Government’s ‘new’ R100 billion BEE fund under fire

The government’s plan to capitalise a new R100 billion fund to promote Black Economic Empowerment (BEE) has come under fire for its potential to be plagued by corruption and the likelihood that it will be a tick-box exercise with little meaningful impact. 

This is despite the government reworking its plans for the fund to try make it more palatable to companies to contribute to it. 

Initially, the so-called BEE Transformation Fund was set to be capitalised through existing funding sources, including –

• Companies contributing 3% of annual net profit after tax for the development of black suppliers as part of enterprise and supplier development.
• Multinational entities complying with the ownership element by setting aside 25% of the value of their South African operations for transformation purposes.
• Intervening in mergers that raise public interest concerns to get companies to commit to transformation funds.

The latest proposal from the Department of Trade, Industry, and Competition revealed new incentives for companies to contribute to the fund. 

Under this proposal, first reported by Business Day, companies that contribute 3% of their after-tax income to the fund will earn double the BEE points currently available for their contributions towards enterprise and supplier development. 

This increased number of points will improve the chances of contributing companies to access government and corporate procurement. 

The fund will be governed by a board appointed by the minister and supported by a public-private investment committee. It will only issue funding in line with Broad-Based BEE regulations. 

Minister of Trade, Industry and Competition, Parks Tau, has been a strong advocate for the Transformation Fund, arguing that it is set to increase economic participation and the income-earning potential of black-owned businesses. 

“Established businesses must support black-owned enterprises and SMMEs for them to participate in their value chains and other markets as suppliers,” Tau said. 

He said the fund is not about imposing new obligations on companies. Rather, it is about ensuring that “existing commitments under BEE legilsations are strategically utilised to create meaningful economic transformation”.

Stiff criticism

Despite the fund’s lofty goals, it has come in for stiff criticism as a potential feeding trough for corrupt actors and the inability of such a vehicle to make meaningful change in the economy. 

In particular, many have pointed out that such a fund will do little to improve economic growth in South Africa. Thus, it will have little impact on employment and inclusion in the economy. 

Some individuals have also criticised the fund as a tick-box exercise, whereby companies will merely contribute funds without driving meaningful transformation. 

“The short answer is that the reworked version is not an improvement over the first proposal. There are no meaningful changes to it,” CEO of Unconventional CA Hiten Keshave told 702. 

“We are fundamentally sitting in the same position with the same concerns, with the government proposing to centralise funds, but they have no form of direction as to how these funds will help small businesses or grow the economy.” 

Business leaders and lobby groups have pointed out that South Africa already has significant funds that are meant to help small businesses and black-owned businesses, with little positive impact in reality. 

“It is unfortunately not the case that these funds help businesses. I think with the centralisation of funds that is being proposed, the risk that more funds are wasted increases,” Keshave said. 

“The centralisation raises the concentration risk further and, especially if the governance is weak or politicised, capital leakage is going to become more likely.”

“With the lack of confidence we already have in the government and state-owned entities, there are going to be many red flags raised regarding this proposal.” 

Apart from this, even if businesses contribute and the fund is managed well, there is no evidence that it would lead to meaningful transformation. 

“There will be questions as to whether this is really true transformation or just a check-box exercise to allow companies to boost their BEE scorecard,” Keshave said. 

Keshave questioned whether the government is pursuing transformation or if it is merely looking to fill gaps in its existing budget that should go towards small businesses. 

Currently, the Department of Small Business Development has a shortfall in funding for its various initiatives to support companies and black-owned businesses. 

Keshave also pointed out that the minister’s authority to appoint the board by himself is a major concern, with it likely to become a tool to be used for political ends by whoever is in power. 

Aside from these concerns, he also pointed out that it would be an arduous task for the board of directors to even find businesses to invest the planned R20 billion a year for the next five years. 

Simply put, there are not enough small businesses for the government to be able to invest that sum of money effectively, particularly if it limits itself to a particular type of business. 

Political opposition

The proposal to create a R100 billion BEE fund has also been sharply criticised by political parties that are part of the Government of National Unity (GNU).

Chief among these is the second-largest member of the government, the Democratic Alliance (DA), which said it would “not support this madness”.

“This fund could very easily become a bottomless pit for taxpayers’ money, with little to no oversight or meaningful outcomes,” the DA’s spokesperson on trade, Toby Chance, said when the proposal was first unveiled.

“Not only does the DA reject race-based legislation, but BBBEE has proven counterproductive in closing our inequality gap.”

He added that the majority of funding is missing the mark in terms of stimulating high-growth enterprises in South Africa. “Instead, we believe in providing resources based on merit and the business’s viability and growth potential,” he said.

“Our country has an abundance of entrepreneurs drawn from diverse communities who just need the opportunity to succeed.”

Chance said the fund will not address the root causes of South Africa’s economic problems and will perpetuate the same cycle of mismanagement that has led to poor economic growth.

“A R100 billion fund, built on this flawed framework, will likely lead to further financial waste and political cronyism rather than true economic empowerment,” he said.

Following the adjusted proposal, the VF Plus, a fellow member of the GNU, called on business leaders and investors to take a firm stand against the R100 billion BEE fund.

The original aim of BEE – to economically empower black South Africans – has not been achieved, the party said.

Under ANC rule, the system was exploited to enrich a small group of billionaires while the broader public has grown even poorer.

Meanwhile, the party said, extensive corruption and state capture have siphoned hundreds of billions of rand off the fiscus. Consequently, the economy keeps shrinking, unemployment keeps climbing and infrastructure is crumbling.

It also said it is a recipe for political interference and corruption for the board managing the fund to be appointed by the minister.

“The only thing that will stimulate meaningful economic growth, create job opportunities and truly empower all South Africans is implementing sound free-market policies,” the VF Plus said.

“The Freedom Front Plus will keep endeavouring to replace failed ANC policy and corruption with a clean, free-market-driven alternative that prioritises the people’s interests.”