CDE’s submission to DTIC warns that the proposed R100bn fund will deliver neither inclusion nor growth.

The Centre for Development and Enterprise (CDE) has warned that the government’s proposed R100 billion Transformation Fund is “a lose-lose proposition” that will fail to achieve its stated objectives.

“The implementation of this Fund will undermine existing efforts to promote economic inclusion and harm black-owned firms involved in current supplier development value chains,” said Ann Bernstein, executive director of CDE.

In its submission to the Department of Trade, Industry and Competition (DTIC), CDE argues that the concept document outlining the Transformation Fund is riddled with gaps, flawed assumptions, and implausible funding mechanisms.

“South Africa’s deep inequalities – rooted in apartheid and compounded by weak growth and failing policies – must be addressed with urgency,” said Bernstein.

“The goal of creating a more inclusive and bigger economy in which historically disadvantaged South Africans own and manage a much larger share of businesses is not in dispute. But this Fund is not the way to achieve it,” said Bernstein.

“The Transformation Fund proposal is based on an inaccurate assessment of what transformation requires, and an equally misguided belief in the state’s capacity to deliver it,” she added.

According to Bernstein: “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.”

In CDE’s view, these assumptions are wrong. “The real obstacles that struggling black-owned businesses face – market access, poor infrastructure, a lack of demand for their goods and services, lack of managerial capacity – are barely acknowledged,” said Bernstein.

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

“There is no model in which one organisation can deliver grants, loans, technical support, training, and market access across all industries, cities, townships and rural areas. It is inconceivable that a single organisation could do this effectively and efficiently,” Bernstein said.

“What happened to the President’s commitment to evidence-based policy making? CDE finds the proposal surprisingly vague and lacking in the most basic information needed to assess its viability. It is unclear what kind of fund this is, what it is meant to do, or how it will be structured,” said Bernstein.

“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 added.

CDE’s analysis suggests that the bulk of the R100 billion is expected to come from Enterprise and Supplier Development (ESD) spending under the Broad-Based Black Economic Empowerment (B-BBEE)  codes, but this is highly unlikely to materialise voluntarily.

“Redirecting ESD spending to the Transformation Fund would be ineffective and expensive. Perversely, it would harm existing black-owned businesses that are currently supported through integrated supply chain relationships,” said Bernstein.

CDE warns that when the Fund fails to attract sufficient voluntary contributions, government may resort to making these contributions compulsory, as suggested in the 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 cautioned.

Instead of pushing ahead with an ill-conceived mega-fund, CDE calls for a major rethink of transformation policy.

“South Africa needs accelerated growth that is far more inclusive,” said Bernstein.

“Instead of doubling down on outdated and ineffective policies, the GNU must start by asking some hard questions: What has worked over the last 20-plus years of transformation policy? What has not worked? At what cost? Who has benefited? And who hasn’t? What the country needs is a credible, evidence-based review of its entire transformation strategy,” she said.

CDE recommends that an independent panel of economists, legal experts, business leaders, and civil society representatives lead a comprehensive review of B-BBEE 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,” said Bernstein.

“The GNU should scrap the Transformation Fund proposal and take the hard decisions about what it takes to build an economy that works for everyone. Let’s build a new consensus that promotes inclusive growth, ensures accountability, and delivers tangible benefits to the vast majority of South Africans,” Bernstein concluded.

For media enquiries and interview requests, please contact Refiloe Benjamin: media@cde.org.za | 011 482 5140

ABOUT THE REPORT
Right Goal, Wrong Approach is CDE’s submission to the DTIC on the proposed Transformation Fund. The full submission is available here.

ABOUT THE CENTRE FOR DEVELOPMENT AND ENTERPRISE

CDE is an independent policy research and advocacy organisation. It is South Africa’s leading development think tank, focusing on critical development issues and their relationship to economic growth and democratic consolidation. Through examining South African realities and international experience, coupled with high-level forums, workshops and roundtables, CDE formulates practical policy proposals outlining ways in which South Africa can tackle major social and economic challenges.