The dispute that has stalled the Tourism Equity Fund can be resolved. This should happen without further delay.
For almost two months the Tourism Equity Fund (TEF), established by the Department of Tourism to promote the participation of black South Africans as owners of the country’s tourism assets, has been on hold.
This is a disaster for the industry at a time when depleted tourism businesses desperately need to invest in preparations for the return of global tourism. For many, this includes exploring shared ownership partnerships of different kinds involving black staff, partners and suppliers – necessary arrangements that have historically been unaffordable.
An initiative like the TEF offered a great opportunity to fulfil both these goals simultaneously.
Although at a small scale initially – a fund of R1.2 billion (€70.8m) will not go far in a sector that previously accounted for almost 10% of GDP – it offered the opportunity to test and develop different partnership models as the basis for replication at scale, once the recovery kicks in.
By proving the viability of different empowerment models on a pilot basis, the Fund could enable future finance to be sourced (from both public and private sources) at a scale that would make a real difference to the sector.
It was not to be.
This is a travesty, and the reasons for this need to be understood and resolved. Urgently. To avoid a long and drawn-out legal process that is in no-one’s interests and will serve only to rub salt in the wounds of businesses that have been hammered by the pandemic and whose plans and ideas to ‘build back better’ are now on indefinite hold.
One strand of the re-growth vision – widely shared by individual businesses and the industry as a whole – is for a transition to a tourism economy characterised by much broader and deeper ownership and economic inclusion.
In practice this means individual businesses of all shapes and sizes and from widely differing circumstances, pursuing a range of partnership models that enable significant numbers of black South Africans to participate in the tourism value chain for the first time – as owners, shareholders and suppliers.
TEF should be an invaluable catalyst – what went wrong?
The TEF should be serving as an invaluable catalyst for the fulfilment of this vision. Why then have things gone so badly wrong?
Beyond the procedural and legal issues that have stalled the Fund’s implementation, there are a number of fundamental issues that undermine its relevance and impact.
These lie at the heart of the current legal impasse.
For example, the sole criterion that determines an applicant’s eligibility for funding is the requirement that it be 51% black-owned and controlled. Qualifying applicants then stand to receive a grant of up to R20 million plus a loan (of indeterminate value), the terms of which could also be highly concessionary.
There is no means-testing of applicants to exclude already wealthy and ‘empowered’ businesses that could readily raise funding elsewhere. No way of preferencing applicants for whom the Fund represents their only hope of overcoming the financial barriers that exclude them from first-time ownership opportunities.
Thus, by way of example, a well-established and highly profitable black-owned company with ready access to other sources of finance could receive a R20 million grant on top of a concessionary loan to acquire anything up to 100% of an established tourism business.
By contrast, a white-owned company wanting to finance the allocation of shares in the business to longstanding black workers – a highly likely scenario and a good example of the kind of broad-based empowerment the industry sorely needs – will be disqualified. Merely because the applicant is majority white-owned and is unable or unwilling (at this point) to cede majority ownership and control to black shareholders.
The first deal might result in the further enrichment, on fabulously generous terms funded by the state (i.e. the taxpayer), of a single, already established and wealthy black-owned company which might have a single black shareholder.
The second – non-qualifying – deal offers the prospect of first-time part-ownership in a profitable business (with scope for this ownership share to grow over time) for a significant number of poor black South Africans who have dedicated years of their lives to help create. And who have no alternative means of financing this opportunity.
The disjuncture is obvious.
‘Unjustifiable use of public resources’
It points to the unjustifiable use of scarce public resources on highly concessionary terms to finance a small number of empowerment deals that benefit already established businesses and wealthy people.
Exacerbating this scenario is the fact that, beyond 51% black ownership, there is no (known) scorecard of criteria that the Fund will use to adjudicate between competing applications.
Yes, TEF publicity emphasises the participation of women and youth in the industry and the relevance of enterprises in rural and township areas. But this does not amount to criteria that provide clear guidance to applicants and the Fund’s decision-makers alike.
Without clarity and transparency around the criteria used to allocate funding, applicants have no way of shaping their ideas in relation to the nuanced requirements of the Fund. And the devil is always in the detail of these facilities.
Nor do they (or the public at large) have any means of holding the Fund to account for its eventual funding decisions.
As has been highlighted elsewhere, this confers enormous subjective and discretionary decision-making power to the Fund’s manager.
Given that there is likely to be a long line of powerful and politically connected applicants to a Fund offering finance on such generous terms and against so few conditions, it is obvious which way many funding decisions will go. Especially as the Fund’s commercial banking partner will be concerned to minimise the risk of the deals it participates in.
What will grants be used for?
The absence of funding criteria begs another question: what will the grants of up to R20 million (€1.2m) be used for?
The most basic tenet of grant funding – especially when used in support of private companies – is that, to avoid wasteful expenditure, distortion and capture, there should be a very a clear rationale justifying its use.
TEF grant applicants should, at the very least, prove that they are unable to raise funding from other sources. And that the grant funding will fulfil a broader ‘public good’ (not merely a private return) which would not be possible without it.
Current TEF application requirements are completely silent in this regard.
Finally, in the absence of clear criteria, how will the accumulated backlog of R5.6 billion in ‘qualifying applications’, as alleged by Minister Kubayi-Ngubane, be sorted and prioritised?
The list of the TEF’s inadequacies is a long one, the full elaboration of which is not possible here. Together they add up to a Fund which is likely to deliver perverse outcomes. Unintended maybe, but entirely predictable.
As currently designed, the Fund is unlikely to deliver the promise of economic opportunity for entrepreneurs and hard-working people for whom the Fund represents their only hope of fulfilling their ownership aspirations in the tourism economy.
This need not be the case. The Fund can be fixed and turned around, with minimum further delay.
The current legal impasse offers an opportunity to do this. Quickly and in good faith.
And based on a shared commitment by all the parties to the goal of broad-based participation by those South Africans unjustly excluded from ownership opportunities in the past. And who lack the means to do so today.