The Transformation Fund initiative could champion much needed transformation of the financing system for black people’s meaningful participation in business and the economy, writes Tshediso Matona
Minister Parks Tau’s proposed Transformation Fund has triggered a major discussion on the topic of access to capital by black people and businesses. The topic is a critical aspect of the ongoing debate about the broad-based black economic empowerment (B-BBEE) policy as an instrument for promoting meaningful participation in the economy by black people in general.
It is important not to allow contestations about the proposed Transformation Fund devalue and de-prioritise the difficulties of access to capital suffered by black enterprises of all sizes and forms. It is also important to recognise that these difficulties have historic origins in apartheid policies, which excluded black people from participating in social and economic affairs of the country. Their persistence to this day serves as another structural constraint that bedevils both transformation and growth. This is not always cited in economic commentary, but the fact is that the economy’s entrepreneurial base continues to be limited to incumbent white businesses who dominate major sectors, value-chains, networks, and as such, have a head-start advantage in emerging opportunities and industries. This is a vicious cycle of inherited past privilege and present-day advantage, which needs grasping and confronting if solutions to black businesses’ access to capital are to be equal to the task and scale of the challenge.
Viewed from this perspective, it is uneconomic to suggest that interventions should prioritise economic growth and de-focus from transformation. Intentionally fostering significantly more businesses, entrepreneurs, capitalists, employers, high-skilled professionals, and managers is decidedly pro-growth. Naturally, these new entrants will largely be drawn from the ranks of black people by the sheer force of demographics, as black people make up 92% of SA’s population according to StatsSA’s census 2022, which demands targeted support for them to overcome their inherited position of disadvantage from discrimination during apartheid.
What can be so difficult to understand about this common-sensical economic logic? Unless what is actually being safeguarded is the status-quo and vicious circle of privilege and advantage, at the cost of depriving growth of the contribution of the majority of the population?
Without accessible, inclusive, and equity-based financing, black people’s participation in ownership, management, and control in SA’s economy will remain elusive and superficial. And the strategic and high-value sectors like mining, finance, and manufacturing will remain concentrated and untransformed.
It is also one of SA’s remarkable market failures that the country has a highly developed and world-class banking and financial sector, and at the same time has a narrow Medium, Small, and Micro entrepreneurial base compared to its peers, let alone one that is responsive to the specific needs of black enterprises.
From the onset, post-apartheid policy and legislation recognised that transformation and meaningful black economic participation required that access to finance be targeted with special interventions. Among objectives, the B-BBEE Act is “promoting access to finance for black start-ups, SMMEs, co-operatives, and black entrepreneurs, including those in the informal sector” and “including non-financial support”. The National Empowerment Fund (NEF) Act seeks to promote and facilitate black people’s “ownership of income-generating assets” and to support “business ventures pioneered and run” by them.
In practice, what transpired since then has driven home how deeply intractable the challenge of access to finance for black entrepreneurs has proven to be. It is clear that the NEF was established within the framework of a corporate financial system that was not specifically designed to fund transformation-led initiatives. While the NEF and other state-owned funding instruments are helping, they are not fully meeting the scale of the challenges and extent of the financing gap. They are not fully unlocking what is possible within SA’s financial sector.
The challenge also has many layers to it, and black entrepreneurs’ needs for capital are fairly diverse. For example, available funding does not always match every type of need for finance, while the terms and conditions don’t always match every enterprise’s circumstances.
In essence, there is another form of market failure that the Transformation Fund proposal seeks to address. As such, the proposal cannot be dismissed in the knee-jerk fashion that comes from some quarters. Instead, it should be engaged with to ensure that its crafting is informed by lessons learnt, successes and shortcomings of existing measures, as well as by available opportunities.
The B-BBEE Codes of Good Practice include important instruments contributing to addressing the financing challenge, namely the Enterprise and Supplier Development (ESD) element of the BEE score-card, and the Financial Sector Code’s Empowerment Financing provision, both of which aim to stimulate growth of the SME sector and ownership of businesses by black people, through inter alia offering more favourable terms than traditional commercial loans to SMEs. However, the B-BBEE Commission’s monitoring shows that implementation of the Codes and of ESD is not optimal, and the private companies and banks are not fully meeting the targets set in the Codes.
The Commission’s 2022 study on the effectiveness of ESD found that only 62% of entities surveyed confirmed they had ESD strategies, suggesting a prevalence of “tick the box” exercises in executing ESD, which diminishes it as a lever for economic transformation. The study also found misaligned expectations between implementing companies on the one hand and ESD beneficiaries on the other. For example, while beneficiary entities may prioritise operational efficiency, market penetration, and sustainability, an implementing entity might instead emphasise the relevance of the beneficiary’s services and/or products, or its B-BBEE rating; or it may prefer grants or promptly paying suppliers as its ESD contributions, or mentoring/professional services to beneficiaries at no charge.
The potential of ESD has not been fully unlocked to contribute to a thriving MSME sector, which supports growth and job creation, as it does elsewhere among SA’s peers globally. There is thus an opportunity to improve the deployment and impact of ESD, along with that of the Financial Sector Code’s Empowerment Financing scheme. This calls for reassessing and rejuvenating these instruments, informed by the genuine needs of MSMEs owned by black people, including women, youth, and persons with disabilities. In this regard, the B-BBEE Commission’s ESD study recommended the aggregation of ESD funds into a central fund, with an institutional and governance oversight structure modelled on the Solidarity Fund, which provided support during the COVID-19 pandemic.
Other monitoring reports of the B-BBEE Commission, the National Trends and Status Report on B-BBEE (released in 2022) and Major B-BBEE Transactions Report 2023/2024, find that while black ownership transactions have increased in number, financing schemes for these acquisitions include prolonged lock-in periods which delay or deny value to black participants.
Some of the challenges with the B-BBEE financing mechanisms are:
- Debt-heavy deals: In which ownership transactions rely on highly leveraged (debt-based) financing. As black participants lack upfront capital, the shares are bought on credit, using future dividends to repay the loan. As such, if the company underperforms or does not pay dividends, black shareholders derive no real economic benefit and sometimes end up being highly indebted;
- Lack of collateral and credit history: Black South Africans lack assets that can serve as collateral due to historical dispossession, and as such, traditional banks and financial institutions view black entrepreneurs as high-risk, often denying them funding or offering punitive interest rates;
- Short-termism in deal structures: B-BBEE deals are often designed for quick scorecard points rather than long-term sustainability, and when funding conditions are not met, the shares often revert to original (white-owned) shareholders;
- Exclusion from capital markets: Most black-owned businesses operate on an informal or small scale, and are excluded from mainstream capital markets like the JSE. As a result, they cannot attract equity (institutional) investors/backing to scale-up their ownership or operations; and
- Beneficiary dilution: Broad-based empowerment schemes (e.g. community trusts, employee share ownership schemes) often lack ongoing capital reinvestment, which leads to dilution and symbolic ownership, and not the desired impactful transformation.
The Transformation Fund initiative could champion much needed transformation of the financing system for black people’s meaningful participation in business and the economy.
Clearly, the proposed Fund might not by itself be the solution to all the abovementioned challenges, but could be a catalyst for change in the MSME support eco-system. For this, it will need to be innovative and seek creative partnerships, including with mainstream banks and financial institutions.
Although the challenge of access to finance ranks high in this eco-system, it is not a panacea as equally important complementary interventions are required, such as access to markets, technology, infrastructure, skills and mentorship.
There is a chance to unlock the financing constraint and re-energise SA’s MSME support eco-system to advance economic justice and sustainable participation of the black majority in the economy.
Tshediso Matona is the Commissioner of the B-BBEE Commission.
