LESS IS MORE - JSE MAGAZINE

LESS IS MORE

Small businesses are supposed to be the engine of future growth in the country, yet they are being smothered by red tape. Or are they? And what exactly is the SME sector in the first place?

LESS IS MORE

Much has been made of the National Development Plan (NDP) saying that ‘some 90% of jobs’, in its best-case scenario for economic growth to 2030, will be created in ‘small and expanding firms’. The official plan to promote these small businesses involves cutting ‘red tape’ with simplified Labour Court procedures and simpler reporting rules on employment equity and skills development.

Tax reforms highlighted in this year’s budget review are also squarely aimed at small businesses. Government clearly accepts that these enterprises want what all business wants – lower costs, less tax and simpler procedures. The devil is, however, in the detail. For one thing, size matters and the actual regulatory burden differs sharply within the enormous umbrella that is the small medium enterprise (SME) ‘sector’.

Most attempts at measuring the state and health of small business in SA immediately gets bogged down in the problem of the definition of small business. Complaints about these business being strangled by red tape often revolve more around medium-sized companies than the really small ones. The vastly different challenges in different sectors also cannot be subsumed in easy prescriptions presented as applying to all SMEs.

The kinds of small businesses the NDP touts are those concerned with ‘domestic-orientated activities in the services sector’. More specifically, it sees small companies either providing personal services to richer households – or trailing large companies by falling into the value chains they establish. This is after the NDP’s reforms lower barriers to entry in these value chains.

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Despite being generally applauded, the NDP’s vision doesn’t necessarily sit easily with what is prescribed by other advocates of SME-led growth. Most of what is said about SMEs in SA today is derived from a handful of private sector survey projects with different agendas – and different notions of what the SME sector is. The annual SBP SME Growth Index is keeping track of ‘some 500 SMEs in three sectors deemed to have high-growth potential’. These are, on average, established white-owned companies with turnover averaging over R10 million.

In terms of the NDP, which talks up SMEs as part of the answer to white domination of the economy, they could arguably be seen as part of the problem, not the solution.

SBP chief executive Chris Darroll welcomed this year’s budget review’s commitment to reducing the tax compliance burden on SMEs. At the same time, he criticised Finance Minister Pravin Gordhan for introducing a reform of the special tax regime for ‘micro’ businesses as one of the key pro-SME measures. The focus should be on the ‘older, more sophisticated’ companies, he says.

The budget included a few early proposals from the Tax Review Committee under Judge Dennis Davis, dealing specifically with the future of the existing special tax regime for SMEs, which ‘government accepts subject to public consultation’.

The first is the turnover tax that applies to companies with revenue under R1 million. This has been reduced from 6% to 5%, with tax-exemption for revenue under R335 000. The tax filing system is also to be simplified for these micro businesses. According to Darroll, the threshold for this dispensation should increase to R5 million or more.

The Impact Trust is another aid-funded advocacy initiative that is trying to affect official thinking around small business, with a specific focus on tax.

In sharp contrast to SBP and the Davis tax committee, it has proposed that SA do away with the turnover tax for micro enterprises and put the smallest companies in the same boat as those enjoying the other major SME concession – being taxed as small business corporations (SBCs). There is a fundamental difference of emphasis here. While the government’s vision presented in the budget certainly does not exclude larger, more advanced SMEs, it sees very small informal entrepreneurs as playing a key role in economic development. Darroll dismisses these as ‘survivalist’ and a less rational target for government support. This difference of emphasis has many consequences.

Turnover tax has been reduced from 6% to 5%, with tax-exemption for revenue under R335 000

The SBP index asks its surveyed companies to choose the biggest impediment to their growth. In the 2013 leg of the survey, a total of 12% chose ‘burdensome regulation’, but a larger group totalling 15% chose ‘lack of skilled staff’, while another 12% said ‘local economic conditions’. Taken at face value these responses show that the inadequate education system of SA could be the largest burden on this tier of companies.

Interventions that would really benefit SMEs are not actually ones that directly target small businesses. These include finalising digital migration of TV signals to unleash the power of real broadband, and the controversial youth wage subsidy that is finally being implemented.

The nature of the regulatory burdens that need to be dealt with obviously depends on the size and nature of the business. The international gold standard for ranking regulatory barriers facing ‘medium-sized’ businesses is the World Bank’s Doing Business report. Its hypothetical medium-sized business is a manufacturing company with 60 employees and a turnover of 1 050 times income per capita – relatively huge by the going definitions of SMEs in SA.

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One of the best sources of information on the small business sector in SA is the FinScope survey, of which there is a 2006 and a 2010 version.

The latest one concluded that SA’s ‘small business’ landscape consists largely of self-employed retailers – that is, hawkers. If the colossal informal trade sector is included under the SME umbrella, an inefficient taxman and labour laws seemingly designed with large employers in mind quickly recede into the background. The point is illustrated by the varied objections that met last year’s Licensing of Businesses Bill, which was released for comment in March. The bill aimed to have all ‘businesses’, apparently including hawkers, register with their local municipalities, magically abolishing the informal sector overnight.

Interventions that would really benefit SMEs are not actually ones that directly target small businesses

While more established formal businesses would have to contend with a new piece of red tape, the overwhelming majority of small businesses, which really just consist of one person selling things, would have more to fear from a new proposed inspectorate with a mandate to fight all forms of illegality including the employment of illegal immigrants. The very different kind of red tape facing the bottom tier of the small business sector was also very graphically illustrated by last year’s violent expulsion of traders from Johannesburg in the city’s Operation Clean Sweep. The ‘regulatory burden’ took the form of by-laws and urban planning revisions enforced by alleged police brutality and arbitrary confiscations.

For all the talk about SMEs over the last two decades, very little is actually known about the country’s small businesses in aggregate. Depending on who you ask, SMEs make up 27% or 57% of GDP. They either create all the jobs, or are the main site of its destruction. The most cited research on the size and importance of SMEs for employment or GDP is outdated, and relied on crude statistical methods to begin with.

Despite generally endorsing the job- and growth-creating power of small business, the NDP states that a lack of good data means small businesses’ ‘ability to assist in employment growth has become heavily weighted with ideology, assumptions and anecdotes’. Even when dealing with relatively similarly sized companies, the SBP survey also shows how different the red tape concerns are in various sectors. Asked what regulatory issue gives them the largest headache, 26% of the SBP respondents said SARS.

This is, however, truer for respondents from the business services sector. Tourism, in contrast, cite municipalities as their major regulatory headache, while manufacturers have more uphill with labour issues, especially with the perceived difficulty of firing workers and the drain on management time in dispute resolution processes prescribed by law.

Another attempt to take the pulse of the broad community of small business owners is the SMME Index series produced by the Africagrowth Institute in Cape Town. Its small quarterly survey of SMEs also includes a question about the major ‘business limiting factors’ and gives different results compared to the SBP survey.

The reason for that is probably the difference in the samples with the institute surveying smaller companies concentrated in the service sectors. Here the most frequently cited problem is employee costs, which 20% of respondents cited in the latest iteration of the survey late last year. After that ‘taxes and regulation’ are the major complaint, without much distinction between the two.

A shortage of skilled labour is far less frequently cited, a logical consequence of polling businesses in the less skill-intensive service industries.

By Dewald van Rensburg
Image: David Maclennan