Complying with BEE regulations is complicated and expensive. For enterprises with more than R50m in annual revenue, the generic scorecard requires considerable work to complete, plus spending to meet target thresholds for skills development, enterprise development and socioeconomic development. Ownership transactions cost even more.

Wouldn’t it be nice if companies could just pay 3% of revenue and get automatic level 3 compliance? This is the carrot the department of trade, industry & competition is considering as part of its Transformation Fund development, a quite different funding approach to what’s been proposed so far.

Is this a good plan? First, consider it from a company’s perspective. The shortcut to level 3 makes sense where alternative routes are more expensive and the prize worthwhile.

How the maths stacks up

Contributors would get BEE scores for at least two of the five main scorecard domains.

Companies currently must spend 3% of net profit on enterprise & supplier development (ESD), plus 1% on socioeconomic development, to achieve full marks on those elements, and 3% of payroll on skills. On the surface, the 3% top-line fee compares to a 4% bottom-line fee, hardly attractive for most companies.

However, if the levy also satisfies the ownership element via the equity equivalent mechanism, the calculus changes. This mechanism, currently available only to multinationals, aims to achieve an equivalent to 25% ownership through other means, typically negotiated case-by-case with the department.

For high-margin businesses a 3% revenue levy might be cheaper than selling 25% equity to qualifying shareholders. But for low-margin operators such as mass-market retailers, 3% at the top line would be unaffordable.

A risky flaw

This reveals a fundamental flaw: applying a tax at the top line arbitrarily treats companies differently based on their margins, which surely isn’t the point. It also increases corporate risk, creating a new above-the-line cost companies must pay regardless of performance.

This raises the risk of business collapse when trading conditions deteriorate and makes borrowing harder because of reduced free cash flow. The same amount of money taken at the bottom line is always more efficient than at the top line.

From a public policy perspective, the question hinges on what value the public receives for the money compared to alternatives. The levy is estimated to be able to raise R40bn annually, alongside other funding sources. Is this the best use of those resources?

There’s always harm when taking money from firms — whether through taxes, fees or levies — because it leaves less for investment, expansion and employment. Assessing the 3% levy requires determining whether the benefits outweigh these costs. And that depends on whether the Transformation Fund will deliver good returns.

From inputs to outcomes

Regular readers know I was unimpressed with the first concept paper, which failed to explain how it would use the R100bn it intended to raise.

It was riddled with what I called “inputitis”, the affliction of focusing on inputs (money spent) rather than outcomes (transformation achieved). It’s like assessing holiday plans by cost rather than the quality of experience.

The good news is that the latest iteration makes a determined effort to cure this disease. There’s now substantial reference to being “outcome-based” rather than concentrating on cash inputs alone.

I applaud the framing around specific objectives: small business output, profitability, employment, exports and formalisation. These will be tracked through impact reporting with a solid data-gathering approach.

While the first version obsessed over money to be raised, this version focuses on the changes we want to see in the world. That’s a big leap forward.

Recognising what works

The paper also recognises that some existing programmes in effect develop small black-owned businesses — those run by larger companies and honed over years. Another significant improvement is the fund’s intention to work with these successes rather than against them.

There’s also much better reckoning with the fact that business failure is driven more by lack of skills and capacity than lack of money. The paper now includes an “access to capability” pillar — the mentorship and support companies need to succeed. Many studies identify lack of market access and mentorship as more important than access to capital.

The fund acknowledges the mentorship capacity problem and suggests solutions, including platform economics. The outcomes-linked financing approach — releasing funds when companies meet defined capability milestones — is another major improvement.

Still too many gaps

These are all sound theoretically and show good thinking about what constrains small business success. But there’s too little analysis of what delivery really requires. There remains little reckoning with why other attempts — including the National Empowerment Fund (NEF) and Khula Enterprise Finance — have had limited success. The large amount of idle cash on the NEF’s balance sheet proves money isn’t the binding constraint; the ability to spend it effectively is.

Much depends on an IT system that doesn’t yet exist. There’s no analysis of what it will cost to create or the challenges in getting it to work. The concept paper essentially proposes solving the mentorship scalability problem through technological innovation without proving the technological solution itself is feasible at the required scale.

An IT system serving more than 100,000 small businesses with real-time data capabilities will cost billions to build. The paper doesn’t cost it or assess the risks. Building integrated platforms for this scale typically takes five to seven years, based on comparable financial infrastructure projects. The concept paper doesn’t budget for this, suggesting its architects haven’t costed their own proposal.

We’ve replaced one bit of wishful thinking with another. That’s why I remain sceptical despite the vast improvement. We can’t reliably accept that funds raised will be well spent because there’s no evidence the fund will have the capacity to deploy them effectively.

Prove it before you tax it

Before asking businesses for R40bn annually through a revenue levy, the fund’s architects must prove their model works. Show us a R400m pilot. Demonstrate the technology functions. Prove mentorship scales. Until then, it remains an expensive experiment with other people’s money and a tax increase by another name, arbitrarily penalising companies based on their margin structure rather than their transformation impact.

The concept has evolved from focusing purely on inputs to emphasising outcomes, which is progress. But without rigorous implementation planning and proof of concept, it risks becoming another well-intentioned initiative that consumes resources without delivering the transformation SA desperately needs.

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