Issued by Ismail Joosub on behalf of the FW de Klerk Foundation on 04/02/2025

The Department of Trade, Industry and Competition’s recent proposal to establish a R100 billion Transformation Fund has ignited a wave of debate. Promoted as a critical tool for advancing economic inclusion, the fund aims to address the legacy of apartheid by channelling resources into black-owned businesses and Small, Medium and Micro Enterprises (“SMMEs”). But a closer look reveals serious concerns, particularly regarding its constitutionality. In fact, the proposal appears to violate multiple provisions of the Constitution, undermining the very principles that guide our democracy.

The Transformation Fund is positioned as a vehicle for economic redress, drawing on the Broad-Based Black Economic Empowerment (“B-BBEE”) Act of 2003 and section 9(2) of the Constitution, which mandates that the government take measures to promote the achievement of equality. The fund’s supporters argue that it is designed to address systemic barriers that have kept historically disadvantaged communities from fully participating in the economy. With a stated goal of mobilising R100 billion by 2029, the government has signalled that the fund will support high-impact sectors such as agriculture, ICT, manufacturing and tourism, with particular focus on businesses in townships and rural areas. It is intended to offer both financial and non-financial support, including technical assistance and market access, to black-owned enterprises.

However, the government’s grand vision for the Transformation Fund faces multiple challenges. For one, the fund will rely on private sector contributions, particularly through the B-BBEE generic codes. These codes require larger enterprises to contribute a percentage of their net profit to initiatives that support black-owned suppliers. Failure to do so may result in businesses being excluded from lucrative government contracts. The proposed funding mechanism has drawn widespread criticism, especially from parties like the Democratic Alliance (“DA”), which argues that the plan represents an overreach and unfairly burdens businesses.

At the heart of this opposition lies a fundamental concern, that the proposed Transformation Fund is not only economically uncompetitive, but it is also unconstitutional. There are at least four key areas where the fund contradicts South Africa’s founding legal document and this should give us pause before we allow such a policy to take shape.

The first issue arises with section 9 of the Constitution, which prohibits unfair discrimination on racial grounds. South Africa’s constitutional commitment to equality and non-racialism is a central pillar of our democracy. The B-BBEE policy, which this fund builds upon, inherently divides people based on race and then grants preferences to some racial groups while excluding others. This starkly contradicts the notion of non-racialism enshrined in section 1 of the Constitution. By focusing primarily on race as a criterion for the allocation of resources, the fund creates a system that is more likely to perpetuate division than foster the unity needed for real transformation.

Secondly, section 9(3) of the Constitution states that any discrimination based on race is automatically unfair unless it promotes the achievement of equality. However, B-BBEE, as it is currently structured, has not achieved equality. Instead, it has entrenched inequality within the black population, benefiting a politically connected elite, while the majority of the poor are even further marginalised. The failure of B-BBEE to uplift the broader black community is precisely why South Africa’s Gini coefficient—the measure of income inequality—has worsened from 59 in 1994 to 63 in 2022. This is not a success story. The Transformation Fund, rooted in the same flawed principles as B-BBEE, risks deepening inequality further by disproportionately benefiting a small group at the expense of genuine economic growth and opportunity for the majority.

The third constitutional concern involves section 213, which mandates that all money received by the national government be deposited into the National Revenue Fund, except in cases where Parliament authorises an exception. The Transformation Fund’s proposed structure bypasses this requirement, with the government seeking to direct R100 billion into the National Empowerment Fund without explicit authorisation through legislation. This creates a potentially unconstitutional allocation of state resources without the necessary checks and balances that the Constitution demands. Without a clear statutory basis for this fund, the risk of mismanagement or misuse of the funds becomes all too real. The fund could easily become a slush fund for political patronage rather than a vehicle for meaningful economic transformation.

Finally, section 217 of the Constitution stipulates that all public procurement must be “competitive” and “cost-effective”. It requires that government tenders be awarded based on value for money, not on race or compliance with B-BBEE regulations. Yet, under the proposed Transformation Fund, businesses that do not contribute to the fund would be excluded from public contracts, regardless of their competitiveness or cost-effectiveness. This would undermine the principles of fair competition and may result in higher costs for the taxpayer, as companies forced to make these contributions could pass the burden onto consumers. The fund risks distorting the market, favouring compliance with B-BBEE regulations over the merits of business efficiency and competitiveness.

In essence, the proposed fund not only violates the constitutional principles of non-racialism and equality, but also risks further entrenching inefficiencies in the economy. The government’s emphasis on race-based policies has long hindered investment, economic growth and job creation. The B-BBEE system, which is the foundation for the Transformation Fund, has failed to deliver on its promise of broad-based empowerment. Instead, it has led to the enrichment of a few, often politically connected individuals, while the vast majority of South Africans remain excluded from the fruits of economic prosperity.

What South Africa needs is not another race-based fund or policy, but a system that addresses economic disadvantage based on need, not race. A model like Economic Empowerment for the Disadvantaged (“EED”), which uses a means test to identify those truly in need, would be far more effective. EED could direct resources to the most vulnerable without perpetuating racial divisions or creating new forms of inequality.

The R100 billion Transformation Fund, as currently proposed, is a step backward. It perpetuates the same race-based policies that have failed to lift the majority of South Africans out of poverty. If we are to move forward as a nation, we must reject these outdated policies and embrace a more inclusive, non-racial approach to economic empowerment. Only then can we hope to achieve the constitutional ideals of equality, justice and prosperity for all.