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Trade, industry & competition minister Parks Tau. File photo: FANI MAHUNTSI/GALLO IMAGES
Trade, industry & competition minister Parks Tau. File photo: FANI MAHUNTSI/GALLO IMAGES

The muted response from business to trade, industry & competition minister Parks Tau’s announcement of the R100bn Transformation Fund is surprising — or perhaps not. The sheer audacity of the proposal might have blindsided organised business so much that they haven’t yet fully processed its implications. For it amounts to expropriating billions of rand now deployed by the private sector in enterprise and supplier development (ESD) initiatives, to fill state coffers. A new tax, in other words. 

The R100bn, a number pulled out of a hat and notable because it’s so enormous, will come from the following sources:

  • The 3% of net profit after tax the companies spend on ESD.
  • Multinationals that balk at handing over shares to black beneficiaries, so instead have to contribute the equivalent of 25% of the value of their SA operations to the fund.
  • Companies wanting approval from the Competition Commission for mergers and acquisitions (M&A). This invokes the public interest clause of the Competition Act, which gives the commission the power to set conditions for approving a transaction, in this case paying money into the fund.

Tau proposes amending the broad-based BEE (BBBEE) regulations and scorecard, forcing companies wishing to do business with the state to make these contributions to get their points and retain their BBBEE rating. He made no mention of the likely need for the National Treasury to approve the fund and table a money bill in parliament, enabling it to channel these funds from the National Revenue Fund into the Transformation Fund.

Tau further proposes that the fund be managed by a special purpose vehicle (SPV) under the watch of the National Empowerment Fund (NEF). The NEF has a chequered history and is severely undercapitalised. In February last year it was made a wholly owned subsidiary of the Industrial Development Corporation, the state’s principal development finance institution under the department of trade, industry & competition. Its mandate being the funding of black-owned businesses, the NEF was presumably the chosen vehicle so it can fulfil its raison d’être with a huge new injection of cash. Tau vaguely mentioned that the SPV will be jointly managed by the private sector, but did not elaborate on the modus operandi. 

The announcement of the fund leaves many questions unanswered. What proportion of the 3% net profit after tax will go into the fund, or be left for companies to spend themselves? Similarly, what proportion of their equity-equivalent funding must multinationals contribute? What yardsticks will be used to determine payments into the fund from M&A transactions? And what points on the scorecard will be given for all of these contributions? 

The generic (not sector-specific) scorecard allocates points for the following: ownership (25 points); management control (19); skills development (20); ESD (40) and socioeconomic development (5). From the above it is clear the composition of the ownership and ESD elements of the scorecard will, at the very least, have to be significantly amended to cater for the new points allocation. Tau has given no indication yet of his, or the BBBEE Commission’s, intention to consult with the private sector on these amendments. 

The one positive outcome of the announcement is that it shines a spotlight on the impact and effectiveness — or otherwise — of BBBEE on economic growth and job creation, beyond its immediate goal of transformation — the euphemism for placing more economic power in the hands of black people.

Since the BBBEE regulations were introduced more than 20 years ago a large industry has grown up to advise companies on how to maximise their rating and implement programmes to achieve it. In June 2023 the department of small business development hosted a policy dialogue on “rebooting ESD for more effective transformation and SMME impact”. The assumption was that the estimated R25bn spent on ESD annually was not moving the needle in terms of the growth of black-owned businesses, particularly through integrating them into large-scale supply chains.

In writing this article I have consulted some of the leading practitioners in the ESD ecosystem and their concerns, in addition to the questions I raise above, can be summarised thus:

  • Will the fund, in its operating model, mandate and funding strategy, be private sector demand-driven? In other words, will it fund black-owned businesses that do or have the real capability to deliver goods and services to meet real market needs, and thus be able to productively invest, grow SME revenues and support efficient and productive supply chains? If not, what is the fund’s real strategic contribution to the economics of ESD? 
  • Companies now have a line of sight and can follow their ESD funding to the point of utilisation, and can thus measure the economic value to the beneficiary and to their own business. To what extent will the Transformation Fund be accountable to the private sector shareholder-owned businesses whose funds are in effect being expropriated? How will individual company contributors to these pooled funds be able to measure the economic value of their contribution to their operations?    
  • Companies implementing ESD strategies and programmes base them on years of testing various models and activities. They need to not only meet transformation objectives but align with company strategic business objectives and operational needs. Many of these programmes are so successful — including for the beneficiaries — that they constitute intellectual property. 
  • Will the fund, by requiring a pooling of funds into a pot for deployment in what will have to be generic or sectoral programmes, remove the incentive for companies to continually refine and innovate in the design and implementation of ESD? 
  • Will it take account of sector diversity, as various sectors have nuanced ESD obligations, and ensure a predictable way of awarding ESD points to corporates on contribution vs when the funds are disbursed to beneficiaries?
  • Will the fund have nonfinancial support and investment-readiness components to ensure adequate support to SMEs and start-ups?
  • Is funding the pressing need in the SMME ecosystem, or are there more fundamental, structural impediments to genuine transformation that need to be addressed first?

This last question raises the most important question: has BBBEE had its day, and is there a better alternative? The DA has long held the view that though well intentioned, BBBEE has been manipulated to the advantage of a narrow black elite, largely connected to the ANC, and that big business has been a willing accomplice, placing ANC cadres on their boards and constructing elaborate ownership structures that recycle the same faces continuously.

Apart from instances in which companies have implemented employee share ownership schemes, the intended broad-based outcomes have failed to materialise: go into any black township in SA and ask 100 business owners to put their hands up if they have benefited from BBBEE and the response will be stark and alarming. 

Apart from the egregious need for racial classification underlying BBBEE (and employment equity) laws, and the divisiveness this creates in our society, it is one of a long list of reasons cited by international investors for not investing in SA. The DA’s economic justice policy advocates a different approach to transforming the economy through socioeconomic interventions by state and private entities, targeting the UN-endorsed sustainable development goals (SDGs) as an alternative to a narrow race-based scorecard. The SDGs are a globally recognised set of yardsticks for socioeconomic development that multinational and local companies can incorporate into their transformation strategies. 

Policies should be evaluated based on their outcomes, rather than their intentions. Instead of setting up a new fund, Tau’s department should work collaboratively with the private sector to fundamentally rethink how transformation can be best accomplished to support a new set of outcomes that drive economic growth and job creation, affecting all businesses of whatever hue of ownership.

These outcomes can start with an increased rate of new business formation and survival, rapid scaling of those businesses, a boost in exports and sustainable job creation. A scorecard based on these outcomes stands a real chance of moving the needle and tackling SA’s catastrophic unemployment crisis. 

• Chance is DA spokesperson on trade, industry & competition.

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