Necessity to Opportunity Entrepreneurship in Rural South Africa – potential of community based enterprises Ranjit Raju, Manager, SMME Development, Technology for Development – Corporate, CSIR South Africa Post Box 395, Pretoria 0001, South Africa Tel: +27 12 8412360 Fax: +27 12 8413011 Email: [email protected] URL: www.csir.co.za Key words: Necessity Entrepreneurship, Rural Development, and Poverty Alleviation

Abstract Since 1994, the advent of democratic South Africa, Small Medium Micro Enterprise development has made substantial progress in terms of policy to practice. However, the dichotomy of the economy coupled with past policies, has posed some major challenges to practitioners and institutions involved in this domain. Utilizing the available literature, paper uses a case in point from one of the current initiatives in rural South Africa, supported by the Council for Scientific and Industrial Research (CSIR). Subsequent to the establishment of Manguzi Information and Development Centre (MIDC) and the CSIR’s continuous interactions evaluating various economic development opportunities in the Maputoland/Kwa – Zulu Natal, South Africa, the CSIR had identified and scoped an opportunity that impact on the economic activities of the region. Incema and Ishikhoko, two types of indigenous grasses are harvested and processed manually to produce ropes by the local women in the region. The rope produced are utilised in the furniture manufacturing initiative at MIDC. At an intervention cost of approximately US$100,000 spanning over a three-year period, the initiative was expected to leave well over 200 sustainable jobs in the region. Progressing to the final phases this initiative shows substantial potential to promote many a South African rural necessity entrepreneur further along the continuum. The captured learning is reviewed against the observations from more than thirty initiatives CSIR is associated with, which are driven by the same guiding principles and funding model. At an exploratory level, the observations indicate sufficient scope to consider communitybased enterprises as a potential intervention option to move necessity entrepreneurs to opportunity entrepreneurs in rural South Africa. Although the paper hasn’t attempted to synthesise the learning to a generic model, nor it may be apt for all scenarios, it highlights potential factors to consider towards the development of a rural development model.

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INTRODUCTION It is an acknowledged fact worldwide that the small business sector plays an important if not critical role in the economic and social development of a country. Within the South African context, the SMMEs business sector is viewed as an effective vehicle for generating employment, the equitable distribution of income, activating competition, exploiting niche markets (both locally and internationally), enhancing productivity and technical change and through all of this, simulating economic development. The South African Small, Medium Micro Enterprises From the discussion paper in 1994 on Strategies for the sector (South Africa, The Ministry of Trade and Industry, 1994) to the White Paper on SMMEs (South Africa, Government Gazette – 16317, 1995) and in the National Small Business Act of 1996 (South Africa, Government Gazette – 17612,1996) references and segmentation of this sector are based on the notion of economic entity. The current amendment to the bill , the “National Small Business Amendment Bill” (South Africa, Government Gazette – 24628, 2003) has taken cognisance of number of changes needed in this regard. However, the current amendment has not entertained a separation on the geographical basis. Last year’s Global Entrepreneurship Monitor (GEM)(South Africa, GEM, 2001) study results for the country provides a very important distinction for comprehending the dynamism and complexity of the South African environment. GEM bases the report on Total Entrepreneurial Activity (TEA) index that comprise of start-up index, new firm index, opportunity entrepreneurship index and necessity entrepreneurship index. (2001GEM). The study indicates while South Africa compares well with many a developing nation, the country is still challenged with the relatively large group of necessity entrepreneurs and the much needed growth in the opportunity entrepreneurs grouping. For the purposes of this exploratory study the authors notion of an SMME is left to its broadest sense, that, it is an economic entity irrespective of its legal status, restricting it to the size and turnover as referred in the Small Business Act, created and managed by entrepreneurs either out of necessity or in pursuit of an opportunity, contributing to the economic aggregation of the nation.

The Necessity Entrepreneur As in many countries worldwide, there are many constraints and problems facing the SMMEs compared to big businesses in South Africa. These range from legal and regulatory environment confronting SMMEs, access to markets, finance, business premises, the 2

acquisition of skills and managerial expertise, access to appropriate technology, the quality of business infrastructure in poverty stricken areas, tax burden right through to sector specific constraints. The South African situation is aggravated by the legacy of the big business domination, constrained competition and (with high GINI coefficient) unequal distribution of income and wealth. The definitions provided by GEM to distinguish the necessity entrepreneur and opportunity entrepreneur is particularly helpful under this scenario. An opportunity entrepreneur is defined as some one who is an owner – manager of a start – up or a new firm primarily to take advantage of a business opportunity as opposed to a necessity entrepreneur as some one engaged like wise because they have no choice. The South African GEM study of 2001 estimates that 83 % of entrepreneurial activity in rural areas is driven by necessity. Taking note of the extreme challenges facing a rural entrepreneur in South Africa (South Africa, GEM, 2002), the poverty situation in the country and mention of relevant policy documents are needed to place the case in context. Poverty Context Data from Statistics South Africa show fifty-seven percent (57%) of Africans in South Africa live below the poverty threshold (R353, around $50 pm) versus 2.1% of whites that are in similar position. One out of every four families goes to bed hungry every day. By 1996, the Northern Province with the lowest Human Development Index (HDI), 0.53, had the highest percentage of rural population (89%) whilst Gauteng with the highest HDI (0.712) had the lowest rural population (3%). The poorest 40% of African females live in rural areas. The United Nations Development Programme HDI uses income levels, levels of educational attainment and life expectancy to measure the extent of human development needed to push back the frontiers of poverty. Human development is defined as the process of enlarging people’s choices (goods, services and human capacities) and raising their levels of well-being. Based on a scale of 0 to 1, South Africa has an HDI 0.628 relative to the average of 0.637 for all developing countries and seen in conjunction with the high GINI coefficient for the country. Presidential nodal areas have started to systematically capture data that could be used for policy decisions, programme formulation and for monitoring of progress. The core components of a broad spectrum of policies and strategy frameworks on socioeconomic development and poverty eradication largely indicate a convergence of views that need to be tackled. A number of documents – The World Summit Sustainable Development implementation plan, the new Partnership for African Development, the Micro Economic Reform Strategy of Government, Vision 2014, The National R&D Strategy Poverty 3

Reduction Technology Mission and the Integrated Sustainable Rural Development Strategy of the Government include some common intend. A common thread that runs through al these frameworks points to the shared for attainment of sustainable socio- economic development and eradication of poverty. The two goals are mutually reinforcing sides of the same coin in that, experience has shown that, there can be no sustainable growth and development with out poverty eradication and vice-versa. The challenge however, for a new nation such as South Africa with her past enforced imbalances, is to translate this to reality. THE CHALLENGE The post apartheid South Africa has introduced a number of interventions to promote the entrepreneurial activity across the spectrum. Further, as signatory to Bologna Charter on SMME policy in 2000, South Africa, through both private and public sector initiates has been trying to design and implement SMME support programmes in an effort to translate these policies to practice. Given the past policies and its effect on vast majority of South African population, SMME development remains an absolute priority for the nation. Considering the high unemployment in the country, the domain has enjoyed high levels of priority by the Government as a vehicle for employment. One positive outcome of this redefined status of SMME’s in the economy has been an influx of research into the domain. Irrespective of one subscribes to the negative sentiment (as noted by Levy, 1996, Levin 1997,Kesper 1999) or the positivism (reflected by Gumede 2000), in this regard; overall, research on SMME domain has made substantial progress. Predominant number of these research work are on the microenterprises mainly emanating from cross-section surveys, with limited literature on established successful SMMEs (Kesper 2000). Although, attempts such as GEM, World Bank Discussion Papers and The State of SMMEs in South Africa by NTSIKA (NTSIKA, 2000) is definitely contributing to the “informed re-orientation of national initiatives”, there was hardly any literature available on programme, design and implementation. This problem is further aggravated for a practitioner or an institution venturing to into the domain of promoting rural entrepreneurship in South Africa for the want of captured learning and researched publications. It is within this void the Department of Arts Culture Science and Technology (DACST – now two separate departments, the Department of Arts and Culture -DAC- and the Department of Science and Technology -DST -) in South Africa, decided to pilot a range of projects in rural parts of the country. Using CSIR and other Science and Technology institutions in the country, the department wanted to alleviate rural poverty by leveraging and enhancing entrepreneurial activity based on indigenous knowledge and resources. Challenges that faced 4

the implementer, range from issues raised by Oberhauser (Oberhauser AM, 1998) from a gender perspective, challenges recognised by Nieman (Nieman G, 2000) in the entrepreneurial education in the country to range of research challenges in the domain by Havenga (Havenga K, 2001). The 2002 South African GEM augments many of these suggestions specifically in the context of rural entrepreneurs. In a country that is challenged to alleviate poverty for millions, potentially by sustainable economic interventions and enhanced entrepreneurship it is worth checking if: Necessity entrepreneurs can turn to opportunity ones using community based enterprises? Considering the shortage of researched material specific to the region and field a case study method is opted for finding an answer to this challenge.

An intervention, in Manguzi

(Kwangwanase/Kosi Bay) situated at the top eastern corner of Kwa-Zulu Natal, from the cluster of initiatives, totalling over thirty introduced by the DAC and DST was chosen for this purpose. The learning from the case is reviewed against generic findings in other initiatives to come to an answer. While attempting to narrate the process possibility and potential of using community based enterprises as vehicle for community development, the reader is cautioned against considering the process as one of generic nature, apt and adaptable to all community development efforts. “WEAVING MANGUZI” A CASE IN POINT The background Manguzi on the proposed Spatial Development Initiative, en route to Mozambique is endowed with a wide variety of natural resources such as indigenous grasses and various hardwood trees. The community is also located near popular national parks and nature reserves that are visited by thousands of tourists every year. Subsequent to the establishment of MIDC and the CSIR’s continuous interactions evaluating various economic development opportunities, the CSIR had identified and scoped an opportunity that would positively impact on the economic activities of the region. Incema and Ishikhonko are two types of indigenous grasses that are found in this region over a stretch of approximately 100 kms predominantly in the Northern Kwazulu-Natal/ Maputo Land. The women in this rural area harvest these grasses (see INSERT 1) in a particular method by removing the fully-grown central stem thus not hampering the ecological balance in the region. The stems of Incema are shredded using a safety pin and dried (see INSERT 1).

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INSERT - 1

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Ishikhonko is mashed before drying. These dried shreds are then manually rolled in to a rope (see INSERT 1). These ropes are then finally woven on to wooden frames carved or manufactured at the Manguzi craft centre based on traditional patterns (see INSERT 1). The people affected by chain of activities can be divided into 3 groups. 1. A group of 15 weavers and carpenters who produce furniture on site on a semi permanent basis for Ngezandla Zhehtu- Handicrafts (NZ) a Closed Corporation which is managed by Manguzi Information and Development Centre 2. A group of approximately 200 women whose products are utilized by NZ as a component in the furniture making. 3. Approximately 50 craftsmen who use NZ as a showcase for their particular products. Currently these finished products are marketed and sold by NZ at their premises on MIDC. Tourists who visit the region form a major market for these products as well as the booming hotel industry. There is substantial scope for branding and marketing, widely using effective distribution and marketing channels. The communities involved along the value chain had already taken pro-active steps of forming small community groups at the harvesting and rope making stage. NZ was already trading as a CC, which was sourcing the produced ropes, from these communities. Being located strategically on the MIDC, premises as well as having accesses to management support through MIDC made this project suitable for the creation of sustainable jobs in the region. The intervention In 1999 when the author visited the region with one of the CSIR field specialists, the initiative originally started by missionaries as job creation initiative, has turned itself into what was classified as a failure by the community.

The entire operation was failing to produce,

irrespective of local visitors wanting to purchase the products. The groups of women producing the rope were considering other livelihood options as transportation and other logistics were in complete disarray (local floods didn’t help this situation either). NZ the furniture producer had failed to honour many a payment promise (the rope producers were incurring cost just by bringing it to the premises). Quality was inconsistent; the planning was impossibility under the circumstances. The fact that the Manager of the operations would seldom get R20 (around $2) a week, indicated the financial state. Anchoring and availing the DACST Poverty Relief Programme opportunity, CSIR planed and carried out the following interventions to relieve poverty in the region through the support for the creation of sustainable jobs. 7

a) Augmentation of production methods by appropriate technologies: Community production practices such as use of safety pin, and rolling shreds on legs etc. inhibited the desired quality production outputs. The introduction of special purpose tools and machineries augmented by adequate training and usage across the value chain was planned. However, during the course of the intervention a number of practices were retained. b) Optimisation of processes: The practices existed used minimal or no planning, contributing to inefficiencies in the quality of various production stages. The project empowered the community in carrying out aggregate planning, optimal inventory production, appropriate quality management and health and safety systems over a period of one year. c) Formalization of support structures for optimum performance: Although informal and semiformal structures were in existence for the current chain of operations there was a lack of effectiveness. By establishing appropriate co-operatives or stand-alone units across the entire value chain with proper logistical support, constraints were eliminated. The development and implementation of effective marketing strategies and business processes for local and export markets were carried out during the intervention period. Inadequate branding and ad-hoc marketing strategies had resulted in low market penetration, less profitability and high inventory carrying costs leading to exploitation by intermediate traders. The intervention empowered the community in the development and implementation of effective marketing strategies initially by correcting the business practices, pricing policies and addressing the promotional and distributional issues. Subsequent to addressing the local market, the second phase is exploring export opportunities leveraging on the Internet accessibility at MIDC. d) Expansion of product range and rationale: There is a great scope for expansion of the existing product range, which could cater to various other applications. Strong backward integration will not only help enhance the core competency but with the support of niche product manufacturers widening of market access can be effected. This intervention task is currently underway. e) Capacity building for self-sustainability in the region: To ensure the long-term sustainability and success of the project, adequate capacity needs to be built within the community. The project is currently focusing on this objective by encouraging adequate participation and ownership of all activities within the project. 8

f) Training to effectively capitalize on Indigenous Knowledge Systems (IKS) for sustainable job creation and local economic growth: The community over the years has shown innovative capabilities to capitalize on income generating opportunities based on indigenous knowledge systems. However, there has been a tremendous lack of training in formally capturing these IKS based ideas. The project at its completion, after a 3-year period would have trained the community in the various aspects of effectively establishing a value chain based group of SMMEs harnessing the available resources. This drive is linked to the product range expansion and runs concurrently. The results The interventions were planned for a period of three years at total cost approximately $100000, of which 90% were for the community in the form of initial training stipend and other training costs, infrastructure, and for other capital expenditure. The intervention was subjected to both internal and external reviews and both agreed on the sustainability and selfsufficiency by the end of current year, the final year of support by the CSIR. This is further evident from the consolidated sales figures (there was a month on month improvement in the detailed figures) as shown in Table – 1 below: Table – 1 Consolidated Sales Figures for NZ 2000 (Before Intervention)

2001(Start of Intervention)

R10000 (Around $1250)

R24100 (around $3000)

2002 (during Intervention) R 150300 (Around $19000)

As a poverty relief intervention, the aim of the CSIR, as the intervening agency, was to reduce the level of poverty within the Manguzi community through sustainable use of local natural resources such as grasses and plants in order to leverage sustainable socio- economic activities, enabling the: 

Transfer of skills and knowledge to building capacity



Manufacturing of quality and competitive products



Establishment of linkages to markets

Resulting from this intervention, after two years of implementation, a vibrant small business, Ngezandla Zethu Handcraft exists, which employs 25 people on a full time basis, and uses 245 people as continuous local suppliers of twine and rope raw materials. It is furthermore provides a retail outlet for products of other SMMEs such as fish traps, carvings, baskets, hats and other products, creating self employment opportunities for more than 100 people.

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The learning As an intervention agency, the implementer, the lessons learnt from the case in point, by the CSIR are two fold, firstly at an implementation level: 

The success of socio-economic development projects depends on acknowledging and understanding the social dynamics of communities.



Communities should be engaged and encouraged to take ownership.



Business management skills and knowledge transfer should form the core of capacity building.



Technology transfer should always be adapted to suit local conditions.



Indigenous knowledge should be conserved, valued and harnessed to develop products that relate to the culture and tradition of the community.



Environmental impact assessment at feasibility stages is essential to ensure sustainable development.



The unavailability of transport and bulk purchasing facilities constrain the development of viable small business.

Secondly, with the appropriate interventions necessity entrepreneurship could be transformed to opportunity entrepreneurship in rural South Africa by encouraging community based Enterprises. A BROADER REVIEW Expanding the exploration of the possibility of creating sustainable community based enterprises in rural South Africa, the other interventions funded by DAC and DST were reviewed. These projects are all introduced under the poverty relief programme, using the same funding principles and were identified based on local resources available to the communities. With out exception each has managed to create sustainable employment, contributing to poverty reduction through community-based enterprises. However, number of them are in it infancy stages, which would warrant continued support beyond the original three year horizon. One of the major contributors to this effect is the choice of intervention in farming based products, were the development and establishment period were under estimated. Although contributing positively to the promotion of entrepreneurship in rural communities, a number of projects warrant major co-operative arrangement to grow the market, and to prove the viability of the options. At different stages of growth as an enterprise, Table – 2 provides an overview of the other interventions by DST and DAC

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Table – 2 Businesses created under the Department of Science and Technology and the Department of Arts and Culture through their respective Poverty Relief Programmes. BUSINESS CREATED PROJECT NAME

NUMBER

TYPE

Beekeeping

Honey Production

23

Cashmere

Knitting

2

Essential Oil

Essential oil enterprises

2

Indigenous Food

Food processing enterprises

2

Leather

Leather based production enterprises

8

Mohair

Mohair-based production enterprises

2

Seeds

Seed production business

3

Papermaking

Paper making business

16

Plant fibre

Hemp-based farming associations,

13

Sewing-based enterprises, Papermaking business Weaving

Furniture production business

Wool

Shearing,

wool-based

1 manufacturing 18

enterprises Yoghurt

Food processing enterprise

1

Craft (25 separate projects)

Craft production enterprises

25

While one could argue about the somewhat benevolent nature of these interventions, the results are worth noting in that; they move the rural communities from the dependency culture to an entrepreneurial one. As noted by Aliber, (Aliber, 2002) the country’s efforts to eliminate poverty have been frustrated by the continued shredding of jobs from the formal economy, as well as by the fact that successful poverty-eradication measures are dependent on government and civil society capacity, which are still being built up (Aliber, 2002). Challenges and key learning from one such national initiative by Old Mutual – Rural Economic Development Initiative , REDI, reflects the national scenario in this domain fairly accurately. Reported in the Corporate Social Investment Handbook (CSI Handbook, 2002), South Africa, they are:

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Market-driven enterprise is the only formula for sustainable economic development. Sustainable jobs can only be created if business are viable, profitable and show some growth potential.



Sustainable development is only possible when individuals share similar values and principles, actively mentor others.



Individuals are the key to development, embraced through REDI philosophy of “ a hand up and not a hand-out’.



For an organisation or development network to be effective, it is critical that, it manages itself, is independent and held accountable.



In order to be effective and ensure delivery, the champions themselves require support in the form of mentoring, access to skills development (personal or technical), information, resources and financial support.

The DACST, REDI and other similar interventions are however not without the pains of exposure to the “notorious nine” –political, economical and environmental constraints, institutional realities, personal constraints, short comings in technical assistance, decentralisation and participation, timing, information systems, different agendas, and sustainable project benefits - problems of project implementation (Carvalho, White, 1996). Comprehension of each of these specific to intervention and relevant solutions introduced would ensure higher probability of success to the initiative. RECOMMENDATIONS While the case study and the limited review of broader interventions indicate the possibility of moving necessity entrepreneurs through to one that of opportunity, by creating community based enterprises, more robust and longitudinal research is needed to substantiate this claim further. Considering the remarkably large population in rural South Africa, should this be a proven potential option, a much deeper understanding of the rural communities in the country and the entrepreneurial nature there in need to be explored further. Studying the case a bit further it was evident during the intervention community based enterprise (CBE) approach were exposed to problems associated with project implementation at higher level than for a normal CSIR project. This suggests it would be useful to study the limitations of CBE approach, more in detail and the finding would simplify the organisational efforts in the domain. One salient point to note in the CBE approach taken in the case was effectiveness of networking which allowed for obtaining a number of support needed to address the constraints facing the South African entrepreneur, noted in the beginning of the paper. Leading from this observation was the challenge to the Private Sector that they may not 12

be having sufficient researched mechanisms at their disposal for a more active engagement in rural development. However, in this instance, the case study, and the others reviewed suggest in the least community based enterprises is more sustainable option to poverty relief initiatives in the country. In addition, by appropriate socio-economic interventions based on community partnerships and market linkage the necessity entrepreneurs could progress to source out opportunities. In conclusion to quote from Klass Havenga’s (Havnga, 2001) paper: “While the social organisation and economic systems resulting from Africa’s past contributing to its present dilemma, the future will be constructed from the efforts of its entrepreneurs as they work within the evolving systems.”

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Kesper. A., Failing or not aiming to grow? Manufacturing SMMEs and their contribution to employment growth in South Africa. TIPS working Paper 15-2000, TIPS, Pretoria.

Kesper. A., Small clothing manufacturers in Johannesburg inner city: Facing the global challenges. 1999. Urban Forum 10(2), 137 –164

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South Africa. The Ministry of Trade and Industries. Strategies for the Development of an Integrated Policy and Support Programme for Small, medium and Micro- Enterprises in South Africa – A Discussion Paper. 1994, Pretoria.

South Africa. Parliament of the Republic of South Africa. White Paper on National Strategy for the Development and promotion of Small Business in South Africa. 1995. Government Gazette No.16317. Cape Town. South Africa. President’s Office. National Small Business Act. No.102 of 1996. 1996. Government Gazette No.17612. Cape Town

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