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South Africa: a tough climate for SMEs

SMEs spend eight working days a month dealing with red tape – survey.

South Africa’s stringent policy framework and legislation is proving more difficult for small and medium enterprises (SMEs) to grow, despite being identified as key engines for job creation by the government.

This is according to the findings of an SBP survey titled ‘Counting the cost of red tape for business in South Africa’ which was conducted in 2012, and features 500 SMEs in Cape Town, Durban and Johannesburg.

The survey notes that 2013 was a good year for SMEs in terms of turnover, with nearly two thirds of the sample noticing an average rise in turnover of 13%.

According to Neil Rankin, economics associate professor at the University of Stellenbosch, all the surveyed firms said it was harder to operate businesses in 2013 than 2012, with red tape being the source of contention.

According to the survey, SMEs spend “eight working days per month” dealing with red tape which includes frequent changes in the regulatory environment, lack of access to information and South African Revenue of Services inefficiencies.

On a breakdown of the top barriers of growth for SMEs and the percentages of dissatisfaction amongst entrepreneurs, the survey identified a lack of skills at 15%, burdensome regulation recorded 12%, lack of finance and cost of labour respectively.

Although such challenges for SMEs can all be resolved, enterprises continue to struggle, Rankin said.

“There are South African specific conditions that can be changed. From a long-term perspective we are not saying anything new (the problems for SMEs that are highlighted). We want these types of SMEs to contribute to the economy, increasing skills and regulatory reforms,” he said.

What adds further pressure to small businesses is that incentives in South Africa to become an entrepreneur are relatively small and the risk greater, Rankin said.

On labour for example, he says it takes on average five days for the Commission for Conciliation, Mediation and Arbitration (CCMA) to resolve a dispute. In South Africa a typical firm is taken to the CCMA twice in a year – meaning ten days of business are wasted and such a process “can drag out”.

Government policy

On the jobs front, government has adopted the National Development Plan (NDP) which targets 11 million jobs by 2013, which it says will be met by the private (including small businesses) and public sector.

In addition, to curb South Africa’s unemployment which is sitting at 24.1% according to the Q4 2013 figures by Statistics South Africa, government has legislated the Employment Tax Incentive Act in which SMEs have a part to play. Employers can claim the incentive for any employee between the ages of 18 and 29 who receives a monthly salary lower than R6 000 per month.

Known as the youth wage subsidy, the Employment Tax Incentive scheme will compensate companies for hiring young job seekers. The act came into effect on January 1.

“In 2013 SMEs have had a better year. Employment is encouraging. This is another reason why we want SMEs to employ people to facilitate growth. If we want South Africa and SMEs to be popular, we need to reduce costs and encourage firms to employ,” Rankin explains.

The survey indicates that older and established SMEs are less willing to add new jobs than younger firms. Such firms create more jobs upon growth of their turnover.

However, growth in turnover has not translated into job growth on a significant scale. Almost 50% of firms reported that they kept their staff numbers static in 2013. Eighteen percent reported staff cuts, while only a third grew their staff complement, according to the survey.

SBP Chief Executive Officer Chris Darroll says in the survey that government’s current focus of stimulating start-up businesses is unlikely to “drive extensive job creation and meet the NDP’s employment goals”.

Finance and investment for SMEs

However, there is good news for small enterprises on the nascent (those creating new ventures). Access to finance and investment is not a problem among businesses surveyed: 18% of all firms applied for bank loans and 16% for bank overdraft or credit facilities.

Well over two thirds of overdraft and credit applications were granted in full. “In the period of the survey only credit and overdraft applications and bank loan applications of 13% and 10% were rejected respectively,” it stated.

However the credit extension was largely for established small business with a “10-15 years” of track record and has recorded higher growth.

Not only is the funding for business on the upside, but also the sheer investments that come through to sustain SMEs.

“Owners of growing small businesses are pursuing innovation and are investing [in] their own firms”, the survey states, with the bulk of investments made to SMEs being retained earnings and shareholding.

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