Growing Worries Arise Regarding Proposed R100bn Transformation Fund

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JIMMY MOYAHA: If I recall correctly, prior to the State of the Nation Address earlier this year, back in January, we first learned about the proposed R100 billion transformation fund. Since then, a Concept White Paper has emerged regarding the fund itself. However, it appears that we still have more questions than answers. Hopefully, we can clarify things and find some answers.

I am currently joined by Busi Mavuso, the CEO of Business Leadership South Africa, to discuss this further and see if we can make sense of it. Ms. Mavuso, good evening. It’s wonderful to have you back on the show. Thank you for taking the time to join us.

We’ve been engaged in this discussion for quite some time, and from my perspective, it seems South Africa tends to commit financial resources towards solutions or fixing problems without having a concrete plan in place. Is that what we are repeating here?

BUSI MAVUSO: Good evening, Jimmy, and thank you so much for having me.

The intention appears to be good, but it seems we haven’t fully fleshed out the solution we are proposing. It’s a half-baked idea, Jimmy.

It seems we aren’t starting with a clear end goal in mind, leading to numerous questions from the business community regarding the fund and its intended impact.

Firstly, it’s undeniable that our country requires transformation. The evidence is clear; inequality continues to rise, and we remain the most unequal society in the world. According to the Commission of Employment Equity Report released annually, Corporate South Africa is still not a transformed society.

Let’s acknowledge that the purpose and intent behind establishing this fund are not in question.

There are several positives to consider from our initial discussions on this matter, which the minister described as “half-baked” when it leaked in Parliament in January, and many questions emerged.

From what we can gather in this concept paper, the dtic [Department of Trade, Industry, and Competition] positions it as a collaborative effort between the business sector and the public sector. It is open to our feedback as businesses to further develop the proposal – which is commendable. We have a strong foundation for a business-government partnership, so the more we strive to create viable solutions for our country’s issues, the better.

As the business community, we appreciate that the fund concept adopts a more voluntary tone and emphasizes collaboration with the private sector, alleviating our concerns about it being mandatory. We were questioning how making this compulsory would work alongside existing successful initiatives and enterprise supply development funds.

However, the downside of the paper is its lack of detail regarding its operational aspects. There’s no clear indication of where the R100 billion will originate, its funding sources, and so forth.

The paper suggests that equivalent programs will be a primary funding source, but we are aware that these are ineffectively applied, causing uncertainty for multinationals operating in South Africa. It also implies that various government contributions will be involved, yet it is unclear where these contributions will originate.

Additionally, it suggests that it will seek voluntary contributions from firms looking to achieve full scorecard credit for ESG [environmental, social, governance] principles. However, many of these funds are already allocated.

Many companies manage their own successful programs, and it’s doubtful that the fund will significantly enhance market access. If the fund attempts to intervene in market access as indicated in the paper, its ability to do so remains questionable.

The paper does not provide any comparative analysis against existing government-backed funding mechanisms, such as the Cooler Fund, the IDC [Industrial Development Corporation], or the NEF [National Empowerment Fund]. Will the fund replace them? Complement them? If it complements them, how?

Governance is crucial as well. The paper does mention an SPV [special purpose vehicle] consisting of eight board members from both the public and private sectors, but lacks a detailed operational plan. Will it be centralized? Distributed across provinces? Based in major towns? What will be the fund’s annual administrative budget, and where will that funding come from?

The document appears to advocate for a centralized model, which may hinder agility in responding to shifting market signals.

This centralized approach could stifle the flexibility required by the targeted entities and likely impede progress rather than aiding it.

There are significant gaps and weaknesses present, and the document does not clarify previous interventions in transformation. If former initiatives have failed, what lessons have been learned? How will this transformation fund ensure that the identified gaps and weaknesses are effectively addressed?

How do we ensure that these funds are not misappropriated, Jimmy? That must be a foundational element in the guardrails and governance structure of this fund.

Without a clear understanding of the intended outcomes, it’s impossible to assess whether the fund will provide good value for money. The figure of R100 billion itself is perplexing; why that specific amount? How was it determined?

While it’s visually striking to state R100 billion, one must articulate the intended impact of this money. Will it go towards equity, loans, or target a specific number of SMMEs? How will the fund aim to reduce the failure rate of these businesses, and what is the current failure rate and the goals within a specific timeframe?

These are crucial questions we are currently exploring, and we will certainly submit our insights to the minister.

JIMMY MOYAHA: Ms. Mavuso, I want to explore other aspects of this issue. While we’ve raised multiple concerns, we’ve also acknowledged the positive side: the government’s willingness to accept consultations and suggestions.

With that in mind, let’s discuss the solutions we propose. It’s one thing to have permanent solutions – and you’ve mentioned this before – but we require more than just temporary fixes; we need sustainable solutions. I want to delve into whether we are truly solving problems on a sustainable level, as opposed to just providing a quick fix.

BUSI MAVUSO: That’s precisely the point, especially when it comes to enterprise and supply development, Jimmy.

The objective of enterprise and supply development programs is to nurture small businesses currently excluded from the procurement budgets of larger corporations.

We must consider how we can assist newly formed businesses like “Busi Incorporated” or “Jimmy Incorporated,” which may operate on a small scale and lack contracts with large firms like Discovery, Nedbank, or SAB due to their scale and market access limitations.

That is the aim of enterprise and supply development. A company like Discovery can develop small businesses to benefit from their procurement process because they understand the components of their procurement and supply chains. Once they’ve developed a small business to meet their quality standards, they can begin purchasing from them.

However, if you compel Discovery to redirect its funds to the NEF or another entity to develop these businesses, it raises several concerns. What is the objective of this development? How does one ensure that the developed business meets Discovery’s quality requirements? What connects these firms back to the larger businesses that will actually supply them?

This presents a challenge; will the development be sustainable? Or are we separating these suppliers from their necessary corporate ecosystems, where they can’t be optimized in isolation?

What specific outcomes is this SPV intending to achieve?

This gap in clarity poses a significant concern from a business standpoint. We worry about sustainability, as there exists a risk of removing effective programs and benefitting suppliers from existing initiatives, potentially relegating them to uncertainty without guaranteed outcomes. Therefore, the question of sustainability looms large as we consider how these programs are conceived.

JIMMY MOYAHA: Busi, before we conclude, let’s address the magnitude of this initiative. As you pointed out earlier, it’s vital to understand the sheer scale of R100 billion. This translates to approximately R55 million daily over the next five years, or R80 million daily when only counting business days.

Such significant sums can accomplish a great deal – and I’m sure you agree this poses concern over how we prevent misuse of these funds.

BUSI MAVUSO: Absolutely, and this represents a considerable gap. Our preliminary calculations raise questions about the source of these funds. In looking at SARS numbers, there’s a small pool of reported profits.

For instance, total after-tax profits reported by SARS amounted to around R456 billion, of which only 3% would yield approximately R13.7 billion. It’s crucial to note that not all companies are BBBEE compliant, and many choose not to contribute the required 3%.

This raises significant questions: Given that compliance with BBBEE is voluntary, how do we realistically achieve the R100 billion goal? This value implies sourcing R20 billion annually.

Keep in mind, not all entities are compliant with BBBEE and thus are reluctant to contribute. How do we bridge the gap for the remaining R7 billion? The expectation of contributions from other government sources, while the country faces fiscal constraints, raises further doubts about feasibility.

Simply speaking, from a numerical and computational angle, this proposal appears disjointed.

JIMMY MOYAHA: This highlights the importance of critically evaluating these aspects and engaging in meaningful discussions to avoid repeating past mistakes.

Let’s conclude our conversation on that note. Thank you to Busi Mavuso, the CEO of Business Leadership South Africa, for sharing her insights regarding the concerns surrounding the proposed R100 billion transformation fund, while also recognizing the potential positive impact this fund could have.

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