The R100bn Transformation Fund – Yay or Nay?
By Kizito Okechukwu
Since the announcement by Minister Parks Tau from the Department of Trade, Industry and Competition (the dtic) on the establishment of the R100 billion Transformation Fund to support Micro, Small and Medium enterprises (MSMEs), many stakeholders in the broader ecosystem have been up in arms with many calling it unlawful, while some resorted to calling it an expropriation of 3% of private sector profit.
Many have also slammed it for being racially discriminatory for focusing on black businesses.
The detail around the Fund is still not clear to many, but one thing is clear and certain, South Africa needs a Transformation Fund that will support the establishment of micro, small and medium enterprises.
The lack of access to finance experienced by many black South Africans remains a concern.
In 2018, 22 On Sloane conducted a study with the World Bank, in which we highlighted the Unseen Sector Report (2018), that estimated an MSME credit gap of $6bn (R120bn) in the formal sector and $24bn (R480bn) in the informal sector.
Many recent reports have also estimated the MSME credit gap at between R86bn to R346bn.
Working with MSMEs across 43 countries in Africa, we see the challenge first hand, where MSMEs are discriminated by mainstream financial institutions because of lack of collateral, poor credit history, limited financial records, high interest rates, and perception of high risk by lenders.
We cannot grow the economy without having the adequate resources channelled towards the micro, small and medium enterprises.
Over the years, many South African companies, as required by law, have invested 3% of their profits in growing MSMEs.
While commendable, some have failed to utilise this allocation, hindering sector development. This is due to a lack of impactful programmes, coordination or vehicles like the Transformation Fund, which could channel unused funds effectively. From a 2022 report by the B-BBEE Commission in 2021, it was found that only 62% of participating entities have Enterprise and Supplier Development (ESD) strategies in place.
The report also found that there were instances of misalignment between the measured entity and the ESD beneficiaries on the ideal intervention. Further findings, which could be linked to the aforementioned ones, are that 61% of ESD set targets were achieved by the measured entities.
Though details around the Fund remain unclear, the proposed fund should be designed to generate sustainable investment returns for ESD funders by coordinating efforts between corporates, government and financiers.
This strategic alignment ensures that SMEs and startups receive the necessary post-investment support, market access and capital injection from relevant stakeholders.
A key feature of the proposed fund should be its substantial allocation toward capacity-building initiatives.
These initiatives will ensure that SMEs and startups are investor-ready and equipped to meet market demands. By enhancing their operational capabilities, governance structures and financial acumen, the fund will facilitate long-term growth and sustainability.
The fund could be capitalised using unspent ESD funds, estimated at R30bn, based on insights from the FINFIND Inaugural South African SMME Access to Finance Report 2018.
The report highlights that ESD spending has declined to R26bn out of the R56bn available, signifying a considerable pool of unused funds.
It should be encouraged that corporates that are currently spending their ESD funds should continue doing so, while those not spending should then invest it in the Transformation Fund.
The first close of the fund could be estimated at R30bn of unused ESD funds. With an annual accumulation of unused ESD funds, it is envisaged that the fund size will exceed R100bn within the first five years.
The fund could receive annual allocations based on the available unutilised ESD funds for each funding cycle. The already allocated ESD funds will not be affected, since the first close only targets unused ESD funds.
The Fund could operate under a centralised Fund of Funds (FoF) model, enabling ESD funders to earn investment returns in proportion to their contributions or get additional tax benefits.
This model will ensure efficient capital allocation, diversified risk management and professional oversight of investments, thereby optimising returns for participating stakeholders. Through this structure, funders will be able to leverage economies of scale, access high-potential investment opportunities and benefit from structured governance mechanisms.
The proposed Fund could be structured as an evergreen investment vehicle, with periodic dividend distributions scheduled at regular intervals, such as every five years, better still would be re-investing these in the Fund.
With the right ecosystem support and strategic interventions, the portfolio should be expected to outperform South Africa's prime lending rate, providing funders with competitive returns.
To further enhance investor confidence, the South African government can provide a capital guarantee, ensuring capital-back over a predefined investment period (e.g. five years).
This guaranteed mechanism will safeguard funders' contributions, mitigating risk and promoting participation from a wide range of corporate investors that are under-utilising their ESD funds.
It will be crucial for government to emphasise or clarify that this fund is not another form of taxation.
Instead, ESD funders are positioned as investors who are entitled to returns on their capital, supported by a government-backed guarantee. This ensures a balanced approach, where both social impact and financial sustainability are prioritised, fostering long-term economic growth and transformation.
The proposed R100bn Transformation Fund offers a strategic, sustainable and impactful solution to the current challenges faced by the ESD funding ecosystem. By adopting a collaborative, well-structured approach, the Fund should aim to unlock meaningful economic opportunities, drive innovation and contribute to the broader national development agenda.
In conclusion, investors will be assured of returns, risk mitigation through government guarantees, as well as the opportunity to play a pivotal role in shaping South Africa's economic future.
For me, it’s a Yay, if we can get the above mechanisms right….
Kizito Okechukwu is the Executive Head of 22 On Sloane, Africa’s largest entrepreneurship campus; and Co-Chair of the Global Entrepreneurship Network (GEN) Africa
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