The concept paper published by the department of trade, industry & competition concerning the proposed R100bn Transformation Fund has attracted widespread attention.
Aimed at supporting black-owned businesses and SMMEs, the enterprise and supplier development (ESD) initiative seeks to promote inclusive economic growth by leveraging private and public sector contributions in line with broad-based BEE regulations. The fund would operate as a special purpose vehicle with oversight from a board comprising representatives from business, government and civil society.
As I stated in last week’s Business Leadership SA (BLSA) newsletter, the organisation supports and shares the government’s commitment to transformation. Both business and the government acknowledge that transformation should happen faster in SA. The department of employment & labour’s annual Employment Equity Report and many other analyses clearly show that transformation in SA is not where it should be.
The department of trade, industry & competition has positioned the fund as a joint business and public-sector initiative and has made it clear that private sector feedback is welcomed to help develop it. Importantly, trade, industry & competition minister Parks Tau has emphasised that contributions to the fund will be voluntary, and has committed to establishing governance structures that ensure accountability, transparency and efficiency. The co-governance model is particularly welcome as we share the same goal of inclusive growth and transforming the economy.
Despite these positives, questions remain. The obstacles that need to be managed in enterprise development are complex. About 70% of all new businesses fail in SA. The reasons for this failure rate include a lack of skills, limited access to markets and insufficient access to funding. Initiatives that have attempted to address these challenges, including the supplier and enterprise development component of BEE, have had mixed success. While there are good examples where companies have fostered successful black-owned businesses and integrated them into their supply chains, many other companies have failed to gain traction despite significant funding. Access to funds alone is demonstrably not the answer.
The concept paper provides no evidence of how the new fund will succeed where others have failed.
One of the questions that arises from the concept document is how the fund proposes to improve on aspects related to ESD, over and above funding. The primary constraint on successful small business funding, for example, is the mentorship required to simultaneously develop capacity. Effective mentorship depends on a scarce and stretched skill set. The performance of the National Empowerment Fund (NEF) and similar funding initiatives has been constrained precisely because of the lack of mentorship capacity in the country. Enterprise development is not easy, and several committed players have devoted significant time and resources to getting it right over many decades.
The Transformation Fund envisages R20bn of contributions every year for five years. How can we ensure this amount is deployed into enterprise development with appropriate risk management and recovery? How could this level of funding be adequately supported through mentorship? And what is it about this fund that guarantees a better developmental return on investment than allocating the same funds through existing structures?
The concept paper provides no evidence of how the new fund will succeed where others have failed. The paper provides no comparative analysis of existing government-backed funding mechanisms (such as the Khula Fund, Industrial Development Corporation or the NEF) or private sector schemes (such as the SA SME Fund or Business Partners) and how the proposed fund would differ from them or aim to complement them.
BLSA welcomes the way in which the minister has emphasised the importance of including business in discussions to improve the concept. The department has positioned the Transformation Fund concept paper as a joint business and public sector initiative, open to business feedback, and BLSA will provide formal input in due course. To support an evidence-backed assessment of the fund’s ability to achieve its fundamental goals, we would suggest that the department develop a detailed asset management model, capacity strategy, funding strategy and operating model, and that the fund is developed gradually based on evidence of its effectiveness.
We would also suggest that methods be found to enhance existing ESD programmes, and that their strengths and weaknesses be analysed and incorporated into a strategy that informs future initiatives; that the government offers tax incentives or BEE scorecard enhancements for voluntary contributions; that clear key performance indicators, independent audits and strict fund-allocation transparency be prerequisites for any future fund; that the government should partner with existing investment vehicles such as the SA SME Fund and Business Partners to enhance SME development without duplicating efforts; and that initiatives to achieve redress include structural reforms (including improving market access, addressing regulatory hurdles and investing in skills development).
If we are to deploy public resources, let us make this count towards structural reform that drives sustainable economic activity. SA has many urgent, varied and often competing developmental priorities, and both public and private funding should be directed to deliver the maximum return in development outcomes. Funding should be allocated to those projects that have demonstrated their ability to make a real and sustainable difference, or to a fund that is carefully designed to complement or expand on those success stories.
• Mavuso is BLSA CEO.
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