EDITORIAL: Transformation fund is worth testing — but on a tight leash

As expected, the government is steaming ahead with the establishment of a transformation fund despite serious objections and reservations from think-tanks, opposition parties and business bodies.

On Friday, the department of trade, industry & competition postponed a public ceremony to launch the fund in Pretoria. Still, plans are afoot to set up the grand fund, now variously known as the Presidential Transformation Fund and Phakamani.

The fund was initially announced in March, and then a concept note was subsequently published for comment. A revised concept note suggests the government took some of the inputs into consideration. It acknowledges, for example, the need to avoid duplication with other development finance institutions such as the Industrial Development Corporation. The document makes participation voluntary instead of mandatory.

Critically, there is no suggestion that the government will establish it through legislation. This will, in all likelihood, have invited litigation even from the parties in the government of national unity.

The latest iteration suggests a phased approach to its establishment commencing this year. Parks Tau, the minister for trade, industry & competition, had earlier indicated that the fund would be up and running by the end of this year.

Still, many elements of the initial concept note are retained. These include housing the fund within the National Empowerment Fund (NEF), a small entity of the trade, industry & competition. Also, the proposal to seed the fund through enterprise and supplier development (ESD) contributions remains. But other sources of financing will be approached for contributions.

The fund’s broad objectives — to fund small black-owned businesses and co-operatives in the townships and rural areas —are maintained. The truth is, there is a legitimate need for patient capital. Not charity, not certificates. Small black-owned firms often have customers, contracts and credible business models but lack the capital structure to scale. 

Capacity constraints

The new approach is pragmatic. It acknowledges the government’s poor track record of setting up new institutions. It takes years to set up agencies. The problem is made worse by the government’s protracted recruitment processes.

The state’s capacity constraints are legendary. During the Covid-19 pandemic, it took the private sector’s intervention to get the Unemployment Insurance Fund (UIF) to disburse relief to retrenched workers.

Private-public partnerships are rare in SA. In recent times, two stand out. First is the business-government partnership to tackle crises of energy, freight logistics and crime and corruption. Second is the establishment of the Solidarity Fund during the pandemic. Without the private sector’s participation, it is doubtful the government, on its own, would have successfully implemented the idea.

—  The timing of the fund’s launch — a year before the municipal elections — will make it a political football.

Even the softer language in the new document fails to decisively address many concerns. These include mechanisms to insulate the fund from political interference. While the document promises that board members of the special purpose vehicle will be recruited based on the skills they bring, the minister will still be the appointing authority.

This is concerning. Despite court challenges of the ANC’s deployment policies, there is no evidence that SA’s largest political party has discontinued its deployment committee. Most boards of state agencies are populated by ANC supporters and sympathisers.

The other concern relates to diverting the ESD proceeds into the centralised fund. Until now, the private sector and, to a limited extent, the state-owned enterprises have had the liberty to implement their own ESD programmes. Typically, these are managed by outsourced specialists. It is hard to imagine why and how these large businesses will ditch a formula that has worked, albeit not with outstanding success, for an untested one.

The timing of the fund’s launch — a year before the municipal elections — will make it a political football. It will be seen as a vote-buying gimmick. And crucially, while the fund seeks to support black-owned small businesses, there is no evidence that the small business development ministry co-authored the latest version of the concept note.

Make no mistake, the transformation fund is worth testing, but only on a tight leash — legally watertight, Treasury cleared and pilot-driven. Alternatively, it will become another headline-friendly vehicle that buys certificates.