Ekurhuleni Metropolitan Municipality Upgrading for Growth Strategy Local Economic Development (LED) & Micro and Small Enterprise Development (MSE) ...
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Cities Alliance Project Output
Ekurhuleni Metropolitan Municipality
Upgrading for Growth Strategy
Local Economic Development (LED) &
Micro and Small Enterprise Development
(MSE) Issues Report
Upgrading for Growth: Implementing the Breaking New Ground
Policy within Ekurhuleni’s City Development Strategy
P100698
This project output was created with Cities Alliance grant funding.Ekurhuleni Metropolitan Municipality
Upgrading for Growth Strategy
Local Economic Development (LED) &
Micro and Small Enterprise Development (MSE)
Issues Report
May 2007
Submission made as members of the:
Cities Alliance (World Bank) Consulting Team to the
Ekurhuleni Metropolitan Municipality
By:
Roland V. Pearson, Jr.
Team Designation: LED Expert
and
Sharda Naidoo
Team Designation: Enterprise Development SpecialistTABLE OF CONTENTS Introduction & Executive Summary ...................................................................................... 3 Key Elements of the LED & MSE Development Conceptual Framework.............................. 6 Introduction....................................................................................................................... 6 SLA .................................................................................................................................. 7 MMW4P ........................................................................................................................... 9 MSE Linkages & Value Chains ....................................................................................... 11 MSE Development & the Financial Systems Approach ................................................... 14 LED – Emphasis on Economic Governance & Acting as a Process Catalyst .................... 16 A Review of Relevant EMM Strategies and Plans ............................................................... 19 Compendium of Resources.................................................................................................. 23 National Provincial and Local Programmes on Offer to MSEs in EMM .......................... 23 Services Provided by South African BDS organisations .................................................. 25 LED Resources ............................................................................................................... 26 Example Case Studies ..................................................................................................... 27 Synthesis of Key Issues....................................................................................................... 28 Annex 1 – International Case Studies of LED and MSE Development ................................ 30 Shopping in Japan ........................................................................................................... 30 Industrial Linkages Catalysed by Local Government ....................................................... 32 NATWest, Marks & Spencer, Bath Environment Centre, Local Government and the Community ..................................................................................................................... 34 Unilever in Uttar Pradesh ................................................................................................ 35 EMM UFG-LED MSE Development-1st Report-Final v01.doc Page 2 of 35
Introduction & Executive Summary
This report constitutes the ‘Status Quo and Issues’ report on Local Economic Development
(LED) and Micro and Small Enterprise Development (MSE), as part of the Ekurhuleni
Metropolitan Municipality (EMM) Upgrading for Growth (UFG) project, funded by the
Cities Alliance (World Bank), in partnership with the Ekurhuleni Metropolitan Municipality
in South Africa. The report follows the structure outlined by the two authors in earlier team
and working group meetings, and addresses the issues highlighted in the respective terms of
reference (TORs) for the LED and MSE Consultants. The table below summarises the key
deliverables expected of the two Consultants over the life of the project. In light of the
inextricable linkages between LED and MSE development, this first report / deliverable has
been written jointly. Although close collaboration will continue between the two Consultants
for the remainder of the project, future deliverables may or may not be combined into one
output.
Key Deliverables
LED Expert Enterprise Development Specialist
1. Report on national, provincial and 1. Report on national, provincial and
local agencies both private and public local agencies, both private and public,
focused on the development of small, focused on the development of small,
medium and micro-enterprises in Ekurhuleni, medium and micro-enterprises, especially
including assessment of the alignment those with relevance to Ekurhuleni, including
between municipal driven LED initiatives an assessment of the alignment between
and investments by individual stakeholders. municipal driven SMME initiatives and
investments by individual stakeholders.
2. A draft capacity assessment which 2. A demand side analysis, summarising
concisely articulates the expectations of key characteristics and trends of the existing
national and provincial directives on local SMME sector in Ekurhuleni, while also
economic development and the extent to suggesting strategies to overcome identified
which Ekurhuleni is institutionally and barriers, as well as strategies to create
financially able to deliver. synergies from existing positive elements.
3. A final capacity assessment which
incorporates comments from Ekurhuleni
Task Team.
4. A time-bound work plan of LED 3. In consultation with the LED Expert,
activities for incorporation in the Upgrading contributions to the work plan of LED
Strategy and Financing Plan. activities for incorporation in the Upgrading
Strategy and Financing Plan.
5. A presentation to the Ekurhuleni Task
Team and key stakeholders outlining the
above report’s findings and recommendations
as well as the proposed work plan.
This report begins with the conceptual framework, which has given shape to the analysis,
and which should guide the execution of the remainder of the project. In particular, the
authors propose application of the Sustainable Livelihoods Approach (SLA) as the overall
methodology through which the efficiency, effectiveness, impact and sustainability of the
LED and MSE aspects of the UFG can be optimised. Furthermore, we explain the structure
and relevance of the Making Markets Work for the Poor (MMW4P) paradigm – a particularly
EMM UFG-LED MSE Development-1st Report-Final v01.doc Page 3 of 35appropriate approach in addressing the human and financial capital elements of the SLA,
which are the most immediate targets of LED and MSE activities. The final two legs of the
conceptual framework comprise an overview of our approach to LED and MSE development
and microfinance.
We next move to a review of relevant EMM strategies and plans, in particular the Growth
and Development Strategy (GDS) and the LED strategy. To some extent, the purpose of this
chapter is simply to summarise the key aspects of the relevant strategies. However, we also
use this space to analyse the real or expected success of those strategies, using their alignment
to the relevant elements of the conceptual framework, as a guide. This chapter also analyses
the metro’s LED strategies and problems through the three predominant ways in which local
government may act, namely investment, management, and engagement.
The next two chapters set out a compendium of resources – i.e. money, people, institutions,
and knowledge – upon which EMM may draw to implement the LED and MSE aspects of the
UFG strategy. In one chapter we briefly describe an array of mostly Provincial and National
level institutions, projects, and programmes, which may have relevance to implementing the
LED and MSE components of the UFG. The next chapter summarises a series of national,
regional, and international case studies, which help to illustrate possible, practical courses
that EMM may take.
The report concludes with a synthesis of key issues arising, which include:
• The vital importance of community governance, especially in migrant / fractured
communities, such as the informal settlements, which are the focus of the UFG;
• Availability, accessibility, and appropriateness of governance and management systems
to effectively and efficiently manage multiple sources of funds at the community and
local levels (especially in the context of “accreditation”);
• Trade-offs and differing emphases on social, financial, and economic returns to business
development, as well as the trade-offs between short-term outputs and longer term
outcomes (i.e. impact)
• Impact of the influence of ASGISA (the Accelerated and Shared Growth Initiative for
South Africa), and especially the growing recognition of political ambition to elevate
growth rates nationally to 6-7%, which implies economic growth rates of 10-15% in the
cities;
• Trade offs between growth and sustainable development
• The “unfunded and constitutionally conflicted mandate” problem – while long-term
policy and legislative reform is absolutely necessary, what can be done in the short to
medium term?
• Reconciliation of local, provincial, and national strategies and plans, and their execution
• Substantial market disparities between the skills demanded and the labour skills available;
• Targeting and moulding investment to optimise long-term employment prospects, in
addition to economic growth
Because of the purely secondary nature of the research undertaken to produce this report, its
criticisms and suggestions should be viewed as questioning of areas that bear more detailed
examination and perhaps application of a different perspective, rather than absolute right or
wrong. The quality of documents produced by EMM must reflect the professional skills of
other qualified consultants and the informed engagement of responsible metro personnel. It
must be assumed that direct and indirect factors, alternatives, consequences, trade-offs, etc.
EMM UFG-LED MSE Development-1st Report-Final v01.doc Page 4 of 35have been considered by others. Thus, this report tries to spot gaps and / or inconsistencies at a comprehensive level, in order to recommend adjustments that should optimise the LED and MSE development elements of the UFG, rather than de-construct what others have done and try to lay a totally new path. EMM UFG-LED MSE Development-1st Report-Final v01.doc Page 5 of 35
Key Elements of the LED & MSE Development Conceptual Framework Introduction This chapter describes the over-arching conceptual and analytical framework, which will guide our analysis of EMM’s existing LED, MSE, and related strategies (e.g. Growth and Development, IDP, etc.) in the next chapter. Overall, the framework includes four inter- related aspects. At the highest level, we deem the Sustainable Livelihoods Approach (SLA) as the most relevant guiding principle for EMM, in part because of its comprehensiveness, but also because it is very adept at guiding policy and strategy focused on poverty alleviation, which, in light of the focus on informal settlements in this EMM UFG project, makes the issue paramount. At the next level down, we propose looking at EMM UFG through the lens of the Making Markets Work for the Poor (MMW4P) model. This approach reflects the latest international thinking and experience around economic development generally, and enterprise and job creation specifically. Thus, while the SLA may have applications beyond the economic realm, the MMW4P paradigm will help to focus our analysis on the economic issues most pertinent to LED and MSE development. Finally, we propose a third filter of frameworks that are most relevant to MSE development on the one hand, and LED on the other. On the MSE side, we explain the Linkages and Value Chain approach that should guide the non-financial aspects (e.g. training, advisory services, etc.) of the MSE development strategy; and the Financial System approach that should guide the financial aspects (e.g. microfinance) of the MSE development strategy. In respect of LED, we explain the modern model of MED, which emphasises the Economic Governance and Process Catalyst role of local government. The graphic below captures these elements, and the remaining pages in this chapter explain each of the framework elements in detail. EMM UFG-LED MSE Development-1st Report-Final v01.doc Page 6 of 35
EMM UFG Conceptual Framework
(For the MSE & LED Components)
Sustainable Livelihoods
Approach (SLA)
Making Markets Work for the
Poor (MMW4P)
Micro & Small Enterprise Local Economic
(MSE) Development Theory Development (LED) Theory
Linkages & Value Chains Economic Governance /
(Non-financial services) Process Catalyst
Financial Systems Approach
(Financial services)
SLA
The paradigm most relevant to the application of LED and MSE development is the
sustainable livelihoods approach, SLA, (graphically depicted below).
EMM UFG-LED MSE Development-1st Report-Final v01.doc Page 7 of 35Sustainable Livelihoods Approach
• Natural capital: environmental sustainability
– Reducing the ecological footprint of the settlement
The sustainable livelihoods approach – Location, integration, land conservation
offers an analytical tool to understand the – Energy efficiency and renewable energy / Water conservation
various ways in which living conditions can be – Sanitation, resource recovery, waste management
improved and disparities decreased. The • Social capital: networks of mutual support, social cohesion
approach focuses attention on the various – Strengthening community institutions and social networks
assets of the poor (capital) and the
strategies they use to make a living.
– Overcoming racial and socio-economic segregation
– Integration of socio-cultural amenities and services
– Measures to address crime and violence, enhance safety
– Innovative partnerships and enabling governance
Natural • Physical capital: a sustainable built environment
capital – Shelter with security of tenure
– Public infrastructure: schools, clinics, libraries, police stations,
etc.
Social – Transport infrastructure
Physical
capital capital – Engineering services
– Commercial & industrial facilities
• Human capital: Skills, knowledge, and ability to work
– Access to appropriate health & education facilities
– Job creation, entrepreneurship, LED
Human Financial – Empowerment for women and the marginalised
capital capital • Financial capital: economic sustainability
– Increasing income
– Affordability and alternative finance
– Cost savings
– Functioning secondary market
The SLA captures the essence of LED and MSE development from the personal and
household level. In this way, the juxtaposition of the LED and SLA frameworks helps to
reconcile the connections between often very complex processes among large institutions,
and the impact upon and from the individuals who are meant to participate in and benefit
from the institutional actions. Furthermore, the SLA serves to drive home the poverty
eradication goals of LED, since, by design; it granulates very finely the determination of the
existence, value, and potential of a series of core assets (i.e. natural, physical, financial,
human, and social) that each individual and household must have, in order to achieve a
sustainable livelihood.
This poverty focus is important in
Ekurhuleni, since the UFG project focuses
specifically on informal settlements, where
the incidence and depth of poverty can
reasonably be expected to be higher than in
formal settlements in EMM. Also the chart
to the left (from the SA Cities Report, 2006)
shows another potentially troubling trend.
Firstly, the growth in the poorest segment
(i.e. LSM 1 and 2) was nearly double the
growth in highest LSM categories.
Meanwhile, the negative growth in all of the
middle categories may denote a further polarisation of income and lifestyles in Ekurhuleni.
(NB: It is not clear whether the growth in both ends and the reduction in the middle
EMM UFG-LED MSE Development-1st Report-Final v01.doc Page 8 of 35categories reflect shifts within Ekurhuleni, or the impact of inward and outbound migration).
Other poverty indices, such as HDI, employment / unemployment, access to basic
infrastructure (e.g. water, electricity, sanitation, etc.), etc. show similarly better performance
by Ekurhuleni, relative to the national figures. Although economic measures, such as import
and export growth and GVA per capita, show mixed performances over the past several
years, generally in line with the boon and bust cycles of the manufacturing and mining
industries
So, most of Ekurhuleni’s residents remain poor, which, in turn, would seem to necessitate a
particular steering of LED, and indeed, the overall UFG, in a poverty-eradication direction.
MMW4P
The dichotomy between growth and development has been a confounding element in poverty
reduction. One of the primary causes for the exclusion of the poor from the benefits of
growth is their non-integration into markets. The current dominant paradigm in development
thinking is concerned with integrating the poor into well-functioning markets, its popular
descriptor being, Making Markets Work for the Poor (MMW4P).
Marking markets work for the poor is both an objective and an approach.1 Markets are the
site of all economic exchanges or transactions. Economic agents participate as consumers,
producers and employees. In simple terms, when people are excluded from (this group of)
transactions, they do not benefit from the gains. For example, the nearly 20% of unemployed
people in South Africa, who are no longer actively looking for work, are not part of labour
markets, whereas informal businesses are integrated into markets. Increasing the gains for
the poor in the economy thus implies that these excluded groups must be integrated into
markets. The vision of making markets work is of more inclusive and more effective markets
as a means of achieving growth and large-scale poverty reduction.
As an approach, making markets work is not a set of precise formulae. Rather it is a rigorous
process or a set of analytical tools to enable us to:
• Discern the complexity of markets,
• Analyse the roots and factors that cause exclusion and poverty
• Identify action that is grounded in markets and
• Build realistic plans for making inclusive markets work effectively.
Markets work at three layers:
1. The Core Market – the site of supply and demand transactions
2. Institutions which set and regulate the rules of the game
3. The layer of infrastructure and catalytic and support services
The MMW4P paradigm assumes that markets work when these three layers are in place and
interact organically, namely:
• An institutional layer in which government policies, legislation and the regulatory
framework provides a transparent, predictable, and robust foundation for markets;
• An organisational or transactional layer in which retail services providers such as banks,
market linkage firms and suppliers of business development services among others
1
Ferrand, D. Gibson A. and Scott H., (2004): Making Markets Work for the Poor
EMM UFG-LED MSE Development-1st Report-Final v01.doc Page 9 of 35provide goods and services to clients at price, quality and quantity levels that reflect true
market demand; and
• A support infrastructure, in which service providers, such as consultants and research
firms, among others, service the needs of the provider organisations and the consumers in
the organisational level, as well as the Government and other institutions in the
Institutional layer – in effect acting as a critical catalyst and connector among key market
actors.
The practice of making markets work requires sturdiness at each layer e.g. policy certainty at
the foundation level is a necessity; responsiveness and innovation at the organisational level;
and understanding of market needs at the support level. The layers of the paradigm are
illustrated below.
Source: Finmark Trust, Making Markets Work Paradigm (www.finmark.org.za)
Our task in making markets work for the poor starts with understanding functioning and
interactions at each layer2. At the core or transactional layer we would need to get a picture
of performance, trends, players, structure and issues within markets. Most importantly we
would need to identify where and how the poor fit in or are excluded. An accurate picture
would give us indicators of the lack of information, skills or technology that could enhance
the participation of the poor.
In analysing the institutional layer, we would need to extrapolate information on the rules
(policies and legislation), or that lack or inadequacy thereof, that impinge most on market
development. Our objective in analysing this layer is to assess the relative ease that
businesses and labour can interact within markets. Clearly some standards in environment
and health protection are necessities for sustainability, but many other types of legislation can
be eased to facilitate entry and exit into the economy.
The third layer of the framework would consider the availability of services and
infrastructure – both hard and soft that impact on markets. It is to be expected that businesses
2
Source: Ferrand, Gibson and Scott, 2004
EMM UFG-LED MSE Development-1st Report-Final v01.doc Page 10 of 35operated by the poor may have limited access to hard (e.g. telephones, electricity, roads and
water) infrastructure. New technologies are however, rapidly progressing to fill that gap in
many instances. That cell phones are now so accessible and can even be used for some
financial transactions is a good example of market development which benefits the poor.
Understanding the availability of soft infrastructure, the services which enable businesses to
innovate and compete effectively is one of the key elements of making markets work for the
poor. The term ‘knowledge economy’ is a clear indicator of the importance of ongoing
learning and information in staying ahead in business. Such access impacts on the poor both
directly and indirectly, i.e. their production may suffer due to inefficient technology or their
employers may become uncompetitive due to lack of competitiveness. The knowledge base
and support service layer are thus seen as central to survival and competitiveness.
Clearly, an analysis of the three layers would mean that many changes would need to be
made to make markets work for the poor. While it is not always possible to make rapid
changes at each level, it is optimal to consider which changes at which level(s) are likely to
create the maximum impact in integrating the poor into functional markets.
MSE Linkages & Value Chains
Elements in the Growing Methodologies of Business Development Services (BDS)
As investment in BDS had resulted in varied impact, governments and donors had learnt the
value of client consultation and through this realised the importance of business development
services (BDS) for small and micro-enterprises.
With this realisation, a new school of thought emerged. It was not dissimilar to the patterns
of microfinance development. One of the major proponents of current best practice, the
Market Development Approach, Gibson (2000) defines its goal:
“Develop a vibrant and competitive, private sector of relevant, differentiated services
consumed by a broad range and significant proportion of small businesses.”
The primary departure from previous approaches is the development of a “private sector” of
business support services. The motivation for this approach is the recognition that services
are at the heart of successful economies.
The probable influence in this thinking is the need for regular innovation in business to
remain competitive. Given the multi-skilling required in small businesses, the use of
specialised services is likely to build efficiency and in the long run also promote innovation.
A further influence was probably that sub-contracting as a means to build efficiency and
competitiveness among big businesses had proven to be fairly popular in the nineties. These
practices, in conjunction with the development of microfinance, increased the potential for
and appeal of declining donor dependence. Whatever the influences on the market
development approach, it is conceivable that a competent, varied and sustainable business
support sector is likely to reap rewards for the economy on a number of fronts.
The primary elements of the MDA are that services are demand-driven, transaction based and
therefore sustainable. The hope of this approach is that a functional market for business
development services will be created and sustained by demand from businesses.
EMM UFG-LED MSE Development-1st Report-Final v01.doc Page 11 of 35The motivation for market development is premised on the growing realisation that
businesses operate in an environment of market-based transactional relationships.
If donors and policy makers are to improve business development services for SMEs it means
that the market environment for services has to be improved.
In order to implement the MDA, a three-stage process is called for. The first is to analyse the
market context, identifying constraints and opportunities for market development. The
second stage is to construct a vision for the future. The third stage is to work out appropriate
interventions to realise the vision for sustainable BDS.
In analysing the market context, the supply and demand sides have to be disaggregated. On
the demand side, there are usually small and medium enterprises that require research and
development, product development, advocacy, skill enhancement, information provision,
regulation and co-ordination. On the supply side, there is the state, the private sector,
business networks, membership associations, and the non-profit sector. To build a match
between the supply and demand sides, there has to be decisions and solutions for the problem
of who pays for the services and who delivers them. Gibson’s’ primary assumption is that
providers of BDS do exist in the private sector and that information about these are needed by
SMEs.
Based on this notion, the key role in promoting BDS is to build business linkages between
suppliers and consumers of business services (i.e. micro, small, and medium sized
enterprises). The types of interventions recommended on the supply side are to develop
technical assistance, develop (demand-focused) financial and BDS products and promote
venture capital. On the demand side it is recommended that vouchers, matching grants and
information is provided to catalyse market functioning. The role of government in this view
now extends beyond provision of public goods3, addressing externalities, regulating
monopolies and overcoming imperfect information. The key roles for governments are to
foster markets and promote clustering. This is of course in addition to protecting the poor,
providing social insurance and redistributing assets.
Some of the conditions laid for implementing a market development approach are to:
• Take a clear view of the sustainability objective by constructing a functional vision for
how markets will work in the longer term;
• Understand how the private sector will be able to promote varied and continuous BDS
services and innovations;
• Ensure that services, especially subsidised ones, are finite with a clear exit point;
• Build interventions on market constraints; and
• Ensure that Government interventions are facilitative rather than delivery oriented.
Although the intention of the MDA was to focus on and build BDS for small and medium
enterprises, many agencies extended and have used the approach to design interventions for
3
Public Goods characterized by very low levels of subtractibility and excludability, by contrast with Private
Goods Low subtractability implies that a good is available to all consumers at the same time, and consumption
by one consumer does not use up or reduce the supply available for another consumer. Low excludability
implies that if a good is provided to a consumer in a defined region then other consumers in that region cannot
be easily excluded from consuming the same good. Public Goods are non-rivalrous in consumption and use
does not exclude other users. Theses characteristics suggest these goods are (nearly) always provided by
governments.
EMM UFG-LED MSE Development-1st Report-Final v01.doc Page 12 of 35micro-enterprises, as well. In developing countries with large numbers of micro enterprises
in the same type of activity and lacking access to services and linkages, the approach has
proven fairly effective. For example, poultry producers in a rural Eastern European
environment were able to grow their market share considerably by introducing them to
buyers for urban retailers.
In keeping with the idea that market functioning should be enabled in the promotion of BDS,
USAID’s AMAP (Accelerated Microenterprise Advancement Project) promotes a value
chain approach to BDS for small and micro enterprises. This approach identifies the
opportunities and constraints to growth in a particular industry and takes the additional step
of identifying the factors that drive firms’ behaviour in markets. “These factors include:
• Mutually beneficial relationships among firms that are related horizontally and
vertically;
• Learning that takes place through vertical and / or horizontal cooperation; and
• The depth and breadth of benefits from participation in a value chain.
Building competitiveness among small and micro enterprises requires a broader view of the
industries in which they participate. A picture of the opportunities and constraints for
improving competitiveness is built through a systemic view of the fabric of the relationships
between firms in a single industry. A diagnostic framework for a value chain analysis would
include the following elements:
• End market opportunities
• Enabling environment (national and international)
• Inter-firm cooperation: Vertical Linkages
• Inter-firm cooperation: Horizontal Linkages
• Supporting markets (sector specific and non-sector specific, including financial
services)
• Firm-level Upgrading (product and process upgrading).
End markets determine quality and standards, as they demonstrate the demands of the end
user. The enabling environment, which is local, national and international, is affected by
trade agreements and standards. They have a significant influence on the constraints and
opportunities for growth of an industry. Standards, however, can be very expensive for
MSEs to comply. Herein is where opportunities lie for donor and government support in
increasing market access.
Firms improve competitiveness through improving production efficiency (leading to lower
prices) or product quality (leading to market differentiation and price increases). A firm or
industry’s ability to constantly innovate determines its ability to stay ahead in the market.
This in turn depends on the availability of technology, services and learning channels. Value
chains where learning mechanisms are institutionalised are the most competitive.
EMM UFG-LED MSE Development-1st Report-Final v01.doc Page 13 of 35T h e V a l u e C h a in
G lo b a l M a rk e t
N a t io n a l M a r k e t s
S u p p o r t in g
M a r k e t s E x p o r t W h o le s a le
S e c to r s p e c if ic
P r o c e s s in g
C r o s s - C u t t in g
P r o d u c t io n
F in a n c ia l
In p u t S u p p ly
N a ti o n a l E n a b lin g E n v ir o n m e n t
G l o b a l E n a b lin g E n v ir o n m e n t
The connectedness of these markets is illustrated above. (Source: Freeman, M. 2005)
While promoting considerably more depth in the analysis of market functioning, the value
chain approach takes the market development approach to a new level in analysing
interventions to promote improved market functioning.
MSE Development & the Financial Systems Approach
Best practice in finance for enterprise development has extended itself from access to finance
for businesses to more expansive thinking which encompasses access to financial services for
the majority in a country. This expansion is a reflection of the notion that a broad and
inclusive base of formal financial services provides a sound platform for economic
development which reaches deeper into society, i.e. is targeted at the poor and more
specifically the un-banked. The principles which guide the development of the financial
sector are entirely consistent with those of making markets work for the poor. (MMW4P). In
fact, much of the learning which influenced both the market development approach to
business development services and the MMW4P paradigm arose from experiences in the
development of the microfinance sector.
Having started with provision of credit for enterprise development, learning in the field soon
progressed to the need for at least savings and credit among the poor. Some of the key
learning that led to ideas such as, “Building financial systems that work for the majority”4 is
useful to consider in our local context:
• That provision of financial services to the poor is desirable and necessary;
• Offering credit to the poor can contribute to poverty reduction when the credit is invested
for good returns as in a business but this depends on the opportunities and markets in the
environment where the business is run;
• Despite the fact that credit provision in itself does not reduce poverty, provision of safety
nets for the poor through safe savings is essential;
• That the poor can afford to pay cost recovery rates for credit as the returns on the
investment are more important than the cost of the funds;
• While cost recovery rates are possible, it is still important to build efficiency and scale;
• Institutional efficiency is built by increasing the case loads of staff, reducing transaction
costs of the lender, and achieving and maintaining high recovery rates and scale by
building on the numbers of clients reached by the institution;
4
Building financial systems that work for the majority”4 is the vision statement of Women’s World Banking.
Similar visions are articulated by other influential international agencies such as CGAP and UNCDF.
EMM UFG-LED MSE Development-1st Report-Final v01.doc Page 14 of 35• Sustainability becomes possible by progressively increasing efficiency levels and
building outreach, i.e. institutions become profitable by reaching large numbers of clients
at the lowest possible cost; and
• As poor people often do not have assets, collateral substitutes are necessary. These may
take the form of group guarantees, peer pressure, community standing or other means.
As increasing numbers of institutions have achieved the conditions outlined above, the need
to go beyond donor and government dependence became apparent. This in turn, has
engendered approaches to commercialisation of micro finance. Commercialisation can take
different forms, one being sourcing of funds from commercial arenas. E.g. In India, SEWA
and SHARE and in Latin America, especially in Colombia and Bolivia a number of
institutions have been trading on money markets to access funds to on-lend since the late
1990s. These institutions are now linked to ratings agencies (e.g. PlaNet Finance and Micro
Rate), the results of which enable them to link with additional sources of local and
international finance. Another and probably more popular option for commercialisation is
transformation from NGO or non-profit status to becoming a bank. There are now a number
of successful examples of such transformation. Amongst others, these include the
transformation from Prodem to Banco Sol in Bolivia, K-REP to K-REP Bank in Kenya and
ACLEDA in Cambodia.
The choice to transform to a bank is by no means simple and involves radical realignment of
the institution especially at the levels of ownership and governance. The key change at the
levels of governance is the shift from a poverty or development orientation to one of meeting
investor expectations. In addition, there has to be re-consideration of the products offered,
the image of the institution, appearance of the premises, strengthening of technology, systems
and human resources, as well as a new orientation to marketing.
As we established within the MMW4P, if commercial or market driven approaches are to
operate, the rules of the game need to clear, i.e. conducive regulation which allows the sector
to develop while maintaining systemic and consumer safety is essential. In this regard a range
of policy and institutional frameworks have been tested in a range of conditions in developing
countries. These are designed to encourage the development of an environment conducive to
the proliferation of a variety of institutions to build an inclusive financial sector. At the
policy level, it is recognised that there is a need for a regulatory framework, which allows for
the development of the various services that are needed. One of the features of such
liberalised financial frameworks is that interest rate regimes should be unregulated to allow
cost recovery (at minimum, though profitability is optimal). The framework also allows for a
variety of institutional types such as credit only NGOs and private financiers, credit and
savings cooperatives, village banks, commercial banks, business NGOs, and grass roots
savings groups (ROSCAs). The extent of the regulation of such institutions depends on the
risk associated with the products they offer.
The predominant approach now adopted among a host of international agencies is termed the
sector development approach. UNCDF is one of the proponents of the approach. Sector
development is promoted through co-operation among relevant government departments, the
central bank, donors, MFIs, banks and any other grouping which is involved in financial
sector. The motivation for this approach is that balanced growth or development is more
likely with a financial sector that caters for the needs of the majority. (See www.uncdf.org)
EMM UFG-LED MSE Development-1st Report-Final v01.doc Page 15 of 35Clearly, the financial sector has a bigger role to play in development promotion than many others. We could go so far as to say that the extent of integration into the financial sector is a key determinant of asset building, wealth creation and thereby poverty reduction. In view of this understanding the extent of inclusivity does have significant implications for a society or community’s ability to reduce poverty. An assessment of inclusion in financial markets is therefore critical to establishing the extent of development on the one hand and on other hand, consideration of how to increase inclusivity are both a necessity and an opportunity. One of the methods of assessing inclusion in the financial sector has been designed by a locally based agency, FinMark Trust. The tool that is used is termed the access frontier. A range of measures are agglomerated to discern levels of access. One of the key ones is the financial access strand which provides a useful high-level summary of financial product usage. It segments the market into three broad segments. The first segment comprises those who are financially captured. These adults have products offered by formally regulated institutions (adults in this segment may also have informal financial products). The financially captured segment is divided into those who are formally banked5 and those who are not banked but who have other formal financial products such as insurance or retail credit. The next segment, termed the Development Frontier, comprises those who do not have formal products but do have informal products. Informal products include stokvels or savings clubs, burial societies and informal sources of credit. The last segment is the Financially Excluded segment. Adults in this segment have no financial products, formal or informal. FinMark Trust conducts annual surveys, FinScope in South Africa (and in other countries in the region) which measures financial services, needs and usage amongst consumers. The aim is to establish benchmarks and highlight opportunities for innovation in products and delivery. FinScopeTM tracks the changing landscape of access to financial services across all the main product categories - transaction banking, savings, credit and insurance. The study extends over a spectrum of areas of financial interest; from examining quality of life and poverty, to attitudes to and the use of technology, as well as levels of financial literacy. Based on the primacy of financial services in development, access to safe and regulated institutions is a vital part of platforms for growth. Simultaneously, we have to distinguish and highlight the importance of investment which will promote asset building and thereby engender growth among the poor. LED – Emphasis on Economic Governance & Acting as a Process Catalyst To a large extent, local economic development (LED), in its modern application, has focused more keenly on the encouragement and building of sustainable institutions and processes, rather than on achieving specific economic outputs. This thinking aligns very closely with the ‘making markets work (for the poor)’ (MMW4P) paradigm that many international donors and their development partners throughout the world have adopted and adapted over the past five to ten years. 5 An individual who is banked has any bank savings or transaction product, including a bank account (savings or transaction), an Mzansi account, an ATM card etc. EMM UFG-LED MSE Development-1st Report-Final v01.doc Page 16 of 35
The role of local municipalities (the ‘State’ in broad terms, and in particular, Ekurhuleni, in
this analysis) has typically included the following:
• Economic governance
o Convening economic actors for dialogue
o Organising physical and participatory planning
o Helping build partnerships & action
o Helping manage processes
• Enabling enterprise development
o Facilitation
o Inter-mediation
• Locality development
o Managing the whole territory
o Providing infrastructure and service delivery to improve the locality
o Improving the regulatory environment to reduce the burden on business
• Enabling social development
o Facilitating training
o Facilitating community level development planning & implementation
o Involving communities in public works construction
The graph below captures these core elements.
The Elements of LED
Local Arena
Goals
Overall goal: reduction of poverty
Development: objective: local economic development
Outcomes
Capacity building
Local Social/ Locality Enterprise
economic community Development Development Gender
governance development
ICT
Housing as a critical
Synergies between elements of LED
leverage point!
Convening Health, Infrastructure, Improved
LED actors, education, environment, efficiency of
planning, welfare, social & econ enterprises Capacity building
Activities
partnerships, cultural overhead & functioning
networks & & spiritual Capital of markets: Gender
Institutions Finance
ICT
BDS
Commodity
Given the structure of the UFG project and the consulting team, this analysis focuses almost
exclusively on the first two of the four usual main areas of LED – namely, economic
governance and enabling enterprise development. The latter two, especially, locality
EMM UFG-LED MSE Development-1st Report-Final v01.doc Page 17 of 35development, are covered by other project elements and team members. Although arguably, neither the project design nor the project team sufficiently reflects the ‘enabling social development’ agenda, except from a building and financing of public-use infrastructure (i.e. schools, parks, community centres, etc.). The heavy use of enabling environment language, like “convene”, “facilitate”, and “help” reinforce the notion that LED programmes and projects, and certainly any support at the level of building the capacity of municipalities to undertake an LED initiative (as opposed to actually implementing the LED initiative itself) should emphasise the creation of sustainable processes and institutions to continually adapt and shepherd those processes towards attainment of the chosen outputs (i.e. mostly numerical manifestations of specific inputs) and outcomes (i.e. impact, or qualitative and quantitative evidence of change). Other critical international trends in LED practice comprise: • Bottom-up, local stakeholder-driven processes • Rapid mobilisation around practical initiatives that converge towards longer term goals • Simplified, rapid, entrepreneurial processes • Mainly local resources – people, institutions, finance, & materials • Increasingly demand-driven, market-provided services • Opportunities & problem-focused initiatives • Smaller, networked, viable initiatives with cumulative impact These elements contrast importantly with older forms of LED, wherein large, comprehensive, multi-faceted and multi-layered programmes, which put greater emphasis on actual delivery of goods and services by the State, seemed appropriate responses to complex and long- intractable problems. Ekurhuleni’s LED plans reflect some of this new approach, but in particular seem to most directly take their cues from the first and last points, which this analysis will re-visit later. By design and out of necessity, partnerships drive LED. Different drivers often must lead in different spheres. So, for example, Ekurhuleni should probably play a strategic role, especially in economic governance and locality development (e.g. housing and related infrastructure). Meanwhile, business actors should play key roles especially in enterprise development (even if overall management and coordination remain the mandate of the State). In addition, other actors, such as government-run utilities and NGOs play vital implementation roles in LED. The conventional definition of LED encompasses a process in which partnerships between local government, the private sector and the community are established to manage the resources and stimulate the economy of a well defined territory. Its distinguishing objectives include the immediate objective of growing the economic (as measured by employment, GVA, GGP, investments flows, etc.) and tax base of a locality; and an overall goal to eradicate poverty (in the specific locality). Typically, LED features a focus on local actors and resources; a strong connection between economic growth and poverty reduction (i.e. ‘jobless’ growth in GGP, GVA, or GDP, however stellar, is contrary to the notion of economic growth in the context of LED); and linking of local and global processes (both in terms of competitiveness and value chains). EMM UFG-LED MSE Development-1st Report-Final v01.doc Page 18 of 35
A Review of Relevant EMM Strategies and Plans
This analysis of Ekurhuleni’s approach to LED has mainly relied upon an overall assessment
of the Ekurhuleni’s LED Policy, LED Strategy, and LED Implementation Framework, plus
the LED input to the 2006 – 2010 IDP, and the Growth and Development Strategy (GDS). In
this regard, the EMM LED policy document is a cogent, comprehensive, ambitious, articulate
presentation of very laudable principles and goals – very much influenced by (and directly
quoting) the RDP. In theory, it aligns very well with the key aspects of the SLA, MMW4P,
LED, and new microfinance and BDS paradigms. The following passage demonstrates the
alignment between the principles and framework laid out earlier in this paper and EMM’s
own thinking:
“…Despite the interconnectedness between economic and political stability, the local
government’s ability to act in the economic arena is limited. For example, local
government does not have a direct mandate to conduct trade promotion and regulate
industry. Local government does, however, play a crucial role in the provincial and
national economies by providing core infrastructure and services (i.e. water,
electricity, and refuse removal) that no other level of government provides. Thus, the
political mandate of local government is to facilitate the growth of the economy at
local level by providing these services without which the economy would grind to a
halt”.
Source: EMM LED Strategy, 2004
The EMM LED Implementation Framework sets out a very comprehensive and process-laden
set of activities, as does the document, “2006 – 2010 LED Portion Integrated Development
Plan” (with specific KPAs, performance targets, and deadlines). While theoretically correct,
in terms of the emphasis in LED on the processes that Government should facilitate, have the
initiatives actually been implemented by and worked for EMM, and have they generated the
kinds of outcomes desired?
The SA State of the Cities Report6 contended that “…many city strategies identify complex
linkages between activities in the economy that are traditionally seen as ‘formal’ and
‘informal’. These local level strategies have moved beyond a simplistic dualism of ‘first’
and ‘second’ economies” {emphasis added}. However, this analysis of Ekurhuleni’s
approach to poverty and the ‘second economy’ differs with this overall view. While many of
the documents pay rhetorical attention to the linkages and the need to respond to and
encourage an economic continuum, the actual strategies still seem to propose (perhaps
unintentionally) largely separate and unlinked approaches, especially in the emphasis on
cooperatives to address MSE and informal sector challenges. Given that the populace select
private businesses (albeit dominated by trading), the emphasis on co-operatives would require
careful consideration in terms of scale and efficacy.
This section of the report examines a set of trade-offs that frame the argument for one sort of
approach to LED versus another, within the context of the UFG. It captures a series of issues
that arise from reading the literature, which go directly to the type of economic development
Ekurhuleni may achieve, and how sustainable it may or may not be. The issue trade-offs
include three opposing paths to economic development, namely:
6
South African Cities Network, “State of the Cities Report, 2006”
EMM UFG-LED MSE Development-1st Report-Final v01.doc Page 19 of 35• poverty vs. growth
• high value jobs vs. low employment creation
• national & provincial goals vs. Ekurhuleni comparative advantage (and image)
The emphasis on poverty or growth represents the largest and most important trade-off. It
echoes at every level of South Africa’s economy; this debate has taken centre stage of almost
all economic policy debates within the Government and the ruling party; and the dichotomies
arise most pointedly in the mixed economies of the major metros, like Ekurhuleni. Of course,
it is not a pure trade-off. Fundamental LED theory holds that targeted investments (in
people, capital, etc.) will lead to increased capacity to carry out new or heightened economic
activity, which will lead to improved market functionality, which increases incomes, which
will lead to a more robust fiscus, which will lead to more investment, and ultimately more tax
revenues for re-distribution for social welfare, along with better job creation. However, the
critical difference lies in properly aligning investments in people and infrastructure that suit
the capacity and potential of the targeted communities.
Ekurhuleni’s economic development strategies put substantial emphasis on poverty reduction
and MSE development. Specific initiatives mentioned in the EMM LED strategy give
credence to this view, namely:
• Strategic Interventions on agriculture are backed up by an agricultural strategy adopted by
the council…. Two areas of developing agricultural exports (flower growing and
medicinal herbs) are being piloted.
• The Springs Fresh Produce Market belongs to Ekurhuleni Metropolitan Municipality and
provides a marketing service to the agricultural sector. The restructuring of the Springs
Fresh Produce Market will cover employment equity, the broadening of the base of agents
and suppliers, increasing access to economic opportunities for local people, and
restructuring the ownership of the market to ensure that the Municipality derives revenue
from the investment in the property as well as, encouraging the agricultural sector in the
region to play a decisive role in the operation of the market are key points linked to this
intervention.
• A programme to consider an upgrade plan linked to placement of street furniture has been
embarked on. This is linked to small business development in the services sector.
• A set target ensuring that 20% of all procurement is with start-up businesses would
provide an incentive to ensure that informal businesses are formalised and become more
efficient.
EMM LED documents make frequent mention of the job creation imperative. This view
comes through in approaches to procurement by EMM, and in focus on sub-segments of
industry that may hold more potential for MSE involvement, such as:
• an approach to developing profitable business opportunities through recovering gold and
other materials in the surface mine residue deposits.
• Support and facilitate the sustainability of the manufacturing sector to grow and be
competitive …. The main role of local government in terms of facilitating industrial
development is the following: engaging with industry to achieve its developmental
objectives by anticipating interventions that industry would make, gather information,
analyse the strategic path of manufacturing, and coordinating activities and initiatives of
institutions engaged in industrial development (e.g., employment equity and skills
development).
EMM UFG-LED MSE Development-1st Report-Final v01.doc Page 20 of 35In respect of the need to reconcile metro plans with those at Provincial and National levels, it
would appear that EMM has largely heeded a quotation from the SA Cities Report:
“… the Asgi-SA documentation suggests that there needs to be a closer working
arrangement between the Department of Trade and Industry, the Department of
Provincial and Local Government and the municipalities in delivering economic
services, including various business support initiatives. This is a worthwhile area of
focus. The DTI has been actively developing customised sector plans in support of the
priority sectors identified in Micro-economic Reform Strategy and repeated in Asgi-
SA. To ensure that these sector plans translate into effective local action it is
important to look at regional differentiation in the priority sectors and to
identify decentralised action plans for different contexts”. (pp 5-13) {emphasis
added}
EMM very clearly states its comparative and competitive advantages in the context of both
Provincial and National spheres, with particular emphasis upon its manufacturing and mining
legacy, as well as the unique housing of OR Tambo International Airport. What remains
seemingly insufficiently explored is the relationship between the National programmes of
DTI and other relevant agencies, on one hand, and EMM, on the other. It would appear
necessary and prudent to go beyond dialogue and sharing of visions and information between
EMM and various national entities.
EMM’s heavy reliance upon forums and other approaches to dialogue make a clear statement
about the municipality’s plans for engagement. In fact, EMM seems to have taken heed from
a quote from the SA Cities Report, namely, “Urban decision-makers will need to start
thinking about city regions [in recognition of the complex set of economic actors and
interactions, which do not heed formal municipal boundaries]…. The urban visions that have
been crafted by municipalities so far still remain the exclusive property of local government.
They are not owned by all city stakeholders”. (pp 6-2 - 6-3)
Approaches to investment are more muted, but can be found in EMM’s intention to use its
procurement needs to spur MSE development, as well as in the active discussions with the
private sector, with clear directives to invest in people and new infrastructure to improve
competitiveness and raise skill levels and employability. Perhaps the weakest element, from
this perspective, arises in the management sphere. Although engagement and investment
seem relatively strong, we need to ask whether EMM has sufficiently robust approaches in
place to effectively monitor and evaluate its actions, in other words manage the processes that
it aims to generate.
Overall, EMM has hit the right policy notes for LED and MSE development. Questions that
remain deal with the status and performance of various specific initiatives mentioned in the
strategy. In addition, the EMM LED strategy document laid down a list of key drivers,
namely:
1. Cooperative governance
• Political buy in and support;
• Administrative co-ordination and cooperation;
• A collective response by all departments and political actors.
2. Partnership
• Sectoral forums with business and communities;
• Grow the cooperative sector;
EMM UFG-LED MSE Development-1st Report-Final v01.doc Page 21 of 35You can also read
