Transformation Fund could undermine broad-based BEE, says think-tank

The Centre for Development and Enterprise (CDE) has lashed out at the proposed R100bn Transformation Fund saying it will fail to achieve its stated objectives and potentially harm broad-based BEE (BBBEE). 

The fund was announced last year by trade, industry & competition minister Parks Tau who released a draft concept document for public comment.

Business organisations are strongly opposed to the idea.

The minister hopes to raise about R20bn a year over five years for investment in black owned enterprises and is looking to the private sector to voluntarily invest its enterprise and supplier development (ESD) commitments under the BBBEE codes of good practice into the fund.

The CDE has made a submission to the department of trade, industry & competition on the concept document which it said is riddled with gaps, flawed assumptions and implausible funding mechanisms. 

“The implementation of this fund will undermine existing efforts to promote economic inclusion and harm black-owned firms involved in current supplier development value chains,” said CDE executive director Ann Bernstein. 

“The goal of creating a more inclusive and bigger economy in which historically disadvantaged South Africans own and manage a much larger share of businesses is not in dispute. But this fund is not the way to achieve it,” she said in a statement. 

“The Transformation Fund proposal is based on an inaccurate assessment of what transformation requires and an equally misguided belief in the state’s capacity to deliver it,” she added.

Bernstein said the fund relied on unsupported assumptions that access to finance was the main barrier for black-owned businesses, and that a centralised, state-managed mega-fund could somehow distribute vast sums effectively and offer mentorship, skills and other support to small enterprises. 

“The real obstacles that struggling black-owned businesses face — market access, poor infrastructure, a lack of demand for their goods and services, lack of managerial capacity — are barely acknowledged,” said Bernstein. 

The CDE’s submission also highlights the serious governance risks of establishing a centralised fund to undertake a wide range of complex and high-risk activities.

“There is no model in which one organisation can deliver grants, loans, technical support, training, and market access across all industries, cities, townships and rural areas. It is inconceivable that a single organisation could do this effectively and efficiently,” Bernstein said.

The CDE believed it was highly unlikely that the private sector would voluntarily channel its ESD commitments into the fund. 

“Redirecting ESD spending to the Transformation Fund would be ineffective and expensive. Perversely, it would harm existing black-owned businesses that are currently supported through integrated supply chain relationships,” said Bernstein. 

The CDE said in its submission that it was sceptical that the Transformation Fund could attract R100bn in funding in five years.

“The only plausible sources of funding at this scale are direct allocations from the budget or redirecting ESD spending. Neither of these is plausible. Redirecting ESD spending in the manner envisaged would actually weaken BBBEE substantially.” 

There was the danger that when the fund failed to attract sufficient voluntary contributions, the government might resort to making these contributions compulsory, as suggested in the concept document. The CDE said this would be equivalent to imposing a new tax on corporate profits.

“This would lead to lower levels of investment, fewer jobs and ultimately less support for black-owned businesses — the very opposite of what transformation should achieve,” Bernstein said. 

The CDE has called for a major rethink of transformation policy rather than government pushing ahead with an “ill-conceived mega fund”. The think-tank recommended that an independent panel of economists, legal experts, business leaders, and civil society representatives lead a comprehensive review of B-BBEE policy and its outcomes.   

ensorl@businesslive.co.za