Creating interconnected informal and formal sectors: The next economic frontier (GG Alcock)

GG Alcock is a marketer, author and entrepreneur.

Creating more interconnectivity between the formal and informal sectors present a real and accessible opportunity to transform the battered South African economy. As illustrated by the following examples, there are massive opportunities to engage profitably with the informal sector. But it is not about creating entrepreneurs, or creating jobs. There are already hundreds of thousands of businesses and entrepreneurs in the townships, and they are already creating jobs. The questions we need to answer are: how do we support them, how do we supply them, how do we connect them to the formal economy? I believe all future formal economic activity will be entwined with the informal sector. Because we need one another to build a better future in this country.

Kasinomics

The underlying concept of ‘kasinomics’ is the economics of the kasi, the township. The ‘informal sector’, however, is everywhere: it’s certainly in the townships, but also in the rural areas, the inner cities, and the residential suburbs.

Despite its massive size and profitability, the informal sector is still invisible to many people, who often underestimate its scale and dynamism. There are two main misperceptions:

  • The belief that people in this sector would immediately abandon their little business if they could get another job.
  • The belief that these are subsistence and survival businesses, and that they don’t make a lot of money.

Let me show you why this is not true.

The informal fast food sector

I know a couple who have been selling vetkoek (or amagwinya) in downtown Johannesburg for eleven years. They sell 3,000 vetkoeke every single day at R1 each, as well as R500’s worth of polony, cheese slices, tea and coffee. Of their R3,500 daily turnover, about 50% is profit, so they earn at least R1,500 per day, six days a week.

There is another young lady from Limpopo who moved to Johannesburg looking for work, and when she couldn’t find a job, also started selling vetkoek. She now sells 6,000 vetkoeke every single day at R1 each, and employs four people. In the South African context, both of these cases certainly do not represent bare survival, and yet many people would walk past them while looking on their perceived poverty with pity.

Then there is a lady who has been selling snacks at a school in Thembisa for 26 years. Her stall is only an upturned plastic bucket and a wooden plank, but from this she generated enough income to pay for the university education of her two children. She makes a profit of R6,500 a month, working three hours a day: first break, second break, and after school. I tested the idea with her that informal traders would grab any other job if they could. She smiled: “What would I do? Come to your house and wash your underpants?” which put it perfectly in perspective. If she worked as a domestic worker, she’d work eight hours a day, commute up to three hours a day, and probably earn R3,500 a month. Selling snacks on the side of the road, she works for three hours a day and earns R6,500 a month.

Kasi kos, or the informal fast food sector, includes a range of fast foods: kotas (a quarter loaf of bread with slap chips, polony and a cheese slice), shisanyamas (meat grilled over hot coals), chicken dust (grilled spicy chicken), hard bodies (whole live chickens that’ve been plucked in the street and cooked there), and the amaplati (a plate with meat, starch and maybe a salad). You’ll often see a gazebo or a caravan at an industrial site, on the streets in the township, or at the taxi rank, selling amaplati for R35 each.

What most people don’t know is that this sector employs about 200,000 people in 50,000 outlets in South Africa, that together generate just under R90 billion a year. There are incredibly lucrative opportunities locked up in kasi kos, if you know where to look.

For example, the popular kota didn’t orginally include cheese. But in 2005 Parmalat launched into the townships, and today they sell R2,5 billion’s worth of cheese slices in kotas and vetkoeke every year.

Another example is a young man from Soweto, called Kopano. He was supplying 30 out of 60 fast food outlets in three suburbs in Soweto, using his late grandfather’s Nissan 1400 bakkie, and storing his supplies in his grandmother’s back room. He wanted to grow his business and was looking for better suppliers of flour, cooking oil, spices, sauces, and chicken, but couldn’t find any wholesaler willing to supply to him on a small scale. Until the CEO of one company, Hume International (an importer and supplier of meat in South Africa), was willing to come to Soweto and meet Kopano. Hume financed a Hilux bakkie with a refrigerated back (that Kopano had to pay off over two years) and extended R100,000 credit for stock. Within two months, Kopano was selling 2,5 tonnes of chicken every single weekend. By taking a chance and investing in that little business, Hume generated an additional 130 tonnes of chicken sold every year. This might not be a lot in some contexts, but imagine if Hume started supplying another 999 Kopanos, while their competitors are all walking away from the same opportunity.

The informal fresh produce sector

For a moment, let’s contemplate the estimated 500,000 hawkers, tabletop traders and mobile sellers in the taxi ranks and street marketplaces around the country. These traders earn anything from R3,000 to R15,000 a month: you do the math. It’s a massive sector, particularly in terms of selling fresh fruit and vegetables.

To get an idea of the real scope of the informal fresh produce sector, and its important interconnectivity with the formal economy, consider the fact that the Johannesburg fresh produce market has about 20,000 weekly customers, and can generate a turnover of R450 million a month. On the first three days of the COVID-19 lockdown, these hawkers were not allowed into the market. Over those three days, the fresh produce market lost 40% of their turnover, before hawkers were allowed to buy stock again. Can you imagine the impact on the agricultural sector of this country if this informal sector did not exist?

The informal residential and commercial rental sector

Most township houses have a back room or three, and township households rent these out for R900 to R1,500 a month, earning about R20 billion a year.

Why does this rental sector even exist? The question is prompted by two misperceptions about the townships: that they are basically informal settlements, and that they are made up of large households. According to the South African General Household Survey, however, more than 80% of our population live in formal dwellings, and only 12% live in informal dwellings. The same survey indicates that 25% of households in South Africa consist of only one person, and on top of that, 14% of the population are single generation, which essentially means a mother with one or two children. So actually, 40% of households comprise one to three people: therefore the massive demand for back room rentals.

Another R25 billion is earned by renting out back rooms to spazas (local grocery shops). These shops are generally owned by immigrants (Somalis, Pakistanis, Ethiopians), who rent the property from South Africans. So township households earn R45 billion a year in residential and commercial rental income, which is not being measured in the formal economy.

The demand for back room rentals, as well as the income generated by it, has transformed townships into suburbs. People are constantly renovating and extending their homes, but not through utilising homeloans or short term loans, because they simply cannot access these formal financial products. Their options are: layby, stokvels, and building ‘brick-by-brick’ (which refers to buying and storing a few building supplies every month until they’ve accumulated everything they need, and then paying a builder for labour).

So again, similar to the wholesale fast food supply chain, a vast proportion of the building sector is being largely ignored by formal financial institutions, primarily because the models used to measure affordability, risk and ownership don’t apply (or appeal!) to the informal sector. Yet this presents another untapped opportunity for formal economic growth.

The informal auto mechanics sector

And what about the kasi mechanics? There are 250,000 taxis on our roads, most of which are serviced and repaired by mechanics working in the dust, on the pavement. On top of that, there’s another 10 million or so uninsured vehicles all coming to backyard or street mechanics. But the owner of the vehicle has to go to a Midas or Autozone shop, buy the necessary parts, and bring them to the mechanic. This is such a time-consuming process: what if wholesale auto parts suppliers recognised the kasi mechanics as legitimate businesses and supplied them with parts directly? What if they put up a few basic workshops and invested in a few reciprocal relationships?

Creating interconnectivity between the formal and informal sectors

Many people believe that the future of the South African economy lies in growing small businesses. Yet a recent research report by MSME Voice (an international finance corporation) indicates that 80% of informal businesses in South Africa have never borrowed money, and of those who have, only 21% utilised a bank loan. Many of these businesses start with a stokvel loan or payout, a loan from their family, or savings. Most, however, use incremental linear trading. In essence, they buy five apples and sell them. Then they buy six apples and sell them. Then they buy ten apples and sell them, and that’s how it grows. Imagine if there were better financial mechanisms, whether it be credit or other financial instruments, to support these businesses to grow faster?

How can we support the informal sector, and create an interconnectivity with the formal sector?

  • We need to expand our definition of ‘a business’ to include these informal businesses, even if they operate from their home in the township, or on the street.
  • We need to update legislation to recognise these informal businesses as legitimate, which enables better access to the legal and financial systems in the formal sector.
  • We need to simplify, and speed up, the registration of new micro and small businesses. It takes 40 days to register business in South Africa, while in Rwanda it takes only four days.
  • We need to create different risk assessments for loans to these businesses, so that they can access the type of (mostly micro) loans they need.
  • We need to provide more appropriate financial services and products, such as micro insurance and aggregated selling models, that caters specifically for the informal sector.
  • We need to recognise that townships have transformed into a socially and financially sophisticated suburban space, and that people are choosing to trade and do business in their local neighborhoods, similar to the high street concept.

This talk was presented at Nation Builder’s 6th annual In Good Company conference (September 2020) which looked at “building back better”.

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