Is government’s R100 billion Transformation Fund a pothole or highway to growth?

The overnment’s proposed Transformation Fund of R100 billion could be a highway to growth or a pothole depending on how it is run. It could stimulate the economic growth of above 3% that South Africa so desperately needs, or it can be another adder’s nest of corruption.

Unfortunately, the government does not 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, the likely inefficient and ineffective deployment of funds, or even worse, of creating a black hole ripe for plunder, Shaun Smit, director at Transcend Capital, says.

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. Smit says a well-managed fund could drive economic growth and transformation, but critics highlight risks of inefficiency, corruption, and unintended economic consequences.

According to trade, industry, and competition (DTIC) minister Parks Tau, the Transformation Fund will be a public-private partnership managed through a National Empowerment Fund special purpose vehicle (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.

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Contribution target of 3% of net profit for businesses to Transformation Fund

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 minister stated that funding for the Transformation Fund will come from these contributions. However, Smit points out that, in his address to the national assembly, he stated that entities are obliged to make these contributions, while in fact entities may partially contribute for lower recognition or choose to not contribute at all at the risk of being B-BBEE non-compliant in terms of the B-BBEE Codes.

One of the most compelling arguments in favour of the Transformation Fund is its ability to aggregate and deploy resources efficiently, Smit says. “By pooling substantial capital, the fund could provide significant support to black-owned businesses and SMMEs, which often face barriers to accessing traditional financing.”

He says 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.

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Large-scale funding can help with economies of scale

“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.”

Smit says B-BBEE has been a cornerstone of South Africa’s economic policy for decades, but 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.”

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Should funds from Transformation Fund be based on merit only?

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’ viability and growth potential.

Smit says while this technically does not align with a pure B-BBEE contribution concept, it is hard to argue that this approach would not be the best option to grow the economy. “Perhaps there is an opportunity for fund rules to ensure that the 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.”

Smit also points out that South Africa does not have a great track record when it comes to government-managed funds, and although there have been some successes, many initiatives were 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 highlighted the need for stricter auditing and monitoring to ensure funds are used as intended. Administrative delays are a further risk, as bureaucratic inefficiencies could slow the disbursement of funds, undermining their impact. Timing of support could mean life or death for many small businesses.”

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Transformation Fund could create additional challenges for economy

He also points out that South Africa is already competing in a battle for the deployment of funds by global investors and multinational businesses and warns that 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.

“Limited DTIC statements to date seem to imply that mandatory fund contributions will not be required and that this will not be a cost in addition to B-BBEE contributions, but clarity from the department on requirements on contributions and the integration with B-BBEE legislation will be important for all stakeholders.”

Smit also warns that 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, he says.

“In addition, 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, support should extend to include business mentoring and training.”

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Transformation Fund bold step, but…

Smit says the proposed Transformation Fund is a bold step to address South Africa’s economic inequalities and foster inclusive growth. “Successfully implemented, this initiative could be a resounding success.

“However, this will need transparency and accountability, as well as merit-based allocation, strong public-private stakeholder collaboration, robust monitoring and evaluation, and implementation that does not spook investors.”

He says perhaps a strong public-private partnership can drive what is 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.”