The proposal by the department of trade, industry & competition (DTIC) for the establishment of a R100bn Transformation Fund is not only a seriously flawed response to a very real challenge; it is bound to make matters worse.

There is no way in which the fund can be implemented as envisaged. If it were established in the manner described in the concept document it would derail transformation while throttling economic growth, distorting market incentives, undermining legitimate empowerment initiatives and wasting an extraordinary amount of money in the process.

The goal of creating a more inclusive economy in which historically disadvantaged South Africans own and manage a much larger share of businesses is not in dispute. Achieving that is critical for long-term prosperity and is overdue. But this fund — vague in design, impossible to execute and flawed in its assumptions — is not the way to achieve it.

Complicating any response to the proposed Transformation Fund is the lack of detail in the concept document. Beyond the headline-grabbing R100bn price tag and a long list of vaguely expressed aspirations, the proposal is a patchwork of wishful thinking. How will the fund operate? What criteria will it use to allocate support? What kind of support will it provide and to whom? What outcomes will it measure? The document provides no real guidance.

The document is more marketing pitch than plan of action. It relies on unsupported assumptions that access to finance is the key barrier for black-owned businesses and that a centralised, state-managed behemoth can somehow distribute vast sums effectively and support small enterprises. These assumptions are wrong. They are also dangerous. 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.

The Transformation Fund proposal skips over fundamental questions. Why is another fund necessary when entities such as the National Empowerment Fund, the Black Industrialists Programme and numerous other B-BBEE-linked mechanisms already exist? What has been learned from their successes and their failures? What has worked, what hasn’t, and why? Who has benefited? None of this is addressed. Instead, the fund is introduced as if these questions are somehow irrelevant.

This approach implies that we should ignore decades of uneven results and embrace a new, larger iteration of the same failed approach simply because the price tag is bigger and the rhetoric louder. What happened to the president’s commitment to evidence-based policy making?

At the heart of the proposal lies a fantasy: that complex economic transformation can be centrally directed by the state through a single mega-fund. This reflects a grossly inflated belief in the capacity of government institutions that have consistently failed to deliver on far simpler mandates.

The most important danger is that this fund will become another slush fund for politically connected players. With no detailed framework for accountability, no transparent metrics for success and an ill-conceived governance structure, there is a high risk of rent-seeking and corruption.

Or there would be if there was a likelihood that the R100bn would flow into the fund. That seems very unlikely when one examines the proposed sources of funding, starting with allocations from the fiscus.

The gravest consequence of this proposal is that it will set the country back

South Africa’s constrained fiscal circumstances mean that there is no way that government can allocate R20bn a year to the fund. This sum is equivalent to two-thirds of the Social Relief of Distress Grant budget and considerably more than the 0.5 percentage point increase in VAT was going to raise. It is inconceivable that funding at this scale will be approved any time soon.

What about the equity equivalent investment programme (EEIP), which consists of funds committed to transformation by foreign companies when their ownership structure makes it impossible to take on B-BBEE equity partners. EEIP contributions are historically tiny and cannot cover more than a very small fraction of the fund’s aspirations. A DTIC 2022 report identified R8bn in EEIP contributions to B-BBEE between 2007 and 2022, or a little over R500m a year.

What about philanthropic support, which the concept document proposes? Again completely implausible, especially before the fund has overcome the reputational challenges that new government initiatives inherit from their many corrupt predecessors.

That leaves existing enterprise and supplier support and development (ESD) spending by the private sector and state-owned companies as the only remotely viable avenue for funding. But it is one that could succeed only by cannibalising existing empowerment practices.

Existing ESD contributions to B-BBEE are deployed by companies with deep knowledge of their supply chains and business partners. Pulling these resources into a state-run vehicle will reduce their effectiveness and actively harm the black-owned businesses that currently benefit from them.

Though the Transformation Fund concept document claims contributions to the fund will be voluntary, the fine print — and the logic of desperation — suggests that this will become compulsory once it is clear that voluntary donations won’t suffice.

This is not mere speculation — it is stated explicitly in the proposal. The document says, at one point, that: “Government will review ESD Codes to ensure that funds for ESD are paid by entities towards the Transformation Fund.” Once ESD contributions are mandated to flow into the fund, it effectively becomes a backdoor corporate tax. And like all taxes, the costs will be passed on: to shareholders, yes, but also to workers and consumers.

The gravest consequence of this proposal is that it will set the country back. It will divert scarce resources from functioning systems. It will scare off investors. It will reduce employment. And it will increase the cost of doing business at a time when the country can least afford it.

We cannot grow our way into a more inclusive society with policies that suffocate growth. Transformation cannot succeed without growth, which cannot be achieved without investment, and investment will not happen in an environment where capital is punished.

Instead of doubling down on outdated and ineffective policies the government must start by asking hard questions. What has worked over the last 20-plus years of transformation policy? What hasn’t? At what cost? Who has benefited? And who hasn’t?

South Africa needs a credible, evidence-based review of its entire transformation strategy. This should be led by an independent panel of economists, business leaders, legal scholars and civil society actors. It should take stock of what the B-BBEE framework has delivered, what it has distorted, what impact it has had on growth and investment and what a smarter, more effective approach would look like.

Is the Transformation Fund a serious proposal or a stunt? A politically inspired gesture that could result in doubling down on failure? It is based on shallow assumptions, glosses over critical issues and offers a deeply flawed path forward. It must be rejected.

If we are serious about building a fast-growing, inclusive economy, we need transformation policies that are lean, smart, evidence-based and accountable. That is not what this proposal offers. What it offers is regression masquerading as progress.

South Africa cannot afford this. The GNU should scrap the fund proposal and get real about what it takes to build an economy that works for everyone.

• Bernstein is executive director of the Centre for Development and Enterprise. This article is based on the CDE submission on the Transformation Fund submitted to the DTIC.

This article was published on Sunday Times