STUART THEOBALD | Transformation Fund a threat to transformation

Thousands of black-owned small businesses are at risk.

The department of trade, industry & competition’s draft BEE code amendments, published in January, would systematically penalise the corporate enterprise & supplier development (ESD) programmes that currently provide these businesses with capital, mentorship and market access — and redirect that money to a Transformation Fund with no track record, no demonstrated capacity and no convincing plan.

Not all ESD programmes are good. That is because they are assessed on how much is spent (the target is 3% of after-tax profit) rather than the impact they have. But many deliver. Sun International’s ESD programme funded 102 beneficiaries in 2024, investing R65m to give black-owned suppliers access to its supply chains and support them in developing into businesses capable of servicing many clients.

Exxaro has invested more than R900m in high-growth businesses over six years; those businesses have collectively generated R7bn in economic activity and created more than 3,300 jobs, largely by supplying Exxaro itself. Accenture trains, mentors and funds black-owned firms through its network, then procures from programme alumni — many of the most successful black-owned IT firms in the country were seeded this way.

The South African Institute of Chartered Accountants draws on a volunteer force of chartered accountants to help more than 500 businesses a year develop financial skills. The Association for Savings and Investment South Africa’s business acceleration programme has backed 48 companies, several of which are becoming household names. The banks, Anglo American, Sasol, Glencore, Transnet and Sanlam run programmes that collectively support hundreds more.

What these programmes share is something a central fund cannot easily replicate: deep integration with real supply chains, highly skilled volunteers, and the mentoring relationships that turn a nascent business into a sustainable one. But all of this is now threatened by a scoring change that in effect makes it mandatory to contribute to the Transformation Fund.

The mechanics are worth understanding. The ESD pillar of the BBBEE scorecard currently accounts for 40 points (of a maximum of 118). The proposed amendments inflate this to 62 points by introducing the Transformation Fund as a fourth ESD element worth 22 points. Each of the four components carries an eight-point minimum threshold, and failure to meet any one of them triggers an automatic drop of a full BEE level.

The practical consequence is that any company wishing to maintain its BEE level must contribute to the Transformation Fund, regardless of the efficacy of its existing ESD programme. Spending on your own programmes is not enough. The department has created a mandatory levy dressed up as a scorecard element.

A second, less-discussed problem is that the draft codes significantly upweight spending on 100% black-owned businesses relative to majority black-owned ones. Companies that have built good-faith ESD programmes serving majority black-owned firms will see their scores fall sharply, and the businesses they support will suddenly find themselves viewed less favourably in accessing such programmes. This change arrives without warning and without transition provisions.

It is also unclear what the payments to the Transformation Fund actually are. Loans? Donations? Equity? The distinction matters enormously. ESD programmes can currently count loans as spending, making capital recyclable and capable of supporting far more beneficiaries over time.

If Transformation Fund contributions are donations, there are tax implications. And if they are effectively a compulsory levy, which the mandatory threshold structure strongly suggests, there is a constitutional problem: it is unlawful to create a tax through subsidiary regulations rather than legislation, or to restrict the use of tax revenue to anything other than the general revenue fund. The department cannot do through BEE codes what it cannot do through parliament.

There is one genuine improvement in the draft language. The codes show a shift toward measuring the impact of ESD spend, not merely the amount spent. This is welcome. The input bias of existing BEE measurement, which rewards rand spent rather than outcomes achieved, has long been one of the framework’s most serious weaknesses. But this principle is conspicuously not applied to the Transformation Fund itself.

If impact is to become the guiding criterion — and it should — the fund must demonstrate it can deliver before it is permitted to displace programmes that are provably working. The logical policy position is straightforward: pilot the Transformation Fund. Let it prove, over a defined period, that it can provide mentorship, market access and investment outcomes that match what the best existing programmes deliver. Only then should it become a mandatory element of the scorecard.

This matters all the more because of how we got here. South Africa’s transformation policy has a history worth defending. The Financial Services Charter and the sectoral charters that followed were the product of hard-fought, good-faith negotiations between government, industry and representative bodies. They balanced the imperative for change with the practical knowledge of what corporate South Africa could actually deliver. The 2007 BBBEE legislation built on those foundations. The resulting framework was imperfect, but it was legitimate, shaped by genuine engagement rather than imposed from above.

The Transformation Fund process has been something different from the start. It began with a headline R1bn target, announced before anyone had worked out how the money would be spent or what capacity would be needed to deploy it effectively. Concept papers followed that were poorly considered and provoked predictable criticism. The department pressed ahead anyway. The result is a draft that threatens to destroy demonstrably effective programmes in favour of a vehicle that has yet to prove it can do anything at all.

The comment process closed this week. Minister Parks Tau and his department now have a choice: engage with the substantive critique that has unquestionably arrived in volume or press ahead with a proposal that undermines the very transformation it claims to advance. The answer should not be difficult. Protect the programmes that are working. Pilot the fund before making it mandatory. And return to the collaborative approach that made South African transformation policy worth being proud of.

• Dr Theobald is founder and chair of research-led consultancy Krutham.