Government’s proposed Transformation Fund: highway to growth or pothole?
By Shaun Smit
South Africa’s Department of Trade, Industry, and Competition (DTIC) has unveiled plans to establish a R100 billion Transformation Fund aimed at fostering inclusive economic growth, which the country so desperately needs.
By targeting black-owned businesses, the initiative seeks to address the legacy of economic exclusion and promote more broad-based participation in the country’s economy. A well-managed fund could drive economic growth and transformation, but critics highlight risks of inefficiency, corruption, and unintended economic consequences.
How will the fund work?
According to the Minister of DTIC, Parks Tau, the fund will be a public-private partnership managed through a National Empowerment Fund SPV. Funding will be raised through the Competition Commission’s public interest participation investment commitments and in line with the B-BBEE Codes of Good Practice – specifically the Enterprise and Supplier Development (ESD) and Ownership pillars. The fund will offer equity funding, debt and grants to accommodate different needs of the intended target beneficiaries.
The ESD provisions of the B-BBEE Codes set out a contribution target of 3% of annual Net Profit After Tax for the development of black suppliers. Under the Ownership pillar, multinational corporations that cannot address B-BBEE ownership through shareholding or sale of assets may instead contribute up to 25% of the value of the entity for enterprise development in terms of the Equity Equivalent Investment Programme (EEIP).
According to the DTIC, the target is to mobilise funding by 2029.
The opportunity for inclusive economic growth
One of the most compelling arguments in favour of the Transformation Fund is its ability to aggregate and deploy resources efficiently. By pooling substantial capital, the fund could provide significant support to black-owned businesses and SMMEs, which often face barriers to accessing traditional financing.
Aggregated funds allow for scalability, risk mitigation, and targeted interventions. Essentially, the argument is that a fund approach can achieve better outcomes than a mass of individual company initiatives, some of which may be half-hearted tick-box exercises. Large-scale funding can help businesses achieve economies of scale, enhancing competitiveness. A diversified portfolio of investments spreads risk, increasing the likelihood of overall success. And by focusing on specific sectors or regions, the fund can address disparities in economic development and stimulate industrialisation.
B-BBEE has been a cornerstone of South Africa’s economic policy for decades, however, the Minister believes that B-BBEE legislation has not achieved its intended outcomes of fostering an inclusive economy. South Africa’s economy remains heavily skewed, with wealth and opportunity concentrated among a relative minority - black and white.
The fund could serve as a powerful tool to redress this imbalance by prioritising SMMEs and community-level enterprises. This would create opportunities for a wider segment of the population, stimulate job creation and domestic production and ultimately foster social cohesion and political stability.
The DA does not support the fund in its current form, and sees a better shot at economic growth through providing resources purely based on merit and the prospective beneficiary business’s viability and growth potential.
While this technically does not align with a pure B-BBEE contribution concept, it’s hard to argue that this approach would not be best to grow the economy. Perhaps there is an opportunity for fund rules to ensure that deployment of grants enables partial support of beneficiaries that are not “black” for B-BBEE purposes, while still strongly supporting black-owned businesses.
Even if the Transformation Fund contributions are housed mostly under B-BBEE legislation and will be for the exclusive benefit of black-owned businesses, allocation of funds must be merit-based without any form of favouritism.
Risk of corruption and mismanagement
South Africa doesn’t have a great track record when it comes to government-managed funds, and although there have been some successes, many initiatives have been marred by inefficiency, corruption, and failure to deliver on promises.
A key criticism of the Transformation Fund is the risk of corruption and mismanagement. Without robust oversight mechanisms, there is a risk that funds could be diverted for personal or political gain. Previous initiatives have highlighted the need for stricter auditing and monitoring to ensure funds are used as intended. Administrative delays are a further risk - bureaucratic inefficiencies could slow the disbursement of funds, undermining their impact. Timing of support could mean life or death for many small businesses.
Potential negative economic consequences
South Africa is already competing in a battle for deployment of funds by global investors and multinational businesses. The proposed fund could inadvertently create additional challenges for the South African economy.
All too often multinationals raise concerns about the high cost of doing business in South Africa. As mentioned, private sector contributions that are mandated through B-BBEE Codes or competition requirements will provide income for the fund.
Concerns about corruption, inefficiency, and policy uncertainty may dent investor confidence and deter both domestic and foreign investors. In addition, over-reliance on government intervention could stifle competition and innovation, particularly if funds are allocated based on political considerations. And, government funds can foster dependency rather than self-reliance. Without a clear focus on sustainability, businesses that receive support may struggle to survive once funding ends. Where SMMEs are targeted by the fund, support should extend to include business mentoring and training.
Moving forward
The proposed Transformation Fund is a bold step toward addressing South Africa’s economic inequalities and fostering inclusive growth. Successfully implemented, this initiative could be a resounding success. What this will need though is transparency and accountability; merit-based allocation; strong public-private stakeholder collaboration; robust monitoring and evaluation; and implementation that does not spook investors.
Unfortunately, the government doesn’t have a rich history of success in similar initiatives and many will be critical of possibly increasing the cost of doing business in South Africa, of likely inefficient and ineffective deployment of funds, or even worse, of creating a black hole ripe for plunder.
Perhaps a strong public-private partnership can drive what’s needed to achieve the fund’s goals.
Minister Tau, prove the naysayers wrong – if it is going to be constructed, make the Transformation Fund a highway for growth rather than a pothole on South Africa’s journey to inclusive economic growth.
Shaun Smit is a director at Transcend Capital
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