Posted: November 8, 2022
The chairperson of the National Council of Provinces, Hon. Amos Masondo.
Minister of Small Business Development, Hon. Stella Ndabeni-Abrahams.
All MECs present.
Members of the NCOP.
Officials of Government Departments.
Ladies and gentlemen.
Chairperson, you have convened us today to discuss one of the important issue that should be at the uppermost of government and corporate agenda. It is a matter that we should have a national consensus with as public and private sector that social pacting must be forged in turning townships and rural areas, the seedbed and the flywheel of SMMEs to create sustainable livelihoods.
Your today’s theme is “Measures to unlock and grow the full potential of the township economy”. The question of the Township Economy has been dominant feature in our economic development discourse as government, for a longest of time. Confronting it in a more systematic way with concrete targets has been lacking in the past. The recent plunge of our country into the untold backwaters of the economy has reignited our resolve to locate this economic intervention to the township and rural side, at the centre of our focus.
The two year COVID-19 economic squeeze, as a result of lockdowns caused untold severe consequences to the township economy and employment. The 2021 July unrest that targeted and vandalised mainly the townships shopping centres and adjacent factories, that were a source of much employment to the townships’ population; and the 2022 KZN and Eastern Cape floods that ravaged the townships infrastructure and annihilated many small businesses, all combined, have had a devastating effects to our township architecture. These externalities came and worsen the state of poverty and unemployment in the rural and township.
Because of the reduced numbers of the employed people in the townships, in the last three years, battered by the impact of these three unfortunate realities – the household disposable income has shrank to unprecedented levels. People living below the poverty line have grown multi-fold. Unfortunately, even as we project some glimmers of economic growth projections, minimal as it is, bullishly recovering from a sustained tailspin, this will not trickle to the improvement of our townships and rural areas. To them, all of this remains an academic exercise because their conditions remains the same. This is a ticking time bomb and the country is standing on the tinderbox of social explosion unless we intentionally, we greater speed; unleash all kinds of interventions to ameliorate the current outlook.
In shifting our interventions to the township economy, and of cause rural, we are inviting the private sector – the big corporates to invest in our township SMMEs and give them contracting opportunities to transact with them. Many business activities is happening in our townships and in rural areas which includes primary agricultural products of high quality that can be supplied and be procured by established retail businesses. Manufacturing of various building materials is dominant in our townships, and transacting with these SMMEs by big corporates can create massive jobs.
Chairperson, the point I am underlining is that, big commercial companies must never interface with townships from the point of view of expanding their own commercial interests like building Malls and have big retail brands shops making more money in townships without any commitment to transact with township Start-ups and other forms of SMMEs. In sourcing of suppliers, large companies must prioritize townships and rural enterprises. We need to be firm on this matter in the context of localisation framework.
Part of our Economic Reconstruction and Revitalisation Plan (ERRP), post COVID is to catapult township economy and informal economy in general.
Key Assumptions about Township Economy.
Most business models in townships are structured towards survival with tight margins and very little pricing power. Because of that reality, very little savings are often left for re-investment. Growth driven largely by meagre internal resources.
Transactions are largely cash-based and profits are largely transferred to the core economy, as they buy and get services to the established formal economies. This is true about many Spaza shops that do their bulk buying from the formal economy to resell in the township. The taxi industry service their fleets and buy tyres in the formal economy. This is also true about hairdressing and building material businesses. The issue of value chains to circulate the economy and build value and scale remains a challenge.
Systemic Hurdles to Townships.
Chairperson, it is a tragedy of our time that townships are still largely ignored for investment. The economy doesn’t have townships in their investment radar screen except retail sector through shopping malls, because there exist disposable income from households to spend on groceries. The dominant paradigm is to view townships as in need of corporate social investments (CSI) rather than potential nodes of fast growth. Corporate mind-sets are not geared towards township investment, at all.
There is limited products to address market failures in townships. Related to that is limited strategy, targets and action plans to invest in township economies. Because of these investment patterns indirectly perpetuate the transfer of wealth in affluent areas, like the Alexander Township to Sandton contrast or KwaMashu and uMhlanga situation. Banks and our own Development Finance Institutions, as well as investors in general, accept huge risks elsewhere, but very little in townships. It would seem that there is still a redlining imposed towards townships as an investment destination.
Poor infrastructure remains a biggest challenge in our townships such as industrial areas, business parks, business incubators, serviced land and logistics. These systemic important elements hampers organic commercial growth.
As indicated before, the restricted linkages with formal value chains from a transactional (business off-takes) perspectives in productive activities of SMMEs stifles growth. Limited entrepreneurial traditions and limited core business capabilities to some start-ups. With all of these challenges abound, there is a further growing higher rates of poverty, unemployment and social ills bedevilling the already oblique state of affairs.
How big is the township economy?
Financial services company, Investec says that an estimated 17% of the country’s total employment is through the informal economy or so-called township economy.
“Informal businesses operate within a multitude of industries and offer goods and services that meet various social and economic needs within township communities. Retail dominates the informal township economy, with spaza shops, fast food outlets, bakeries, shebeens and hawkers.
“Additional businesses include backroom rentals, minibus taxi operators, mechanics and panel beaters, metal fabricators, childcare services, barbers and hair salons among others,” it said
Standard Bank is the latest company to tout the potential of South Africa’s township economy, joining many corporates, particularly in the banking, grocery retail and telecoms sectors.
Small businesses operating in historically designated townships on the periphery of the country’s developed urban economy are as much a part of our economy as large national companies or home-grown multinationals operating out of Sandton, the lender said.
Simone Cooper, head of business clients at Standard Bank, speaking to Business Tech, believes that township enterprises are the missing link required to get South Africa onto a higher and more inclusive growth path.
“South Africa’s small business sector is critically important because they can unlock growth, inclusion and long-term social stability – everything that has been eluding South Africa for so long. Far from being peripheral, small businesses are central to building the economy and society we all want,” said Cooper.
In May, MTN South Africa said it would ramp up its investment in Gauteng to the tune of R2.2 billion to meet increasing demand, while the group said it would also extend its reach into township areas, to fuel growth and boost participation in the digital economy. This includes several digital wallet solutions.
A diverse, vibrant and growing small business segment drives the growth, broad-based employment and innovation that expands inclusion, builds general prosperity and maintains social stability, said Cooper.
“Given the very large role small businesses play in employment and GDP growth around the world, if South Africans are puzzled by lacklustre growth and the inability of our economy to provide employment, we need look no further than how we support, develop and include our small – and especially our small periphery or township business segments – in the formal economy,” the business lead said.
South Africa’s small business segment is characterized by a divide between more formal urban enterprises located closer to developed business and financial hubs – and less formal peri-urban or peripheral enterprises located in townships, informal settlements or among rural communities.
Standard Bank said it has developed a range of solutions designed to bridge the distance between small and peripheral township enterprises and the formal economy. These are glimmers of hope that requires harnessing from our part as government, as we are busy with policy livers to coordinate a systemic long range intervention to this economy.
Objectives of the Township Economic Interventions.
As government, we have now started to develop concrete approaches towards township economy. I must commend Gauteng that has been trailblazing in initiating concrete policy levers towards this question from a Gauteng townships intervention perspective, working with IDC. KwaZulu Natal has followed suite with their own conceptual direct policy on township and rural economy. As the dtic, we have set up a Unit with a team working on a national overarching township economic policy. Interesting work and action plans will flow from this work, because consultations with provinces for their input is solicited to inform the policy outlook.
Therefore, what are the objectives of the township economy interventions?
- To develop a coherent Township Economy Development framework to support Township Enterprise Hubs / Zones / Clusters (including economic corridors – to promote interprovincial and cross border development) – in partnership with Provinces.
- Understand, identify and quantify economic opportunities (that drive localisation and import substitution) – in collaboration with industry, chambers / councils / associations, etc.
- Provide critical infrastructure support (primarily for manufacturing and value add opportunities & investments) in state owned Industrial Parks that are township based.
- Develop diagnostic growth tool to guide inclusive economy and equity practices for sustaining township & rural enterprises / industrial clusters.
We are working on the township mapping exercise to do the following:
- Profile the township economy – under economic (including industrial), demographic (e.g. gender, age, disabilities, qualifications) and other key social characteristics.
- Identify current support mechanisms for the township & rural economy – policy instruments (funding or incentive packages by both government and the private sector) sector support systems, and governance support structures.
- Identify the critical challenges affecting economic development, specifically with the lens on industrial development in townships. This will highlight practical and concrete examples.
- Identify current and possible funding and financial instruments that can advance township & rural economies.
- Recommend key industrial and related economic opportunities for support in 52 townships, including specifying the support required and role players required in providing the support.
As the Department, we are targeting 52 Townships that will be sampled from all Districts and Metros along the lines of the District Development Model (DDM). Rural economic nodes will also be included in the mapping exercise.
- The key consideration for township and rural sampling would be the economic linkages with other townships and the broader economy.
- Population density and migration patterns; the extent of industrialisation or past industrialisation
- Demographic profile (with priority given to townships with a high share of young people and women);
- The extent of government and private sector interventions (to extract lessons on best practice);
- Prevalence of government’s priority sectors; prevalence of entrepreneurship and SMMEs; and availability of up-to-date data.
Work with five (5) Metros townships has started. The engagements with stakeholders for development of business case studies started in the following areas:
- EThekwini (KwaMashu and uMlazi townships) – for distribution and logistics Hub concept.
- Ekurhuleni (in Laboria Industrial Park) – to repurpose factories for township clusters.
- City of Johannesburg (Soweto) – to revitalize feasible industrial Parks in Orlando and Dobsonville.
- City of Tshwane – Repurpose or develop a township manufacturing precinct at Babelegi Industrial Park.
- Buffalo City (Eastern Cape) – creation of a township enterprise precinct at Dimbaza industrial Park.
National Business Initiative (NBI) in collaboration with private business association there is going to be a promotion of investment into the township-based industrial Parks and address skills gaps through work based capacity development. Manufacturing / Services Clusters in collaboration with Township & Rural based network / association are going to package support for critical infrastructure support. All the studies being done will be completed by March 2023 for mapping and identifying of opportunities in 20-townships and development of Diagnostic Growth Matrix along sectoral and spatial analysis.
Chairperson, four (4) Township Manufacturing / Enterprise Hubs or Precincts to be initiated in (4) Industrial Parks located in four townships, with identified opportunities packaged as business cases. This will be supported through existing measures of the Industrial Parks Revitalisation Programme (IPRP). Our biggest aim is to motivate for a creation of a special fund to support Township (& Rural Economy). As a start, the Department will request allocation of unused Floods / Unrest funds to be directed to assist in this programme as an initial funding.
The Departmental Agencies on Township Economy.
As the dtic, through our agencies, we seek to leverage what they are currently having as packages of incentives towards townships development in a more streamlined manner to support the work that the Department is starting. Our Agencies have been doing some work but without an overall coordination. This will be rectified and be channelled within the context of this overarching approach.
As an example, NEF has incentives designed towards township and rural economy development. NEF development of rural and township economies is through its
Fund Management Division, which consists of five specialist Funds, which are:
- iMbewu Fund (SME development),
- Rural, Township and Community Development Fund,
- uMnotho Fund (medium-sized businesses),
- Strategic Projects Fund (black industrialists), and
- Women Empowerment Fund.
These Funds provide financial support to black-owned businesses of different sizes with a focus on enterprises that operate in the township and rural areas. The Funds aim is to facilitate meaningful participation of black entrepreneurs that operate their businesses in rural, township and peri-urban areas. They also execute the NEF mandate to support Government’s economic policies that seek to develop high-growth sectors that are labour-intensive, support the District Development Model (DDM) and the Build Back Better Initiative spearheaded by the dtic.
IDC has also placed a special focus on supporting and growing the Township Economy. This support has been directed primarily through four pathways, which is financing of projects and businesses located in and around townships through normal IDC business products; Social Impact Funding mechanisms and initiatives; and seeking innovative solutions and strategies. They also fund the facilitation of partnerships.
Amongst the IDC’s mandate performance areas related directly to the support of township economies, are to:
- Create inclusive employment opportunities;
- Support local economic development initiatives;
- Fostering entrepreneurship and supporting the SME sector (particularly youth, women, Black Industrialist, disabled); and,
- Being a catalyst for private and public sector investments.
Township Economy Partnership Fund (TEPF), which is an IDC and Government of Gauteng programme on Township Economy, has approved R300million of R400million made available through partnership between IDC and GEP to capitalise Strategic Implementing Partners to support township enterprises:
- R200million to SA SMME Fund supporting 5 000 businesses.
- R50million to Family Tree supporting 7 600 businesses.
- R50million to Emerge/Bluefield’s to support 200 businesses.
- R200million already disbursed.
- Township Economy Partnership Fund 2 to be proposed (R1bn fund).
- Re-submission currently underway on Indlu for R100million supporting 2000 jobs. A programme supporting small-scale property owners in townships like rental cottages owners.
- Pipelines have been identified as part of due diligence process.
About R4.9 million grant approved for “Smart Township” feasibility initiative for Sebokeng in partnership with others including Siemens, targeting Energy, ICT, Water and Transport and Logistics. Project in planning phase and feasibility likely to begin end October 2022.
Other Provinces have been approached to consider expansion of the IDC TEPF into those provinces. So far, three (3) provinces have been identified for this financial year, and that is, Eastern Cape, KZN and Free State.
Chairperson, we are the first to say we are not there yet on making concrete interventions to the township economy, but we have reality began this journey. We will not make any meaningful impact without provincial government leading the charge, especially Provincial Economic Developments and their provincial Agencies. We will not succeed without Districts Municipalities and Metros playing a significant role through their LEDs, and the effective usage of the mechanism of District Development Model. In a word, the intergovernmental relations both vertical and horizontal is critical in this regard. I count our coordination with the Department Of Small Business Development as our sister Department. Pooling together of all resources towards this end, is more than urgent.