Regular readers will know I am not one of the BEE cynics. I believe empowerment policy has done a lot of good in its primary objective of undoing the racial skew in the distribution of wealth in this country. But its impact has been uneven, with some unintended consequences.

The department of trade, industry & competition appears to be making a genuine effort to improve it. But one of its key initiatives, the Transformation Fund, risks creating more problems than it solves.

Last week, the department quietly published draft regulations that would enable the fund to begin operations. These draft changes represent a soft launch that sidesteps rather than solves the fundamental problems I and others have identified with this initiative.

I have written in this column before about the huge challenges the fund will face (“Transformation Fund worsens disease of ‘inputitis’”, March 26). The problems are not primarily about access to money — they are about access to skills, markets and intellectual property.

The fund has been designed as something of a venture capital or private equity investor focused on developing small black businesses. It is a good objective — supporting and stimulating black entrepreneurs has been the least successful component of BEE, and yet entrepreneurship is potentially a major wealth generator.

The problem, as any private equity investor will tell you, is that success in this domain is not about money alone. It is about mentorship, governance and market support. Successful investment is not just financial engineering — it is about understanding a business deeply enough to add real value. And the main constraint to success is the availability of good mentors who can do that.

A fund that has lots of money but no capacity to provide businesses with the hands-on support needed to ensure success will waste money and fail to achieve its objectives. So, as the Transformation Fund concept has developed, I’ve complained about the lack of bottom-up thinking.

How many black businesses are there that can succeed with the right investor support? It is not an infinite number. Look at the efforts of other initiatives such as the SA SME Fund and National Empowerment Fund (NEF), which is intended to be the secretariat to the Transformation Fund.

The SA SME Fund is a fund of funds; it channels investment into a series of specialist venture capital and growth equity funds. Each of those fund managers has a well-developed strategy for how they invest in and foster the development of the companies they support.

The NEF was created with a mandate almost identical to the Transformation Fund. It has had mixed success and is carrying a large portfolio of nonperforming loans. It is also sitting on substantial idle cash it has been unable to deploy, showing clearly that the constraint to investing in more black-owned businesses is not money alone.

The SA SME Fund has raised R1.24bn in investable capital. The NEF in its most recent financial year had an investment portfolio of about R3.9bn, though this includes R1.2bn of MTN shares it holds for lack of better ideas. It has another R1.8bn of cash on its balance sheet.

The NEF and the SA SME Fund are concerted efforts to achieve what the Transformation Fund aims to achieve — the NEF with the full backing of the public sector and the SA SME Fund backed by a wide array of big businesses. Their scale is a good indicator of what is actually possible.

Against that reality, the Transformation Fund aims to invest R20bn annually, with the magical R100bn total still hanging around. This is impossible.

To the department’s credit, it has attempted to respond to critics. The initial concept for the fund was a classic case of ”inputitis”— the disease of thinking only in terms of inputs and not what outcomes are desired. Subsequent concept papers talked much more about the intended outcomes, which was progress.

But then they magicked up an IT system that would somehow overcome the huge capacity constraints. This is not credible – it shifted the magical thinking from how to create mentoring capacity to how to create an IT system that can do things no other investment fund has been able to do.

Such a system would need to serve more than 100,000 businesses with real-time data capabilities – a multi-billion rand, multi-year undertaking that the concept paper neither costs nor properly explains.

But these bleak realities are not stopping the government. The draft regulations published last week show that companies will be able, voluntarily, to contribute 3% of after-tax profit to the fund and receive full marks for their enterprise and supplier development scores on the BEE scorecard.

The changes also enable the Transformation Fund to be used for equity-equivalent programmes by multinationals (a mechanism that allows multinationals to achieve the equivalent of 25% black ownership through alternative means).

This is an improvement on the original mechanism proposed, which was for companies to contribute 3% of turnover — an expensive mechanism that would have been prohibitively costly for low-margin businesses. But companies will still need to achieve targets on the other scorecard elements.

If gazetted in their current form, the changes represent a soft launch of the Transformation Fund. They will probably raise some initial money from companies that see contributing to the fund as a cheaper or simpler option than running their own enterprise and supplier development programmes.

The department has also made much of a R10.8bn loan that will apparently be made to the fund by the African Export-Import Bank. I am eager to see the terms of this loan — I cannot imagine it will come without strings attached, especially with a National Treasury guarantee.

If the NEF’s credit performance is any guide to what we should expect from the Transformation Fund, we should anticipate it will be loss-making.

Last week’s draft changes open a pathway to the fund, but much more is to be done. The binding capacity constraints remain unaddressed.

If somehow money does flow into the fund, I expect it will just sit there — much like the NEF’s idle billions — unless it is splurged unwisely on investments without adequate due diligence and support.

Squandering the money will be a net negative for BEE compared to the status quo, representing a notable policy failure.

• Dr Stuart Theobald is founder and chair of research-led consultancy Krutham.
  This article first appeared in Business Day.