SA lost 83 000 companies in one sector in 10 years

The number of companies in the financial and business services sector has changed dramatically. While 222 532 companies in this sector submitted tax returns in 2007, South African Revenue Service (Sars) Company Income Tax (CIT) data shows this figure had shrunk to 139 664 in 2016 – a 37% decline.

The CIT data records a decline of almost 83 000 incorporated firms.

This sector includes banks, cash loan companies, short-term insurance firms and independent brokers, investment advisors, business consulting firms as well as real estate services.

Figure 1 shows how the number of firms remained relatively stable from 2007 to 2010 before experiencing a rapid decline, then stabilising again from 2014 onwards.

Financial crisis and a business unfriendly environment

A multitude of factors drove this sectoral decline.

Among the most important:

• The financial crisis of 2007/8 dramatically reduced turnover and profits, with a 79.6% decrease in taxable turnover between 2008 and 2010. Low profitability, depleted cash reserves and a struggle to procure loans triggered both the collapse of firms and substantial consolidation.
• A dramatic increase in administrative and regulatory burdens. Compliance for small firms constitutes time and cost burdens, undermining their sustainability. While top fund managers often complain about the 16-hour training that they should attend, their remaining team members can continue to handle investors’ queries and react to sudden market movements. In similar circumstances, however, the owner-manager of a small advisory firm simply loses two productive days, having no access to high level support personnel. In the investment advisory services subsector there was substantial consolidation, with independent smaller firms closing or being swallowed by larger ones. The extent to which PSG Konsult has expanded since its inception is a case in point.
• Stalling property prices and the absence of long-term confidence.  The real estate segment experienced the demise of numerous smaller real estate firms. Simultaneously the period saw the expansion of the likes of Pam Golding, Sotheby’s and Seeff into smaller towns.
• The high cost of crime for businesses in SA. South African businesses struggle with the fifth highest cost of crime in the world, according to the World Economic Forum.
• A future of prosperity and security outside South Africa. Not only have more than 400 000 high income professionals emigrated since 1994, but millions of remaining individuals are utilising the easing of foreign exchange controls to let their money emigrate.

Long-term insurers contracted by 78%

Sars records long-term insurance companies as a separate sector. The number of companies reporting in this sector declined by 78% from 312 in 2007 to 69 in 2016. Where the 312 had taxable income of R19.9 billion in 2007, the 69 in 2016 jointly registered losses of R6.6 billion. The fact that CIT from this sector nevertheless amounted to R12 billion is indicative of some large companies that record substantial profit.

SMEs under particular stress

A poor economic climate coupled with high regulatory requirements and the outflow of high-level, high-remunerated skilled professionals because of political and security reasons, knocked small and medium-sized enterprises (SMEs) in the financial and business services sector. The change in average taxable income over the 10 years reflects the higher survival rate of larger companies.

CIT data indicates that the SME component of the business world is particularly under stress. Contrary to popular belief, however, SMEs are not better creators of sustainable jobs than large companies. Nevertheless, the demise of many smaller firms is not a good outcome, since it contributes to concentration.

Other sectors that registered substantial declines in the number of companies registered for CIT, were:

• Retail: 44 972 fewer companies (57% decline)
• Agencies: 11 799 fewer companies (20% decline)
• Wholesale trade:  6 310 fewer companies (28%), and
• Transport and storage: 3 378 fewer companies (15%).

Aside from a number of large firms, the South African world of enterprise is indeed in a rather precarious position. There is little if any understanding of that in governing circles and in policy.

Johannes Wessels is director of the Enterprise Observatory of SA. This article first appeared here.