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Tourism Equity Fund: A blunt, racially exclusive and one-dimensional BEE ownership instrument


Paul Zille is a development economist with extensive experience in impact investing, fund design and fund management in South Africa and abroad.

The R1.2-billion Tourism Equity Fund launched by government in January 2021 is, in principle, to be welcomed – but it is unlikely to meet the objective of broad-based transformation and, in its current form, will retard prospects for an inclusive recovery.

Tourism is South Africa’s silver bullet. 

Much more than its 8.6% (pre-Covid-19) contribution to GDP, tourism is perfectly suited to the realities of our low-skilled, youthful demographic. It is labour intensive, employs a disproportionate number of women and serves as an accessible platform for large numbers of small businesses to set up and thrive – even in remote areas, which offer few alternative economic opportunities.

While Covid-19 has been an unmitigated disaster for tourism, the sector will survive. What the crisis has done is create opportunities for meaningful transformation, rooted in inclusive business partnerships across all segments of the tourism economy. This is a widely acknowledged industry imperative which until now has proven stubbornly elusive.

In these circumstances, the launch of a R1.2-billion fund aimed at overcoming the access and financing constraints that have excluded aspirant, emerging and established black entrepreneurs from mainstream commercial tourism opportunity is to be greatly welcomed.

Unfortunately, the Tourism Equity Fund is unlikely to realise this historic opportunity. It may even leave in its wake a weaker, more divided and unequal sector in which poorer participants remain excluded from ownership opportunities, new entrants cannot survive without ongoing subsidies and a small number of established black businesses use grant money to grow bigger and richer.

While the purpose of the fund – to provide debt and grant funding to facilitate equity ownership and project development by black entrepreneurs – is clear and urgently needed, its funding model is vague and ill-defined.

It is devoid of the solid funding criteria needed to ensure transparency, impact and sustainability and to avoid cronyism and corruption.

In the terminology of development finance, the fund is offering a blended finance product, combining grants (to finance equity for people historically prevented from generating capital) with loans (to finance working capital and assets for their business). This is widely acknowledged as being necessary to enable the participation of historically excluded black South Africans (who had no means of accumulating capital or savings) in formal business.

However, the fund’s guidelines offer no clarity on how the funding mix will be structured, on what terms and according to what criteria. All we learn is that between R10-million and R20-million is available to qualifying applicants and, what has to be an error because it provides for no loan component, that “grant funding is limited to R20-million… of which the Small Enterprise Finance Agency (Sefa) (the government’s small business financing agency that will administer the fund) can finance R15-million”. 

If I can get a grant for the full R20-million, why would I incur a loan? If I am unlucky and have to blend a grant with a loan, what determines the grant/loan mix for my business, and what will the interest rate be on the loan component? The guidelines are silent on these and many other core questions.

We learn that the fund has a co-financing partnership with a “strategic bank coordinator” who will commit R594-million (half) of the fund’s capital. Who is this and what due diligence criteria will it apply to applicants?

What of the development or impact criteria that must guide a publicly subsidised programme of this nature? 

Beyond the standard requirement for legal registration, SARS compliance and SA citizenship, there is but a single passing reference in the fund’s guidelines to “certain developmental matrixis, including jobs facilitated, level of black ownership, etc” that will determine “the amount receivable” by successful applicants.

Will the fund prioritise larger, established and profitable applicants (who may be able to raise funding from existing commercial sources) and those for whom concessionary finance is a prerequisite for success? Or those associated with high employment numbers versus greater capital intensity? Is there a preference for urban or rural enterprises, and a requirement (standard in most government programmes) for “geographic spread”?

The absence of clarity and transparency on these basic issues simply enhances the discretionary authority of the fund manager. And with this comes subjective decision-making around who is (not) funded and for how much. This makes it much easier for powerful and connected insiders to leverage funding to their advantage – regardless of the merits of their proposals.

We know how this works and where this ends. To launch a fund without clear, robust criteria to maintain focus and provide protection from powerful interests is asking for trouble.

This leads one to the second major flaw in the fund’s design. Its only empowerment criterion is the requirement for 51% black ownership and control. Job retention and job creation, surely the most important broad-based empowerment considerations of our time, don’t warrant a mention.

This single-minded focus on majority black ownership is unnecessarily restrictive, divisive and distortionary.

Restrictive, because it eliminates from consideration the many potential partnerships that are possible between established white-owned commercial businesses and black entrepreneurs, workers or suppliers etc, merely because the current black ownership of such partnerships might fall below 51%.

Many white-owned tourism businesses are eager to establish meaningful equity-sharing partnerships with new black shareholders (not least to relieve the cash flow pressures they currently face), but for a variety of reasons are unable or unwilling to transfer majority ownership and control – at least not immediately. Why exclude them?

Why not provide funding which incentivises all bona fide empowerment ideas and innovations and not just those requiring 51% immediate black ownership? 

Why not use the concessionary money to incentivise broad-based empowerment partnerships which may start below the 51% threshold, conditional on an explicit and verifiable commitment to meet it over time?

Equity-sharing partnerships of this kind deliver transformation at the lowest possible cost and risk – to all parties – precisely because the pre-existing commercial owner stays and contributes the financial, risk management and marketing resources needed to survive – and which new stand-alone businesses typically lack. As ongoing shareholders they remain totally invested in the success of the business because they have skin in the game and are directly exposed to risk.

The 51% black ownership requirement is also unnecessarily divisive. 

Instead of incentivising and enabling risk-sharing partnerships, it feeds the widespread concern across the industry that Covid-19 relief and development funding is being used to drive transformation by stealth.

There may be a clinical logic, as is being widely alleged, to the state now capitalising on the availability of distressed tourism assets for transfer at bargain-basement prices to new black owners. Unless the fund’s recipients are already established and strong (in which case, how can grants be justified?) the chances of new black-owned businesses surviving in the post-Covid-19 market are slim.

What about the distortionary consequences of distressed assets being offloaded to grant-funded recipients, many of whom will be new to the sector and lack the experience, expertise and networks to survive? 

The spectre looms of a generously funded pipeline of struggling businesses unable to survive without ongoing subsidy and support. This directly threatens the viability of all businesses operating in the affected market segments.

All this feeds the perception that the government is using the crisis to drive a racially exclusive transformation agenda in tourism. This will come at a great opportunity cost by excluding a major source of heavy-lifting capacity in the form of existing owner-operators from the rebuild process, and by risking the perverse outcome of existing asset owners using public funding to dump their distressed assets onto new black owners who have little margin for error.

What is the alternative?

Why not provide funding which incentivises all bona fide empowerment ideas and innovations and not just those requiring 51% immediate black ownership? 

Why not offer a continuum of concessionary funding to all genuine empowerment partnerships, with the magnitude of the subsidy being weighted in favour of those initiatives which meet and exceed the 51% black ownership target?

And why not make verifiable employment retention and creation commitments a prerequisite for any form of funding, with incremental incentives available to reward firms which create jobs above the levels initially agreed?

One hopes it is not too late for the minister and Sefa to reconsider the fund’s current design and convert it into a source of innovative, partnership-based transformation and investment, as opposed to the blunt, racially exclusive and one-dimensional BEE ownership instrument it currently represents. DM


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