Peter Stein | April 23, 2025
On March 19, 2025, the Department of Trade and Industry Competition (“DTIC”) published a draft concept document for the Transformation Fund for public comment. The proposed fund was first announced by the Minister of Trade, Industry and Competition (the “Minister”) in January 2025, and will involve raising R100 billion over five years for the purposes of Black-majority-owned and controlled support companies as defined by the Wide Black Economic Empowerment Act (the “BBBEE ACT”).
The concept document provides that the proposed fund will be administered through a special purpose vehicle (“SPV”). SPVs are registered as tax-free entities Finance service From a provider's perspective Finance Advisory and intermediary service Activities. There is an eight-member board of directors appointed by the minister, including two representatives of the private sector. The fund is funded by governments, public institutions, donation institutions (including international institutions and development banks) and the private sector. Two key sources of information regarding private sector funding are identified in the concept document –
1) A stock-equivalent investment program (“EEIP”) that allows local subsidiaries of certain multinational companies to earn BBBEE ownership points without holding actual black stocks. Instead, funds will be donated to the BBBEE initiative approved by the DTIC. It is not clear whether DTIC will request changes from existing EEIPs to contribute to the proposed fund, or whether contributions to the fund are only required for the new EEIPs.
2) By contributing to the proposed fund, the company will be able to earn company and supplier development (“ESD”) points for the purposes of a BBBEE rating. In this regard, DTIC modifies the current Good Practice Code (“Code”) issued under the BBBEE Act. measurement ESD company score.
The concept documentation does not provide much detail on the proposed amendments to the ESD provisions of the code. Regarding the BBBEE Act, amendments to the code must be made by the Minister of the Government Gazette for at least 60 days of public comment.
Current frameworks for measuring a company's ESD score from a code perspective include evaluating company's supplier development (“SD”) and enterprise development (“ED”) contributions. The company's SD and ED scores are measured based on post-tax net profit, taking into account the targets (2% for SD and 1% for ED). The main difference between SD and ED is that SD beneficiaries are existing suppliers, while ED beneficiaries are not existing suppliers. The code provides that if a company fails to earn at least 40% of all available points for SD and ED, its BBBEE rating will be automatically downgraded at one level if the total annual revenue total exceeds R10 million. Therefore, ESD forms an important part of determining a company's BBBEE rating.
The current framework involves establishing direct work Relationship between ESD Points and companies seeking ESD beneficiaries. This has some commercial benefits for the beneficiaries, especially as the code considers both financial and non-monetary SD and considers contributions such as investments, loans, grants, guarantees, credit facilities, etc. trainingmentoring, discounts and other priorities have an opinion to integrate beneficiaries directly into the company's supply chain. The contributions are made directly to the beneficiaries and generally require considerable time; resource From companies that develop and implement ESD programs. Importantly, beneficiaries must receive contributions within the company Finance For this reason, the year contributes to the company's ESD score Finance year. This encourages the prompt provision of contributions to the beneficiaries.
However, the concept document shows that companies can earn ESD points “quickly” by simply contributing to the proposed fund. This saves businesses a considerable amount of time and money if they don't need to implement their own ESD programs. The conceptual document is not clear in this regard, but states that the “participation agreement” should be concluded with an SPV. The terms of such agreements should be considered carefully, especially if you are attempting to impose obligations in addition to contributions to the fund.
The concept document states that contributions to the fund are generally exempt in relation to section 56(1)(h) of the Income Tax Act and are subject to deduction in terms of section 18(a) of the Income Tax Act. Therefore, there may be tax incentives when contributing to the fund.
Compliance with current SD and ED targets in the code is not mandatory, and ESD points are scored on a proportional basis, taking into account whether the company meets the target. This means that companies have the flexibility to decide how much they spend on SD and ED (bearing (Please keep in mind the risk of automatic downgrade mentioned above). It is not clear from the concept document whether the company's contribution to the fund is less than its target.
The concept document states that the company may decide whether to contribute to the fund's contributions. Perhaps companies may choose not to contribute, although it is not clear on this point, and continue their own ESD programme. Many rely on the details of the code revision.
The current framework is directly assumed work Relationship between private companies and ESD beneficiaries. The concept document envisages SPVs as third parties between the private sector and ESD beneficiaries. SPV collects and distributes funds and implements its own ESD initiative. This adds complexity to the provision of ESD contributions to beneficiaries and can adversely affect the benefits of such direct beneficiaries. work relationship.
There are several existing entities and programs tasked with promoting BBBEE and supporting the majority of Black people work Small, Medium and Micro Enterprises (SMME) including the National Empowerment Fund industry Development Corporation, DTIC's Black Industricist Scheme, The Small Enterprise Development and Finance Agency (SEDFA), and Small divisions work development. The key question is whether funds allocated to the proposed fund should be provided to existing entities and programs rather than establishing new entities.
The proposed fund should be operated supplementally (rather than overlapping) with existing entities and programs. The effectiveness of the fund on existing ESD programs implemented by the private sector also needs to be carefully considered. Ultimately, the success of a fund depends on its delivery, efficiencyreliability and excellent governance.
“Disclaimer – the views and opinions expressed in this article are the views of the author and are not necessarily those of the Bee Room.”
