrowed ranges from R 2000 for a business loan to R 4000 for a non- business loan. The period of the duration remains small because of the high cost of capital and varies from 6 months for business loans to 12 months for non-business loans. The median repayment on a R 2000 business loan is typically R 2450. At simple interest rates these rates suggest a monthly interest rate of 3.8 percent or approximately 45 percent per annum for business loans, partially explaining the low demand for informal credit among businesspersons operating below poverty levels in Johannesburg. Piazza-Georgi (2001) notes that in 1999, the loan repayment applicable to informally self-employed individuals in Soweto was 1 - 12 months (35 percent), over 12 months (41 percent), and less than 1 month (8 percent). Being lenders of the last resort, private money lenders charge extremely high interest rates that range from 5 - 50 percent per month, and double in the event of late payments. Business owners also reported that private money lenders frequently changed the interest rates causing disruptions in their business activity. No more than 7 percent of the informal business owners use their services. ACCESS TO FORMAL CREDIT Because of the informality of their business operations, informal firm owners are high-risk and constrained in accessing formal credit which, if made available, is frequently cheaper. Only 12 28 percent36 of them have ever attempted to obtain a business loan from a South African bank or other credit institution and 3.6 percent have been awarded a loan (Table 4.1). Piazza-Georgi (2001) reports that in 1999, 17 percent of the informally self-employed Sowetans noted that they had unsuccessfully applied for bank loans in the past. In spite of the minuscule numbers, there is a clear pattern across firms. Employers, especially pre-apartheid male firm owners are more successful in accessing formal credit. Perhaps because of their greater business visibility, thrice as many employers as self-employed business owners obtained loans. Only half as many post-apartheid compared to pre-apartheid business owners apply for formal loans and about 24 percent are successful in obtaining credit (Table 4.1). Table 4.1: Informal firms access to formal bank loans Percent of Of the applicants, Percent of firms firns that percent that were (applicants+non- applied for a awarded a loan appl.) that were formal bank awarded a bank loan loan All firms 12.4 29.0 3.6 Self-employed owners 10.6 11.1 1.2 Employers 13.4 36.4 4.9 Post-apartheid owners 9.2 24.1 2.2 Pre-apartheid owners 17.9 33.3 6.0 Black male owners 14.6 22.2 3.2 Black female owners 11.7 34.3 4.0 Since most black informal businesses do not have a well-established credit history, or financial capital, a collateral such as a physical asset is critical in accessing formal credit. Among the informal firm owners that obtained formal business loans, the three most important formns of collateral used reflect a poverty-stricken business environment37. Of the 18 firms that obtained loans, 56 percent (10 firms) used their existing businesses, 39 percent (or 7 firms) used family assets, and 22 percent (or 4 firms) used their houses as the security required to obtain a loan. In the absence of personal and family financial assets, basic assets such as tools, or household physical assets such as furniture and cars, and houses serve as collateral for business loans. Thus, for a large proportion of poorer business owners who do not own a house, or do not have a fixed business location that can be easily appraised, lack of a credible collateral is a critical constraint to formal credit for business expansion. 36 In terms of numbers, of the 499 firms that were surveyed, only 62 had applied for a formal loan and of these, only 18 were awarded the loan. 2 were self-employed owners while 16 were employers; 6 female and 12 male owners; and 7 post-apartheid and 11 pre-apartheid owners. 37 Piazza-Georgi (2001) argues that among Informally self-employed blacks in Soweto, "stokvel membership has the characteristics of a collateral in Soweto business life: namely that it serves as a security for loans, either through the guarantee of a sizeable inconiing sum in a foreseeable future or generally as an indicator of trustworthiness," pp.(20). 29 Chart 4.3: Reasons for failure in obtaining a bank loan Procedures are too complicated Banks are not interested in this type of business _ _ _ _ _ _ Costs are too high _ _ _ _ _ _ Other sources of cred. are nure easily accessible _ Respondent lacks guarantees required _ - _ _u Respondent prefers to use own resources _ m _ Other Reason for refusal of loan not explained by the bank 0 2 4 6 8 10 12 14 16 18 20 Percent of fimus Besides lack of a collateral, other equally important reasons also explain the low use of formal credit. Between 12 - 18 percent of firm owners identified various factors ranging from complicated application procedures38, lack of interest on the part of banks, and high transactions costs of applying and borrowing (Chart 4.3). Complex application procedures were particularly problematic for self-employed informal businesspersons. The high cost of formal credit reflects the high risk premium contained in the interest rate offered to informal businesspersons. Presumably, these difficulties encourage at least 12 percent of the business owners to prefer their own savings, use other sources of informal finance and even try to manage without borrowing. Many post-apartheid employers fall in this category (Annex 3, Table 3.7). Piazza-Georgi (2001) reinforces this hypothesis: 92 percent of the informally self-employed Sowetans noted that they did not apply for a loan even when they needed one because of high interest rates (64 percent), lack of collateral (60 percent), complex application procedures (32 percent) and perception that "banks don't lend to people like me" (20 percent). The reasons for not obtaining formal loans are not unique to South African black informal firms. Bigsten, Collier, Dercon, Fafchamps, Gauthier, Gunning, Soderbom, Oduro, Oostendorp, Patillo, Teal and Zeufack (2000)) find similar reasons why micro firms did not apply for formal loans in 6 African countries they studied. For example, they found that the main reasons were inadequate collateral for 15 percent of micro firms, don't want additional debt for 9 percent, procedures are too difficult for 13 percent, did not need a loan for 15 percent, did not think they would get a loan for 23 percent, interest rates are too high for 4 percent and 'other' for 20 percent. Piazza- Georgi (2001) notes that the lack of collateral (67 percent) was the main reason given by 17 percent of the informally self-employed Sowetans who applied but never received a loan. Like 38 Research in the Western Cape (Ruiters et al., 1994) indicates that that complexities involved in application procedures are a major impediment in applying and receiving a loan 30 informal firms elsewhere in the world, Johannesburg's predominantly black informal firm owners display the typical signs of poverty and credit rationing. However, there is one important difference. Given that apartheid was, as argued in this report, their plight today could not have been any different. FINANCIAL AND BUSINESS RECORD KEEPING IN BLACK INFORMAL FIRMS There are several pre-requisites for obtaining access to formal credit. In addition to a collateral and credit history, firm owners are required to have proper business and financial records to demonstrate proper financial and business management, and skills to operate a profitable business. Chart 4.4: Profile of record keeping among informal business owners in Johannesburg (1999) Otlher. Loan repayment Stock control _ *.. Records of credit to customers _ _ - Records of orders andpaymerls - _ _ _ Income/expenditure records _ _ _ - _- No records/accounts _ - _ _ 0 5 10 15 20 25 30 35 40 45 50 Percent of all finns Consider the prevailing situation with respect to record-keeping in informal firms. 58 percent of the informal business owners keep some type of business records, 42 percent keep none (Chart 4.4). Among the self-employed owners, about 64 percent do not keep records. While the latter group would be denied access to formal credit institutions which require proper accounting records, the profile of the 58 percent that keeps records could also be strengthened with support from government through training and skills building in this area (Annex 3, Table 3.8). About half of the business owners who do not keep records do not /now why records are important and should be maintained, and a third need help in learning how to keep them (Chart 4.5). Business promotion programs that increase awareness among firm owners of the usefulness of record-keeping and the cost-effectiveness of using formal over informal credit would serve informal business owners well (Annex 3, Table 3.9). 31 CHART 4.5: REASONS wHY 42 PERCENT OF BUSINESS OWNERS DO NOT KEEP BUSINESS RECORDS Vat are 'business Notime records"? 19% 7/o Don't know 1% records 21% Not Can't iread/write neede.d...i rnpota 4% ~~~~~~~~48% SOME POLICY CONSIDERATIONS Similarities in the financial characteristics between Johannesburg's informal firms and those in any developing country in Africa or South Asia seem to suggest that there may be a case for government to support informal firms. Informal firms owners have weak access to credit because they do not have credit records and other pre-requisites to be judged creditworthy by formal lenders. The vast majority of them rely on private sources of capital but the latter are typically available for start-up, not working capital. Since scarcity of working capital hinders the entrepreneur's ability to implement productivity-enhancing technological change, informal firms operate at low levels of technical efficiency. Productivity, profits and incomes remain below poverty levels and firms are unable to grow and create more jobs. Hence, in many developing countries, the most popular reasons for public support, to informal firm owners are based on (1) poverty reduction, and (2) job creation. Typically, interventions have been in the form of micro- finance (but with mixed success). Both objectives apply equally strongly to Johannesburg's informal sector, hence there is a rationale for examining a case for a micro-finance program. Lessons from international experience and some examples of best practice are presented in Chapter 8 and indicate that success is critically contingent on efficient design and implementation. There is an additional rationale which reinforces the cause of black informal firm owners in South Africa. Table 4.2 illustrates firm evidence from the 1999 Informal Sector and SMME firm surveys. 32 * First, the Table shows that informal firms rely more heavily than formal micro SMMEs on private sources of finance for start-up capital. Since private capital is not available to finance working capital, black informal firm owners, relative to formal or even black SMME owners, are far more constrained for capital that facilitates firm growth and job creation. This difference between the sources of working capital available to SMME owners and informal firm owners is stark. The direct implication of this is that if two micro entrepreneurs, one black and the other non-black, set up a micro enterprise with private capital, ceterisparibus, the prospects for planned investment in the black informal firm are likely to be lower than in the non-black firm that has access to alternative sources of finance. Table 4.2: A comparison of black-owned informal and formal Non-black and black SMMEs (micro) in Johannesburg, 1999 Black Non-black Black informal formal formal firms SMMEs SMMEs- Sources of start-up capital - share of fin-ns that use this source_ -Credit from foiiial sources 5% 24% 17% - Private savings & friends/relatives 100% 78% 89% - Retrenchment package/stokvels 20% 3% 6.3% - Retained earnings fr. previous business _11% 8.3% Sources of working capital - share of firms that use this source - Have access used a loan in past 5 years n.a. 50% 33% - Used bank loan in last 12 months 9% 50%_39 4% - Retained eamings 0% 87% 87% - Cheaper loan from parent company 0% 23% 8% Main reasons for not using a bank loan Lack of access: - applied for a loan 13.4% - awarded a loan 4% Do not need a loan 67% 32% Do not have the right collateral 13% 10% 32% Do not have the right papers 6% 15% Interest rates are too high 16% 12% 3% Procedures are too complicated -don't know how to 18% - - proceed I Banks are not interested 17% Prefers. to use own resources or borrow from other 27% sources of credit _ 3950 percent of SMME owners have access to bank loans but decided to use alternative cheaper sources of credit because interest rates in 1999 were very high in real terms. 33 * Second, historical racial discrimination surfaces in the financial characteristics of SMMEs too. Even though formal SMME owners have reasonably good access to capital, the small set of black SMME owners who have been fortunate to graduate to the SMME tier remain relatively disadvantaged compared to their non-black counterparts. * Fourth, while 50 percent of all SMME owners have access to credit, a much smaller proportion uses it and many more do not need it. High interest rates, rather than access to credit, appears to be more of an issue in the SMMIfE sector while access to credit is a key issue in the informal sector. Evidence from the Informal Sector Survey shows that improved access to credit was associated with higher investment rates in firms. In 1999, 61 percent of informal firm owners made new investments with an average (median) value of R 4000. The ratio of new investment to the resale value of the fixed capital stock was 0.50. Further empirical tests based on multivariate analysis40 show that there is a statistically significant relationship between investment levels and variables associated with access to credit for start-up capital. The level of investment was positively related with (i) access to formal sources of credit such as bank loans, suppliers credit, and financing from government programs; and (ii) access to informal sources of financing such as stokvels and private money lenders. Investment levels were negatively related to high interest rates in 1999 and absence of a collateral. Other factors that were positively related to investment were the initial size of the capital stock, employment level, the value of the firm, and firm profits (proxied by household income derived from profits). Annex B presents the results of the regression. On grounds of poverty reduction, job creation, racial equity and empirical evidence validating the positive relationship between investment levels and start-up capital, a case for micro- financial support to back informal firm owners can probably be made. However, Survey findings also indicate that although the credit constraint is one of the key factors, it is not the only constraint hindering the growth of black informal firms. A strategy for assisting the black informal sector must recognize this (see Charts 3.5, 3.6, 3.9). 1. As Charts 3.5 and 3.6 show, while credit is perceived as an important constraint by 8041 percent of firm owners and 50 percent would like government's help with it, significant proportions of firm owners also noted other equally challenging constraints such as overall market demand. Presumably, credit is likely to be ineffective in alleviating the shortage of overall demand unless policy makers can address constraints such as the apartheid-created locational disadvantage of black informal firms. Their locational isolation is compounded by poor public transportation that continues to keep them segregated from Johannesburg's prosperous growth nodes and access to input markets and customers including larger firms who can offer subcontracting opportunities. In almost all other countries, since the informal sector is not spatially separated from the formal sector, the two co-exist alongside sharing the 40 A simple econometric analysis is presented in Annex B. 41 This finding is very similar to the conclusions of many previous empirical studies carried out in various parts of South Africa (Horn et al., 1993, Liedholm and McPherson,1991 and Matsebula 1993). same input and product markets (for example, supermarkets and side-walk fruit sellers), and mutually profitable subcontracting arrangements. 2. Business skills and training is another critical constraint identified by informal firm owners. The lack of these pre-requisites is also associated with their historical past. Until almost 1990, apartheid-created restrictions and laws systematically undermined the ability of blacks to climb up the job and income ladders and acquire financial and human capital. Laws associated with Bantu Education, and job reservation sought to prevent the blacks from acquiring technical business skills, (see Annex A for more details). Against this backdrop, it seem useful for policy makers to explore the merits of designing a strategy that jointly addresses the key constraints of black informal firms owners. Box 4.1: Credit alone is not sufficient for informal sector growth - skills\training-enhanced credit will help Falk (1994) puts the issue of financing as a constraint to informal businesses in a broader context. He underscores that financing alone does not have the potential for creating sustainable informal finns: 'only together with, or even preceded by the provision of infrastructures, information, training, access to markets, etc...' will improved access to financing result in reducing the constraint to informal business development. Swainson (1992, p.7) and Liedholm and McPherson (1991) also reinforce the same idea: the issue of access to credit for informal firms can be more effectively addressed if thought of as part of a system where increased training and higher levels of managerial skills are a necessary complement to financial improvements. 35 SKILLS, EMPLOYMENT AND WAGES IN THE INFORMAL SECTOR In most developing countries, the informal sector is the employer of the last resort. It creates many jobs, not all of which are fully remunerated and not all of which are full-time or permanent. This chapter examines employment and wage statistics from the 1999 survey in Johannesburg against the background of these issues. The main conclusions of this chapter underscore the job creation potential of the black informal sector against the backdrop of an economy which has witnessed a persistent decline in formal relatively unskilled jobs since 1996. On average, a third of the informal firm owners are self- employed; the remaining are 'employer'-owners who create about 3 jobs per firm, a number that is identical to the jobs created infor7nal micro firms (SMMEs). 93 percent of the informal jobs are fully remunerated, full time and permanent. 44 percent of the jobs are performed by family labor. Employment trends indicate that during 1997-99, as formal job losses continued, there was impressive job growth across the board in informal firms - the average number of jobs per firm rose from 2 to 3 workers. At R 700 per month, the average informal wage is between 32-78 percent of the national minimum, depending upon the sector, and 34 - 50 percent of the Minimum Living Level. Informal wages are not complemented by benefits - almost 55 percent of the firms do not provide any benefits. 80 percent of the informal firm owners have between grade 4 and matric education but only a third have had some type of vocational training. The latter is mostly self-taught or learnt from relatives. Only about 20 percent of the informal owners have received some form of assistance in the past in the form of training, business opportunity identification and machinery/equipment use. Among the leading assistance providers for informal firms are small business development centers (SBDCs), private firms, and Industrial Training Boards who serve about 4 - 9 percent of the informal firms. As in the case of small micro firms, the scope for government support through more and better equipped business development centers is substantial, especially if the informal sector is envisioned as the stepping stone to the SMME sector. PRESENT EMPLOYMENT LEVELS AND PAITERNS Informal firms generate fairly stable and sizable employment,42 comparable in magnitude to levels created by formal micro firms in Johannesburg. In 1999, a third of the firms were owned by self-employed businesspersons but the remaining two thirds that were employer-owned created roughly 3 jobs per firm (Annex 4, Table 4.1). This number is identical to the average employment in formal micro enterprises. Pre-apartheid firms had slightly higher employment numbers.43 Across sectors, construction and furniture firms appear to be the most employment- 42 In 1999, the 499 informal firms surveyed created a total of 1431 jobs. Two thirds of the firms were employer- owned and created 1261 jobs, averaging roughly 3 workers per firm. 43 Pre-apartheid' informal firms employed 4.09 workers and more immigrant workers (3.05). 36 intensive - they create about 4 jobs per firm. In contrast, prepared food and beverages, retail and hawking and tourism sectors generate only 2 jobs per firm,44 (Annex 4, Table 4.2). Immigrant workers are popular among some employers. In 17 percent of the employer-owned firms, immigrant workers constitute a significant share of the overall workforce. In 1999, in these firms, the number of immigrant workers per firm averaged 2.4, yielding a ratio of 1.5 immigrants per domestic workers. The nature of the relationship between firm owners and the labor force depends upon the type of remunerated employment created, i.e. paid full-time or paid part-time jobs and the extent to which family labor is preferred to non-family workers. The pattern of employment in Johannesburg's informal sector reveals that 93 percent of the informal workforce is comprised of paid labor. The distribution of the workforce is split almost evenly between family and non- family or what is referred to as "other" workers (Chart 5.1). The share of family labor is 44 percent in the informal workforce. Migrants account for 11 percent of the informal jobs.45 Only 7 percent of all jobs are performed by unpaid family workers. The rest are all fully remunerated. Chart 5.1: Pattern of employment in informal employer-owned firms in Johannesburg, 1999 Other hired nugrant Unpaid 7% .- Eg ruHred &mily Other hired labor domestic 44bo% labor 38% The use of flexible labor arrangements The quality of employment in the informal sector can be gauged by a variety of flexible work arrangements. Hiring part-time as opposed to full-time workers provides one type of employment flexibility for employers. Typically, part-time and temporary workers are more 44 96 percent of the workers in informal firms were Africans and 67 percent were men (Annex 4). 45 This low figure could be a reflection of respondent's reluctance to reveal hiring foreigners out of fear of legal retaiiations. 37 cost-effective because they do not earn employee benefits. In Johannesburg's informal sector, 93 of the workforce is employed full-time with approximately equal shares of male and female workers. The average number of full-time workers per firm is 3.56 compared with 0.29 part-time workers per firm. Among both full- and part-time employees, male workers comprise approximately two thirds of the workforce. The use of temporary as opposed to permanent workers is another type of labor arrangement that provides employers flexibility to grapple with demand uncertainty. In Johannesburg, 91.6 percent of the informal employers hire permanent workers (Chart 5.2). The share of employers using temporary workers is thus quite small and contrasts sharply with the 33 percent share of formal micro enterprise owners (Chandra et al., 2001). Sectors that use the most temporary labor are construction (18 percent of firms) and furniture (13 percent of firms) Chart 5.2: Use of permanent workers in the informal sector r.. ............T............... . Construction Fumiture _ Metals _ Retail+Hawkers _ Tourism _ Shebeens Clothing Personal Svcs v Prepared FoodlBev 75 80 85 90 95 100 Percent of firms In sum, Johannesburg's informal sector creates as many jobs as its formal micro enterprise sector. The majority of these jobs are full-time, permanent and fully remunerated. Family labor accounts for roughly half of workforce. Only 17 percent of firms employ immigrants but when they do, the ratio of immigrants is 1.5 per domestic worker. EMPLOYMENT TRENDS IN THE INFORMAL SECrOR Employment trends in Johannesburg's informal sector show phenomenal growth and provide support for the hypothesis that the South African labor market is gradually 'informalizing', i.e. in recent years, the decline in better paid formal sector jobs46 has been paralleled by an impressive 46 Data from Statistics South Africa suggest that after growing at 2.4 percent in 1996, national manufacturing sector employment registered a 5.4 percent decline in 1997, 3.8 percent decline in 1998 and 2.3 percent decline in 1999. 38 growth of informal jobs. Like other countries, the size and growth of the informal sector are clearly symptomatic of the problems of the formal sector - i.e. the informal sector is the home and workplace of last resort for millions unable or waiting to find high-paying jobs in the organized sector. The pattern and growth are examined further below. An important question is whether employment in the informal sector is indeed growing steadily or whether job creation is due to the emergence of new firms! with a high turnover. This is determined by examining recent employment trends at the level of the sector and the firm. Between 1997 and 1999, in employer-owned firms employment rose phenomenally at a rate of over 100 percent (Table 5.1). While all sectors expanded substantially, the four sectors with the highest growth rates were construction, prepared food and beverages, retail & hawking and tourism Table 5.1: Employment trends in the informal employer-firms Employment Employment Employment Growth 1997 1999 1997-99(%) All informal firms 581 1167 100.9 Clothing 127 182 43.3 Construction 52 137 163.5 Furmiture 93 180 93.5 Metals 77 112 45.5 Personal services 55 109 98_2 Prepared 34 84 147.1 Food/Beverages _ Retail & Hawkers 77 211 174.0 Shebeens 62 123 98.4 Tourism 4 29 625.0 Rapid growth in employment levels can occur because of the emergence of new firms and an increase in the number of jobs created in existing firms. During 1997-99, across all sectors, median employment in employer-owned firms rose from 2 to 3 workers, confirming that the increase in employment was indeed across the board. During 1997-98, about 66 percent of firms kept their employment levels unchanged. However, in 1999, when the economy recovered slightly from the slowdown of 1998, job creation grew rapidly in most informal firms. Only 5 percent of the employers reduced employment, 67 percent increased employment and 28 percent kept employment levels unchanged. Sectors with the largest proportion of employment- expanding firms were furniture, clothing and tourism (Annex 4, Table 4.3). Employment trends in the informal sector thus suggest that in recent years, the sector has mushroomed significantly to absorb many of the workers laid off in the formal sector. Since it has continued to create sizable and steadily rising employment at a time when the formal sector has continued to shed jobs, it has indeed offset some formal employment losses. Does this trend signify a trade-off? What is the quality of informal job creation? 4T The extremely high growth rates in tourism are explained mostly by the extremely low base employment levels in 1997. 39 REMUNERATION IN THE INFORMAL SECTOR 75 percent of the employers in the informal sector claim to pay the minimum wage. Clothing and furniture are the two exceptions where only half or even fewer employers adhere to the minimum wage (Table 5.2). The median monthly wage reported by employers was R 700 in 1999. In U.S. dollars, this translated into a monthly wage of $ 140Q4 Given South Africa's income level (approximately US $3120), the informal wage is approximately 54 percent of the per capita income. Table 5.2: Wage paid in the informal sector (Rands per month) % of firms at Median wage paid say they pay the per month minimum wage (Rands peT month) All informal firms 74.8 700 Clothing 52.4 1080 Construction 82.4 740 Furniture 30.0 975 Metals 74.3 685 Personal services 83.9 780 Prepared Food/Beverages 93.5 700 Retail & Hawkers 80.0 650 Shebeens 89.2 690 Tourism 92.3 670 The hallmark of the informal sector is its regulations-free status. One would expect that in a setting with unusually high levels of formal unemployment, the informal sector wage would reflect market wages. We decided to cross check how the wages paid by informal employers compare with some national minima49. Table 5.3 reports these statistics by way of illustration. For some selected sectors, the wages paid by informal employers measure between 32 - 78 percent of the national minima set by bargaining councils for 1999. Another comparison shows that the informal wage in metals was only 67 percent of the minimum wage for a grade 1 worker in mining and metals. Assuming that many informally employed workers are actually more skilled than grade 1 workers, it appears that informal wages are significantly below the minimum wage. As noted earlier, the informal wage is typically the only source of income for an informal household. Comparing this with either the Minimum Living Level50 (MILL) for 1999 or 4s Using an exchange rate of Rand 5 to a dollar for 1999. 49 Source: CASATU website. so The Minimum Living Level (ILL) is a measmue of basic living costs calculated by UNISA's Bureau for Market Reseach (BMR). 40 Household Effective Level reveals that the informal sector household income for a family of 4-5 earned by an informal worker was only 34 - 52 percent of the corresponding national minima. Table 5.3: Comparisons of informal monthly wages with the national minima, 1999 All Construc- Furniture Metals Personal Prepared National firms -tion services food & Minima beverages for hh of 4-5 persons 1) Infornal actual wage - R700 R740 R975 R685 R780 R700 WB Survey 1999 _ 2) Minimum wage in 1999- R1150 R1250 R1950 R1194 R2156 based in union agreements _ _ 3) Inf. actual age as share 64% 78% 35% 65% 32% of national minimum (1/2) 4) Inf. actual wage as share 67% of minimum wage for grade 1 level mine worker Minimum living level R1335 (MLL) 1999 (UNISA) _ Household subsistence level R1778 (HSL) 2000, (Univ. of PE) Household effective level R2039 (HEL) 2000 (Univ. of PE) nf. actual wage as share of 52% MLL _ Inf. actual wage as share of 39% _ HSL _ Inf. actual wage as share of 34% HEL In addition to wages and salary, the quality of employment also depends on the amount of the remuneration in the form of benefits such as sick and maternity leave, compensation for retrenchment, etc.. One of the prime advantages of a formal job is the magnitude of the benefits package in addition to the minimum or higher level of wages. In the informal sector of Johannesburg, almost 55 percent of the firms do not pay any benefits. A third allow leave for holidays or sickness and only 12 percent provide paid sick leave. Maternity leave is provided by only 5 percent of the firms and retrenchment benefits are almost negligible. Sectoral affiliation matters in an important way. For example, only 5 percent of the firms in clothing and 15 percent in metals do not pay benefits, indicating that surprisingly, these sectors are quite regulated even though they are in the informal sector! In contrast, in prepared food and 41 beverages, shebeens and retail, over 65 percent of the firms do not pay workers any benefits (Table 5.4). The scale of job creation in the informal sector is thus large, stable and growing steadily, forcing many of the retrenched and unemployed to either make a living by operating a self-employed business or running a small micro enterprise with a few workers, or to simply join the vast pool of the poorly remunerated informal workforce that may earn 35-78 percent of the minimum wage but not too much more. Table 5.4: Benefits paid in the informal sector (percent of firms that pay) No Leave for Paid sick Maternity Retrenchme benefits holidaylsickness leave leave nt, other All informal 55 33 12 5 2 firms _ Clothing 5 81 0 24 5 Construction 44 44 19 8 3 Furniture 15 57 2 3 0 Metals 81 13 11 0 0 Personal services 58 29 23 0 3 Prepared 69 25 9 3 6 Food/Beverages ___I Retail & 67 23 14 5 0 Hawkers Shebeens 67 22 3 5 0 Tourism 57 36 0 7 0 SKILLS AND TRAINING IN THE INFORMAL SECTOR The informal sector owner's education and skill levels The extent of skills development in the informal sector is critically dependent on the entrepreneurs and workers educational background and skills levels. Fortunately, in Johannesburg, the vast majority of the informal business owners have some education although the legacy of apartheid-created inequality in education and skills is apparent from the low proportions of workers or employers with post-matric technical and higher degrees. Only 5 percent of all firm owners did not have any education. In the self-employed category, the number was close to 9 percent. 80 percent of all informal firm owners have between grade 4 and matric level of education. Only 3 percent have a post-matric, technikon or university diploma (Annex 4, Table 4.4). These statistics are similar to those in Piazza-Georgi (2001) for informally self- employed Sowetans5l and indicate the potential for training and skills development among informal firm owners. With the advantage of having attended school critical skills like book- 5' 3% had none or less than standard 1 education, 87% had matric or less, 1% had artsanalAechnical education, 5% had post-matric diploma and 2% had a university degree (Piazza-Georgi, 2001, pp.5). 42 keeping, considered essential for obtaining formal loans, can be imparted fairly easily in the informal sector. Unlike the experience with traditional schooling, a large majority or 67 percent of all respondents have no vocational training. This is particularly true of black female entrepreneurs. 81 percent have had no vocational training. About 16-17 percent of the informal firm owners have had semi-skilled worker-level vocational training. Another 10 percent have been trained as craftsmen (Table 5.5). At the household level, among informally employed Sowetans, Piazza- Georgi (2001) found slightly higher numbers. 59 percent had attended at least one type of formal training course. Only 7 percent had attended business skills training. Table 5.5: Informal firm owner's hig est level of vocational training Percent of firms No vocaional qualificaton 66.7 Semiskilled worker 16.2 Skilled craftsman (technical certficate) 7.8 Master craftsman (certficate) 2.2 Technician (diploma) 5 Other 2 In the absence of any formal vocational training, most informal firm owners have over time acquired skills through their own efforts. About 33 percent have self-taught skills. Others developed business skills mostly through informal sources such as learning from relatives (22 percent), or on-the-job training/previous job experience (17 percent). As many as 20 percent of the business owners indicated that they did not need any skills to operate their businesses. These numbers suggest that one reason why only 50 percent of the black informal owners identified the need for training and skills is that many are not aware of the potential benefits of additional business skills. Chart 5.3: Means of skills acquisition in the informal sector iter