Professional service firms are key to growing SA economy

skyline, which is increasingly dominated by multibillion-rand skyscrapers housing major foreign professional services firms.

Further evidence of the market size of the professional services sector can be found in the 2014 Davis Tax Review Committee (DTC) interim report on base erosion and profit shifting by multinational companies in South Africa. According to the report, using the latest available data obtained from the South African Reserve Bank at the time of its publication, which provides an indication of the measure of payments directed offshore as recorded by the bank, R205 billion in non-goods payment left the country between 2008 and 2011(refer to table 1 adjacent). the period reviewed by the DTC.

The industry has an estimated market value of R23bn and more than 500 officially registered firms. However, market concentration is in the hands of about 10 dominant players, all of which are foreign-owned multinational entities where the effective control lies outside South Africa. The industry generally works on the business principle that each employee contributes R1 million to turnover. The implication therefore is that the 10 large foreign-owned firms collectively generate annual revenues in excess of R1bn as they each engage, on average, about 1 000 employees in South Africa. This implies that a significant amount (approximately an average of about R10bn a year or 43 percent of annual revenues) generated by the industry between 2008 and 2011 was shipped out of the country.

Complex projects

What does this mean in the context of socio economic transformation in the professional services sector?

Historically, the perception exists that only multinationals can undertake large, complex projects in the professional services sector. This limits the participation of wholly-owned South African entities, specifically large and small black-owned and controlled companies, to sub-consultant roles or as small joint-venture partners in intricate projects, perpetuating the continuous cash outflows alluded to in the DTC review.

In addition, relegating these entities to small repetitive roles in projects that are deemed easy hinders the creation of a core local skills base that South Africa can rely on to undertake future complex projects in engineering, legal and accounting services, among others.

Citing the local engineering consulting sector in the context of the infrastructure deficit facing South Africa and the rest of the continent, the above mindset implies that there will always be a dependency on foreign-owned companies to implement infrastructure programmes and by extension, a continuation of profit shifting, an outlook that permeates the African continent and is usually structured along former colonial ties.

According to the DTC review, stateowned enterprises (SOEs) in South Africa account for about 60 percent of all expenditure on architectural, engineering and technical services. As the public sector is typically a greater catalyst for transformation than the private sector, it stands to reason that SOEs need to develop a deep understanding of the sectors they procure their services from to develop fully responsive procurement strategies.

Importantly, transformation across the entire spectrum of professional services should focus on ownership profiles as well as skills development. Public entities and SOEs must proactively seek to understand the various market structures and conduct thorough market research to unearth the many competent, wholly-owned South African entities, especially black-owned and controlled entities, which can compete with the best foreign companies. The tried and tested excuses often used by many procurement departments that “we can’t find a competent black-owned company” or “there is no company in South Africa that can perform this task” can no longer be justified amid a growing list of highly competent and well managed black-owned and controlled professional services firms.

This does not mean multinationals do not have a role to play. They are an important feature of the country’s economic landscape, particularly as it operates in a global community and is signatory to various global trade agreements that promote free market access.

However, to create balance and sustainability within the professional services sector, more equitable distribution of high value complex projects is required, without compromising on quality and delivery.