What problem does government want to solve with R100bn Transformation Fund?

The minister of trade, industry and competition published a concept document last week regarding its R100 billion Transformation Fund for public comment, but it is not clear what problem the government wants to solve.

According to Minister Parks Tau, the aim of the Transformation Fund is to gather Enterprise and Supplier Development (ESD) funds, particularly to support transformation and the participation and sustainability of black-owned enterprises in the economy.

“This provides an opportunity for the seventh administration, working with the private sector, to increase the effective economic participation of black-owned and managed enterprises, including small, medium and micro enterprises and co-operatives and enhance their access to financial and non-financial support in line with the requirement of the B-BBEE Act,” Tau said in a statement.

It is expected that an amount of R100 billion will be gathered over the term of the current administration through a joint effort by government in partnership with the private sector.

“We are firmly in pursuit to transform the economy as guided by Vision 2030 of the National Development Plan, which is to eliminate poverty and reduce inequality. Our constitutional imperative places a collective burden on all of us to advocate for equality and redress.”

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Transformation Fund: Little analysis of problem

However, not everyone is excited by the prospect of the Transformation Fund. Busisiwe Mavuso, CEO of Business Leadership South Africa (BLSA), says in her weekly newsletter that when money is directed at solving a problem, we must make sure that it will result in a sustainable solution.

“The challenge for the fund concept is to demonstrate that it will meet this bar – sustainably solve a problem in a cost-effective way.”

Unfortunately, Mavuso points out, the concept paper for the Transformation Fund contains little analysis of what exactly the problem is that the new fund will solve. “While we can all accept that transformation should happen faster, particularly enterprise development, the obstacles that must be managed are complex.

“An estimated 70% of all new businesses fail in South Africa, for many reasons including a lack of skills, access to markets and access to funds.”

Logic for not clear in concept document

She also points out that various initiatives that attempted to solve this problem, including the supplier and enterprise development component of B-BBEE, had mixed success. “There are some good examples where companies fostered successful black-owned businesses and integrated them into their supply chains, ensuring their long-term sustainability.

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“However, there are many other companies that failed to get traction despite significant funding. It would be much easier to see the logic of the fund if the concept paper carefully diagnosed the problems and presented a clear institutional solution.

“We know from institutions that are currently involved in enterprise development that it takes armies of mentors and vast resources to support businesses and they operate on a tiny scale compared to the R100 billion fund target.”

Mavuso says the concept paper for the Transformation Fund provides almost no information about the institutional design required to achieve its aims or how it will resource it and ensure its success.

However, she does say it is positive that the Department of Trade, Industry and Competition positioned the paper as a joint business and public sector initiative and that it is open to business feedback to help develop it.

“BLSA will be glad to support that ambition and provide formal input in due course.”

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Objectives of Transformation Fund in concept document

According to the department, the objectives of the Transformation Fund is to:

• Promote economic transformation to enable meaningful participation of black people in the economy;
• Improve access to funding for black-owned and controlled enterprises;
• Empower and support black-owned and controlled enterprises participation in value chains across key sectors of the economy;
• Mobilise financial resources from the private and public sector using B-BBEE legislation.

There are no additional requirements for the Transformation Fund over and above what currently exists in the B-BBEE policy that requires entities to contribute through Enterprise and Supplier Development (ESD) in the 3% of Net Profit After Tax (NPAT), to the development of black suppliers, black industrialists and SMMEs to broaden the industrial and services base in the country.

Tau says government wants to maintain the principle of establishing partnerships between established businesses and emerging businesses in the Transformation Fund, as well as diversification of suppliers within the value chains, as contained in the B-BBEE Codes.

“However, we would like to see a much more impact and spending on relevant ESD activities that must lead to growth and sustainability of black owned enterprises and SMMEs, by having a coordinated effort.”

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Transformation Fund aimed at women, youth and disabled

Particular attention will be paid to businesses owned by women, youth and people living with disabilities, especially those based in rural and township areas. These groups historically faced significant barriers to economic participation and the challenges of unequal access to resources and opportunities remain deeply entrenched in South African society, Parks says.

“Their meaningful participation in key sectors of the economy, such as manufacturing, agriculture and tourism is vital for stimulating economic activities across all regions of our country with their unique potential.”

He says his department will put governance structures in place that will ensure accountability to both government and the private sector, as well as transparency and efficiency in managing the fund.

A special-purpose vehicle that will be accountable to an oversight committee and a board with therequired skills and capacity will also be established.

The department will also hold sessions with stakeholders to create awareness while soliciting more inputs during the 30-day commentary period. The concept document can be accessed here.

Members of the public and interest parties must send their inputs to transformationfund@thedtic.gov.za.