In a concept document released in April the department of trade, industry & competition proposed the introduction of a R100bn Transformation Fund, which it conceives as a vehicle to accelerate empowerment by supporting black-owned businesses through financial and nonfinancial interventions.

While the stated aim of this fund is one that everyone shares, the proposed approach, particularly the intention to fund it through the redirection and centralisation of private sector enterprise & supplier development (ESD) spending, is economically unsound and strategically counterproductive.

This would not only fail to advance transformation, but also disrupt one of the more successful empowerment mechanisms in place. It thus actually risks reducing real inclusion by divorcing firms benefiting from ESD spending from their most potent enabler: integration into commercial supply chains.

Under the broad-based BEE codes ESD is not a form of corporate philanthropy or social investment. It is about leveraging business processes to direct business to black-owned and black-managed firms. To accrue ESD points companies must buy goods and services from empowered firms or invest in the development of black-owned suppliers. This means businesses’ supply chains are used not merely to meet legislative requirements but to build resilient, cost-effective and inclusive supply chains.

The consequence of this is enormously important regarding the Transformation Fund concept document: ESD is not optional spending, it is embedded in procurement activity that is essential to a business’s commercial and operational strategy. Similarly, supplier and enterprise development activities are directed at improving the capacity of firms that already supply the business or could do so in future.

These are not discretionary contributions waiting to be redirected to an all-purpose Transformation Fund. They are targeted investments into viable commercial partnerships from which the firm doing the procurement receives goods and services needed for commercial reasons. Suggesting that there is a world in which businesses might “voluntarily” hand these over to the Transformation Fund, which is what the concept document proposes, is not just unrealistic — it is fundamentally disconnected from how ESD functions.

Do the authors of the document not appreciate this? Maybe. But maybe they do. Maybe that is why, buried in the concept document’s depths is an important clue to how the Transformation Fund will evolve: “Government,” the document says, “will review the ESD codes to ensure that funds for ESD are paid by entities towards the Transformation Fund”.

This is a clear signal that the government is contemplating the possibility that supposedly voluntary contributions may become mandatory. Once it becomes clear that individual businesses are unwilling to fund a centralised initiative that offers them no commercial return, no supply chain benefits and no meaningful control, the state will move to compel contributions through a revision of the broad-based BEE codes.

Forced redirection of ESD funds will be a stealth tax on business — disconnected from market realities and divorced from operational effectiveness. In doing so it would undermine the very essence of empowerment: building black-owned businesses that are commercially viable and integrated into the economy.

The logic of the Transformation Fund suggests a simple trade-off: instead of empowering businesses through market access and corporate mentorship, the state will centralise funding and attempt to provide equivalent support from above. This approach assumes the government can:

• Identify viable black-owned businesses more effectively than the private sector using its existing supply chain processes.
• Offer better development and training support than corporates with a direct commercial stake in success.
• Facilitate market access for empowered companies without being the buyer of those businesses’ goods and services.

These assumptions are not only unproven; they fly in the face of experience. Existing government empowerment funds, including the National Empowerment Fund (NEF) and the Black Industrialists Programme, have struggled with scale, impact and governance. Their loan books carry high impairment rates. Their reach into rural and township economies has been limited. And their commercial insight is dubious.

So why would the state assume that a new centralised fund — operating with a broader mandate and less specificity — will do any better? Ludicrously, by removing ESD funds from their present context and relocating them to a distant central body, the Transformation Fund will weaken existing black-owned businesses that are part of real supply chains. These are precisely the businesses that are most likely to succeed.

The most effective empowerment is that which is embedded in the commercial logic of existing supply chains. ESD works because businesses understand their markets, their procurement needs and their operational risks. They choose suppliers who can meet their standards, and they invest in those suppliers accordingly. Empowerment is achieved not through sentiment, but through alignment of incentives.

Even assuming perfect governance, a centralised fund cannot replicate this dynamic. It cannot assess whether a small logistics firm in a rural town can meet the delivery requirements of a national retailer, or help it do so. It cannot provide mentorship in the intricacies of data integration or food safety protocols. Corporates can, and do.

A centralised mechanism operated at arm’s length from commercial realities can only increase inefficiency and waste, while weakening empowerment outcomes.

There is no evidence that ESD is failing. According to the Broad-based BEE Commission, total ESD spend by JSE-listed firms and state-owned companies amounts to about R26bn annually. While not perfect, this system supports thousands of firms. It is commercially anchored and largely self-sustaining. Why disrupt this?

The Transformation Fund concept document offers no empirical review of what has worked in existing broad-based BBBEE policy. It offers no diagnostic analysis of ESD effectiveness. It doesn’t even attempt to quantify the trade-offs involved in redirecting these funds. Instead it proceeds on the presumption that centralisation is inherently better and that the state (weak and corrupt as much of it is) is better suited than private players.

SA urgently needs more inclusive economic growth. Apartheid’s legacy, with decades of economic underperformance, has left many millions of South Africans locked out of opportunity. But inclusion cannot come at the expense of economic logic. Empowerment policies must be tested, measured and revised based on data — not designed around political optics or centralised control.

A better way forward would be to commission an independent, evidence-based review of BEE outcomes over the past 20 years. Such a review would assess the relative effectiveness of tools such as ESD, preferential procurement and skills development. It should weigh benefits against costs and evaluate how to scale what works while discontinuing what doesn’t. The goal should be to build a transformation agenda that would not have all the risks associated with large pots of discretionary money.

As proposed the Transformation Fund does not meet these standards. The department of trade, industry & competition’s proposal to fund the Transformation Fund by centralising ESD contributions is misguided. It will disrupt integrated supply chains, disempower viable black-owned businesses and create a bloated, inefficient bureaucracy. Far from advancing transformation, it will set it back.

If SA is to build a more inclusive economy it must do so through mechanisms that align public objectives with market realities. ESD is one such mechanism. Undermining it to fund a vague and overambitious Transformation Fund is a mistake the country cannot afford to make.

• Bernstein is executive director of the Centre for Development & Enterprise. This article is based on the centre’s submission to the department on the Transformation Fund.