South Africa sitting on a R900 billion goldmine

South Africa’s township economy is estimated to be worth R900 billion. However, this sector’s small and medium-sized enterprises (SMEs) are struggling with infrastructure challenges, raising capital, and formalising their businesses.

This is according to Luncedo Mtwentwe, managing director at Vantage Advisory, who discussed the issue with Stephen Grootes on The Money Show.

Mtwentwe said that, given how volatile and unpredictable markets have been this year, many countries have started considering how to make their local industries more competitive.

The same needs to happen in South Africa, since the country has billions of rands worth of untapped potential in the informal sector.

“You have to unlock the sleeping giant, which is the SME township economy that is massive,” Mtwentwe said. This economy is estimated to be worth over R900 billion, “and that is still an untapped potential”.

The informal economy is dominated by spaza shops, which essentially mimic the formal retail sector and are estimated to be worth around R180 billion annually.

The informal sector alone contributes around R150 billion in cash sales annually. With an estimated 150,000 spaza shops, these businesses collectively contribute as much as 5.2% to South Africa’s GDP and employ 2.6 million people.

Shoppers frequent spaza shops on average four times a week, significantly more than traditional supermarkets, which they visit once a week.

According to Mtwentwe, neither South Africa’s government nor the private sector has yet to support this economy to enable it to grow where it should be.

These businesses face many challenges that impede their growth. The biggest stumbling block for many SMEs in the township is competitiveness.

“When you run a business, you have to be competitive. If you’re not competitive, no one is going to buy your products.”

Many people would rather buy imported goods than local products, because they are often really affordable.

For example, Chinese companies like Shein and Temu offer a wide range of products at incredibly low prices, which can make it difficult for local retailers to compete.

Consumer wants competitive, affordable products

The consumer wants competitive, affordable products. He explained that if a business is operating in a country where production costs are high, then it becomes difficult to be competitive.

South Africa’s government has tried to push a localisation policy to help the township economy. “However, if you’re not investing heavily in infrastructure within the township, then the cost of production is going to be extremely high.”

Electricity costs are high, and transport costs are extremely high. For years, the electricity supply has been incredibly unreliable due to load-shedding, with power outages sometimes lasting for upwards of 6 hours a day.

Although the power utility has since improved the reliability of its supply, prices still remain a big concern, with Eskom hiking its prices by 12.74% for 2025/2026.

However, infrastructure and service delivery challenges are even more widespread, with poor water supply, out-of-service traffic signals, and poor-quality roads also impeding growth prospects for small and established businesses.

These are the things that have really locked the township economy from booming to the level where it should be, Mtwentwe said.

Fortunately, private sector players have started looking into this part of the economy, with companies like Vodacom and Tiger Brands moving into townships.

Mtwentwe stressed, though, that the government also has an important role to play in expanding the sector.

Apart from improving infrastructure and service delivery, it needs to make it easier for informal businesses to formalise their operations.

From Vantage Advisory’s experience working with SMEs, Mtwentwe said that around 60% of them are formal, while 40% are informal.

The administrative cost of formalising a business, as well as the cost of compliance, is simply too much for many of these businesses.

This is where the government should be stepping in to provide a competitive environment for these businesses to thrive.

It is extremely difficult for SMEs in South Africa and across the rest of Africa to access capital, which is one reason that a large part of the township economy is made up of informal businesses, Mtwentwe explained.

Many of these businesses simply do not have the basics, like their numbers and compliance documents, in place, which means that they cannot obtain funding.

Mtwentwe said that now is the time for governments across Africa to implement the African Continental Free Trade Area (AfCFTA).

“Let’s make it happen, because at the end of the day, we’re going to be left behind again,” he said.