59795 Promoting Entrepreneurship in Namibia: Constraints to Microenterprise Development June 2011 Financial and Private Sector Development Africa Region The World Bank ii Promoting Entrepreneurship in Namibia: Constraints to Microenterprise Development Table of Contents List of Figures iii List of Tables v Acronyms and Abbreviations vi Acknowledgments vii Executive Summary viii CHAPTER 1 Introduction 1 1.1 The Development Policy Context of Microenterprises in Namibia 1 1.2 Design of the Pilot Survey 4 1.3 Objectives of the Report 5 1.4 Organization of the Report 6 CHAPTER 2 Profile of Microenterprises 7 2.1 What Makes Microenterprises Different? 7 2.2 Who Are the Microentrepreneurs? 12 2.3 Capability Groups 20 2.4 Conclusion 33 CHAPTER 3 Constraints to Enterprise Development 35 3.1 Informality, Productivity, and Access to Services 36 3.2 Reported Constraints 41 3.3 Constraints Reported by Active Microenterprises 56 CHAPTER 4 Summary and Conclusion 59 4.1 Microbusinesses in Namibia 59 4.2 Constraints to Business Development 61 4.3 Next Steps: Toward Support Programs for Active Microenterprises 63 CHAPTER 5 References 64 Annex 1: Regression Analysis of Covariates of Reported Major Constraints to Growth 65 Annex 2: The World Bank Enterprise Survey 70 Map 93 iii List of Figures Figure 1 : Number of Own -Account Workers, Labor Force Surveys 3 Figure 2 : Number of Owners of Businesses with Paid Employees, Labor Force Surveys 4 Figure 3 : Registration and Licensing, by Tax Registration Status 11 Figure 4 : Difference in Probability Tax Registration - Male owned-Female Owned (%) 14 Figure 5 : Probability of Tax Registration by Owner’s Schooling – High School less Primary (%) 14 Figure 6 : Probability of Tax Registration of Male Owned Businesses- Active less Involuntary (%) 16 Figure 7 : Net Income per Person Engaged in Active Enterprises (Involuntary Enterprises = 100) 19 Figure 8 : Fixed Investment as % of Net Income 20 Figure 9 : Average Annual Employment Growth Rate Since Startup (%), All Sectors 20 Figure 10 : Annual Net Income of Own-Account Workers (‘000 NAD) – Active and Involuntary 23 Figure 11 : Annual Net Income per Worker, Enterprises Engaging 2-4 Persons – in ‘000 NAD 25 Figure 12 : Percent of Registered or Licensed Enterprises – Own-Account Work Only 26 Figure 13 : Percent of Registered or Licensed Enterprises – Only Those Engaging 2-4 People 27 Figure 14 : Distribution of Active Enterprises, by Line of Business 28 Figure 15 : Distribution of Involuntary Enterprises by Line of Business 29 Figure 16 : Annual Net Income per Worker (‘000 NAD) – Active Enterprises 30 Figure 17 : Percent of Registered or Licensed Enterprises, by Owner’s Characteristics 31 Figure 18 : Percent Distribution of Enterprises Run by High School Graduates 32 Figure 19 : Percent Distribution of Enterprises of Non-high-school Grads by line of business 33 Figure 20 : Percent of Respondents Rating Various Factors as Deterrents to Business Registration 37 iv Promoting Entrepreneurship in Namibia: Constraints to Microenterprise Development Figure 21 : Percent Rating Factors as Obstacles to Registration – Active vs. Involuntary 38 Figure 22 : Percent of Rating Factors Obstacles to Registration by Registration Status 38 Figure 23 : Percent of Enterprise Owners Registration by Expected Benefits from Registration 39 Figure 24 : Percent Rating Factor as Major Growth Obstacle 40 Figure 25 : Percent of Business Owners Rating Factors as Major Constraints to Growth 42 Figure 26 : Percent of Active Enterprises Rating Various Variables at Major Growth Constraints 44 Figure 27 : Involuntary Enterprises Rating Variables as Major Growth Constraints (%) 45 Figure 28 : Active Enterprises Rating Variables as Major Constraints to Growth (%) 46 Figure 29 : Enterprises Using External Finance for Investment or Working Capital (%) 47 Figure 30 : Enterprises Using Supplier Credit for Investment or Working Capital (%) 48 Figure 31 : Enterprises Using External Finance for Investment or Working Capital (%) 49 Figure 32 : Percent of Enterprises That Have a Nonresidential Business Premises 50 Figure 33 : Percent of Enterprises That Have a Landline Phone Connection 51 Figure 34 : Enterprises with Nonresidential Business Premises (%) 51 Figure 35 : Enterprises with Landline Phone Connection (%) 52 Figure 36 : Percent of Enterprise Owners Who Had Graduated from High School 53 Figure 37 : Percent of Enterprise Owners Who Had Been Vocationally Trained 54 Figure 38 : Percent of Enterprises Keeping Books 54 Figure 39 : Percent of Enterprises Using a Professional Accountant 56 v List of Tables Table 1 : Namibia Pilot Survey Sample Distribution, by Location 5 Table 2 : Pilot Survey Sample Distribution, by Sector and Type of Location 7 Table 3 : Distribution of Sample in Other Manufacturing and Other Services 8 Table 4 : Distribution of Sample, by Scale and Other Business Characteristics 9 Table 5 : Number of Persons Engaged per Enterprise, Net Income per Worker, and Fixed Assets per Worker 10 Table 6 : Percent of Enterprises, by Registration Status 11 Table 7 : Distribution of the Sample, by Tax Registration Status 12 Table 8 : Distribution of the Sample, by Business Motive 13 Table 9 : Distribution of Businesses Owners, by Reason for Being in Business 17 Table 10 : Reason for Being in Business, by Scale, Line, and Location of Activities 18 Table 11 : Distributions of Enterprises, by Characteristics of Businesses and Owners 22 Table 12 : Average Annual Net Income and Annual Turnover per Enterprise 24 Table 13 : Annual Net Incomes per Worker and Fixed Assets per Worker 26 Table 14 : Percent of Business Owners, by Demographic Characteristics 28 vi Promoting Entrepreneurship in Namibia: Constraints to Microenterprise Development Acronyms and Abbreviations BDS Business Development Services GDP Gross Domestic Product GON Government of Namibia LFS Labor Force Survey MSME Micro, Small, and Medium Enterprises MTI Ministry of Trade and Industry NEPRU Namibia Economic Policy Research Unit NAD Namibian Dollar NDP3 Third National Development Plan NEPRU Namibia Economic Policy Research Unit NPC National Planning Commission PSD Private Sector Development SEEP Small Enterprise Education and Promotion SMEs Small and Medium Enterprises Executive Summary vii Acknowledgments This report was prepared by Taye Mengistae (AFTFE) and is based on a survey of mi- cro businesses carried out by the Namibia Economic Policy Research Unit (NEPRU) and Survey Warehouse Ltd., of Windhoek. Peer review comments were kindly pro- vided on an earlier draft by Zeinab Partow (AFTP1), Philip Schuler (AFTP1), Chun- lin Zhang (AFTFE), and Ravi Ruparel (AFTFE). Michael Fuchs (AFTFE, Acting Sec- tor Manager) provided overall guidance throughout the preparation of the report. Contributions from Ismail Radwan (AFTFW) and Alvaro Gonzalez (AFTFW) are gratefully acknowledged. Dorothy Judkins and Andrea Vasquez-Sanchez provided excellent editorial and administrative assistance. In Namibia, critical guidance was received in the planning of the study from Dr. Malan Lindeque, Permanent Secretary of the Ministry of Trade and Industry (MTI), Steve Motinga, head of the Directorate of Industry of the MTI, Susan-Marie Lewis, Director of Development Cooperation at National Planning Commission (NPC), Mary-Tuyeni Hangula, Deputy Director of International Cooperation at the NPC, Hennie Fourie, CEO, Namibia Manufacturers Association, Cleo Mono of the Na- mibia Chamber of Commerce and Industry (NCCI), and Danny Meyer, Director of SMEs Competitiveness Consultancy. The report was prepared under the overall direction of Ruth Kagia, (World Bank Country Director for Botswana, Lesotho, Namibia, South Africa and Swaziland) and Marilou Jane D. Uy (Sector Director, Financial and Private Sector Development, Af- rica Region). Operational guidance was provided by Thomas Buckley (Senior Coun- try Officer for Namibia), Philip Schuler (Senior Country Economist for Namibia), Michael Fuchs (Acting Sector Manager), and Chunlin Zhang (Sector Leader). viii Promoting Entrepreneurship in Namibia: Constraints to Microenterprise Development Executive Summary Namibia has had a policy of government support to micro, small, and medium en- terprises (MSMEs) since 1997. But government-financed business support programs have not been successful in reaching microenterprises. There are currently no finan- cial products or business development services (BDS) in the country that are appro- priate or affordable for microbusinesses. This report is based on a sample survey of 800 microenterprises from four regions of the country. The report will inform the design of support programs tailored to help microen- terprises grow. To that end, it identifies what constraints the most dynamic micro- enterprises face and argues that the most vibrant of these enterprises may be those that government will want to focus its resources and attention on and prioritize. In addition, the report lays the groundwork for a formal market assessment of financial services and BDS tailored to the needs of this important, but relatively neglected, segment of the economy. The report’s intended audience includes policy makers con- cerned with the development of the MSME sector in Namibia and experts involved in the design and monitoring and evaluation of MSME support programs. Microenterprises present both a challenge and an opportunity for the country. Many have the potential to evolve into growth-oriented businesses that provide much- needed jobs for the country. Successful microenterprises will also participate in key value and supply chains of major national industries with a knock-on effect on many larger and more formal businesses. On the other hand, many microenterprises are characterized by low productivity and low wages, posing a challenge of social protec- tion and poverty alleviation. The report identifies capability groups in the sample based on measured productiv- ity and earnings and sorts the more productive, growth-oriented businesses that are likely to have effective demand for BDS from those that are not likely to evolve into successful enterprises in the long term.1 It then analyzes barriers to the development of the more capable enterprises based on business owners’ evaluation of the main constraints to enterprise operations. 1 We use the term “capability groups� as a synonym for performance groups, where we measure performance in terms of labor productivity and business growth. Executive Summary ix This report uses the following definitions: • Microenterprise: a business that engages fewer than five workers full time • Small enterprise: employing between 5 and 30 workers • Medium enterprise: employing between 30 and 100 workers. More than 55 percent of enterprises in the survey sample were retail traders. Another 21 percent were involved in services (such as catering, transport, personal care, car repairs, printing services, and finance and real estate). One-quarter were involved in food processing and other manufacturing and crafts, mainly tailoring and knitting, wood work, and metal work. Unlike SMEs, a significant proportion of microenterprises operated from no fixed loca- tion. Itinerant businesses constituted nearly 15 percent of the sample, most, but not all, of them as street vendors. Another 29 percent of businesses were home based. Surpris- ingly, as high as 56 percent operated from nonresidential business premises or structures. Microenterprises in Namibia also appear to last longer than their counterparts in many other developing economies: 25 percent of the sample were businesses that started within the past 2 years, while nearly one in four had been in business for 10 years or longer at the time of the survey. Capability groups Productivity Microenterprises are less productive than SMEs generally because their workforce is less skilled and they operate with less capital per worker. For the full sample, the av- erage annual net income (or value added) per worker was just under 19,800 Namib- ian dollars (NAD), and the value of fixed assets per worker was about 30,900 NAD. Each of these numbers conceals large variation across and within business lines. The median net income per worker was much lower, at 2,400 NAD, under one-third of the country’s per capita gross domestic product (GDP) at the time of the survey. The mean annual net income per worker ranged from just below 9,400 NAD for food vendors to 43,500 NAD for transport businesses. Active enterprises vs. involuntary enterprises This report makes an important distinction between “active enterprises� and “invol- untary enterprises.� Active enterprises are run by those who voluntarily opted out of the labor market and became self-employed because they were likely to make more x Promoting Entrepreneurship in Namibia: Constraints to Microenterprise Development money running their own business. In contrast, “involuntary enterprises� are those businesses that provide self-employment to the owners simply because they are un- likely to be successful in the labor market. Involuntary entrepreneurs would likely take up paid employment if they had the option. Only one in four of those in the pilot survey sample were active enterprises. Active enterprises are far more productive than their involuntary counterparts and have a better chance of evolving into viable and growth-oriented businesses and of provid- ing effective demand for new financial products and BDS over the long term. On average, the entrepreneurs who own and run active enterprises are younger and better educated. Their businesses also are relatively younger and more likely to be registered for taxes. Active enterprises tend to concentrate in high value-added busi- ness lines such as manufacturing and crafts, food processing, and nonretail services. Involuntary enterprises tend to concentrate more in retail trade. Active enterprises also are more growth-oriented than involuntary enterprises. The typical active enterprise invests a greater share of its net income and grows faster than the typical involuntary enterprise. For example, in the survey sample, an active enterprise that started out as an own-account worker two years before the survey would have grown by 32 percent by the time of the survey.2 In contrast, an otherwise comparable involuntary enterprise starting from the same base would have expanded by only 2 percent over the same time interval. Active enterprises and involuntary enterprises represent two distinct capability groups of microenterprise. Within each of these broad groups, productivity varies with: (i) the scale of the enterprise; (ii) how long it has been in business; and (iii) its formality (or registration and licensing) status. These in turn vary with the entrepre- neurs’ schooling and years of experience. In the report, we categorize microenter- prises in the following overlapping groups: a. Startups and post-startup businesses (based on time in business) b. Own-account enterprises and microemployers (based on scale of business) c. Formal and informal (based on registration for tax and holding a license) d. Youth-owned businesses and business of older owners (based on time in the mar- ket of business owners) e. Businesses of high school graduates and those of the less educated (based on the schooling of the business owner). 2 Throughout the report we use the term own-account workers as self employed persons that do not employ others. The term own-account enterprise refers to microenterprises that engage only the business owner and nobody else. The category of the self employed includes own-account workers as well as those who run businesses in which other people are engaged as paid employees or as unpaid family workers. Executive Summary xi Startups and youth-owned enterprises The survey finds that youth-owned active enterprises in general and those of young high school graduates in particular, have the greatest growth potential. Youth-owned active enterprises largely overlap startup active enterprises (active enterprises that came into existence within the last five years). Startup active enterprises are as growth-oriented and productive as the active enterprises of young high school gradu- ates. This is not surprising since this particular group of entrepreneurs accounts for a high proportion of startups. Although some startup active enterprises are own-account businesses, the vast ma- jority are microemployers, meaning they engage up to three people other than the owner. Post-startup active microemployers are relatively productive and growth- oriented. Active enterprises of older high school graduates also have the potential for provid- ing part of what could emerge ultimately as a market for new financial services and BDS. These constitute approximately 9 percent of the sample and more or less coin- cide with the subsample of post-startup active microemployers. Informality and constraints to enterprise development Most microenterprises in Namibia (66 percent) are informal in the sense that they are not registered with the tax office and do not hold a business license.3 Formal microenterprises are relatively more productive than informal microenterprises. Registered or licensed businesses are more likely to have better access to markets and services, which likely raises their productivity. Indeed, many owners of unregis- tered and unlicensed microbusinesses indicate that informality bars them from those markets and services and from participating in potentially useful business support programs. However, they likely choose not to register or get a license nonetheless because the costs of getting registered outweigh the potential benefits. The main cost items include potential tax liabilities, licensing and registration fees, and anticipated compliance costs of labor laws and other aspects of business regulation. Reducing such regulatory barriers to registration and licensing could therefore be a significant component of formalizing microenterprises to improve their access to services. 3 The narrowest and probably the most common definition of an informal business is that it is an enterprise that is not registered for tax purposes. xii Promoting Entrepreneurship in Namibia: Constraints to Microenterprise Development Future support for microenterprises Informality is not necessarily the most important of factors preventing microenter- prises from accessing the financial products and business services currently available to MSMEs. Most microbusinesses in Namibia would not be able to make use of exist- ing products and services regardless of their registration status. Many of them could not afford those products and services in any case. More important, existing products and services do not seem to match the circumstances of even the most successful of microbusinesses. Addressing these issues will require public investment in the development of mar- kets in new financial products and business development services tailored to the needs and capabilities of the sector. Improved availability of affordable and appro- priate services could indeed be the driver rather than consequence of formalization, and might be a greater incentive for registration and licensing than any regulatory reforms could be. What next? The information that the pilot survey has generated on the various categories of mi- croenterprises and the constraints they face is a useful input to the design of future support programs for Namibia’s microenterprises. An important next step would be a formal assessment of the market for existing and potential products and services among the two most productive and growth- oriented groups of active enterprises identified in the report: active startups and active youth-owned enterprises, with a particular focus on microemployers and on businesses of young high school gradu- ates. A formal market assessment would involve four analytic tasks: (i) an evaluation of the target group’s awareness and willingness and ability to pay for existing products; (ii) an evaluation of the group’s willingness to pay for potential products; and (iii) an assessment of the potential for crowding out private demand or supply by public interventions in markets. The findings of this report would be a useful input to the design of tasks (i) and (ii). The tasks will require much more data on constraints to business development than has been generated by the pilot survey. The additional data will need to be collected through focus group discussions with microenterprise owners within each group, more open in-depth interviews with enterprise owners and BDS providers, market observation, and focused market surveys (SEEP Network, 2005). Introduction 1 CHAPTER 1 Introduction 1.1 The Development Policy Context of Microenterprises in Namibia Background to the report This report identifies the major capability groups of microbusinesses in Namibia and the constraints these face. The report is based on a pilot sample survey of 800 microenterprises carried out in August 2009 in four regions of the country: Khomas, Omusati, Ohangwena, and Oshana. The survey was carried out by the Namibia Eco- nomic Policy Analysis Unit (NEPRU) and Survey Warehouse Ltd. We use the term capability as a synonym to performance as measured by productivity and growth potential and define capability groups by observable business characteristics (such as scale of operations and time in business) and attributes of business owners (such as the level of education and experience). The aim of the study is to lay the groundwork for a formal market assessment of financial and business development services (BDS) tailored to the needs of this im- portant, but relatively neglected, part of the economy. The intended audience of the report includes policy makers concerned with the development of the micro, small, and medium enterprise (MSME) sector in Namibia and experts involved in the de- sign and monitoring and evaluation of support programs for microbusinesses. As in other developing countries, the microenterprise sector is for the most part a residual employer in Namibia. The sector is characterized by low productivity and 2 Promoting Entrepreneurship in Namibia: Constraints to Microenterprise Development significant underemployment. It therefore poses a major challenge for policy makers. What can be done to make microenterprises grow more, and how to handle the as- sociated issues of social protection and poverty alleviation? The focus of this report is on the enterprise development aspect of microbusinesses, how to identify the enter- prises that could potentially evolve into growth-oriented SMEs participating in the major value and supply chains of the Namibian economy, and the policy and institu- tional constraints under which this segment of the microenterprise sector operates. MSMEs in the Namibian Economy With an estimated per capita income of US$4,210 in 2008, Namibia is one of the wealthiest countries in Sub-Saharan Africa at the moment. However, it is also a country of extreme income inequality, widespread poverty, and persistently high un- employment. The unemployment problem is very much related to the country’s overwhelming reliance on mining exports, which provides relatively few employ- ment opportunities. The government has responded to the unemployment challenge by setting out a strategy to diversify growth into other, more labor-intensive, sectors. This strategy is set out in its Vision 2030 document and in the Third National Devel- opment Plan (NDP3). The strategy is focused on the development of agriculture and tourism, and public investment in labor-intensive public works program in transport and irrigation projects. In addition, the promotion of MSMEs and nontraditional ex- ports plays a prominent role in the strategy as well. There is good evidence to support the focus on MSMEs for employment generation. The Ministry of Trade and Industry estimates that the MSME sector provides 27-30 percent of total employment in the economy. Not surprisingly, MSME support pro- grams have figured prominently in strategies of the government of Namibia (GON) for employment creation since 1997. The programs include schemes that the govern- ment has introduced or promoted for business training and for improving access to finance, markets, business information, and business premises. In the area of access to finance, the main policy instruments have so far been a small business loan scheme and a credit guarantee scheme, both targeting SMEs. In the area of marketing, the government has been promoting the use of SME business linkages programs with large firms as its main instrument of intervention. In the areas of improving access to business premises, the government has made efforts to provide better market sites for small retailers and small-scale manufacturers. Microenterprises are very much part of the intended beneficiaries of some of the ex- isting MSME support programs. The new private sector development (PSD) strat- egy (government of Namibia 2008) calls for increasing the access of microenterprises Introduction 3 to “financial services, better business premises, telecom services, and opportunities to cluster production to achieve greater economies of scale.� Future efforts to help micro- enterprises to succeed may need to offer financial products and BDS better tailored to the needs of such businesses. The pilot survey was intended to help bridge the knowl- edge gap that may hinder the design of such products and services, by mapping out the heterogeneity of the sector in terms of business capability and business constraints. Figure 1 : Number of Own -Account Workers, Labor Force Surveys 70,000 65,122 60,000 50,000 49,583 40,000 39,980 37,441 34,402 30,000 26,963 20,000 21,922 10,000 6,824 0 1997 2000 2004 2008 Traditional farmers Nonfarm workers This report uses the following definitions: • A microenterprise is a business that engages fewer than five workers full time. • A small enterprise is a business that employs between 5 and 30 workers. • A medium enterprise is a business that employs between 30 and 100 workers. According to the 2008 Labor Force Survey (government of Namibia 2008), approxi- mately 318,000 people were employed in the Namibian economy. About 74 per- cent of these worked in the private sector. MSMEs accounted for about 40 percent of employment in the private sector, engaging about 95,000 persons in total. Ap- proximately 76,000 of these worked in microenterprises. About 22 percent of the workforce of microenterprises were engaged in subsistence farming, while the rest worked in nonfarm activities as own-account workers (of which there were 34,000), microbusiness owners (of which there were 11,000), or employees or family workers of microenterprises (of which there were 31,000). As can be seen in figure 1, some of the rapid increase in unemployment since the 1997 Labor Force Survey (LFS) reflects the sharp decline in employment in subsist- 4 Promoting Entrepreneurship in Namibia: Constraints to Microenterprise Development ence farming that has occurred since then. Although nonfarm private sector employ- ment expanded during this period, it was not at a pace high enough to absorb the natural growth of the labor force and the workforce being released by the traditional farm sector. In particular, own-account work and wage employment in the microen- terprise sector failed to expand from 2000 onward (figures 1 and 2), which led to the explosion of the unemployment rate to about 38 percent by 2008. For this reason, many experts also believe that Namibia’s MSME sector needs to be much larger than it is at the moment if the country is to tackle its unemployment problem successfully. Figure 2 :Number of Owners of Businesses with Paid Employees, Labor Force Surveys 25,000 22,451 20,000 15,000 13,678 12,875 12,669 10,956 10,000 8,987 6,288 5,000 4,541 0 1997 2000 2004 2008 Nonfarm business owner Traditional small farmers 1.2 Design of the Pilot Survey The pilot survey was designed and implemented by the Namibia Economic Policy Research Unit (NEPRU) and Survey Warehouse Ltd. during August and September of 2009. It involved administering a common written questionnaire to the 800 sam- pled business owners through face-to-face interviews by trained enumerators. The questions dealt with:4 • Demographic characteristics of business owners • Location, activities , staffing, organization, startup history, and current registration and legal status of their businesses 4 The full survey instrument is included as an annex to the report. Introduction 5 • Owners’ assessment of what they thought were obstacles to the day-to-day opera- tions and growth of their businesses • Information on turnover, employment, revenue, staff remuneration, cost of pur- chases, and sources of finance • Indicators of the business environment in such areas as interaction with govern- ment agencies, property crime, and quality of public utilities services. The sample was drawn randomly from districts in the regions of Khomas, Omusati, Ohangwena, and Oshana according to the distribution shown in table 1. These areas were chosen as survey sites mainly because they were thought to have the largest concentration of microbusinesses. The sample may therefore not be necessarily rep- resentative of the national population of businesses on any other criterion. Table 1 :Namibia Pilot Survey Sample Distribution, by Location Region District Count Percent Count Percent Khomas 203 25.3 Khomasdal North 23 2.8 Omusati 199 24.8 Tobias Hainyeko 32 4.1 Ohangwena 200 25.1 Windhoek West 85 10.5 Oshana 198 24.8 Outapi 188 23.5 Ohangwena 200 25.1 Oshakati East 66 8.2 Oshakati West 114 14.2 Other 92 11.6 Total 800 100 Total 800 100 Source: Namibia Pilot Microenterprise Survey 1.3 Objectives of the Report The report attempts to assess the extent to which microenterprises differ in their ca- pability (or productivity and growth potential) and in the constraints they face with a view to informing the design of future public sector interventions in the MSME sector.5 In cases where the interventions involve the provision of financial services and BDS, the results of the survey could help inform the design of formal mar- 5 It should perhaps be stressed that the report is not an attempt to identify or assess unmet demand for specific financial products or BDS, for which a formal market assessment would be needed. The report does assume that there may be demand for financial services and BDS on the part of microenterprises, but the validity or otherwise of any of its conclusions about capability groups of microbusinesses and their reported constraints to growth does not depend on that assumption. Testing the assumption itself is an important task, but can be carried out only in the course of formal market assessments for specified services, the design of which the report is intended to help inform. 6 Promoting Entrepreneurship in Namibia: Constraints to Microenterprise Development ket assessments for such services.6 The report identifies capability groups based on measured productivity and earnings, and separates the more productive and growth- oriented businesses that are likely to have effective demand for BDS from those that are not likely to evolve into viable enterprises in the long term. It also compares and assesses how much these capability groups differ in terms of the growth constraints they face based on business owners’ evaluations of the main factors that constrain their activities and their growth. A key consideration in the identification of capability groups of microbusinesses and constraints to their growth in the context of southern Africa is the role that busi- ness informality seems to play in determining access to services and markets. We characterize a business as formal if it is registered for tax purposes or operates on an official business license. Gelb et al. (2009) show that, unlike the case in other parts of Sub-Saharan Africa, informality in southern Africa is strongly associated with lower productivity and poorer access to services. The other dimensions used in the report to define capability groups of enterprises are the scale of the business, its age, and the human capital of business owners. As determinants of the enterprise’s capability, these three are significant correlates of productivity, registration and licensing status, and access to markets and services. 1.4 Organization of the Report The rest of the report is organized as described below. • Chapter 2 defines the main capability groups of microenterprises in terms of scale of activities; length of time in business; and the experience, education, and busi- ness motives of their owners. The capability of each group is measured by the average productivity and growth record of its members.7 • Chapter 3 discusses how the categories identified in the second chapter differ in terms of reported constraints to business operation and access to markets and services. • Chapter 4 concludes the report by laying out the implications of the survey results for the design of future public interventions to promote the sector. 6 The purpose of a market assessment for financial products or services would be to determine (i) whether or not there is signifi- cant actual or potential (effective) demand for particular types or categories of financial products or BDS by some populations of enterprises; (ii) whether BDS providers in the country or a particular region have sufficient capacity to meet that demand; and (iii) whether there is lack of (effective) demand or supply, the reasons for it, and the kind of interventions that would be needed to remedy the observed deficiency in demand or supply (Donor Committee 2001). 7 The differences in productivity, growth, scale of operations, and indicators of constraints and participation that exist among different groups of microbusinesses, as highlighted in chapters 2 and 3 of the report, are statistically significant as established by regression analyses that are available on request. In the interest of simplifying the presentation of the report, those results are not described in the report. Profile of Microenterprises 7 CHAPTER 2 Profile of Microenterprises 2.1 What Makes Microenterprises Different? More than half of enterprises in the survey sample were retail traders (tables 2 and 3). Another 21 percent worked in services such as catering, transport, personal care, car repairs, printing services, and finance and real estate. One-quarter were employed in food processing and other manufacturing activities and crafts. A significant proportion of microenterprises operate from no fixed location. About 15 percent of the sample consisted of itinerant businesses. Most, but not all, of them were street vendors. However, a relatively high 56 percent of the sample also oper- ated from nonresidential premises or structures. Another 30 percent of businesses in the sample were residence based. Table 2 : Pilot Survey Sample Distribution, by Sector and Type of Location Industry Count Percent Type of location Count Percent Food and beverages 101 12.6 Nonresidential location 445 55.7 Garments 37 5.4 Located in residence 234 29.2 Other manufacturing 47 6.1 No fixed location 121 15.1 Retail trade 437 55.2 Other services 167 20.9 Total 800 100 Total 800 100 Source: Namibia Pilot Microenterprise Survey 8 Promoting Entrepreneurship in Namibia: Constraints to Microenterprise Development Scale and Longevity A little over half of the microenterprises covered by the pilot survey were run by own-account workers. The rest provided employment to one–three people other than the business owner as paid employees or as unpaid full-time family workers (ta- ble 4). The median microenterprise in manufacturing and nonretail services engages two people full time. This number is consistent with any of the following plausible pairings: a husband and a wife, the household head or the spouse with a child helper, or either of the two with a hired hand from outside of the household. Many of the larger enterprises rely on two–three paid employees. Such enterprises are common in tailoring and similar crafts, and typify such services providers as barber and car repair shops. On the other hand, the modal retail trader would be an own-account street vendor (table 5). Table 3 : Distribution of Sample in Other Manufacturing and Other Services Manufacturing Count Services (excluding retail) Count Food and beverages 101 Barber Shop and hair saloon 48 Garments 37 Wholesale trade 22 Chemicals and plastics 9 Hotels and restaurants 17 Basic metals 4 Car Wash and tire repair 15 Fabricate metal products 15 Car repairs 14 Machinery and equipment 5 ITC 13 Electronics 2 Printing / secretarial services/ Photography 5 Other manufacturing 12 Laundry and dry cleaning 5 Transport 4 Financial and real estate services 3 Shoe repair service 3 Security Services 2 House painting 2 Butchery 2 Property Services 1 Repairs of electronic goods 1 Secretarial Services 1 Carpenter 1 Bicycle and Trolley Rentals 1 Personal trainer 1 Total 185 Total 161 Source: Namibia Pilot Microenterprise Survey Microenterprises also tend to be younger than SMEs. However, microenterprises in Namibia appear to last significantly longer than their counterparts in many other developing economies (table 4). At the time of the survey, some 25 percent of the samples were businesses that had started within the past two years, whereas nearly as many had been in business for 10 years or longer. Profile of Microenterprises 9 Table 4 : Distribution of Sample, by Scale and Other Business Characteristics Scale Count Percent One-person operation 418 52.2 Engaging 2-4 people full time 382 47.8 Total 800 100 Business age group Count Percent 2 years or less 200 24.84 2-5 years old 233 29.09 5-10 years old 180 22.47 Older than 10 years 189 23.6 Total 800 100 Bookkeeping practice : Kept books 565 70.5 Have an accountant 58 7.2 Registration status: Registered with the local authority/MTI 371 46.5 Registered with tax authorities 268 33.6 Holds a trading license 412 51.6 Source: Namibia Pilot Microenterprise Survey Productivity About 30 percent of enterprises in the sample kept books, but only approximately 7 percent employed professional accountants for this task (table 4). These low rates no doubt have to do with the fact that their workforce is smaller and typically less educated and skilled than that of larger businesses. These factors, combined with low levels of fixed assets per worker, make microenterprises less productive than larger enterprises. The average annual net income (or value added) per worker for the full sample was 19,800 NAD, and the value of fixed assets per worker was approximately 31,800 NAD (table 5). However, each of these numbers concealed enormous variation across and within business lines. The median net income per worker was much lower at 2,400 NAD. The median value of fixed assets per worker was 12,000 NAD. Com- paring subsamples across sectors, the mean annual net income per worker ranged from just below 9,400 NAD for food vendors to 43,000 in manufacturing.8 8 The gaps in scale, productivity, and capital intensity that are highlighted here are statistically significant. Standard errors and p-values of specific differences are available on request. 10 Promoting Entrepreneurship in Namibia: Constraints to Microenterprise Development Table 5 : Number of Persons Engaged per Enterprise, Net Income per Worker, and Fixed Assets per Worker Number of Net income per Fixed assets Persons worker per year per worker engaged (‘000 NAD) (‘000 NAD) Mean Median Mean Median Mean Median Food and beverages 1.5 1 9.4 5.5 8.7 4.5 Manufacturing/crafts 2.0 2 43.5 10.4 67.7 11.8 Retail trade 1.5 1 24.9 1.42 33.5 2.0 Other services 2.0 2 9.4 2 29.3 5.2 0.0 All sectors 1.7 1 19.8 2.4 30.9 2.5 Source: Namibia Pilot Microenterprise Survey Informality Unlike SMEs, most microenterprises also are informal in the sense that they are not registered with the tax office and do not hold a business license. The narrowest and probably the most common definition of an informal business is one that is not regis- tered for tax purposes. By this definition, some 34 percent of enterprises in the pilot survey sample were formal (table 4). However, for the purpose of this report we will use a broader definition, whereby an enterprise is deemed formal if it is registered for tax or it holds a business license. Using this definition, 53 percent of the enterprises in the sample qualify to be formal. The tax registration rate varies enormously across the sample by line of business. It is as low as 6 percent for food vendors but as high as 40 percent for transport services (table 6). In contrast, there is not much variation in the rate of licensing, which ranged from 43 percent for food vendors to 50 percent for other sectors. Ninety-seven percent of the microbusinesses registered for tax hold a business license, and 90 percent of them are also registered with the local authority or the Ministry of Trade and Industry (figure 3). Profile of Microenterprises 11 Table 6 : Percent of Enterprises, by Registration Status Registration or licensing status Industry Registered with Registered Holds a Registered for Registered with the the local for tax business license tax or licensed local authority/ authority/MTI MTI or licensed Food and beverages 30.0 24.8 31.7 32.7 32.7 Manufacturing/crafts 53.5 39.5 62.8 65.1 67.4 Retail trade 44.4 31.7 49.7 50.5 51.9 Other services 57.0 40.5 62.6 63.7 65.6 All sectors 46.5 33.6 51.6 52.6 54.0 Source: Namibia Pilot Microenterprise Survey Figure 3 : Registration and Licensing, by Tax Registration Status 120.0 97.4 99.3 100.0 90.6 80.0 60.0 40.0 28.4 30.4 24.0 20.0 0.0 % holding a % registered % registered or trade license with local holding a authority/MTI license of the tax -registered of those not registered for tax On average, tax-registered enterprises are larger, have been in business for longer, and are more likely to operate from specialized business premises.9 Table 7 describes distribution of the sample by tax registration status and three business characteristics pertinent to enterprise, namely, the scale of the enterprise, its location, and how long it has been in the market. 9 Differences in the probability of registration for tax as shown in tables 6 between own-account enterprises and enterprises employing two-four persons are statistically significant. So are the differences in the probability of registration between (i) en- terprises that are five years or older and those that have been in business for two years or less, and (ii) itinerant businesses and enterprises operating from a residence or a nonresidential premise. 12 Promoting Entrepreneurship in Namibia: Constraints to Microenterprise Development 2.2 Who Are the Microentrepreneurs? Gender, Experience, and Schooling The scale of an enterprise and its registration and licensing status ultimately result from the attributes of the business owner. These attributes include schooling, dura- tion and type of previous economic experience, and other social characteristics such as gender and ethnicity. Fifty-three percent of microenterprises in Namibia are owned and run by women (table 8). Women-owned enterprises are slightly less likely to be registered for tax, partly because female business owners in the sample tended to be less educated than male owners (figure 4), and the more educated among business owners are more likely to have their businesses registered with the tax authorities. About 30 percent of owners in the pilot survey sample had not completed primary school or had no formal schooling at all. At the other end of the educational attain- ment spectrum, 17 percent had graduated from high school or had some vocational training. Between these extremes were the majority of business owners in the sam- ple, who had completed primary school or had gone to middle school, but had not completed high school. Table 7 : Distribution of the Sample, by Tax Registration Status Is the business registered for tax? Yes No Total (1) Number of persons engaged 1 person (own-account work) 61 351 412 % 14.81 85.19 100 2-4 persons 207 178 385 % 53.77 46.23 100 Total 268 529 797 % 33.63 66.37 100 (2) Number of years in business 2 years or less 52 145 197 % 26.4 73.6 100 2-5 years old 70 162 232 % 30.17 69.83 100 5-10 years old 61 119 180 % 33.89 66.11 100 Older than 10 years 85 103 188 % 45.21 54.79 100 (3) Type of location of transactions Nonresidential premises 190 255 445 % 42.7 57.3 100 Profile of Microenterprises 13 Located in residence 70 163 233 % 30.04 69.96 100 No fixed location of operation 8 111 119 % 6.72 93.28 100 Source: Namibia Pilot Microenterprise Survey 27. There is some association between a business owner’s schooling and the likeli- hood that the business is registered for tax or holds a trade license. Thus, the business of a male owner randomly picked from the sample would be 9 percent more likely to have been registered for tax if the owner had completed at least high school than if the owner had completed only primary schooling (figures 4 and 5).10 Table 8 : Distribution of the Sample, by Business Motive Characteristics Count Percent Female headed 424 52.93 Manager’s education: No schooling 84 10.61 Primary incomplete 151 19.07 Primary completed 212 26.77 Junior secondary completed 212 26.77 Senior secondary completed 75 9.47 Vocationally trained 58 7.32 Total 792 100 Reason for setting up this business Count Percent Absence of alternative employment 458 57.25 Pay in alternative too low 32 4 Enjoy running it 52 6.5 This is what I am best at 116 14.5 Other 142 17.75 Total 800 100 Source: Namibia Pilot Microenterprise Survey 10 Figures 5 and 6 summarize results of regression analyses in which the various controls listed in each figure are found to have statistically significant association with the probability tax registration. Moreover, the differences in the probability of registration between female owned businesses and businesses owned by men as shown in the two figures are all statistically significant. 14 Promoting Entrepreneurship in Namibia: Constraints to Microenterprise Development Figure 4 :Difference in Probability Tax Registration - Male owned-Female Owned (%) Given level of Given level of Given level of education, age, and With no controls education education and age business motive 0 -0.5 -1 -1.5 -2 -2.5 -3 -3 -3.5 -3.4 -4 -3.6 -4.5 -4.3 -5 Source: Namibia Pilot Microenterprise Survey Figure 5 : Probability of Tax Registration by Owner’s Schooling –High School less Primary (%) 9.2 9 9 8.8 8.6 8.6 8.4 8.2 8.1 8 7.8 7.6 With no controls Given owner's age Given owner's age and business motive Source: Namibia Pilot Microenterprise Survey Profile of Microenterprises 15 Active Entrepreneurs vs. Involuntary Entrepreneurs People end up in occupations as the outcome of rational choices that they make subject to the constraints imposed on them by market parameters and their skills and wealth. At the same time, not everyone makes choices from the same set of alternatives. Even when underlying preferences are similar to those of everyone else, some people’s choices are more restricted than others. In other words, not every self-employed person running a microbusiness––or, indeed, any business––does so because he or she would not want to do anything else, given other choices. A widely held view is that a large proportion of those who are self-employed or run- ning microbusinesses in developing economies are people who have been unsuccess- ful in the formal labor market and would be found working for someone else if there were a sufficient number of jobs at the going wage rates. A term occasionally used to describe people who run microbusinesses by default, or because they cannot earn their livelihood as employees in the formal sector, is “involuntary entrepreneur.� At the other end of the spectrum are the “active entrepreneurs.� They comprise business owners who can possibly earn a living as formal sector employees at the going wage rate, yet choose to be entrepreneurs because they make more money or find more self-fulfillment this way. One way of distinguishing “active entrepreneurs� from “involuntary entrepreneurs� is to ask enterprise owners why they decided to be in business rather than work for someone else. In the Namibia survey, owners were asked to pick what best fit their actual business motive from a list of four alternatives (table 8). People pushed into self-employment for lack of opportunities in paid employment at “living wages� are assumed not to claim to enjoy their current occupation or accept that their current earnings are what they would be inherently worth in the labor market. This distin- guishes active entrepreneurship and entrepreneurship by default. On the other hand, those who are self-employed as a matter of choice would claim to enjoy their cur- rent occupation and indicate that they perceive employment opportunities working for someone else. Following this reasoning, some 27 percent of the sample, or 168 business owners, qualify as active entrepreneurs, leaving the balance as “involuntary entrepreneurs,� as those who were in business only because they could not find any alternative employment at all, or could not live on the wages on offer to them from potential employers.11 11 The reason that people give for having set up their businesses as reported in table 8 relates to what happened in the past. It does not therefore necessarily describe the respondents’ current evaluation of their current occupation. Since it is the current evaluation of the current occupation that the definitions of active entrepreneurship and involuntary entrepreneurship relate to, responses reported in table 8 classify business owners between the two categories with some error. However, the patterns in productivity and growth between the two groups of business owners as reported below suggest that the error is not necessarily too large to draw meaningful inferences about the present. 16 Promoting Entrepreneurship in Namibia: Constraints to Microenterprise Development Table 9 breaks down various demographic strata of business owners in the sample by what their responses would be to the hypothetical question of whether they would rather work for someone else at the going wage rates based on the reasons they gave to the actual survey question described in table 8. In effect, the responses classify each stratum into active entrepreneurs and involuntary entrepreneurs. The sharpest pattern in the table is that the likelihood of a business owner being an active entre- preneur consistently rises with his or her educational attainment. Thus, 34 percent of the subsample of those who had at least completed high school would qualify as active entrepreneurs, compared to 16 percent of those who had at most completed primary school. Figure 6 : Probability of Tax Registration of Male Owned Businesses-Active less Involuntary (%) 14 12.7 11.9 12.1 12.1 12 10 8 6 4 2 2 0 No controls Given time in Given time in Given time in Given time in business business and line business, line of business, line of of business business, and type business, and type of business of business location location, and scale of business Source: Namibia Pilot Microenterprise Survey The correlation between business formality and active entrepreneurship is analyzed in figure 6, according to which a randomly chosen male active entrepreneur is 12 percent more likely to have his business registered for tax than a randomly selected male involuntary entrepreneur.12 But nearly all of this correlation is explained by ac- tive entrepreneurs being more likely to run larger businesses, which are more likely 12 The estimated gap between active entrepreneurs and involuntary entrepreneurs with respect to the probability of being regis- tered for tax is statistically significant. Standard errors and p-values are available on request. Profile of Microenterprises 17 to be registered for tax. For example, the proportion of active entrepreneurs among microbusinesses engaging two-four people in the sample averages 36 percent, com- pared to 16 percent for own-account workers (table 10).13 Table 9 : Distribution of Businesses Owners, by Reason for Being in Business Would you rather work for someone else for pay? Yes No Total (1) Level of Education At most primary complete 157 30 187 % 83.96 16.04 100 Junior secondary complete 136 40 176 % 77.27 22.73 100 At least secondary complete 194 98 292 % 66.44 33.56 100 (2) Age Group 24 yrs. or younger 270 89 359 % 75.21 24.79 100 25-29 yrs. 118 35 153 % 77.12 22.88 100 30 yrs. or older 71 33 104 % 68.27 31.73 100 (3) Gender Female 253 93 346 % 73.12 26.88 100 Male 237 75 312 % 75.96 24.04 100 Total 490 168 658 % 74.47 25.53 100 Source: Namibia Pilot Microenterprise Survey A significant part of the correlation between business formality and active entrepre- neurship (figure 6) is associated with the fact that active entrepreneurs are more like- ly to operate from nonresidential premises and that they are more likely to operate in sectors subject to greater regulation, such as food processing and manufacturing (table 10).14 For example, the proportion of active entrepreneurs in manufacturing and crafts was 40 percent, compared to 20 percent of retail traders. Given scale, line of business, and type of location of activities, an active enterprise is only approxi- mately 6 percent more likely to be registered for tax than an involuntary enterprise (figure 6). 13 The gap in the probability of being an active enterprises between own account enterprises and enterprises employing two-four people is statistically significant. 14 The differences in the probability of being an active enterprise as read from table 10 are statistically significant among: (i) own account enterprises and those engaging two-four people; (ii) itinerant businesses and those operating from a fixed location; (iii) manufacturing or craft businesses and enterprises in retail trade; and (iv) enterprises that are registered for tax and those that are not. 18 Promoting Entrepreneurship in Namibia: Constraints to Microenterprise Development Table 10 : Reason for Being in Business, by Scale, Line, and Location of Activities Would you rather work for someone else for pay? Yes No Total (1) Scale: Own-account work 290 56 346 % 83.82 16.18 100 Engaging 2-4 people 200 112 312 % 64.1 35.9 100 (2) Age group : Star up = <5 yrs. 270 91 361 % 74.79 25.21 100 Young = 5 to 10 yrs. 106 37 143 % 74.13 25.87 100 Established = >10 yrs. 114 40 154 % 74.03 25.97 100 (3) Location of activities: Nonresidential premise 273 93 366 % 74.59 25.41 100 Located in residence 136 55 191 % 71.2 28.8 100 No fixed location 81 20 101 % 80.2 19.8 100 (4) Line of business Food and beverages 62 31 93 % 66.67 33.33 100 Manufacturing/crafts 23 15 38 % 60.53 39.47 100 Retail trade 286 71 357 % 80.11 19.89 100 Other services 119 51 170 % 70 30 100 (5) Registered for tax? Yes 337 90 427 % 78.92 21.08 100 No 149 78 227 % 65.64 34.36 100 Productivity Gaps Regardless of tax registration status, active enterprises are on average far more pro- ductive than involuntary enterprises (figure 7). For example, the average net income per worker for tax-registered active enterprises is 25 percent greater than the average net income per worker of tax-registered involuntary enterprises. The productivity ad- vantage of unregistered active enterprises over unregistered involuntary enterprises is lower, at 21 percent. Profile of Microenterprises 19 Figure 7 : Net Income per Person Engaged in Active Enterprises (Involuntary En- terprises = 100) 125.4 No controls 121.7 117.7 Given scale and for �xed assests per worker 113 Given scale , �xed assests per worker , type of 126.2 location of activities 115.9 Given scale ,�xed assests per worker, type of 126.5 location of activities, bookkeeping practices 113.8 105 110 115 120 125 130 Tax -registered or licensed enteprises only Unregistered, unlicensed enterprises only Source: Namibia Pilot Microenterprise Survey Approximately two-thirds of the productivity advantage of the unregistered and un- licensed active enterprises over the unregistered and unlicensed involuntary enter- prises reflects the advantages that active enterprises have in the form of scale econo- mies, better technology, more fixed assets per worker, and higher observed skills. The other third could reflect unobserved advantage in skills or better access to services (figure 7).15 Active enterprises also are more growth oriented than involuntary enterprises. For the year leading up to the survey, fixed investment rates averaged 35 percent of the net income of active enterprises, compared to approximately 26 percent for involun- tary enterprises (figure 8).16 The gap between the two types of enterprises in terms of growth outcomes is particularly pronounced in food processing and manufacturing. Reflecting their higher reinvestment rate, active enterprises grow faster on average than involuntary enterprises. For example, an active enterprise that started out as own-account work two years before the survey would have grown by approximately 32 percent by the time of the survey (figure 9). In contrast, an otherwise comparable involuntary enterprise starting from the same base would have expanded by a mere 2 percent over the same interval. Similarly, an active enterprise that started out with two workers two years before the survey would have increased in scale by 29 percent 15 The productivity gaps between tax-registered active enterprises and tax-registered involuntary enterprises reported in figure 7 are all statistically significant. So are those between unregistered active enterprises and registered involuntary enterprises. The figure is derived from a set of regression results that are available upon request. 16 The gaps between active enterprises and involuntary enterprises in the ratio of fixed investment to net incomes reported in figure 8 for each indicated sector are all statistically significant. 20 Promoting Entrepreneurship in Namibia: Constraints to Microenterprise Development by the time of the survey, while an otherwise comparable involuntary enterprise would not have grown at all over the same period. Figure 8 : Fixed Investment as % of Net Income Food and beverages Retail trade Other services Manufacturing/crafts All sectors 0 5 10 15 20 25 30 35 40 45 Active enterprises involuntary enterprises Source: Namibia Pilot Microenterprise Survey Figure 9 : Average Annual Employment Growth Rate Since Startup (%), All Sectors 35 31.6 29.2 30 25 20 15 15 7.1 8.4 10 5.3 5 2.1 0 0 Started out as Started out with Started out Started out as own-account two workers two with two own- account work two years ago workers 3-5 work 3-5 years ago or ago or late years ago years ago or later (n=19 for (n=16 for (n=24 for later (n=22 for active, n=95 active, n=41 active, n=28 active, n=88 for involuntary) for involuntary) for involuntary) for involuntary) Active enterprises Involuntary enterprises Source: Namibia Pilot Microenterprise Survey 2.3 Capability Groups The distinctions between formal and informal enterprises, on the one hand, and ac- tive and involuntary enterprises, on the other, relate to only two of the dimensions in which capability groups of microenterprises can be defined as segments of the Profile of Microenterprises 21 sector that may respond differently to a given set of policy reforms or interventions. Of these two dimensions, whether a business is formal or informal is an outcome variable. Ultimately, owners choose to have their businesses registered for tax or otherwise depending on their determination as to which of the two courses of action would make them better off. In contrast, whether these same owners are active or involuntary entrepreneurs is not subject to their choice any more than such predeter- mined social and demographic characteristics as their gender, age, and ethnicity are. Rather, whether they are active or involuntary entrepreneurs is a characterization of their previous labor market options as one of the exogenous determinants of their choice to pursue a business career. We classify business owners as active entrepre- neurs to indicate that, given their skills, they would have successfully earned a living in the labor market had they chosen to. Otherwise, given these owners’ skills and the current parameters of the labor market, they would be classified as involuntary entre- preneurs, meaning that the alternative to self-employment would be unemployment or employment at below subsistence wages. In this section we identify narrower and more homogenous categories among active microenterprises based in part on two characteristics of the enterprise, namely, the scale of the enterprises and how long it has been in business, and then on two attrib- utes of the business owner, namely, the owner’s age and schooling. Like tax registra- tion and licensing status, the scale and age of an enterprise are outcomes of the deci- sions that the entrepreneur has made since setting up the business and are also strong correlates of the business’s decision to operate formally. On the other hand, the age and schooling of the business owner are largely predetermined in relation those deci- sions and, indeed, in relation to the decision to set up the business. The owner’s age and schooling are also key determinants of the labor market earnings potential of the entrepreneur and consequently are key determinants of whether the business owner is an active entrepreneur or an involuntary one. Startups vs. Post-Startups The most natural division of the survey sample by scale of activities is perhaps that between own-account work (or single-person enterprises) and microemployers, that is, microenterprises that provide full-time employment to people other than the owner as paid workers or as unpaid family workers. We can further classify each scale group of enterprises by the length of time that they have been in business into “startups� and “post-startups.� Startups have been in operation for no more than five years; post-startups for longer than five years. The first half of the upper panel of table 11 shows the distribution of the 168 active enterprises of the sample across the four categories of this two-way classification. The second half of the upper panel is 22 Promoting Entrepreneurship in Namibia: Constraints to Microenterprise Development the corresponding distribution of 490 of the enterprises that we are able to classify as involuntary. One-third of all active enterprises in the sample were businesses of own-account workers. These are divided equally between startups and post-startups. This section compares the two age groups of own-account active enterprises with each other and with active microemployers in productivity and other characteristics of the business and of the owner. The section also compares both age groups of active microemploy- ers with one another, with own-account active enterprises, and with their respective counterpart groups of involuntary enterprises. One-third of the 168 active micro- enterprises in table 11 are “startup� microemployers. Another 29 percent of active enterprises are “post-startup� microemployers. There are 111 involuntary enterprises employing two-four persons each, as compared to 102 post-startup involuntary en- terprises of the same work force size group. Table 11 : Distributions of Enterprises, by Characteristics of Businesses and Owners Number of enterprises by size groups Own-account work Engaging 2-4 people Total Active enterprises Start ups 28 63 91 Post-start up 28 49 77 Total 56 112 168 Involuntary enterprises Start ups 159 111 270 Post-start up 131 89 220 Total 290 200 490 Number of enterprises by business owners’ level of schooling Had not completed Had at least Total high school completed high school Active enterprises Youth owned 55 69 124 Non-youth owned 6 27 33 Total 61 96 157 Involuntary enterprises Youth owned 242 146 388 Non-youth owned 32 39 71 Total 274 185 459 Source: Namibia Pilot Microenterprise Survey Own-Account Enterprises Of the 168 active enterprises in the sample, 28 were startup own-account enterprises. Another 28 were post-startup own-account enterprises. These two groups contrast Profile of Microenterprises 23 sharply with each other and with their respective matching groups of involuntary en- terprises in productivity, line of business, informality, and the owners’ human capital. In the second half of the upper panel of table 11 there are 159 involuntary startup businesses. The involuntary counterpart group for the 28 post-startup own-account active enterprises is the group of 131 post-startup own-account involuntary enter- prises (shown in the same section of table 11). Figure 10 : Annual Net Income of Own-Account Workers (‘000 NAD) – Active and Involuntary 35 31.6 29.2 30 25 20 15 15 7.1 8.4 10 5.3 5 2.1 0 0 Started out as Started out with Started out with Started out as own-account two workers two two workers 3-5 own-account work two years ago years ago or later years ago work 3-5 years ago or later (n=19 for (n=16 for (n=24 for or later (n=22 for active, n=95 active, n=41 active, n=28 active, n=88 for involuntary) for involuntary) for involuntary) for involuntary) Active enterprises Involuntary enterprises Source: Namibia Pilot Microenterprise Survey Startup own-account active enterprises are more productive than startup own- account involuntary enterprises, but only half as productive as post-startup own- account active enterprises. The average net income of startup own-account active enterprises is 26,100 NAD a year, corresponding to an average annual turnover of 30,900 NAD (table 12 and figure 10).17 These sums are about 30 percent higher than the average annual net incomes of startup own-account involuntary enterprises, but several times smaller than the averages of the annual net incomes and annual turnover of post-startup own account active enterprises, which are 53,600 NAD and 91,600 NAD, respectively. Finally, startup own-account active enterprises are more likely to register for tax than startup involuntary own account enterprises but less likely to do so than post-startup own-account active enterprises (figure 12), al- though there is no statistical difference between active enterprises and involuntary 17 Each of the following gaps in annual net incomes reported in figure 10 and table 12 is statistically significant: (i) that between tax-registered start up active enterprises and tax registered start-up involuntary enterprises; (ii) that between tax-registered post-start-up active enterprises and tax-registered post-start-up involuntary enterprises; (iii) that between tax-registered start- up active enterprises and tax-registered post-startup active enterprises; and (iv) that between tax-registered post-start-up invol- untary enterprises and tax-registered start-up involuntary enterprises. 24 Promoting Entrepreneurship in Namibia: Constraints to Microenterprise Development enterprises in the likelihood of registration for tax by microemployers (figure 13).18 Part of the productivity advantage of own-account active enterprises over own-ac- count involuntary enterprises and the higher propensity of the active enterprises to register for tax is explained by the fact that active enterprises tend to concentrate more in higher-productivity industries and in sectors in which tax registration might be more difficult or less advisable to avoid, namely, food processing and manufactur- ing and crafts, than it seem to be in micro retail trading. For example, 45 percent of startup own-account active enterprises operated in such sectors, compared to ap- proximately 20 percent of startup own-involuntary enterprises, also were in the same sectors. Some 35 percent of post-startup own-account active enterprises also were in these sectors, compared to approximately 16 percent of post-startup own-account involuntary enterprises that operate in the same sectors (figures 14 and 15). Table 12 : Average Annual Net Income and Annual Turnover per Enterprise Active enterprises only Involuntary enterprises only Average Average Average Average Average Average number of annual annual number of annual annual persons turnover net income persons turnover net income engaged (‘000 NAD) (‘000 NAD) engaged (‘000 NAD) (‘000 NAD) I. Own-account work only Startups Tax-registered or licensed only 1 84 62 1 38.5 31.5 Unregistered, unlicensed only 1 27.1 23.9 1 16.6 12.5 All 1 30.9 26.1 1 23.6 19.5 Post-startups Tax-registered or licensed only 1 137.1 91 1 109.1 66.2 Unregistered, unlicensed only 1 52.6 25.6 1 25 20.6 All 1 91.6 53.6 1 66.3 41.6 2. Enterprises engaging 2-4 persons Startups Tax-registered or licensed only 2.7 271.2 180.4 2.5 101.7 78.2 Unregistered, unlicensed only 2.4 41.3 29.2 2.4 39.9 25.6 All 2.6 194.6 130 2.5 78.5 58.4 Post-startups Tax-registered or licensed only 2.9 267.8 218.3 2.4 140.4 108.9 Unregistered,unlicensed only 2 238.3 48.6 2.3 24.4 19.6 All 2.8 50.9 195.1 2.4 119.6 92.8 The owner of the typical startup active own-account enterprise is significantly young- er and has significantly less schooling than the owner of the typical post-startup ac- tive own-account enterprise, but is more educated than and about the same age as the typical own-account involuntary entrepreneur (table 14). 18 The gaps in the probability of tax registration referred to here (and reported in figure 12) are both statistically significant. Profile of Microenterprises 25 Microemployers There were 63 active microemployers in the startup age group of the sample and 49 active microemployers in the post-startup age group of active startups (table 11). Their involuntary enterprise counterpart groups included 111 startup businesses and 89 post-startups, respectively. Both these age groups of active microemployers were more than twice as productive as their involuntary enterprise counterpart groups. Average net incomes per person engaged were 58,600 NAD for startup active mi- croemployers, and 66,600 NAD for post-start-up microemployers, which are larger than the average annual net incomes per person for startup own-account active en- terprises and for post-startup own-account active enterprises respectively (figures 10 and 11, and tables 12 and 13).19 Figure 11 : Annual Net Income per Worker, Enterprises Engaging 2-4 Persons – in ‘000 NAD Tax-registered or licensed 75.3 Active enterprises enterprise only 66.8 Unregistered, unlicensed 24.3 enterprises only 12.2 Tax-registered or licensed 45.4 Involuntary enterprises enterprise only 31.3 Unregistered, unlicensed 8.5 enterprises only 10.7 0.0 10.0 20.0 30.0 40.0 50.0 60.0 70.0 80.0 Post-startups Startups Source: Namibia Pilot Microenterprise Survey 19 Each of the following gaps in average net incomes per worker as reported in figure 11 and table 13 is statistically significant: (i) that between tax-registered or licensed post-startup active enterprises and tax-registered or licensed post-startup involuntary enterprises; (ii) that between tax-registered or licensed startup active enterprises and tax-registered startup involuntary en- terprises; and (iii) that between unregistered and unlicensed post-startup active enterprises and unregistered and unlicensed post-startup involuntary enterprises. 26 Promoting Entrepreneurship in Namibia: Constraints to Microenterprise Development Table 13 : Annual Net Incomes per Worker and Fixed Assets per Worker Annual Fixed assets net income per worker per worker (‘000)NAD (‘000) NAD I. Active enterprises only Startups Tax registered or licensed only 80.9 45.8 Unregistered, unlicensed only 14.1 10.4 All 58.6 34 Post-startups Tax registered or licensed only 73.3 36.6 Unregistered, unlicensed only 24.3 5.7 All 66.6 32.5 II. Involuntary enterprises only Startups Tax registered or licensed only 31.1 41.6 Unregistered, unlicensed only 10.8 11.2 All 23.5 31.3 Post-startups Tax registered or licensed only 47.9 46.6 Unregistered, unlicensed only 8.8 22.5 All 40.9 37 Some of the productivity advantage of active microemployers over involuntary mi- croemployers has to do with the fact that active microemployers are concentrated in more productive sectors. Some 70 percent of active microemployers were found in these sectors, compared to 35 percent of involuntary microemployers (figures 14 and 15). Figure 12 : Percent of Registered or Licensed Enterprises – Own-Account Work Only % registered with the registrar Post-startups % holding a license % registered for tax % registered with the registrar Startups % holding a license % registered for tax 0 10 20 30 40 50 Active enterprises Involuntary enterprises Source: Namibia Pilot Microenterprise Survey Profile of Microenterprises 27 Figure 13 : Percent of Registered or Licensed Enterprises – Only Those Engaging 2-4 People % registered with the registrar Post-startups % holding a license % registered for tax % registered with the registrar Startups % holding a license % registered for tax 0 10 20 30 40 50 60 70 80 90 100 Active enterprises Involuntary enterprises Source: Namibia Pilot Microenterprise Survey A second factor behind the productivity advantage of active microemployers over involuntary microemployers is that owners of active microemployers are more edu- cated on average. Thus, 78 percent of post-startup active microemployers are high school graduates, compared to 58 percent of post-startup involuntary microemploy- ers (table 14). Youth-Owned Businesses and Enterprises of Older Owners More than 80 percent of enterprises in the sample were youth-owned, meaning that they were run by people who were no more than 29 years old (table 14).20 We can further classify the schooling of youth-owned and “non-youth-owned� businesses owners into those run by people who had at least completed high school and those run by people who had not. The distribution of the subsample of active entrepre- neurs among the four categories of this two-way classification is shown in the first half of the lower panel of table 11. A particularly interesting entry in this panel is the 69 active youth entrepreneurs who had graduated from high school. The entry corresponds to a group of enterprises that stands out in productivity in relation to the 55 enterprises of less educated active young entrepreneurs (shown in same panel) as well as to the involuntary enterprises of the 146 young high school graduates shown in the table. 20 The definition of “youth� adopted here is the same as that used in the World Bank World Development Report 2007 and com- monly used by other government publications in Sub-Saharan Africa. It is higher than the cutoff point of 24 years used by UNESCO but well below the 35 years used, for example, by the South African Youth Development Agency. 28 Promoting Entrepreneurship in Namibia: Constraints to Microenterprise Development Table 14 : Percent of Business Owners, by Demographic Characteristics 24 years 29 years Female High school or younger or younger graduate I. Active enterprises only Startups Own account work 88 92 67.9 32.1 Engaging 2-4 people 83 88 50.7 57.1 Post-startups Own account work 30.7 73.1 60.7 53.5 Engaging 2-4 people 21.2 63.8 51 77.6 II. Involuntary enterprises only Startups Own account work 84.1 93.4 50.3 20.9 Engaging 2-4 people 80.8 98 49.5 56.1 Post-startups Own account work 32.3 72.4 61.8 37.4 Engaging 2-4 people 25 70 42.3 58.4 Figure 14 :Distribution of Active Enterprises, by Line of Business 50 45 40 35 30 25 20 15 10 5 0 Food and beverages Manufacturing /crafts Retail trade Other services Food and beverages Manufacturing /crafts Retail trade Other services Startups Post-startups Own-account work Engaging 2-4 people Source: Namibia Pilot Microenterprise Survey Profile of Microenterprises 29 Figure 15 :Distribution of Involuntary Enterprises by Line of Business 70 60 50 40 30 20 10 0 beverages Retail trade Other services beverages Manufacturing /crafts Retail trade Other services Manufacturing/ crafts Food and Food and Startups Post-startups Own- account work Engaging 2-4 people Source: Namibia Pilot Microenterprise Survey Businesses of High School Graduates Sixty percent of the active enterprises in the sample were run by people who had at least high school education. The vast majority of these were young people. The respective involuntary counterpart groups of youth-owned and non-youth-owned active enterprises of high school graduates consisted of 146 youth-owned invol- untary enterprises and 39 non-youth-owned involuntary enterprises respectively (table 11). When we cross-classify the subsample of active enterprises by scale and by time in business, startup active employers turn out to be the most productive of the result- ing four categories of microbusinesses (table 12). When we cross-classify the same subsample of active enterprises by the schooling and age groups of business owners, youth-owned businesses of high school graduates are found to be more productive than those of less schooled owners (figure 16). Among businesses run by young high 30 Promoting Entrepreneurship in Namibia: Constraints to Microenterprise Development school graduates, those registered for tax or holding a business license are signifi- cantly more productive.21 Figure 16 : Annual Net Income per Worker (‘000 NAD) – Active Enterprises Owner graduated from Tax- registered or licensed high school Unregistered, unlicensed Owner did not graduate Tax- registered from high school or licensed Unregistered, unlicensed 0 10 20 30 40 50 60 Youth -owned Run by older owners Source: Namibia Pilot Microenterprise Survey The productivity advantage of active enterprises of high school graduates of either age group reflects in part that these enterprises have more fixed assets per person engaged than both the match group of involuntary enterprises and the active enter- prises of owners who had not completed high school. The higher turnovers and larger fixed assets of active enterprises of high school graduates, compared to involuntary enterprises of the same education level of group owners, also were associated with the higher propensity of active enterprises to formalize. For example, 60 percent of active enterprises of young high school graduates were registered for tax, compared to 35 percent of active enterprises of young owners that had not completed high school (figure 18).22 Again, some of the differences in productivity and registration status between active 21 Each of the following gaps in average annual net incomes per worker as shown in figure 16 is statistically significant; (i) that be- tween tax-registered or licensed businesses of young high school graduates and tax-registered or licensed businesses of young people who did not graduate from high school; (ii) that between unlicensed and unregistered businesses of young high school graduates and unregistered and unlicensed businesses of young people who did not graduate from high school; and (iii) that between tax-registered or licensed businesses of young high school graduates and unregistered and unlicensed businesses of young high school graduates. 22 The difference in registration rates reported for the two groups of youth-owned businesses is statistically significant. Profile of Microenterprises 31 enterprises of high school graduates and those of less educated youth are related to differences in choice of lines of business. Active enterprises of high school graduates tend to concentrate more in relatively high-productivity sectors (figures 18 and 19). Businesses of the Less Educated Forty percent of the active enterprises in the sample were run by people who had less than a high school education. Again, the vast majority of these were youth- owned. Their involuntary counterpart group consisted of 242 youth-owned enterprises and 32 enterprises of older business owners (table 11). Figure 17 : Percent of Registered or Licensed Enterprises, by Owner’s Characteris- tics % registered with registrar enterprises enterprises owned Youth- % holding a license Active enterprises % registered for tax % registered with registrar Non-youth- owned % holding a license % registered for tax % registered with registrar enterprises enterprises owned Youth- % holding a license involuntary enterprises % registered for tax % registered with registrar Non-youth- owned % holding a license % registered for tax 0 10 20 30 40 50 60 70 80 90 Run by high school graduates Run by owners who did not graduate from high school Source: Namibia Pilot Microenterprise Survey Active enterprises of youth who had not completed high school operated on a smaller scale than active enterprise run by high school graduates. Their turnover was smaller by 75 percent, and their fixed assets per worker were 55 percent lower. 32 Promoting Entrepreneurship in Namibia: Constraints to Microenterprise Development Figure 18 : Percent Distribution of Enterprises Run by High School Graduates Other services enterprises Active Retail trade Manufacturing/crafts Youth- owned Food and beverages Other services Involuntary enterprises Retail trade Manufacturing/crafts Food and beverages Other services enterprises Retail trade Active Run by older owners Manufacturing/crafts Food and beverages Other services Involuntary enterprises Retail trade Manufacturing/crafts Food and beverages 0 10 20 30 40 50 60 70 Source: Namibia Pilot Microenterprise Survey Profile of Microenterprises 33 Figure 19 : Percent Distribution of Enterprises of Non-high-school Grads by line of business Other services enterprises Retail trade Active Manufacturing/crafts Youth- owned Food and beverages Other services Involuntary enterprises Retail trade Manufacturing/crafts Food and beverages Other services enterprises Retail trade Active Run by older owners Manufacturing/crafts Food and beverages Other services Involuntary enterprises Retail trade Manufacturing/crafts Food and beverages 0 10 20 30 40 50 60 70 80 Source: Namibia Pilot Microenterprise Survey 2.4 Conclusion To sum up, there are two kinds of microbusinesses in Namibia today. One group is the active entrepreneurs, who would successfully earn a living in the labor market if they chose to, but are self-employed because they are better off in business than they would be working for someone else. In contrast, the involuntary entrepreneurs, or survivalists, are self-employed by default. These are people who could not find paid employment even though they would have taken up paid work at the going rate if there had been a sufficient number of jobs in the economy. About 25 percent of the enterprises covered in the pilot survey sample were active enterprises. The rest were involuntary. Active enterprises are typically more produc- tive, in part because their owners are typically more educated and younger. Active enterprises are also younger on average, far more likely to be registered for taxes, and tend to concentrate in relatively high-value-added business lines. By contrast invol- untary enterprises tend to concentrate more in microretail trade. 34 Promoting Entrepreneurship in Namibia: Constraints to Microenterprise Development Active enterprises also are significantly more growth oriented than involuntary enter- prises. The typical active enterprise invests a far greater proportion of its net income and grows faster than the average involuntary enterprise. Active microenterprises therefore seem to have the best chance of evolving into viable SMEs and of providing effective demand for these products and services over the long term. Among active enterprises, youth-owned enterprises in general, and those of young high school graduates in particular, appear to be the most productive and most growth oriented. The group overlaps startup active enterprises, by which we mean active enterprises that came into existence within the last five years. A minority of startup active enterprises belongs to own-account workers, but more than two-thirds of them are microemployers that engage two-four. Post-startup ac- tive microemployers constitute 8 percent of the sample and are also relatively pro- ductive and growth oriented. Constraints to Enterprise Development 35 CHAPTER 3 Constraints to Enterprise Development Some of the productivity gap observed among various categories of microenterprises is related to differences in the skills and effort of their owners. There are also indi- cations that some of the gap is associated with differences in access to key markets and services. Some businesses have relatively easier or less costly access to external finance than others for reasons that may have little to do with how well run they are or how profitable their projects might be. Some may have better access to public utilities or to markets and suppliers for reasons unrelated to their productivity or their previous market performance. Indeed, remedying this lack of access to public utilities and services is part of the ra- tionale for public intervention to support the development of the sector. As a group, MSMEs do not have as much access to credit, markets, business services, or public utilities as do larger companies. Within the MSME sector, microenterprises are at a particular disadvantage not least because they are less capable than SMEs of taking advantage of the business support schemes intended to improve the sector’s access to markets and services. It also is widely believed that business informality often is a significant barrier to microenterprise access to markets and services. To the extent that is indeed the case, some of the effort to support the integration of the microenterprises in finan- cial and BDS markets should be aimed at efforts to encourage microenterprises to formalize. 36 Promoting Entrepreneurship in Namibia: Constraints to Microenterprise Development This chapter discusses how far finance and other services may have constrained the productivity and growth of microenterprises and the role that business informality may have played in impeding access to markets and services by the various categories of microenterprises identified in chapter 2. 3.1 Informality, Productivity, and Access to Services Drivers of Informality Why do so many microenterprise owners choose to operate informally, that is, opt not to register with the tax authority or get a business license? Enterprises would choose to operate formally only if the act of registering for tax or getting a license would make their net profits higher. Getting registered or obtaining a license would raise an enterprise’s net profits only if either of them increased the enterprise’s rev- enue by more than it would add to the cost of the enterprise’s activities. Then the enterprise owners who operate informally would be only those who had decided that registration for tax or being licensed would increase their costs of operation by more than these actions would increase their revenues. The underlying logic of the cost-benefit analysis of registering and licensing a busi- ness is by and large correct. However, it incorrectly assumes that all microbusiness owners know what they need to do to register or license their enterprises, or what net benefits they would get directly or indirectly from doing either. In fact, one of the main reasons that survey respondents gave for not registering their businesses was ignorance. In the survey, ignorance of how and where to get registered––and, in many cases, even whether they were expected to register their businesses––was cited by approximately one-third of unregistered respondents as a major reason for not registering. Moreover, this response rate applied to active as well as involuntary entrepreneurs. However, many survey respondents indicated that there were factors that deterred them from registration, including factors they believed would add to the cost of run- ning their businesses. These items are listed in figures 20–22. The items seem to be given the same weight by formal and informal enterprises as a deterrent of registra- tion. In figure 21, the comparison is limited to enterprises that are unregistered for tax or those not holding business licenses. The figure shows that there probably is no one regulatory factor in Namibia that we could single out as the main driver of infor- mality among microenterprises. At the same time, the chart indicates that a number of cost items related to regulatory requirements may have combined to make the cost of formalization too high and beyond any possible benefit that entrepreneurs Constraints to Enterprise Development 37 might expect to gain from operating formally. Tax liability is one of the more prominent of these cost items. Forty percent of unli- censed enterprises and almost as high a percentage of those unregistered for tax cited the desire to avoid taxes as a major reason for not having registered their businesses. Only a slightly smaller fraction of each of these groups of respondents also report- ed that registration fees were prohibitive. Twenty-seven percent of business owners cited the desire to avoid complying with labor laws as a major reason that they had avoided registering. Some 24-30 percent of each group thought that businesses were discouraged from registering by the length of the time needed to complete the reg- istration. A slightly smaller percentage of each group cited the cost of compliance combined with other aspects of business regulation as a major factor. Figure 22 compares ratings of the factors listed in figure 21 between active and invol- untary enterprises. However, it is limited to businesses that are registered for tax or that hold a business license. On the whole, a significantly smaller percentage of active enterprises cite higher taxes and high compliances costs as deterrents. But here also, registration fees and taxes are marginally the most prominent of all the items, and the concern with labor laws is even comparably lower for both groups. Figure 23 describes ratings of deterrents of registration by registered and unregistered enterprises separately. The nature of the factors that matter and the relative weights respondents attach to each do not vary much between the two groups. Figure 20 : Percent of Respondents Rating Various Factors as Deterrents to Busi- ness Registration Taxes on the registered Labor laws Compliance costs of regulation Registration fees Time cost of registration 0 5 10 15 20 25 30 35 40 45 Unlicensed Unregistered for tax Source: Namibia Pilot Microenterprise Survey 38 Promoting Entrepreneurship in Namibia: Constraints to Microenterprise Development Figure 21 : Percent Rating Factors as Obstacles to Registration – Active vs. Invol- untary Registration fees Labor laws Taxes on the registered Time cost of registration Compliance costs of regulation 0 10 20 30 40 50 Active enterprises Involuntary enterprises Source: Namibia Pilot Microenterprise Survey Figure 22 : Percent of Rating Factors Obstacles to Registration by Registration Status Compliance costs of regulation Labor laws Taxes on the registered Registration fees Time cost of registration 0 5 10 15 20 25 30 35 40 Unregistered respondents Registered respondents Source: Namibia Pilot Microenterprise Survey Constraints to Enterprise Development 39 Private Costs of Informality: Does Informality Reduce Access to Services? Survey respondents identified potential tax liabilities, licensing and registration fees, and the compliance costs of labor laws as key items of the cost of formally operating a business. However, many respondents also believed that enterprises that failed to register for tax or get a license would forgo the advantages of potentially cheaper ac- cess to markets and services, which would have enhanced their revenue. For example, more than 70 percent of respondents whose businesses were neither registered for tax nor licensed thought that registration would enable them to participate in gov- ernment business support or incentive programs (figure 24). The proportion of those who thought of registration as a requirement for participation in government pro- grams was even higher among owners of tax-registered or licensed enterprises. Some 40 -60 of respondents also thought that registered businesses would have cheaper access to finance and improved access to business space and utilities. Many even thought that registration would provide some protection from demands for bribes. Figure 23 : Percent of Enterprise Owners Registration by Expected Benefits from Registration Reduces the cost of �nance Protects from demand for bribes from officials Improves access to land/ better business premises Provides access to government programs/incentives Enables business with government and large companies Improves access to utilities 0 10 20 30 40 50 60 70 Registered for tax or holding a license Unlicensed and unregistered Source: Namibia Pilot Microenterprise Survey The effects that respondents expected their businesses would reap through formali- zation with regard to access to markets and services (figure 24) are consistent with the differences between the ratings that tax-registered enterprises gave to various potential growth constraints and the ratings given by those unregistered for tax (fig- ure 25). For example, the proportion of businesses that considered lack of access 40 Promoting Entrepreneurship in Namibia: Constraints to Microenterprise Development to finance to be a major growth constraint was significantly smaller for those that were tax-registered than for those that were not. Tax-registered businesses also were significantly less likely to rate access to business space or access to public utilities as major constraints than enterprises that were unregistered for tax.23 Does Informality Cost Society? Informality and Productivity That a large majority of microenterprises operate informally despite their owners’ belief that being formal would have advantages in access to services suggests that the private costs of informality outweigh the advantages. The question then arises whether society at large would lose as a result. In other words, would raising the for- malization rate of microenterprises in Namibia increase the aggregate productivity of the sector? Figure 24 : Percent Rating Factor as Major Growth Obstacle Lack of access to �nance Lack of access to land Crime Lack of skills Lack of power connection 0 10 20 30 40 50 60 Unregistered , unlicensed Registered for tax or holding license Source: Namibia Pilot Microenterprise Survey This is by no means an easy question to answer. But the pilot survey data show that mi- croenterprises that were registered for tax or held business licenses were significantly more productive than those that were neither tax-registered nor held a license. Given business location, business line, and relevant characteristics of the business owner (experience, education, gender, and business motive), the net income per person en- gaged in the enterprise was significantly higher for a tax-registered or licensed micro- business. Some of the productivity advantage of tax-registered or licensed enterprises likely reflects inherently more productive businesses also having a greater propensity 23 The differences in ratings of access to finance and access to land as reported in figure 24 are statistically significant between businesses that are registered for tax or hold a license and those that are neither registered for tax nor licensed. Constraints to Enterprise Development 41 to operate formally. However, there is also some evidence in the data that even taking into account this kind of correlation would not necessarily remove entirely the pro- ductivity advantage of registered or licensed enterprises.24 There is also some evidence that enterprise productivity increases with access to external finance, which the data also show to be higher for tax-registered or licensed micro-businesses.25 3.2 Reported Constraints Registering for tax and operating with a license would improve a business’s access to markets and services. However, informality is not necessarily the most important fac- tor preventing microenterprises from accessing the financial products and business services that may be available to SMEs. Most microbusinesses in Namibia probably would not be able to make use of existing products and services regardless of their registration status. Many enterprises probably could not afford them in any case, and many of the products and services do not seem to match the needs or circumstances of most microbusinesses. Addressing these factors to improve the access of microen- terprises to services could require public investment in the development of markets in new financial products and new BDS tailored to the needs and capabilities of the sector. The results of the pilot survey suggest that the social payoff in higher productiv- ity from such investment could be substantial. The data indicate, for instance, that improved access to finance could raise the average productivity of microenterprises. The data also suggest that improved allocation of business space, better provision of infrastructure, and development of markets for training services and other business development schemes could have a similar effect.26 However, the microenterprise sector is not homogeneous. The survey data show that the sector is extremely diverse in productivity and business development potential. They also suggest that active enterprises constitute the most productive segment of the sector and therefore are the most likely to be able afford the new services over the long term. Productivity levels, growth prospects, and reported constraints to busi- ness development also seem to vary considerably across the different sections of the population of active enterprises that we described in the previous section. It could be important to take these differences into account in the design and introduction of new products and services. In chapter 2, we discussed potentially relevant capa- bility differences among groups of active enterprises as measured by productivity. 24 The full set of econometric results leading to this conclusion is based on the use of instruments for being registered for tax or being licensed and is available upon request. 25 The full set of econometric results leading to this conclusion is available upon request. 26 These statements are based on regression results available on request. 42 Promoting Entrepreneurship in Namibia: Constraints to Microenterprise Development In the rest of this chapter, we highlight the differences and similarities in reported constraints to business development among those groups. The most cited constraints across all groups are: • Access to finance • Access to land • Access to electricity • Skills • Crime. For active and involuntary enterprises alike, the most important reported constraints are access to finance, access to business space and utilities, crime, and lack of skills (figure 26). Moreover, within each of these groups, tax-registered or licensed enter- prises are significantly less likely to report any of these constraints as “major� than are unregistered and unlicensed active enterprises (figure 27). Overall, “complaint� rates against individual constraints also are consistently lower for active enterprises, which are particularly less likely to report being held by lack of access to finance or by lack of access to business space.27 Figure 25 : Percent of Business Owners Rating Factors as Major Constraints to Growth Access to �nance Crime Access to land Electricity Skills 0 10 20 30 40 50 60 Active entrepreneurs Involuntary entrepreneurs Source: Namibia Pilot Microenterprise Survey A striking contrast (figures 26, 27, and 28) between active enterprises and invol- untary enterprises is that complaint rates do not vary much by business age groups (startup vs. post- startups), by scale groups (own-account enterprises vs. microem- 27 These conclusions, as well as those to follow and highlighting differences in constraints between different types of microenter- prises, are based on regression analyses that control for region/location effects and industry effects and are available on request. The analyses are illustrated in three sets of results that are reported as annex 1 to this report. Constraints to Enterprise Development 43 ployers), or even by age and education groups among involuntary enterprise business owners, whereas constraints do vary considerably on these dimensions among active enterprises. Across both scale groups of active microenterprises, and for startups as well as for post-startups, tax-registered or licensed businesses are less constrained by lack of ac- cess to finance or by lack of access to land. Tax-registered businesses also are more likely to have better access to electricity and suffer from less crime.28 There also is in- dication that the association between business formality and access to services in Na- mibia may have become stronger in recent years. The indication is that the advantage that tax-registered or licensed businesses had over the unregistered and unlicensed was smaller among startups (own-account enterprises as well as microemployers) than it was among post-startups. 28 The differences in ratings between active enterprises and comparable involuntary enterprises in terms of ratings of access to finance, access to land, and crime, as reported in figures 28 and 29, are all statistically significant. 44 Promoting Entrepreneurship in Namibia: Constraints to Microenterprise Development Figure 26 : Percent of Active Enterprises Rating Various Variables at Major Growth Constraints Crime Land Startups Skills Enterprises engaging 2-4 people Electricity Finance Finance Land Post startups Skills Electricity Crime Finance Land Startups Electricity Crime Skills Own -account work Finance Crime Post startups Land Electricity Skills 0 10 20 30 40 50 60 70 80 90 Tax-registered or licensed Unregistered and unlicensed Source: Namibia Pilot Microenterprise Survey Constraints to Enterprise Development 45 Figure 27 : Involuntary Enterprises Rating Variables as Major Growth Constraints (%) Electricity Finance Startups Land Crime Skills Own- account work Land Finance Post- startups Electricity Crime Skills Land Finance Startups Skills Enterprises engaging 2-4 people Electricity Crime Finance Land Post -startups Skills Electricity Crime 0 10 20 30 40 50 60 70 80 90 Tax-registered or licensed Unregistered and unlicensed Source: Namibia Pilot Microenterprise Survey 46 Promoting Entrepreneurship in Namibia: Constraints to Microenterprise Development Figure 28 : Active Enterprises Rating Variables as Major Constraints to Growth (%) Land did not graduate from Run by high school Finance graduates Crime Youth- owned enterprises Skills Electricity Crime Run by owners who Electricity high school Finance Land Skills Finance did not graduate from Run by high school Land graduates Crime Non-youth -owned enterprises Skills Electricity Crime Run by owners who Finance high school Skills Land Electricity 0 10 20 30 40 50 60 Access to Finance Lack of access to finance was the top constraint for almost all categories of active enterprises that had not registered for tax and did not have a business license (figures 26 and 28). This is consistent with patterns in usage of sources of external finance. A sizable proportion of active enterprises use external sources to finance fixed invest- ments and working capital. In the survey sample, the proportion ranged between 50 percent and 85 percent for startups, and from 50 percent to 68 percent among post- startups (figure 30). However, the external finance was almost invariably obtained from informal sources and suppliers (figure 31). Access also was significantly lower among active enterprises that were not tax-registered or licensed; only 20 percent to 30 percent of these had used external sources. Among youth-owned enterprises, only 30 percent to 40 percent had used external sources (figure 32).29 29 The comparisons made here based on figures 30 and 31 are statistically significant. Constraints to Enterprise Development 47 Overall, access to finance was less of a problem for tax-registered or licensed busi- nesses for two reasons. First, a smaller percentage of them rate it as a major problem than do unregistered and unlicensed active enterprises. Second, historical rates of access to external sources happen to be higher for active enterprises that are regis- tered for tax or are licensed. The gap between the ratings of registered or licensed vs. unregistered and unlicensed was particularly large among active startups. The gap was evident both in actual rate of access to external finance and in ratings of lack of such access as a business constraint (figures 28 and 29). Figure 29 : Enterprises Using External Finance for Investment or Working Capital (%) Startups Own-account work Post- startups Active enterprises only Startups Engaging 2-4 persons Post- startups Startups Own-account work Post- startups Involuntary enterprises Startups Engaging 2-4 persons Post- startups 0 20 40 60 80 100 Tax registered or licensed Unregistered for tax and unlicensed 48 Promoting Entrepreneurship in Namibia: Constraints to Microenterprise Development Figure 30 : Enterprises Using Supplier Credit for Investment or Working Capital (%) Own-account work Startups Post- startups Active enterprises only Startups Engaging 2-4 persons Post- startups Own-account work Startups Post- startups Involuntary enterprises Startups Engaging 2-4 persons Post- startups 0 20 40 60 80 100 Tax registered or licensed Unregistered for tax and unlicensed Constraints to Enterprise Development 49 Figure 31 : Enterprises Using External Finance for Investment or Working Capital (%) Owner graduated Youth- owned from high school enteprises Owner did not graduate from high school Active enteprises only Non-youth owned Owner graduated from high school enterprises Owner did not graduate from high school Owner graduated Youth- owned from high school enteprises Owner did not graduate from high school involuntary enterprises Non-youth owned Owner graduated from high school enterprises Owner did not graduate from high school 0 20 40 60 80 100 120 From all external sources From informal external sources only Business Space and Access to Utilities On average, tax-registered or licensed microenterprises are more likely to operate from nonresidential business premises than unregistered and unlicensed ones. How- ever, there is no evidence in the data that active enterprises are significantly more likely to operate from nonresidential business premises connected to public utilities than involuntary enterprises (figures 32 and 33). 50 Promoting Entrepreneurship in Namibia: Constraints to Microenterprise Development Figure 32 : Percent of Enterprises That Have a Nonresidential Business Premises Own-account work Startups Post- startups Active enterprises only Engaging 2-4 persons Startups Post- startups Startups Own-account work Post- startups Involuntary enterprises Engaging 2-4 persons Startups Post- startups 0 20 40 60 80 100 Tax registered or licensed Unregistered for tax and unlicensed Business owners’ schooling and youth are not significant factors in access to nonresi- dential business premises and access to public utilities once we control for the tax registration and licensing status of enterprises. This can be seen in figures 34 and 35, where more than 60 percent of tax-registered or licensed enterprises are shown to have nonresidential business premises within each schooling and age group of busi- ness owners as compared to 40-45 percent of unregistered and unlicensed enterprises that have such premises.30 30 This difference is statistically significant. Constraints to Enterprise Development 51 Figure 33 : Percent of Enterprises That Have a Landline Phone Connection Startups Active enterprises only account Own- work Post- startups 2-4 persons Startups Engaging Post- startups Startups Involuntary enterprises account Own- work Post- startups 2-4 persons Startups Engaging Post- startups 0 5 10 15 20 25 30 35 40 Tax registered or licensed Unregistered for tax and unlicensed Figure 34 : Enterprises with Nonresidential Business Premises (%) Owner graduated Youth- owned enteprises from high school Active enteprises only Owner did not graduate from high school Owner graduated Non-youth- enterprises owned from high school Owner did not graduate from high school Owner graduated Youth- owned enteprises from high school involuntary enterprises Owner did not graduate from high school Owner graduated Non-youth- enterprises from high school owned Owner did not graduate from high school 0 10 20 30 40 50 60 70 80 Tax registered or licensed Unregistered for tax and unlicensed 52 Promoting Entrepreneurship in Namibia: Constraints to Microenterprise Development Figure 35 : Enterprises with Landline Phone Connection (%) Owner graduated enteprises from high school owned Youth- Owner did not graduate Active enteprises only from high school Owner graduated Non-youth- enterprises from high school owned Owner did not graduate from high school Owner graduated enteprises from high school owned Youth- Owner did not graduate involuntary enterprises from high school Owner graduated Non-youth- enterprises from high school owned Owner did not graduate from high school 0 5 10 15 20 25 30 35 40 45 50 Tax registered or licensed Unregistered for tax and unlicensed Skills Constraint Lack of skills was a major constraint for a significant proportion of active enterprises in the sample, particularly among startup microemployers, 68 percent of which re- ported skills to be a major constraint to growth (figures 26 and 28). Within that group, the highest complaint rate against lack of skills was among business owners that had graduated from high school or had some kind of vocational training (figures 37 and 38). The differences in levels of training between tax-registered or licensed enterprises and the unregistered and the unlicensed were reflected in the contrasting ways in which they ran their businesses. For example, a startup own-account worker was ap- proximately 25 percent more likely to have kept proper books if the business were tax-registered or licensed than if the business was not (figure 39) . Similarly, a start- up active microemployer was 15 percent more likely to use the services of a profes- sional accountant for the purpose (figure 39).31 31 Both these differences in the probability of maintaining books are statistically significant. 53 Figure 36 : Percent of Enterprise Owners Who Had Graduated from High School Startups Active enterprises only account Own- work Post- startups Startups 2-4 persons Engaging Post- startups Startups Involuntary enterprises account Own- work Post- startups Startups 2-4 persons Engaging Post- startups 0 20 40 60 80 100 Tax- registered or licensed Unregistered for tax and unlicensed 54 Promoting Entrepreneurship in Namibia: Constraints to Microenterprise Development Figure 37 : Percent of Enterprise Owners Who Had Been Vocationally Trained Startups account Active enterprises only Own- work Post- startups Startups Engaging persons 2-4 Post- startups Startups account Own- Involuntary enterprises work Post- startups Startups Engaging persons 2-4 Post- startups 0 5 10 15 20 25 30 35 Tax registered or licensed Unregistered for tax and unlicensed Figure 38 : Percent of Enterprises Keeping Books Startups account Involuntary enterprises Active enterprises only Engaging Own- work Post- startups Startups persons 2-4 Post- startups Startups account Engaging Own- work Post- startups Startups persons 2-4 Post- startups 0 20 40 60 80 100 Tax- registered or licensed Unregistered for tax and unlicensed Annexures 55 Business Environment Issues: Crime Crime was a major business environment problem for a significant proportion of unregistered and unlicensed microenterprises of all age and size groups in the sample (figures 26 and 28). It was particularly a problem for post-startup active enterprises and for active enterprises run by older or less educated business owners. Crime was rated as a major business obstacle by an even higher percentage of involuntary en- terprises. Crime is a business environment issue, and the provision of protection against crimi- nals by the state should not be rationed. Part of the solution to crime as a business environment problem includes private provision of security and insurance. Provision of secure business premises also could offer a significant part of that solution. 56 Promoting Entrepreneurship in Namibia: Constraints to Microenterprise Development Figure 39 : Percent of Enterprises Using a Professional Accountant Startups Active enterprises only account Own- work 2-4 persons Post- startups Startups Engaging Post- startups Startups account Involuntary enterprises Own- work Post- startups 2-4 persons Startups Engaging Post- startups 0 5 10 15 20 25 Tax- registered or licensed Unregistered for tax and unlicensed 3.3 Constraints Reported by Active Microenterprises Own-account Startups Let us say hypothetically that we are targeting active own-account startups as the beneficiaries of a business support program limited to the group’s most pressing needs. Such a program would focus on access to business space and access to finance. These emphases would be based on the assumption that the most pressing need of a group would be what affects the largest percentage of its membership. The percentage of the unregistered and unlicensed of post-startup active own-ac- count enterprises that complained of lack of access to finance in the survey sample was in fact higher than the percentage of startup own-account enterprises that com- plained about the same issue. Programs aimed at improving access to finance should therefore target both business age groups of active own-account enterprises. Startup microemployers For startup microemployers, skills development is the most pressing issue, followed by lack of business space and of access to public utilities. This is as true of the tax- registered or licensed of the group as it is of the unregistered and unlicensed. On 57 the other hand, access to finance is the most pressing issue for post-startup micro- employers irrespective of tax registration or licensing status, and is followed by lack of business premises. Skills development and crime are also areas of concern for the unregistered and the unlicensed among post-startup active microemployers. Again, if we hypothetically chose startup microemployers as a priority target for a business support scheme limited to the group’s most pressing need, the focus of the scheme should probably be skills development. The complaint rate against lack of skills was larger for the tax-registered or licensed of this group than for any other group of active enterprises in the survey sample. Consequently, the tax-registered or licensed of this group would be part of the target for a skills development program. Constraints youth-owned active enterprises face Businesses of Young High School Graduates This group’s top concern is access to business space and utilities, followed by access to finance (figure 29). Because it had the highest complaint rate against access to business space, this group would be a priority target for programs focused on im- proving access to space. This group also would be a priority target of interventions to improve access to finance. The rationale would be not that it had the highest com- plaint against access to finance in the survey sample (in fact it had the second highest rate), but because it was the most productive of all groups complaining of lack of access to finance and hence would be a more likely source of effective demand for new financial products. Other groups of active enterprises Access to finance and business space are also the major constraints for active enter- prises of youth who had not completed high school. However, the most pressing need of the group is protection against property crime. This group’s reported top concern is lack of access to finance. The group would be a priority target for programs to improve access to finance for a second reason: its complaint rate against lack of access to finance was almost as high as any other group in the survey sample including non-youth-owned enterprises of older high school graduates. The nongraduate business owners also are one of the groups most affected by crime. On the other hand, access to finance is the most complained about issue for active 58 Promoting Entrepreneurship in Namibia: Constraints to Microenterprise Development post-startup microemployers and was rated by the group as far more important than access to business space and utilities (figure 28). This group would be a priority ben- eficiary of a program for improved access to finance. Summary and Conclusion 59 CHAPTER 4 Summary and Conclusion 4.1 Microbusinesses in Namibia Active Enterprises as Potential Markets for BDS This report has highlighted the sharp contrast that exists between active microenter- prises and involuntary enterprises in terms of productivity and development poten- tial. The degree of contrast is not surprising given the underlying difference between the two groups’ business motives. The contrast may have far-reaching implications for the scope of programs of interventions for the development of markets in finan- cial products and BDS tailored to the needs of the sector. It suggests that, in prin- ciple, support programs are probably most appropriate for the businesses of active entrepreneurs. On the other hand, more appropriate interventions for the benefit of involuntary entrepreneurs would seem to be those relating to the demand side of job creation and markets in training programs in labor market skills. Productivity and growth patterns in the survey data suggest that only active enterprises have a realistic chance of evolving into viable and growth-oriented businesses that will have sustain- able effective demand for these financial products and BDS over the long term. Sup- porting active enterprises that manage to grow successfully will also provide more employment opportunities for the involuntary entrepreneurs. Nevertheless, the subpopulation of active microenterprises is extremely heterogene- ous in enterprise capabilities and constraints. This diversity will need to be taken into account in the design of public support programs. Indeed, it may be advisable 60 Promoting Entrepreneurship in Namibia: Constraints to Microenterprise Development to concentrate initial investments in the participation of the more productive and growth-oriented segments of the subpopulation in the evolving markets. The report has identified such segments in terms of characteristics of both businesses and their owners. More Capable Active Enterprises Youth-owned active enterprises in general, and those of young high school gradu- ates in particular, constitute the most productive and growth-oriented group. Youth- owned business should be a target group for future public support. Efforts directed at businesses of older high school graduates also offer much promise. Youth-owned active enterprises and active enterprises of older high school graduates constitute 20 percent and 4 percent, respectively, of the pilot survey sample. Youth-owned active enterprises largely overlap what we have termed “startup active enterprises,� defined as active enterprises that came into existence within the last five years. Startup active enterprises are as growth-oriented and productive as active enterprises of young high school graduates. This finding is not surprising since high school graduates account for a high proportion of startups. Future public support programs should also concentrate on inducing the participation of startup active enterprises. A minority of these enterprises is own-account enterprises, but more than two-thirds of them are microemployers (engage two-four people). Post-startup active microemployers are also a relatively productive and growth-oriented group. Startup active enterprises and post-startup active microemployers constitute 14 per- cent and 8 percent, respectively, of the sample. Together, they overlap the combined subsamples of youth-owned active enterprises. The basic message of this report is therefore that intervention programs for the de- velopment of markets in financial services and BDS for microenterprises would prob- ably have the highest return when applied to youth-owned active enterprises. This group constitutes approximately 20 percent of the pilot survey sample and overlaps the subpopulation of startup active enterprises. The second potential target of the programs where returns are likely to be relatively high is active enterprises of older high school graduates, which constitutes approximately 4 percent of the sample. Involuntary Enterprises Involuntary microenterprises constitute as much as 75 percent of Namibian micro- businesses. For given levels of education and work experience of business owners, given the education and experience of owners, location advantages, and line of busi- Summary and Conclusion 61 ness, involuntary enterprises consistently underperform active entrepreneurs in both productivity and growth by very large margins. The policy challenge that involuntary entrepreneurs poses is how to integrate the younger workers into the formal labor market through training and skills develop- ment schemes as well as schemes designed to expand formal private sector employ- ment. In this context, it is very significant that this subgroup of business owners is overwhelmingly dominated by young people. Some 84 percent of the groups are age 29 years or less. The youth of this group means that, in principle, the majority are trainable in new labor market skills. This conclusion is reinforced by the fact that about 60 percent of the group have been in business for fewer than five years, and are own-account workers. These fac- tors may mean that they are not too locked into their current occupation to join or rejoin the formal labor market. This leaves approximately 15 percent of the group who have been in their current occupations for too long and probably are too old to be retrained for a labor market career. These workers probably would benefit more from business support schemes than from schemes for labor market training. The question is really whether the businesses of this last group are dynamic and pro- ductive enough to ultimately provide effective demand for microfinancial products and micro-BDS. Unfortunately, we do not have the data needed to answer this ques- tion. What we can say at this point is that active enterprises in general and certain segments of them in particular, are far more likely eventually to provide the market for these products and services than involuntary enterprises. If public investments in developing these markets have to be prioritized to enterprises in which the return to the efforts is most likely to be positive, then priority should be given to investing in the participations of active enterprises in the markets over investing in the participa- tion of involuntary enterprises. 4.2 Constraints to Business Development Youth-Owned Active Enterprises The survey shows that youth-owned active enterprises rate lack of access to financ- ing, business space and utilities, and skills as the major constraints to business de- velopment. However, the weight they attach to each of these constraints relative to the others depends on the business owners’ education. For example, business space and access to public utilities is the top concern for active enterprises of high school graduates, followed by access to finance. Although it rates skills and security of prop- 62 Promoting Entrepreneurship in Namibia: Constraints to Microenterprise Development erty as important issues as well, this group is far less concerned about either of these two issues than other active enterprises. In contrast, businesses of active young entrepreneurs who had not completed high school form the group that is most affected by property crime, lack of access to busi- ness space, and access to finance, in that order. Active Startups Looking at differences in needs from another perspective, namely, across the age groups of businesses, rather than the age groups of their owners, we see a high degree of interaction between the tax registration and licensing status of active enterprises and the relative weights that their owners attach to different constraints to business development. In particular, as the most productive age group of active enterprises, active startups that are registered for tax or hold a license are more likely to be con- strained by business space and access to public utilities than they are by financing, although both constraints top their list of concerns. In contrast, access to finance is as much of a constraint as lack or shortage of business space and utilities for active startups that are not registered for tax and do not carry a business license. Formalization and Access to Services Priority needs vary by tax registration and licensing status because whether or not a business is formal seems to be an important determinant of its access to markets and services. In particular, formal businesses are more likely to have better access to finance, operate from nonresidential business premises connected to public utili- ties, and be less exposed to property crime (probably because of the better location of their activities and assets). Moreover, formal microenterprises are far more pro- ductive than informal ones, in part because of their better access to services. Thus, microenterprises’ access to BDS might be helped by promoting greater formaliza- tion of businesses by removing some of the impediments to registration that survey respondents cited. The most common reasons that respondents gave for not registering their businesses included the desire to avoid four things: paying taxes, compliance with labor laws, prohibitive registration fees, and the cost of compliance with other aspects of busi- ness regulation. Respondents who cited any of these reasons also reported that the lack of official status and recognition that not having registered or not holding a Summary and Conclusion 63 license entailed also would bar them from access to key services and markets. The reason that they did not register regardless was that they did not think that there were services and products whose value would outweigh the anticipated costs of becoming and staying registered or licensed. 4.3 Next Steps: Toward Support Programs for Active Microenterprises The information that the pilot survey has generated on the various categories of microenterprises could be useful input to future efforts to make available new fi- nancial products and new BDS to active microenterprises in Namibia. An essential component of the efforts would be a formal assessment of the market for existing and potential products and services among the two most productive and growth- oriented groups of active enterprises identified in this report, namely, active startups and active youth-owned enterprises, with a particular focus on microemployers and businesses owned by young high school graduates. The Donor Committee (2001) guidelines define the scope for formal market assess- ments to include three analytic tasks: (i) evaluating a target group’s awareness and willingness and ability to pay for existing products, (ii) evaluating the group’s willing- ness to pay for potential products, and (iii) assessing the potential for crowding out private demand or supply by public interventions in markets. The main findings of this report will be useful input to the design of tasks (i) and (ii. The tasks will require much more data on constraints to enterprise development than have been generated by the pilot survey. The additional data will have to be collected through focus group discussions with microenterprise owners within each group, more open in-depth in- terviews with enterprise owners and BDS providers, market observation, and focused market surveys (SEEP Network 2005). 64 Promoting Entrepreneurship in Namibia: Constraints to Microenterprise Development CHAPTER 5 References 1. Committee of Donor Agencies for Small Enterprise Development. 2001. “Busi- ness Development Services for Small Enterprises: Guiding Principles for Donor Intervention.� World Bank. 2. Gelb, A., T.A. Mengistae, R. Ramachandran, and M. Shah. 2009. “To Formalize or Not to Formalize? Comparisons of Microenterprise Data from Southern and East Africa� Center for Global Development Working Paper 175 July. 3. Government of Namibia. 2004. “Small and Medium Enterprise Development Program.� Ministry of Trade and Industry, Windhoek. 4. Government of Namibia. 2008. “Draft Private Sector Development Policy.� Min- istry of Trade and Industry, Windhoek. 5. Government of Namibia. 2010. “Labor Force Survey Report 2008.� Ministry of Labor. Windhoek. 6. SEEP Network. 2005. International Labour Organization. www.seepnetwork.org. 7. World Bank. 2007. World Development Report 2010: Development and the Next Generation. World Bank: Washington, DC. Annexures 65 ANNEX 1: Regression Analysis of Covariates of Reported Major Constraints to Growth The results reported in chapter 3 of the report, highlighting differences in constraints among different types of microenterprises, are based on regression analyses available on request. Annex tables A1, B1, and C1 illustrate some of those analyses. In those tables we report maximum likelihood estimates of univariate models in which the probability of a business reporting access to finance, access to business space, access to utilities, skills, or crime as a major constraint to growth is a function of the char- acteristics of the business and of its owner subject to a standard normal error. Each entry of the table measures the marginal effect of a change in a given characteristic on the probability of a factor being reported as a major constraint by a business. The model reported in table A1 states that one in every two enterprise in the sample would report access to finance as a major constraint, or that there is a 50 percent chance that a randomly selected enterprise would report access to finance as a major constraint. However, the second column of the table also suggests that the probabil- ity of reporting access to finance as a major constraint is 10 percentage points lower for active microenterprises than it is for involuntary enterprises when we control for differences in business owners’ characteristics between two groups in terms of schooling, experience, and gender. Part of the reason that active enterprises are less likely to report access to finance as a major constraint to growth is that they are more likely to be registered for tax or hold a license (column 4). Being registered for tax or holding a license itself is associated with the probability of reporting access to finance 66 Promoting Entrepreneurship in Namibia: Constraints to Microenterprise Development as a major constraint being lower by 14 percentage points when we control for busi- ness motive and for other characteristics of the business owner. Some of the association between enterprise ratings of access to finance as a constraint and business motive and business formality has to do with the fact that registered or licensed active enterprises tend to be younger and larger. Businesses that are most likely to rate access to finance a major constraint tend to fall in the 5- to 10-year age group. Startups and established businesses are less likely to complain of inadequate access to finance. Own-account enterprises are also more likely to rate access to fi- nance as a major constraint than microemployers. Once we control for key characteristics of businesses and of their owners and re- gions of location, there is not much difference in the rating of access to finance as a constraint by line of business. However, businesses in the north, particularly those sampled from Omusati and Oshana, are much more likely to complain of inadequate finance than those in the Windhoek area (that is, those in Khomas). The model reported in table B1 states that one in every two microenterprises in the sample would rate business space as a major constraint to growth. The chances of a business rating business space as a major constraint is also about 18 percentage points lower for active enterprises than it is for involuntary enterprises. This is given the business owners’ schooling, age, and gender and holds up irrespective of whether we control for the registration and licensing status of the business. Registration and licensing status itself is associated with a probability of rating business space as a ma- jor constraint that is about 17 percentage points smaller, given business motive and the schooling, age, and gender of the business owner. About half of this association between registration and licensing status and being constrained by business space reflects industry and location effects, whereby businesses in retail trade and other services and those in the Windhoek area are less likely to complain of the constraint. In Table C1 we see that, overall, access to electricity is not considered to be as much of a constraint as access to finance and access to business space are. At one in five, the proportion of those rating access to electricity as a constraint is relatively small. However, here also active enterprises and registered or licensed enterprises are sig- nificantly less likely to complain of the constraint given characteristics of businesses and their owners. Once we control for those characteristics, the probability that a business would rate access to electricity as a major constraint does not vary much by line of business. Region of location is also less of a factor here, although businesses in Ohangwena are more likely to complain of the constraint by about 20 percentage points. Annexures 67 Table A 1 :Probit Model of Rating Finance as a Major Constraint – Maximum Likelihood Estimate of Marginal Effects (1) (2) (3) (4) (5) Enterprise Characteristics: Active enterprise -0.078 -0.100 -0.069 -0.096 -0.083 (1.43) (1.77) (1.26) (1.69) (1.41) 5-10 yrs in business 0.150 (2.50)* More than 10 years in business 0.057 (0.79) Employs 2-4 people -0.079 (1.48) Registered for tax/licensed -0.082 -0.141 -0.133 (1.84) (2.94)** (2.43)* Line of business Manufacturing/crafts 0.081 (0.68) Retail trade 0.068 (0.82) Other services 0.015 (0.17) Region Omusati 0.154 (2.33)* Ohangwena 0.075 (0.94) Oshana 0.179 (2.88)** Characteristics of the business owner Female 0.110 0.103 0.089 (2.45)* (2.27)* (1.87) 24-25 years old 0.175 0.195 0.146 (3.37)** (3.74)** (2.34)* 30 years or older 0.137 0.163 0.160 (2.31)* (2.71)** (2.14)* Completed middle school 0.061 0.096 0.121 (1.02) (1.56) (1.92) High school graduate 0.016 0.077 0.069 (0.29) (1.31) (1.13) Predicted probability of finance being a major constraint for the typical enterprise**** 0.5 0.5 0.5 0.5 0.5 Observations 512 512 512 512 512 Log likelihood -353 -344 -352 -340 -329 Absolute value of z-statistics in parentheses * significant at 5% level; ** significant at 1% level ****The typical enterprise is the business with sample average values for all characteristics. 68 Promoting Entrepreneurship in Namibia: Constraints to Microenterprise Development Table A 2 : Probit Model of Rating Business Space as a Major Constraint – Maximum Likeli- hood Estimate of Marginal Effects (1) (2) (3) (4) (5) Enterprise Characteristics: Active enterprise -0.167 -0.182 -0.158 -0.182 -0.163 (3.17)** (3.41)** (2.95)** (3.38)** (2.89)** 5-10 years in business 0.004 (0.07) More than 10 years in business -0.113 (1.58) Employs 2-4 people -0.137 (2.62)** Registered for tax/licensed -0.117 -0.169 -0.086 (2.64)** (3.44)** (1.51) Line of business Manufacturing/crafts -0.101 (0.86) Retail trade -0.207 (2.56)* Other services -0.228 (2.63)** Region Omusati -0.108 (1.68) Ohangwena -0.169 (2.15)* Oshana -0.097 (1.64) Characteristics of the business owner: Female 0.030 0.020 -0.003 (0.68) (0.44) (0.07) 24-25 years old 0.028 0.052 0.086 (0.52) (0.97) (1.40) 30 years or older 0.103 0.136 0.169 (1.74) (2.29)* (2.42)* Completed middle school -0.062 -0.024 -0.016 (1.04) (0.39) (0.25) High school graduate 0.002 0.078 0.092 (0.04) (1.30) (1.51) Predicted probability of business space being a major constraint for the typical enterprise*** 0.49 0.49 0.49 0.49 0.49 Observations 512 512 512 512 512 Log likelihood -351 -348 -347 -342 -332 Absolute value of z-statistics in parentheses * significant at 5% level; ** significant at 1% level ***The typical enterprise is the business with sample average values for all characteristics. Annexures 69 Table A 3 : Probit Models of Reporting Various Major Constraints – Maximum Likelihood Estimates of Marginal Effects Probit of access to electricity Probit of Probit of being a major growth constraint skills as a crime as a constraint constraint (1) (2) (3) (4) (5) (6) (7) Enterprise Characteristics Active enterprise -0.061 -0.047 -0.053 -0.049 -0.073 -0.023 0.068 (1.47) (1.12) (1.26) (1.16) (1.80) (0.49) (1.24) 5-10 yrs in business -0.044 0.038 -0.047 (0.93) (0.65) (0.88) More than 10 years in business -0.034 0.112 -0.043 (0.58) (1.62) (0.68) Employs 2-4 people -0.123 0.017 -0.106 (2.80)** (0.39) (2.19)* Registered for tax/licensed -0.227 -0.180 -0.113 -0.080 0.071 (6.23)** (4.59)** (2.19)* (1.71) (1.32) Line of business Manufacturing/crafts -0.084 -0.116 -0.128 (0.86) (1.61) (1.47) Retail trade -0.084 -0.015 0.109 (1.02) (0.21) (1.46) Other services -0.033 -0.117 0.045 (0.36) (1.83) (0.57) Region Omusati -0.021 0.122 0.089 (0.27) (1.69) (1.46) Ohangwena 0.195 0.272 0.383 (2.20)* (3.24)** (5.28)** Oshana -0.039 0.178 -0.010 (0.55) (3.11)** (0.20) Characteristics of the business owner Female 0.112 0.103 0.079 -0.012 -0.019 (3.08)** (2.86)** (1.74) (0.32) (0.43) 24-25 years old -0.089 -0.070 0.002 -0.071 0.040 (2.69)** (2.04)* (0.03) (1.46) (0.62) 30 years or older -0.051 -0.026 0.036 -0.039 0.107 (1.24) (0.60) (0.51) (0.65) (1.41) Completed middle school -0.126 -0.092 -0.093 0.023 -0.027 (3.62)** (2.53)* (2.18)* (0.41) (0.46) High school graduate -0.161 -0.087 -0.060 0.040 -0.016 (4.01)** (1.98)* (1.14) (0.77) (0.28) Predicted probability 22 0.2 0.2 0.19 0.18 0.24 0.28 Observations 512 512 512 512 512 512 512 Log likelihood -267 -249 -247 -239 -223 -263 -291 Absolute value of z-statistics in parentheses; * significant at 5% level; ** significant at 1% level 70 Promoting Entrepreneurship in Namibia: Constraints to Microenterprise Development ANNEX 2: The World Bank Enterprise Survey Namibia Micro Enterprise Survey (2009) – Household Based 22 July 2009 • FINAL [A HOUSEHOLD BASED ENTERPRISE IS AN ENTERPRISE WHOSE MAIN BUSINESS LOCATION IS IN THE OWNER’S HOUSE - THIS INCLUDES FIRMS WITHOUT A FIXED LOCATION (E.G., ITINERANT TRADERS, TRUCKERS) THAT USE THE OWNERS HOUSE AS THE MAIN BUSINESS LOCATION.] A: CONTROL INFORMATION [A.1 TO A.4 TO BE COMPLETED BEFORE INTERVIEW] A.1 Location a. Region a1a b. Constituency a1b c. Town/Settlement a1c d. Village/Neighbourhood a1d A.2 Is this a household-owned enterprise? a2 Yes 1 No 2 Does not apply -7 A.3 If yes, what is the household identification number for the matching house- a3 hold? The World Bank Enterprise Survey 71 A.4 What is main business location for enterprise? a4 Located at building other than owner’s residence 1 Located at owner’s residence 2 No fixed location 3 A.5 Industry a5 Manufacturing Food and beverages 15 Textiles 17 Garments 18 Chemicals 24 Plastics & rubber 25 Nonmetallic mineral products 26 Basic metals 27 Fabricate metal products 28 Machinery and equipment 29 Electronics (31 & 32) 31 Other manufacturing 2 Services Wholesale 51 Retail 52 IT 72 Hotels and restaurants 55 Other services 50 Other Construction 45 Transport (60-64) 60 A.12 Time face-to-face interview starts: a12 MINUTE MINUTE MONTH MONTH AM/PM HOUR HOUR DAY DAY on average, how many paid full-time workers (excluding family members but includ- ing temporary workers), paid family members, unpaid family members, paid part- time workers (excluding family members and unpaid workers), and unpaid workers during normal activity month 72 Promoting Entrepreneurship in Namibia: Constraints to Microenterprise Development A.6 Size-1: Number of paid persons who are engaged in the enter- prise full time a6 (excluding family members but including temporary workers): A.7 Size-2: Number of paid persons engaged in the enterprise part time a7 (excluding family members and unpaid workers): A.8 Size-3: Number of unpaid employees: a8 A.9a Size-4a: Number of paid family members engaged in the enter- a9a prise: A.9b Size-4b: Number of unpaid family members engaged in the en- a9b terprise: A.10 Does the enterprise maintain accounting books? This can be a book or a10 sheet where records are kept and updated. Yes 1 No 2 A.11 If the enterprise maintains accounting books, who is the bookkeeper? a11 The business owner 1 Some other person- professional bookkeeper 2 Some other person - not a professional bookkeeper -7 The World Bank Enterprise Survey 73 B: GENERAL INFORMATION [READ THE FOLLOWING TO RESPONDENT BEFORE PROCEEDING.] The goal of this survey is to gather information and opinions about the invest- ment climate in this country. Ultimately, the information gathered here will help the World Bank advise governments to develop policies and programs that enhance employment and economic growth. The information obtained here will be held in the strictest confidentially. Neither your name nor the name of your business will be used in any document based on this survey. B.1 What is this firm’s current legal status? b1 a. Sole proprietorship 1 b. Close Corporation 2 c. Partnership 3 d. Private Company/(Pty) Limited 4 e. Public Company 5 f. Co-operative Society 6 g. Other (please specify): b1x B.2 What percent of this firm does the largest owner or owners own? B2 Percent held by largest owner % B.3 Are any of the owners female? B3 Yes 1 No 2 B.4. What is the national origin of the largest owner? B4 Namibian 11 Angolan 1 Zimbabwean 2 South African 3 Other African 4 Indian 5 Lebanese/Middle Eastern 6 Other Asian (NOT CHINESE OR INDIAN) 7 European/Caucasian 8 Chinese 9 Other 10 Don’t Know -9 74 Promoting Entrepreneurship in Namibia: Constraints to Microenterprise Development [READ THE FOLLOWING TO RESPONDENT BEFORE PROCEEDING.] I want to proceed by asking you about the establishment: when it started operations, management’s experience in this sector, and quality certifications it may have obtained. B.5 In what year did this establishment begin operations in this b5 country? [RECORD YEAR IN FOUR DIGITS.] Year establishment began operations B.6 How many full-time employees did this establishment employ when it started b6 operations? [RECORD NUMBER.] Full-time employees at start-up B.6b How much was invested in starting up the business? [RECORD IN NAD.] b6b Start up investment Don’t know -9 B.6c Was this establishment registered when it began operations in this b6c country? Yes, with MTI 1 Yes, with Local Authority 2 Yes, with other (please specify): 3 Yes, with MTI and Local Authority 4 No 5 Don’t know -9 B.6d In what year was this establishment formally registered? b6b [RECORD YEAR IN FOUR DIGITS.] Year establishment formally registered Don’t know [DNR] -9 Establishment has never been registered [DNR] -7 B.7 How many years of experience working in this sector does the manager of the business have? [RECORD NUMBER OF YEARS. IF LESS THAN ONE YEAR, RECORD b7 1.] Manager’s experience in sector B.7a What is the highest level of education of the manager? b7a No formal Education 1 Completed Primary School 2 Started but did not complete Secondary School 3 Completed Secondary School 4 Vocational Training 5 Some university training 6 Don’t Know -9 The World Bank Enterprise Survey 75 B.7a1 Why did you set up this business? YES NO a. Because I could not find alternative employment 1 2 7a11 b. Because I could not earn enough working for someone else 1 2 7a12 c. Because I love running this business 1 2 7a13 d. Because this is work that I am best at 1 2 7a14 e. Some other reason 1 2 7a15 B.7b Is the manager a member of the household that owns the enterprise? b7b Yes 1 No 2 Don’t know -9 B.7c Where does the manager/owner reside? b7c In this Village 1 Same Constituency, different Village 2 Same Region, different Constituency 3 Different Region 4 Abroad 5 Don’t know -9 C: INFRASTRUCTURE AND SERVICES [READ THE FOLLOWING TO RESPONDENT BEFORE PROCEEDING.] Now, we turn to the establishment’s operations in the last financial year. The questions that follow assess how infrastructure and infrastructure services affect this establishment. C.1 In the last financial year, did this establishment use its c1 own transport to make shipments to its customers? Yes 1 GO TO QUESTION C.2 No 2 GO TO QUESTION C.9 Not applicable -7 GO TO QUESTION C.9 Don’t know -9 GO TO QUESTION C.9 C.2 In the last financial year, what percent of shipments, in terms of all annual shipments to customers, were transported by this establishment’s c2 own transport? [RECORD PERCENTAGE.] Percent shipped with own transport % 76 Promoting Entrepreneurship in Namibia: Constraints to Microenterprise Development C.9 If this household has an electrical connection to the grid, please estimate the losses as percent of annual sales that resulted because of power outages OR esti- mate total annual losses as a result of power outages. [RECORD amount or %, NOT BOTH] If you cannot tell us the percentage or amount, please tell us how often you experience power outages per week. [RECORD NUMBER. IF NONE, RECORD 0.] C.9a1 Loss as percent of total annual sales due to power out- % c9a1 ages or C.9a2 Estimated total annual losses as a result of power outages NAD c9a2 OR instead of recording the percentage or amount, record how often they experienced outages per week C.9b How often do you experience outages per week? c9b C.22 Now turning to the current situation. What type of communication technologies with clients or YES NO D/K suppliers does this establishment use? a. E-mail 1 2 -9 c22a b. Its own website 1 2 -9 c22b c. Cell phone 1 2 -9 AIc22c d. Landline 1 2 -9 c22d In your opinion, to what extent do the following factors present obstacles to the cur- rent operations of this establishment? No Very Minor Moder- Major Severe Don’t Not Ap- Does Obsta- Obsta- ate Obsta- Obsta- Know ply cle cle Obstacle cle cle [DNR] [DNR] C30 Access to 0 1 2 3 4 -9 -7 c30a electricity C31 Reliability of 0 1 2 3 4 -9 -7 c31a electricity supply C32 Access to 0 1 2 3 4 -9 -7 c32a water C33 Reliability of 0 1 2 3 4 -9 -7 c33a water supply D: SALES AND SUPPLIES [READ THE FOLLOWING TO RESPONDENT BEFORE PROCEEDING.] The next topic to be covered is how and where this establishment makes it sales and how and from where this establishment obtains inputs required for produc- tion. D.2 In the last financial year, what were this establishment’s total annual sales? d2 [RECORD IN NAD.] Last complete financial year’s total sales Don’t know -9 Refused -8 The World Bank Enterprise Survey 77 RD.2a-l Please indicate the business activity (in terms of value of total sales in each month) in your enterprise for each month in the following table. [USE 0 TO 3 TO AN- SWER, WERE 0 = INACTIVE; 1=LOW; 2 = NORMAL; AND 3 = HIGH.] Rd2a Rd2b Rd2c Rd2d Rd2e Rd2f Rd2 Rd2h Rd2i Rd2j Rd2k Rd2l Jan. Feb. Mar. Apr. May June July Aug. Sept. Oct. Nov. Dec. RD.23m-o For the last financial year, what was the typical/average monthly sales corresponding to the TYPICAL activity levels below: [RECORD NAD.] MONTHLY SALES ACTIVITY m. Low Rd2m n. Normal Rd2n o. High Rd2o D.3 In the last financial year, what percent of this establishment’s sales were: [PLEASE ASK IN ORDER THAT ITEMS APPEAR IN TABLE. CHECK THAT TOTAL ADDS UP TO 100%.] a. In -country sales % d3a b. Indirect exports [sold domestically to third party that exports products] % d3b c. Direct exports % d3c 100% D.10 In the last financial year, what percent of the consignment value of products this establishment shipped to supply domestic markets was lost while in transit because of theft? [IF NO LOSSES, RECORD O.] d10 Losses (as percent of consignment value) due to theft % Not applicable – no products shipped -7 D.11 In the last financial year, what percent of the consignment value of products this establishment shipped to supply domestic markets was lost d11 while in transit because of breakage or spoilage? [IF NO LOSSES, RECORD O.] Losses (as percent of consignment value) due to breakage or spoilage % Not applicable – no products shipped -7 AFD.11a For the last financial year, referring to the primary supplier of this establishment’s main input, how long have you known this supplier? [IF LESS AFd11a THAN ONE YEAR, RECORD 0.] Years of relations with primary supplier In your opinion, to what extent do the following factors present obstacles to the current operations of this establishment? Very No Minor Moder- Major Severe Don’t Does ate Obsta- Obsta- Obsta- Obsta- Know Not Obsta- [DNR] Apply cle cle cle cle cle [DNR] D30.a Transportation of goods, supplies, and 0 1 2 3 4 -9 -7 d30a inputs D30.b Customs and 0 1 2 3 4 -9 -7 d30b trade regulations 78 Promoting Entrepreneurship in Namibia: Constraints to Microenterprise Development E: DEGREE OF COMPETITION AND INNOVATION E.11 Does this establishment compete against unregistered or informal e11 firms? Yes 1 No 2 Don’t know -9 In your opinion, to what extent does the following factor present obstacles to the current operations of this establishment? No Minor Moder- Major Very Don’t Does Obsta- Obsta- ate Obsta- Severe Know Not cle cle Obstacle cle Obsta- [DNR] Apply cle [DNR] E.30 Practices of competitors in the 0 1 2 3 4 -9 -7 e30 informal sector F: CAPACITY [READ THE FOLLOWING TO RESPONDENT BEFORE PROCEEDING.] We now turn to the topic of this establishment’s capacity utilization in the last fi- nancial year. RF.2a In the last financial year, how many hours per week did this establishment nor- mally operate? a. Typical hours of operation in a week, low activity Rf2a b. Typical hours of operation in a week, normal activity Rf2b c. Typical hours of operation in a week, high activity Rf2c G: LAND AIG.7 Over the last 12 months, has the establishment had to change its main business location due to a lack of secure title to its land or building g7 (i.e., it has been forced out by officials, landlord, others with a claim)? Yes 1 No 2 Don’t know -9 In your opinion, to what extent does the following factor present obstacles to the current operations of this establishment? No Minor Moder- Major Very Don’t Does Obsta- Obsta- ate Obsta- Severe Know Not cle cle Obstacle cle Obsta- [DNR] Apply cle [DNR] G.30 Access to land 0 1 2 3 4 -9 -7 g30a The World Bank Enterprise Survey 79 SAG31 What aspects of access to land are the biggest obstacle to your firms Zg31a current operations? Land Registration Process 1 Cost of Land 2 Availability of infrastructure (power, water) 3 Availability of infrastructure (access to transportation) 4 Land use/Zoning Plan 5 Cost of Transfer 6 Transfer of Land/Title 7 Government Ownership of Land 8 I: CRIME [READ THE FOLLOWING TO RESPONDENT BEFORE PROCEEDING.] We now turn to questions on crime and how crime affects the operations of this establishment. I.1 In the last financial year, did this establishment pay for security, i1 for example equipment, personnel, or professional secu- rity services? Yes 1 GO TO QUESTION I.2 No 2 GO TO QUESTION I.3 Don’t know -9 GO TO QUESTION I.3 I.2 In the last financial year, what percent of its total annual sales is paid for security [RECORD PERCENTAGE.], OR what is the total annual cost of security [IN NAD] [PROVIDE EITHER ONE OR THE OTHER, NOT BOTH.] a. Percent of total annual sales for security % i2a b. Total annual cost of security i2b I.3 In the last financial year, has this establishment experi- enced i3 losses as a result of theft, robbery, vandalism, or arson? Yes 1 GO TO QUESTION I.4 No 2 GO TO QUESTION I.30 Don’t know -9 GO TO QUESTION I.30 I.4 For the last financial year, what are the estimated losses as a result of theft, robbery, vandalism, or arson that occurred on establishment’s premises calculated as a percent of annual sales [RECORD PERCENTAGE.] OR the total annual value of the losses [IN NAD] [PROVIDE EITHER ONE OR THE OTHER, NOT BOTH.] a. Losses from theft as percent of total annual sales % i4a b. Total annual value of losses from theft i4b 80 Promoting Entrepreneurship in Namibia: Constraints to Microenterprise Development I.30. In your opinion, to what extent do the following factors present obstacles to the current operations of this establishment? Very No Minor Moder- Major Severe Don’t Does Not Obsta- Obsta- ate Obsta- Obsta- Know Apply cle cle Obstacle cle cle [DNR] [DNR] I.30 Crime, theft ,and 0 1 2 3 4 -9 -7 i30 disorder J: BUSINESS-GOVERNMENT RELATIONS [READ THE FOLLOWING TO THE RESPONDENT BEFORE PROCEEDING.] The following questions assess how establishments, such as this one, deal with Government officials, their agencies, and the rules and regulations these agencies are designed to implement and enforce and the court system. J.1 I am going to read some statements that describe the courts and the way government officials interpret laws and regulations that affect this establishment’s business. For each statement, please tell me if you Strongly disagree, Tend to disagree, Tend to agree, or Strongly agree. [READ EACH DESCRIPTION AND ASK:] Strong- Tend to Strong- Don’t Do you Strongly disagree, Tend to ly disa- Tend to ly disagree, Tend to agree, or Strongly disa- gree agree agree Know [DNR] agree? gree “The court system is fair, impartial, and 1 2 3 4 -9 h7a uncorrupted� “Government officials’ interpretations of the laws and regulations affecting this 1 2 3 4 -9 j1a establishment are consistent and pre- dictable.� “Corruption is a greater problem today 1 2 3 4 -9 j1b than it was one year ago� J.2 In a typical week over the last 12 months, what percentage of the busi- ness manager’s total time was spent in dealing with requirements imposed by Government regulations, such as tax administration, labour relations, j2 licensing and registration, including dealings with officials and completing forms? [RECORD PERCENTAGE. IF NO TIME, RECORD 0.] Manager’s time spent in dealing with regulations % J.3 Over the last 12 months, was this establishment visited j3 and/or inspected by tax officials? Yes GO TO QUESTION 1 J.4 No 2 GO TO QUESTION J.7 Don’t know -9 GO TO QUESTION J.7 J.4 Over the last 12 months, how many times were this establishment either j4 inspected by tax officials or required to meet with them?[RECORD NUMBER.] Times inspected or met with tax officials J.5 In any of these inspections or meetings was a gift or informal payment j5 expected or requested? Yes 1 The World Bank Enterprise Survey 81 No 2 Don’t know -9 Refused -8 J.7 We’ve heard that establishments are sometimes required to make gifts or infor- mal payments to public officials to “get things done� with regard to customs, taxes, licenses, regulations, services, etc. On average, what percent of total annual sales [IN PERCENT], or estimated total annual value [IN NAD], do establishments like this one pay in informal payments or gifts to public officials for this purpose? [PROVIDE EITHER ONE OR THE OTHER, NOT BOTH. IF NO PAYMENTS OR GIFTS ARE PAID, RECORD 0. IF REFUSED, RECORD -8.] Percent of total annual sales paid as informal payment % j7a Total annual informal payment j7b J.13 Over the last two years, did this establishment submit j13 an application to obtain an operating license? Yes 1 GO TO QUESTION J.14 No 2 GO TO QUESTION J.16 Don’t know -9 GO TO QUESTION J.16 J.14 In reference to the application for an operating license, approximately what was the wait, in days, experienced to obtain that license from the day j14 this establishment applied for it to the day it was granted? [IF LESS THAN ONE DAY, RECORD 1. IF STILL IN PROCESS, RECORD -6. IF APPLICATION DENIED, WRITE -5.] Wait for operating license J.15 In reference to that application for an operating license, was an infor- j15 mal gift or payment expected or requested? Yes 1 No 2 Don’t know -9 Refused -8 ZAJ16. Does this establishment need to renew licenses and/or permits periodically (e.g., every year, every two j15 years, etc.)? Yes 1 GO TO QUESTION J.16a No 2 GO TO QUESTION J.30 [ASK IF YES:] J.16a Number of permits/licenses to be renewed at Local Govern- j16a ment level J.16b Average time needed to renew permits/licenses at Local Gov- j16b ernment level [IN DAYS] J.16c Number of permits/licenses to be renewed at National Govern- j16c ment level 82 Promoting Entrepreneurship in Namibia: Constraints to Microenterprise Development J.16b Average time needed to renew permits/licenses at National j16d Government level [IN DAYS] J.30 As I list some of many factors that can affect the current operations of a business, please look at this card and tell me to what extent do the following factors present obstacles to the current operations of this establishment? [ROTATE OPTIONS.] Very No Minor Moder- Major Severe Don’t Does Not Obsta- Obsta- ate Obsta- Obsta- Know Apply cle cle Obstacle cle cle [DNR] [DNR] a. Tax rates 0 1 2 3 4 -9 -7 j30a b. Tax administration 0 1 2 3 4 -9 -7 j30b c. Business licensing and 0 1 2 3 4 -9 -7 j30c permits e. Political instability 0 1 2 3 4 -9 -7 j30e f. Corruption 0 1 2 3 4 -9 -7 j30f g. Courts 0 1 2 3 4 -9 -7 j30g SAj30D. Macroeconomic instability, such as 0 1 2 3 4 -9 -7 SAj30d exchange rate instability and inflation J31 What aspect of macroeconomic instability is the j31 biggest obstacle to your firm’ s current operations? Exchange rate instability 1 Level of the exchange rate 2 Inflation 3 Unstable domestic demand for this establishment’s goods or services 4 Interest rate 5 Other 6 K: FINANCE [READ THE FOLLOWING TO RESPONDENT BEFORE PROCEEDING.] I would like to ask you a few questions about how you finance the operations of this establishment. K.1 In the last financial year, what percent, as a proportion of the value of total an- nual purchases of material inputs or services, were: [CHECK THAT TOTAL ADDS UP TO 100%.] a. Paid for before the delivery? % k1a b. Paid for on delivery? % k1b c. Paid for after delivery? % k1c 100% K.2 In the last financial year, what percent of this establishment’s total annual sales of its goods or services were: [CHECK THAT TOTAL ADDS UP TO 100%.] a. Paid for before the delivery? % k2a The World Bank Enterprise Survey 83 b. Paid for on delivery? % k2b c. Paid for after delivery? % k2c 100% K.3 Over the last financial year, please estimate the proportion of this establishment’s working capital that was financed from each of the following sources? [CHECK THAT TOTAL ADDS UP TO 100%.] a. Internal funds/Retained earnings % k3a b. Borrowed from banks (private and state-owned) % k3bc e. Borrowed from nonbank financial institutions % k3e f. Purchases on credit from suppliers and advances from customers % k3f h. Other (moneylenders, friends, relatives, etc.) % k3hd 100% K.4 In the last financial year, did this establishment pur- chase fixed assets, such as machinery, vehicles, equip- k4 ment, land, or buildings? Yes 1 GO TO QUESTION N.5 No 2 GO TO QUESTION K.30 Don’t know -9 GO TO QUESTION K.30 N.5 In the last financial year, what was the total annual expenditure for purchases of: a. Machinery, vehicles, and equipment (new and/or used) [IN NAD] n5a b. Land and buildings [IN NAD] n5b K.5 Over the last financial year, please estimate the proportion of this establish- ment’s purchase of fixed assets that was financed from each of the following sourc- es? [CHECK THAT TOTAL ADDS UP TO 100%. RECORD PERCENT SOURCES OF INVESTMENT.] a. Internal funds/Retained earnings % k5a i. Owners’ contribution or issued new equity shares % k5i j. Issued new debt (including commercial paper and debentures) % k5j b. Borrowed from banks (private and state-owned) % k5bc e. Borrowed from nonbank financial institutions % k5e f. Purchases on credit from suppliers and advances from customers % k5f h. Other (moneylenders, friends, relatives, etc.) % k5hd 100% 84 Promoting Entrepreneurship in Namibia: Constraints to Microenterprise Development In your opinion, to what extent do the following factors present obstacles to the current operations of this establishment? No Very Minor Moder- Major Severe Don’t Does ate Know Not Obstacle Obsta- Obstacle Obsta- Obsta- [DNR] Apply cle cle cle [DNR] K.30 Access to fi- 0 1 2 3 4 -9 -7 i30 nancing L: LABOUR [READ THE FOLLOWING TO THE RESPONDENT BEFORE PROCEEDING.] Now I would like to ask you a few questions about this establishment’s employ- ees. I’m going to ask you for levels of employment at different points in time. Rl3a_d For the last financial year, on average, how many paid full-time workers (ex- cluding family members but including temporary workers), paid family members, unpaid family members, paid part-time workers (excluding family members and un- paid workers), and unpaid full or part-time workers during, normal activity month? Rl3a_1 Rl3a_2a Rl3a_2b Rl3a_3 Rl3a_4 Paid full-time Paid family Unpaid family Paid part-time Unpaid full- members members or part-time L.10 Over the last financial year, did this establishment run formal training l10 programs for its paid, full-time employees? Yes 1 No 2 Don’t know -9 In your opinion, to what extent do the following factors present obstacles to the cur- rent operations of this establishment? No Very Minor Moder- Major Severe Don’t Does Not Obsta- Obsta- ate Obsta- Obsta- Know Apply cle cle Obstacle cle cle [DNR] [DNR] L30.a Labour 0 1 2 3 4 -9 -7 l30a regulations L30.b Inadequately 0 1 2 3 4 -9 -7 l30b educated workforce The World Bank Enterprise Survey 85 S: AIDS AND SICKNESS S.1 Has sickness affected this establishment’s work- force in any of the following ways in the past 24 YES NO D/K months: a. High absenteeism among workers due to sickness 1 2 -9 AFs1a b. High absenteeism among workers who need to care of family members or friends due to sickness 1 2 -9 AFs1b S.2 Has HIV/AIDS affected this establishment’s workforce in any of the following ways in the past YES NO D/K 24 months: a. High absenteeism among workers due to HIV/AIDS 1 2 -9 AFs2a b. High absenteeism among workers who need to care of family members or friends due to HIV/AIDS 1 2 -9 AFs2b S.3 Now turning to the experience of the last financial year, did this establishment undertake YES NO D/K any of the following activities to prevent HIV/AIDS among employees? a. HIV prevention messages 1 2 -9 AFs3a b. Free condom distribution 1 2 -9 AFs3b S.4 In the last financial year, how much did this establishment spend on all AFs4 AIDS/HIV programs and activities? [RECORD IN NAD.] Cost of all programs and activities 86 Promoting Entrepreneurship in Namibia: Constraints to Microenterprise Development M INVESTMENT CLIMATE CONSTRAINTS TO THE ESTABLISHMENT AND REFORMS [READ THE FOLLOWING TO RESPONDENT BEFORE PROCEEDING.] The next set of questions is designed to get a general picture of your opinion about the investment climate that affects your operations. M.1 You have indicated that several obstacles affect the operation and growth of this establishment. Please tell me the three that you think are currently the biggest problems, beginning with the worst of all three. Most Serious Most Serious Third Most Obstacle Obstacle Obstacle Second Serious OBSTACLES m1a m1b m1c Access to finance (availability and cost) 1 1 1 Access to land 2 2 2 Business licensing and permits 3 3 3 Corruption 4 4 4 Courts 5 5 5 Crime, theft, and disorder 6 6 6 Customs and trade regulations 7 7 7 Access to electricity 8 8 8 Reliability of electricity supply 9 9 9 Access to water 10 10 10 Reliability of water supply 11 11 11 Inadequately educated workforce 12 12 12 Labour regulations 13 13 13 Political instability 14 14 14 Practices of competitors in the informal sector 15 15 15 Tax administration 16 16 16 Tax rates 17 17 17 Transportation of goods, supplies, and inputs 18 18 18 The World Bank Enterprise Survey 87 N PRODUCTIVITY [READ THE FOLLOWING TO RESPONDENT BEFORE PROCEEDING.] The purpose of the following questions is to allow us to estimate the productivity of establishments like this one. Estimates are made at the aggregate level so the information you provide below will be compiled with the information from other establishments. It is important that this information be as accurate as possible. Please provide the following information from the financial statements of this estab- lishment. N.1 In the last financial year, what percent of this establishment’s total annual sales came from the following activities: [CHECK THAT TOTAL ADDS UP TO 100%.] a. Manufacturing % n1a b. Services % n1b c. Other % n1c 100% N.2 For the last financial year, please provide the following information about this establishment: [RECORD IN NAD] a. Total annual cost of labour (including wages, salaries, bonuses, social n2a payments) e. Total annual cost of raw materials and intermediate goods used in pro- n2e duction b. Total annual costs of electricity n2b c. Total annual costs of communications services n2c f. Total annual costs of fuel n2f g. Total annual costs of transport for goods (not including fuel) n2g d. Total annual cost of rental of land/buildings, equipment, furniture n2d N.4 Approximately, in the last financial year, what was the average monthly com- pensation, including benefits when applicable, for full-time workers; part-time workers and paid family members? [RECORD IN NAD.] a. Average monthly compensation for full-time worker n4a b. Average monthly compensation for part-time worker n4b c. Average monthly compensation for paid family member n4c N.7 If this establishment had to hypothetically purchase the land and buildings, and machinery and equipment in use now, as they are in their current condition, how much would it cost to purchase each of the following? [RECORD IN NAD.] a. Machinery vehicles, and equipment n7a b. Land and buildings n7b 88 Promoting Entrepreneurship in Namibia: Constraints to Microenterprise Development R. REGISTRATION AIR.1 [IF APPLICABLE] Has this firm obtained approval or registered its name r1 with Ministry of Trade and with a Local Authority? Yes 1 No 2 Don’t know -9 AIR.2 Has this firm registered with Ministry of Trade and with a Local Authority? r2 Yes 1 No 2 Don’t know -9 AIR.3 [IF APPLICABLE] Has this firm obtained an operating or trade license or r3 otherwise registered for a general business license with any Local Authority? Yes 1 No 2 Don’t know -9 R.4 Has this firm registered with or obtained a tax identification number from r4 the Receiver of Revenue? Yes 1 No 2 Don’t know -9 The World Bank Enterprise Survey 89 R.5 Whether this establishment is registered or not, to what extent, if any, do the fol- lowing factors present obstacles with respect to registering a business? Very No Minor Moder- Major Severe Don’t Does Not Obsta- Obsta- ate Obsta- Obsta- Know Apply cle cle Obstacle cle cle [DNR] [DNR] a. Difficulty of getting information on what you 0 1 2 3 4 -9 -7 R5a need to do to register b. Time to complete 0 1 2 3 4 -9 -7 R5b registration procedures c. Financial cost of completing registration 0 1 2 3 4 -9 -7 R5c procedures c. Minimum capital requirements for 0 1 2 3 4 -9 -7 R5c registered enterprises in my sector d. Financial burden of taxes on registered 0 1 2 3 4 -9 -7 R5d enterprises e. Administrative burden of complying with all 0 1 2 3 4 -9 -7 R5e tax laws for registered enterprises f. Other administrative burdens imposed on registered businesses 0 1 2 3 4 -9 -7 R5f (e.g., inspections and meetings with government officials) g. Strict labour market rules that registered 0 1 2 3 4 -9 -7 R5g businesses must comply with 90 Promoting Entrepreneurship in Namibia: Constraints to Microenterprise Development R6 Whether you are registered or not, do you think that the following things are eas- ier/less expensive for registered/formal enterprises or unregistered/informal firms? 1 = Much easier/much less expensive for registered firms 2 = Easier/less expensive for registered firms 3 = About the same for registered and unregistered firms 4 = Easier/less expensive for unregistered firms 5 = Much easier/much less expensive for unregistered firms [IF DON’T KNOW; RECORD -666 (DNR). IF NOT APPLICABLE; RECORD -777 (DNR).] a. Access to finance 1 2 3 4 5 -666 -777 r6a b. Bribes/Informal payments that firms 1 2 3 4 5 -666 -777 r6b needs to pay to government officials c. Access to and security of premises and 1 2 3 4 5 -666 -777 r6c land d. Access to government benefits or 1 2 3 4 5 -666 -777 r6d incentive programs e. Ability to sell to/buy from formal 1 2 3 4 5 -666 -777 r6e enterprises f. Access to utilities 1 2 3 4 5 -666 -777 r6f THE SURVEY ENDS HERE THANK YOU VERY MUCH FOR YOUR COOPERATION. The World Bank Enterprise Survey 91 [INTERVIEWERS PLEASE ANSWER AT END OF THE INTERVIEW.] A.15 Time face-to-face interview a15 ends: MINUTE MINUTE MONTH MONTH AM/PM HOUR HOUR DAY DAY A.16 It is my perception that the questions regarding opinions and a16 perceptions were answered... Truthfully 1 Somewhat truthfully 2 Not truthfully 3 A.17 The questions regarding figures (productivity and employment a17 numbers)... Are taken directly from establishment records 1 Are estimates computed with some precision 2 Are arbitrary and unreliable numbers 3 INTERVIEWER COMMENTS: (Problems occurred/extraordinary circumstances which could influence results) 92 Promoting Entrepreneurship in Namibia: Constraints to Microenterprise Development SUPERVISORS PLEASE ANSWER. A.18 This questionnaire was completed in... a18 One visit in face-to-face interview with one person 1 STOP INTERVIEW One visit in face-to-face interview with different managers/ 2 GO TO QUESTION A.19 staff Several visits 3 GO TO QUESTION A.19 A.19 [IF OPTION 2 OR 3 IN A.18:] Estimate duration of the whole interview. MINUTE MINUTE HOUR HOUR a19 93 Namibia Administrative Regions 2003