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Small Business Development and Poverty Allerviation in Alexandra South Africa

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Abstract

is clear that since 1994 a turning point in the policy shaping the South African small business sector has seen the increased participation of the private sector and local communities. However, over the year the most significant development in the sector is the pivotal role allocated by both the government and the private sector to small, medium and micro enterprises (SMMEs) in poverty alleviation and transformation processes. The paper critically assesses the role of the small business sector in poverty alleviation in Alexandra and to examine both government and private sector initiatives for supporting small business development for poverty alleviation. It is observed that small businesses are not playing the expected role due to number of constraints including a lack of policy that deals adequately with the semi-formal and informal business sectors, the predominant sectors in Alexandra. There is also a shortage of small business development agencies that would help in developing a culture of entrepreneurship and business management skills. The overall finding indicates that with positive interaction between development agencies, and small businesses in Alexandra, predominantly informal and semi-formal SMMEs in Alexandra could not only alleviate poverty but could also contribute to the general transformation process.
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Small Business Development and Poverty Alleviation in Alexandra, South Africa
Paper prepared for the second meeting of the Society for the Study of Economic Inequality
(ECINEQ Society, Berlin; July 12–14 2007)
Patricia Agupusi, School of Development Studies, University of East Anglia, Norwich, UK
P.Agupusi@uea.ac.uk
Abstract
Give a man a fish and you feed him for a day; teach him to fish and you feed him forever (Chinese
proverb).
It is clear that since 1994 a turning point in the policy shaping the South African small business sector
has seen the increased participation of the private sector and local communities. However, over the
year the most significant development in the sector is the pivotal role allocated by both the
government and the private sector to small, medium and micro enterprises (SMMEs) in poverty
alleviation and transformation processes. The paper critically assesses the role of the small business
sector in poverty alleviation in Alexandra and to examine both government and private sector
initiatives for supporting small business development for poverty alleviation. It is observed that small
businesses are not playing the expected role due to number of constraints including a lack of policy
that deals adequately with the semi-formal and informal business sectors, the predominant sectors in
Alexandra. There is also a shortage of small business development agencies that would help in
developing a culture of entrepreneurship and business management skills. The overall finding
indicates that with positive interaction between development agencies, and small businesses in
Alexandra, predominantly informal and semi-formal SMMEs in Alexandra could not only alleviate
poverty but could also contribute to the general transformation process
.
2
Introduction
The development of SMMEs is seen globally, and especially in developing countries, as a key strategy
for economic growth, job generation and poverty reduction. Since 1994 South Africa has been
promoting small businesses as an engine for economic growth and socio-economic integration. More
recently, due to the growth of unemployment in South Africa there has been a renewed focus on the
promotion of small businesses from both the government and the private sector, not simply as an
engine for growth but more importantly as the key to job generation and poverty reduction, especially
among historically disadvantaged groups.
Poverty reduction has been one of the key issues facing South Africa since the end of apartheid in
1994. Data from the poverty and inequality research undertaken by the Human Sciences Research
Council (HSRC) in 2005 indicates that 57% of South Africans, of which over 95% are black, are
living below the poverty line
1
. This persistently high level of poverty in South Africa is attributed
partly to the jobless growth of the economy, and has led to an emphasis on small business
development as a catalyst for job creation and poverty alleviation. In 1996 the White Paper for Small
Business Development Act was introduced to redefine the role of small businesses in the new South
Africa.
This paper aims at adding to the debate by looking at the synergies between SMMEs development and
poverty alleviation and their potential contribution to Alexandra’s transformation programme.
The choice of Alexandra for the study was made due to its history of neglect during the apartheid era
which has made it one of the most impoverished towns in South Africa, notwithstanding that it borders
the most affluent part of Johannesburg. The core objective of the paper is to investigate the
relationship between small business development and poverty alleviation in Alexandra. It will also
examine the development and impact of government programmes and private sector initiatives on
poverty alleviation through SMMEs in Alexandra.
Providing the poor with access to productive income opportunities is critical to poverty reduction in
Alexandra. There are several South African poverty alleviation programmes such as welfare provision
through social security and pensions. However, the country cannot afford to support the more than
50% of the population living below the poverty level with welfare payments. Hence there has been an
increase in the promotion of wealth creation rather than unsustainable wealth redistribution. One key
1
The poverty income line in South Africa is R1,290 per month (for detail of the data see Leibbrandt et al, 2004).
3
strategy is an emphasis on wealth creation, especially among the black population, through
entrepreneurship development with the popular slogan ‘Entrepreneurship, the life-blood of the nation’.
In addition, the non-sustainability of equity transfer and several loopholes in the Black Economic
Empowerment Programme have pushed the need for multidimensional strategies for poverty
reduction. This is what has led to the renewed commitment of the government and the private sector to
small business development as a pivotal tool for poverty alleviation through skills training and job
creation.
The key question is whether the poverty can be reduced through SMME development, particularly in
the context of Alexandra, South Africa. To address these questions, the paper examines the SMME
framework as it relates to poverty alleviation. It provides the socio-economic background of
Alexandra and the challenges of SMME development in poverty alleviation. It identifies the roles of
the private sector and the government and the challenges faced by entrepreneurs. Finally, the paper
examines how the different initiatives created by the government and the private sector to provide
financial support, training and mentoring will translate into more sustainable businesses that create
jobs and skills transfers which will contribute to poverty reduction in Alexandra.
The central argument is that SMME promotion has the potential to contribute to poverty alleviation
and the transformation process in Alexandra. The recent Strategy Paper on Small Business
Development
2
also recognises micro enterprises and survivalists as the key to poverty alleviation
through income generation, particularly in rural and impoverished towns such as Alexandra.
The research applies critical analysis of secondary material complemented with primary data obtained
through semi-structured interviews with key informants and actors, entrepreneurs and potential
entrepreneurs.
General Overview of Small Business in South Africa
Globally, the concept of small business is diverse and depends on the level of each country’s economic
development. The lack of a clear and homogeneous definition of small business can affect research
findings and the understanding of its contribution to socio-economic development. There are different
characteristics of small business such as entrepreneurship, ownership and management, labour status,
the formal and informal economy and the size of the entity (Annual Review of Small Business in
South Africa, 2004). Internationally, size of entity is the criteria adopted most in small business
2
Unlocking the Potential for South Africa Entrepreneurs (The DTI 2006)
4
studies. Meanwhile, what constitutes the size of a small business varies from one economy to another.
In developed countries such as the US, businesses with fewer than 500 employees are considered
small, while in developing countries such as South Africa the number employed may be considerably
smaller.
According to South Africa’s 1996 National Small Business Act, an SMME is seen as ‘a separate and
distinct business entity, including co-operative enterprises and non-governmental organisations,
managed by one owner or more persons which, including its branches or subsidiaries, if any, is
predominantly carried on in any sector or sub-sector of the economy’ (National Small Business Act
1996:2). SMMEs in the South African context are classified into five categories: a) survivalist
enterprises; b) micro enterprises; c) very small enterprises; d) small enterprises; and e) medium
enterprises. The survivalist enterprise is generally seen as providing an income below the poverty line.
Micro enterprises are considered as businesses with a turnover of below the VAT registration limit of
R300,000. Many of these informal and micro enterprises provide the livelihoods of millions of people
in South Africa (Annual Review of Small Business, 2004). Table 1 set out the definition of small
business in South Africa.
Table.1 National Small Business Act 1996: Definition of SMEs
Size of enterprise Number of employees Annual turnover Gross assets
Medium Fewer than 100-200,
depending on industry
Under R4m to R50m,
depending on industry
Under R2m to R18m,
depending on industry
Small Fewer than 50 Less than R2m to R25m,
depending on industry
Less than R2m to R4.5m
,depending on industry
Very Small Fewer than 10 to 20
depending on industry
Less than R 200.000 to
R500, 000, depending on
industry
Less than R150, 000 to
R500,000, depending on
industry
Micro Fewer than 5 Less than R150,000 Less than R150,00
With the understanding that there are fundamental differences, in aspects such as the policies and
structure of small and medium, micro and survivalist enterprises, this paper uses the term small
business to mean small, medium and micro enterprises.
Lack of comprehensive data on SMMEs is one of the major challenges of studying small businesses in
South Africa. However, in the last few years data collection in the formal sector has improved,
although not in the informal sector, which is significant in poverty alleviation. The dearth of empirical
5
information in the informal sector is highest in the informal sector and is partly attributed to
inadequate research and the difficulty of recording the frequent entries to and exits from the sector.
To obtain the maximum information this paper intends to triangulate multiple data sources to describe
the different SMME sectors and how they contribute to poverty alleviation in Alexandra. Most
information on SMMEs in this paper is drawn from the Global Enterprises Monitor (GEM) on South
Africa, the DTI Annual Review of Small Business and the Alexandra Development Forum. Primary
data from semi-structured interviews with key informants complement these sources.
Small business development in South Africa is focused on several key factors. It is seen as a catalyst
for economic growth, job generation, and poverty alleviation. According to the most recent Small
Business Annual Review, small businesses make up about 95% of all enterprises in South Africa
(Annual Review of Small Business in South Africa, 2004:50). Non-VAT-registered businesses
operating in the informal sector number between 1.8 to 2.5m. Small businesses contribute 45-50% of
GDP. The remaining percentage is contributed by big businesses and the public sector. Formal small
businesses employ 50-60% of the labour force, increasing to 75% when the informal sector is included
(ibid: 63).
Since the late 1980s, the employment share of big businesses has been in decline, while that of small
business has increased. The increase in small businesses’ job absorption within the jobless growth
economy has led to increased support for small business in South Africa. The 1996 White Paper for
Small Business Development was a hallmark in small business development. Since then the White
Paper has been reviewed and amended to accommodate some institutional changes that offer
differential support programmes for formal and informal SMMEs.
Institutional framework for small business development in South Africa
Several institutions and mechanisms have been introduced by the South African government through
its Department of Trade and Industry (DTI). The two key government agencies established for small
business development are the Small Enterprises and Development Agency (SEDA) and Khula
Enterprises Limited. These institutions have initiated a range of programmes aimed at fostering new
business start-ups and building the capacity of existing ones. For a long time the government did not
have a support agency for micro and survivalist businesses. Although a few NGOs and CBO were
involved in this sector, the lack of government support left a big gap in the development of the
survivalist and micro enterprises sector. In 2004, the South Africa Micro-credit Apex Fund (SAMAF)
was created within Khula to provide them with financial support. SAMAF operates mainly with
6
cooperatives and community development agencies which work directly with small business owners in
rural areas and townships. Table 2, below, explains some of these institutions.
Government Development Institution for Small Business
Institutions Activities
SEDA SEDA offers a range of business development services. It provides non-
financial services through integrated support agencies across the nation with
more than 284 Enterprise Information Centres in the municipalities across the
nation
Khula Enterprises Khula facilitates access to finance for small businesses. It has various
financing products and works with major commercial banks and private
organisations such as Business Partners. Khula’s operations involve loans and
credit guarantees through commercial banks. It also offers a mentorship
programme.
National
Empowerment Fund
(NEF)
NEF provides various start-ups for small businesses and rural and community
transformation. Its financing capacity ranges from R250,000 to R10m. NEF
focuses specifically on disadvantaged individuals.
Industrial
Development
Corporation (IDC)
IDC generates its funds independently of the government. It provides various
sector-focused financing products ranging from R1m, with specific focus on
SMEs and empowerment.
South Africa Micro
Finance Apex Fund
(SAMAF)
SAMAF is modelled on the Grameen Bank in Bangladesh. It provides loans of
up to R10,000 to micro and survivalist enterprises in poor areas. Its main focus
is poverty alleviation.
Gauteng Enterprise
Propeller (GEP)
The GEP is a Gauteng Provincial Government (GPG) agency established
under the auspices of the Department for Economic Development to provide
non-financial and financial support and to co-ordinate stakeholders for the
benefit of SMMEs in Gauteng.
Within Khula there are other products such as the Umsobomvu Youth Fund (UYF), which provides
support for young people. In addition to the above government institutions, private organisations
provide financial and non-financial support to potential entrepreneurs with a special focus on
previously disadvantaged individuals (PDI). The Business Partners collaborates with Khula to provide
7
funds for business start-ups and existing businesses. Anglo Zimele, a subsidiary of Anglo American,
promotes enterprises with a special emphasis on the previously disadvantaged individuals (PDI). The
Business Place provides non-financial support to entrepreneurs and is one of the few business support
centres based in Alexandra. Commercial banks are also involved in small business development
through community banking.
Small Business and Poverty Alleviation
Promotion of small business for poverty reduction in developing countries has been gathering
momentum among governments and international development agencies. For example, the UNDP has
been developing ‘Growing Sustainable Business (GSB) initiatives for poverty reduction in other
developing countries such as Tanzania, Zambia, Ethiopia, El Salvador and Serbia and Montenegro.
The initiatives focus on cutting adage business model that engages range of local partners
3
. In South
Africa, the importance of the promotion of SMMEs as a tool for poverty reduction is noted in the
Strategic framework for Small Business
4
. Most important is the broad scope of participants it will
encompass, especially in the semi-formal and informal sectors which comprise very small, micro and
survivalist enterprises. Survivalist businesses mainly represent a set of activities by people unable to
secure regular formal employment or access to the formal economic sector, while micro enterprises
often involve the owner, family members and at most four paid employees. Very small enterprises
usually apply better business skills and are more organised, with greater potential for growth into the
formal economy. These sectors predominantly comprise Alexandra’s small business activities. They
may act as a stepping stone into the formal sector and subsequently bridge the gap between the first
and second economies typified by Alexandra and its affluent neighbours. Figure 1 illustrates the
relationship between poverty alleviation and small business development.
3
Growing Sustainable Business for Poverty Reduction; www.undp.org/business/gsb
4
Unlocking the Potential for South Africa Entrepreneurs (The DTI 2006)
8
Small business development and poverty alleviation: Modified after Pro-poor Tourism, Roggerson 2006
Sectors of SMMEs with an advantage in Alexandra, such as transport, construction and tourism have
the potential for providing the linkages needed to attract economic development in the community.
There are some inherent advantages in promoting SMMEs for poverty reduction, such as through
skills learning and transfer, especially in areas where there is an acute shortage of skills. Imperatively
is job creation through the employment of others or self-employment thereby creating livelihoods for
many people. SMMEs can also provide access to markets for the poor, much-needed infrastructure
improvements and service in the community. SMME activities are expected to contribute to the
transformation process.
Poverty and small business development in Alexandra
In 1912 Alexandra was made a Native Township wherein blacks were allowed to rent and own
property. The town falls within Region 7 of the Municipality of Johannesburg. It is located 3 km from
Sandton, the financial heart of Johannesburg. Alexandra borders the industrial areas of Wynberg,
Limbro Business Park and Bruma Commercial Park. Smith (2002) describes the distance as just a few
steps: ‘It amazes me the short quick steps two to be exact between Sandton and Alexandra. You
get Sandton, Wynberg Industrial area, Alexandra. Is it really possible to make these steps even
shorter? Although it is located next to the most affluent and one of South Africa’s highest income
residents, the life and living conditions of Alexandrians are the exact opposite of their affluent
SMME and
Poverty
Means of
livelihood
Employment
generation
Entrepreneur
development
Empowerment
Socio-
economic
development
Non-farm
livelihood
opportunities
Skills training/transfer
Access to
market
Infrastructure/
service
development
9
neighbours’. As a result of a long history of neglect during the apartheid era, Alexandra remains one of
the most impoverished and densely populated townships with 60% of its population unemployed
compared to 22% in Gauteng (Bozzoli, 2004; Rogerson, 2006).
There is a long-term problem of structurally unemployed individuals in Alexandra who have never had
a job or who have been laid off from mines or factories due to the transition to the high-tech economy.
It is increasingly difficult for them to find a job in the present-day labour market, which requires
highly skilled labour (Bhorat, 2001; Chandra and Nganou, 2001) As a result, many individuals are left
to employ themselves as SMMEs as their only possible means of livelihood.
The town is characterised by poor infrastructure, inadequate services, high crime and a severe
environment that earns it the title of ‘Dark City’ (Mgquba & Voger, 2004; Roggerson 2006).
According to the 2001 census, 50% of people over 20 years of age are without schooling and about
50% of people aged 2-24 are currently not receiving education, the highest incidences in the province.
Since 1994 there has been series of programmes to transform Alexandra. These include the
Presidential Renewal Project (PRP), involving all stakeholders. There is also small business
development and local economic development. The lives of many Alexandrians have improved since
1994, but a huge proportion of the population is still impoverished.
As a result of previous apartheid laws that discouraged black entrepreneurship, small business
development is in its early stages and lacks adequate infrastructure and an enabling business
environment. There are also limited business service providers in Alexandra. In addition most business
activities operate at an informal, survivalist level.
There are few available data on small business activities in Alexandra, making it difficult to determine
the number of small businesses in Alexandra. According to the Alexandra Chamber of Commerce
there are approximately 4000 small businesses, with survivalist level enterprises dominating this
number. This is in line with the recently-published FinMark survey of 6,000 households, which found
that typical township businesses are in the retail (65%) and services (24%) sectors. Most of the
existing micro businesses employ fewer than nine people, and are mainly kept in the family. The lack
of alternative livelihoods is frequently cited as the primary motivation for starting up new businesses.
Some of the retailers interviewed showed high entrepreneurial drive but lacked the necessary skills
and knowledge to grow their businesses beyond the survivalist level. This explains the high number of
survivalist enterprises and the stagnation of small business in Alexandra. This trend is not peculiar to
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Alexandra, being common to most informal businesses in other parts of South Africa.
This paper concurs with Horn’s (1995) argument that it is misleading to conceive of all participants in
small businesses as entrepreneurs. The GEM analysis distinguishes between necessity and opportunity
entrepreneurial motivation. Opportunity entrepreneurs are those who take advantage of a business
opportunity, while necessity entrepreneurs are those who venture into business because there is no
better livelihood option (GEM South Africa 2004). Although the majority of business owners in
Alexandra are within necessity level it does not follow that these level are irrelevant in small business
development, especially considering their contribution to their livelihoods and that of their family and
others they employ through proactive activity. The role of necessity entrepreneurs in poverty
alleviation through job creation, including in the informal sector, cannot be denied. It is likely that
some will progress from survivalist to micro and formal businesses. Meanwhile, in an environment
where most of the population is neither educated nor has formal employment skills, the tendency to
informal (necessity) SMMEs is high as an alternative livelihood strategy. In addition, recession
conditions in the formal sector are the core explanation for the surge in survivalist enterprises in often
already-overtraded income niches such as tuck shops, spazas
5
and hawking operations (Roggerson,
1996)
There has been a continuous decline in jobs in the traditional sector (manufacturing, mining and
agriculture), which absorbs unskilled labour. The growing service sectors are intrinsically skilled-
labour intensive and thus not have no demand for unskilled labour. With the majority of the
unemployed in Alexandra unskilled, the chances of getting work in this sector or in the commercial
and industrial hub remain very low, at least in the short and medium term. This increases the poverty
levels of Alexandra’s residents. In order to tackle the poverty rate a multifaceted approach must
include enterprises development. Small business development in itself is insufficient as a poverty
alleviation strategy, but the sector could contribute significantly to poverty alleviation.
Key Feature of Small Business in Alexandra
According to the local chamber of commerce, transport and tourism are the dominant SMME sectors;
trading additionally takes a major share of the number of SMMEs. The trend whereby small
businesses predominantly thrive in survivalist enterprises is similar to that in other impoverished
towns and rural areas in South Africa. Small businesses in Alexandra are still in their early stages, at
an average age of five years old. Most small businesses are less than seven years old.
5
Small shops and kiosks
11
The tourism sector has been attracting the attention of the public and private sectors and researchers.
For the most part this is due to the Alexandra’s strategic place in the history of South Africa,
especially during the apartheid area.
As a result of the rejuvenation of the tourism sector and its contribution to employment generation
there has been an initiative by the government towards making Alexandra a tourist destination
(Roggerson 2006:51). The tourism sector is seen as a lever for promoting small businesses through
local entrepreneurs providing such services as tour guiding and handicrafts (Ntlanjeni 2003;
Roggerson 2006). The sector has also attracted linkages with key tourism players in Sandton, such as
the Southern Sun Group and local stakeholders in Alexandra (Pro-poor Tourism in Practice, 2004c).
6
The construction sector has also been thriving in South Africa, including Alexandra, since 1994. This
is the result of an ongoing housing programme and the 2010 World Cup, both of which have attracted
big projects. In addition the government has invested hugely in the sector and has made it key to the
empowerment of PDI through contractor development, skills training and tendering. This provides
entrepreneurs with an opportunity in the sector and is attracting a lot of newcomers.
The transport sector mainly consists of sole proprietors. Transport owners run commercial buses from
Alexandra to other parts of Johannesburg. The sector is mostly dominated by males. On the other
hand, the trading sector, which includes spaza and shop owners and street sellers, includes a high
number of females.
Challenges to Small Business Development in Alexandra
Arguably, small business development can contribute to poverty alleviation in South Africa, but
developing the sector, especially in Alexandra, is more complex and challenging than it appears on the
surface. The complexity is related to the multiple effects of apartheid’s exclusion and discouragement
of entrepreneurship culture among its black population which have led to a lack of positive outlook
towards entrepreneurship in South Africa. The attitude of Alexandrians towards entrepreneurship is
similar to that in other parts of South Africa; they prefer to seek formal employment rather than create
a business. The average total early-stage entrepreneurial activity (TEA) index as calculated by GEM
indicates that South Africa is below average compared, for instance, with countries such as Uruguay
and Argentina (GEM SA, 2006:26)
6
For further study on tourism and poverty alleviation, see Roggerson, 2006 and Pro-poor Local Economic Development.
12
Notwithstanding the lack of positive attitude towards entrepreneurship among the residents and the
predominance of women in informal trading, some of these informal business owners display strong
entrepreneurship. As previously mentioned, they lack basic business management skills which could
make their business more viable and sustainable. Lack of skills and poor infrastructure are frequently
pointed out as obstacles to developing a viable and sustainable business in Alexandra. These are
compounded by the lack of local business service providers and government support agencies in the
area. There are also few financial institutions and small business service providers. The shortage of
local business service centres is argued to be the result of Alexandra’s proximity to Johannesburg,
where most small business service providers have their office outlets. There is also the problem of
crime and violence. To most service providers, including government agencies, Alexandra is a high
risk area.
Development Business Support Agencies in Alexandra
There are very few development support agencies in Alexandra. Notwithstanding the government’s
claimed to commitment to small business development for poverty reduction in rural areas and
impoverished townships, there is no government business support agency in Alexandra. SAMAF, a
government agency whose primary goal is poverty alleviation through provision of financial supports
to informal and micro-enterprises in rural areas and impoverished towns have no outlet in Alexandra.
When I spoke with SAMAF in Johannesburg I was told that they had organised couple of workshops
in Alexandra, but the response had been poor.
One of the two private business support agency working there observes the situation differently.
During an interview it was explained that most agencies avoid Alexandra because of preconceived
ideas which can be traced to impressions of high violence and crime in Alexandra. The problem is also
related to these agencies; lack of knowledge and understanding of the Alexandrian environment. These
drive up the cost of doing business in the area considerably. This is also the key reason for low private
sector investment in the area, although it is a potential area for development of some sectors such as
tourism.
Private sector initiative for SMME development in Alexandra
Alexandra is strategically placed due to its proximity to Sandton and other key commercial areas. The
private sectors’ initiative to support SMMEs in Alexandra includes skills training, outsourcing and
information dissemination. There are high expectations that big companies will partner small
businesses in Alexandra through supply chain linkages. For example, the tourism sector in Alexandra
is targeted to develop strong linkages between Alexandra and Sandton through Southern Sun Hotels
13
(Pro-Poor Tourism in Practice, 2004c; Rogerson 2006). Southern Sun operates six five-star hotels and
is expected to contribute to enterprise development in the area. The partnership is in line with the
South African Black Economic Empowerment transformation initiatives and provides mutual benefits
for both Southern Sun and Alexandra (Roggerson, 2006:51). It is also a means of promoting a link
with the neighbouring commercial community of Alexandra through enterprise development, skills
and job creation (Kaplan, 2004b). Southern Sun out-sources some of its services such as cleaning and
housekeeping operations to Alexandra-based enterprises and supports local restaurant in terms of
training. There is also an initiative to market township tours using residents as tour guides. These
initiatives have contributed to the thriving of the service sector in the area.
Other private sectors are also involved in enterprise development in the town. An entrepreneur
involved in skills training explained that she is in partnership with a private training agency in the city
which usually recruits most of her training clients: ‘At least people are getting a paid job which
provides them with a good income. A little improvement in skills adds value to one’s income; it makes
a lot of difference to the life of young people in the community’.
An entrepreneur with an advertising agency commented that although he is based in Alexandra and
about 70% of his clients are from the city he has no links with private or public organisations. He
explained that it can be very difficult securing clients as he is competing with big, well-established
names with plentiful resources. He argued that stepping out is most important for a businessman.
Having my own business has given me more confidence financially, and I employ people from the
community in addition to offering other community services’.
Key Constrains to SMME Development in Alexandra
Interaction with entrepreneurs in Alexandra revealed that the major constraints to doing business there
are similar to those faced by their counterparts in other townships and rural areas of South Africa, and
are detailed below. These constraints limit the contribution SMMEs could make to poverty reduction.
Lack of business management skills and skilled labour: Although some local business centres
provide training for entrepreneurs, they still have very low business acumen. Interaction with business
owners and service providers indicated that this lack of basic business management skills is affecting
business growth. A private service provider commented that entrepreneurs in the community still have
a long way to go. Some do not keep accounts, nor do they have a bank account. Some spend their
capital because they cannot distinguish between business capital and profit. This leads to business
stagnation and collapse.
14
There is an extreme shortage of skilled labour in Alexandra. Business owners disclosed that it is very
difficult to find an employee with enough training in Alexandra. The cost of employing people from
outside is rather high, and those with skills prefer to work in Johannesburg than in Alexandra. An
advertising agency owner explained that although he has trained his five permanent employees he still
has to do some of the key work himself in order to produce acceptable quality of work. The local
chamber of commerce agrees that outsourcing to local entrepreneurs is discouraging because of their
poor service. Business owners tend to look outside Alexandra for skilled employees, thereby denying
the contribution that small businesses could make to poverty alleviation within the community.
Poor infrastructure: Lack of essential infrastructure is another obstacle to business development.
Although there is some development going on in Alexandra due to the transformation programme, key
infrastructure and services such as water, a reliable telephone system and ADSL that could facilitate
business are not adequately available. The local chamber of commerce is planning a strategy to attract
businesses and service providers to Alexandra so that residents will benefit through skills transfer and
job creation, but poor infrastructure has hindered this move. Entrepreneurs are also affected by poor
infrastructure. One such commented that his desire is to open an internet café, but due to poor internet
access and the cost of operating it he cannot. A graphic designer has to rely on the internet in the office
of a local business service provider, and a spaza shop owner commented that as there is no major
outlet for goods in bulk she has to travel out of Alexandra: ‘It costs a lot to travel outside Alexandra
for bulk purchases. In the end there is little or no profit out of the business, because no one will buy if
prices are too high’.
Crime and negative public perception: Alexandra is known for its politically intense and violent
environment, but it is crime that has given it its bad image. Crime and violence are seen by the
residents as issues of the past that have been exaggerated. On the other hand, most business service
providers outside Alexandra avoid it because of the high crime rate, which makes the cost of doing
business very high. Alexandrian entrepreneurs interviewed did not see crime as their primary problem;
rather, the lack of capital and access to markets was cited as the key constraint to small business
development.
Access to capital and bureaucracy: Lack of capital and the complexities of obtaining loans from
financial institutions and government development agencies were cited as major hindrances to small
business development. The inhibitive policy framework discourages entrepreneurs from seeking funds
to start up new or expand existing business. In terms of support intervention, a huge information gap
has been identified between local business service providers and entrepreneurs. There is a lack of
government support agencies which could fill the gap left by the small number of private business
15
service providers. Indeed, while there is businesses support agencies in nearby Johannesburg, most
entrepreneurs are ignorant of their availability and how they might access them.
The few that have knowledge of some of the services and incentives available for them are
discouraged due to the complexity and bureaucracy involved in obtaining any kind of support. The
Strategy Business Partnerships Report shows that red tape costs businesses R79bn annually in South
Africa (SBP, 2004). Entrepreneurs in Alexandra argued that the process of obtaining support from the
government is not only difficult and discouraging but is also based on ‘who you know’ and political
connections. A number of key players within the sector confirm this, but also argue that most of these
entrepreneurs are not coming forward, and that those that are do not present viable business ideas. The
question now is how the gap can be bridged.
Summary
This paper has sought to critically analyse the activities of small businesses and their contribution to
poverty alleviation and transformation in Alexandra. It is observed that small businesses form a very
significant part of Alexandra’s economic activity and are pivotal to its transformation process.
Considering the socio-economic make-up of the community, small businesses can contribute greatly to
poverty alleviation. Due to the history of discouragement of entrepreneurship and the culture of
working for ‘the boss there is still an absence of entrepreneurial education for young people in a way
that could encourage them to enter business and acquire a culture of entrepreneurship. Small
businesses are faced with a series of constraints which impede their development and consequently
poverty alleviation.
Although the government accepts responsibility for ensuring that there is adequate support for SMMEs
in all communities and addressing the needs of disadvantaged and marginalised black entrepreneurs,
its presence is still to be felt in Alexandra. There is a claim that the government does not consult with
organisations that represent businesses, despite its goal of promoting the sector for transformation and
poverty alleviation.
It has also been identified that the elaborate government policies and established support institutions
for small business development focus mostly on the formal sector and neglect the informal sector,
where the majority of the poor are to be found. A few incentives, such as SAMAF and the Mafisa
micro loan for the informal and semi-formal sectors lack the capacity and drive for implementation.
16
Small businesses in Alexandra are predominantly semi-formal to informal, but present policy on small
business development neglects this sector. The micro and survivalist sectors which are dominant in the
town are clearly contributing to the basic needs and greater wellbeing of their participants.
Nevertheless, this sector could raise living standards and provide employment for residents if there
were a coherent and constructive policy to enhance its dynamism. The chosen policy must understand
the constraints on this sector.
Concluding Remark
Government policy focus has not identified potential sector and disaggregates the characteristics and
particular set of problems of the sectors, (such as the service sector, retailing and construction) and
addresses them specifically. Maximising growth and a pro-poor policy for small businesses will
contribute further to poverty alleviation and general transformation in Alexandra.
Using SMMEs to target poverty alleviation therefore requires a diverse strategy that accommodates
and involves the very poor, who lack skills and formal education for business management.
Approaches such as microfinance, skills and business management training are paramount.
17
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... However, the poor households have a low savings rate, which prevents them from accumulating sufficient assets. Therefore, funds have become the main constraint that restricts entrepreneurs from getting rid of poverty [9]. What' worse, the poor have low education level, so they lack business knowledge and timely and effective information. ...
... Ključno polazište ovde predstavljaju inovacije koje razvijaju preduzetništvo na osnovama zdrave konkurencije što vodi većoj profitabilnosti (Pejanović & Njegovan, 2010). Kod nerazvijenih zemalja i zemalja u razvoju, preduzetništvo može biti instrument za smanjivanje siromaštva putem veće zaposlenosti, što vodi ka ekonomskom razvitku (Agupusi, 2007). ...
... Sources:(Xiao-fu et al., 2017) [58] Different approaches to poverty reduction through entrepreneurship Entrepreneurship and poverty alleviation: Modified after Pro-poor TourismAgupusi (2007); andRogerson (2006). ...
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LocalEconomicDevelopmentinSouthAfrica:AUsefulToolforSustainable DevelopmentUrbanForum
  • D Abraham
Abraham,D(2003)LocalEconomicDevelopmentinSouthAfrica:AUsefulToolforSustainable DevelopmentUrbanForum,14,pp.185-200
Theatres of Struggle: Popular Rebellion and the Death of Apartheid
  • B Bozzoli
Bozzoli B. (2004) Theatres of Struggle: Popular Rebellion and the Death of Apartheid. Edinburgh: Edinburgh University Press.
Obstacle to Formal Employment Creation in South Africa: Evidence from Recent Firm Surveys.' Paper presented at the DPRU/FES Conference on Labour Markets and Poverty in South Africa
  • Chandra
  • Nganou
Chandra & Nganou (2001): 'Obstacle to Formal Employment Creation in South Africa: Evidence from Recent Firm Surveys.' Paper presented at the DPRU/FES Conference on Labour Markets and Poverty in South Africa, Muldersdrift 15-26 Nov.
Exploring the Challenges within the Small Business Market in Gauteng www
  • Judi Hudson
  • Beghin
Judi Hudson & Darrell Beghin (2007) Exploring the Challenges within the Small Business Market in Gauteng www.finmark.org.za