On “Deformalisation”

Spend a day or two in Ghana’s capital of Accra and you might be impelled into believing that the biggest economic opportunity in Ghana is the “Great Middle Arbitrage”.
 
Which is simply to say that there is a big, missing, middle, folks!
 
Most products and services seem targeted at the 1 or 2% of the population with income exceeding $1500 a month or the other 90% of low earners scraping by on $250 a month or less.
 
So, if you feel too big for Gutter-side waakye then be prepared to splash nearly $10 on the meat, fish, and kooko-adorned variety at the Bukas and Asankas of prime-suburb Accra. If you can’t afford the Listers of the health system, then make do with a sweaty ward at La Polyclinic. If you can’t do Liberty International or any of its kin at $3000 a term, then send the ward to ‘Sai-to’. And so on and so forth.
 
It is easy to conclude that entrepreneurs are leaving significant value uncaptured and unharnessed.
 
Take for instance the fact that some taxi drivers pay owners a sum of about $12 a day for driving their vehicles around. Many of these vehicles are actually in decent condition. They are really not all that different from the second-tier rental cars lingering around the various top hotels (the first-tier rentals are managed by the hotels themselves and are so prohibitively priced they fall out of the scope of this analysis).
 
These ‘private saloon’ cars like to charge patrons close to $120 a day for the chauffeured experience (fuel and driver included). Interesting thing though is that most business users really don’t need the chauffeur. They would happily drive themselves if only these companies will offer the option at one-third the cost. What is fascinating is that a lot of the folks who buy saloon cars, convert them to taxis, and then lease them out to ‘professional taxi drivers’ at $12 a day could easily be offering these in the market for private hires at $24 a day to business folks who do not want to sink capital into outright purchase of vehicles for marketing purposes. Looking at these figures, it is not surprising to learn that in the US, an Avis daily rental can cost about $25 in some states.
 
So why don’t taxi owners do this? This is where it gets interesting.
 
We clearly can’t blame the cost of capital here. After all, folks are already investing about $12,000 or so to buy second hand cars that generate $12 a day or thereabouts, and a bunch of these folks have three or four of these cars (apparently, senior police officers are over-represented in the category). There is no point not up-scaling one step further to double or triple the take.
 
The taxi industry’s quirks thus enable us to relax the usual refrain that all observed characteristics of entrepreneurship in Ghana may be attributed to the ridiculous cost of capital. No one can argue that 32% interest rates are traumatic, even for the most savvy business people, but look closely and you will see that even as *current investment levels* entrepreneurs could optimise for better returns in many industries in ways that they are not currently doing. We need something more than just access to capital to explain this.
 
My hypothesis will bemuse you.
 
I think this has something to do with the ‘deformalisation’ of businesses underway in Ghana, and perhaps in Nigeria too. With limited data and an overactive imagination, I would wager that these ‘deformalisation’ and ‘informalisation’ (not the same things) trends are accelerating.
 
Deformalisation in this sense refers to conscious decisions taken by business people to steadily remove the trappings of ‘formal business practice’ from their enterprises. Informalisation simply means some never even bother with the pretense. The trappings being talked about refer to such stuff as ‘payroll’, ‘governance’, ‘tax compliance’, ‘audit and accounting’, ‘process control’, ‘brand development’ etc. The point is not that they don’t do these things at all, but that they don’t follow standard practice in doing them.
 
The argument in this post is that many business people continue to evade the hurdles of implementing modern management systems and have relapsed into relying on informal networks and their personal social capital to run even high-stakes enterprises. They hire temporary staff for ‘deals’ (‘rent a receptionist’, anyone?), rely on one ‘break’ after another instead of a clear business model, and borrow ‘randomly’ rather than develop long-term credit relationships with serious lenders. And so on and so forth.
 
In these circumstances, anything ‘dressed’ to look like a ‘step up’ on the ladder of formalisation tends to be avoided. Whilst this may be shrewd survival logic, and whilst it can cut costs through tax avoidance and low overheads, it very often can also lead to the baby being thrown out with the bath water.
 
Running a proper no-frills (no chauffeurs etc) car rental business at reasonable, or ‘mid-level’, rates requires the company to implement proper vehicle tracking, event logging, branding, social media advertising, and all manner of wahala. So though one could aggressively grow revenue and build the brand collateral that will enable one to borrow at the lower strata of our ridiculous interest rate bands, many Ghanaian entrepreneurs had rather just add two more trotros to the four taxis.
 
Deformalisation is now leading to the disappearance of blue chip enterprises across whole swathes of industries. There is now barely one material design company in Ghana with more than 30 employees. Apart from the big 4 accounting firms, you would struggle to find a professional services firm outside the legal industry with more than 20 staff.
 
Ergo: a Pareto phenomenon. By which I mean: a tiny cohort of big firms (banks, mining companies, telcos, etc) and a teeming sprawl of deformalising and informal enterprises, with little in between.
 
My main point should be obvious by now if you have endured this slog of a post: it takes capable, sound capacity, mid-size, enterprises to cater adequately to the ‘middle opportunities’.
 
Insofar as the best entrepreneurs rarely see any ‘success stories’ in this giant niche, they had rather fight for the high-end customer with a mind to joining the 5% of companies at the very top right away.
 
So next time you walk by Alisa and see them flying their new ‘Swiss Spirit’ brand, go in and smile wryly at the 30% increase in prices on the food menu. Do the same at Eddy’s Pizza and Frankies. And if you see that Papaye is bucking the trend, allow yourself a cynical smile, and leave the question dangling: “for how long can they hold out?”

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