The Centre for Development and Enterprise (CDE) on Wednesday called for the proposed R100-billion Transformation Fund to be scrapped, saying it is “riddled with gaps, flawed assumptions, and implausible funding mechanisms”.

Ahead of Wednesday’s deadline on submissions to the Department of Trade, Industry and Competition on government’s proposed R100-billion Transformation Fund, the CDE warns in its submissions that the fund is “a lose-lose proposition” that will fail to achieve its objectives.

Government believes the fund will help improve the effectiveness of broad-based black economic empowerment (BBBEE) spending as it seeks to aggregate the funding that JSE-listed groups, State-owned enterprises and unlisted private companies spend collectively on enterprise and supplier development, as well as some of the funding multinationals direct towards equity equivalent schemes to secure their BBBEE compliance, without selling shares in their companies.

CDE executive director Ann Bernstein believes that the implementation of the fund will undermine existing efforts to promote economic inclusion and actually harm black-owned firms involved in current supplier development value chains.

She argues that the fund’s proposition is based on an inaccurate assessment of what transformation requires, and “an equally misguided belief in the State’s capacity to deliver it”.

Bernstein highlights that the fund relies on “unsupported assumptions that access to finance is the key barrier for black-owned businesses, and that a centralised, State-managed mega-fund can somehow distribute vast sums effectively and offer mentorship, skills and other support to small enterprises”.

She points instead to market access, poor infrastructure, a lack of demand for their goods and services, and lack of managerial capacity, saying these are the real obstacles that struggling black-owned businesses face.

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

Bernstein says it is “inconceivable” that a single organisation can deliver grants, loans, technical support, training, and market access across all industries, cities, townships and rural areas effectively and efficiently.

She says she finds the proposal surprisingly “vague and lacking” in the most basic information needed to assess its viability, noting that it is unclear what kind of fund this is, what it is meant to do, or how it will be structured.

“There is no detail on whether this is a capital endowment or a spend-down fund, how success will be measured, how many businesses it aims to support and what kind of support is envisaged,” she notes.

Bernstein warns that if the fund fails to attract sufficient voluntary contributions, government may resort to making these contributions compulsory, as suggested in the draft document.

“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 cautions.

She highlights that instead of pushing ahead with an “ill-conceived mega-fund”, CDE is urging a major rethink of transformation policy, noting that South Africa needs accelerated growth that is far more inclusive.

CDE recommends that an independent panel of economists, legal experts, business leaders, and civil society representatives lead a comprehensive review of BBBEE policy and its outcomes. 

“If we are serious about building a fast-growing, inclusive economy with a massive expansion of opportunities for all those millions of people who are excluded, we need effective approaches to transformation that build on the country’s strengths and do not double down on failure,” she says.