WILL ECONOMIC TRANSFORMATION STILL BE HAMPERED BY FRONTING?


Early this year, former Minister of Trade and Industry, Dr Rob Davies said the more black people are able to exercise true business ownership powers, the more economic transformation will take hold in South Africa.

IOL quoted the Minister as saying, “In South Africa, too much [black] ownership is not real economic ownership; too often it is only legal ownership,” said Davies.

Minister Davies is also quoted saying “More economic transformation would take place in South Africa when more black people were able to exercise true business ownership powers” and “Black people only experienced real ownership of a business entity when they were involved in major decision-making and day-to-day operations”

On one hand, the government seems to believe fronting is a widespread practice that is hampering transformation, one the other hand,  business says they are concerned about the reputational risk linked with such practices and try to avoid them at all costs.

Replying to a call by Democratic Alliance leader Mmusi Maimane to scrape BBBEE, President Cyril Ramaphosa said Broad Based Black Economic Empowerment (BBBEE) will not be scrapped. He said while redress is slow, too many black people have benefited from this policy for it to be scrapped.

The gap between the rich and the poor in South Africa remains the widest in the world, and inequality has increased since 1994, this is according to World Bank report. This is despite the BBB-EE act which aims to redress inequality.  Between 2015 and 2016 the number of black business owners had decreased from 33.5% to 27.8%. At the time, BBB-EE experts placed some of the blame for poor performance on government for failing to regulate the policy.

What is B-BBEE?

B-BBEE essentially considers five key elements in the transformation of the economy, namely: ownership, management control (employment equity), skills development, enterprise and supplier development and socio-economic development.

The transformation score [B-BBEE score] of a company is calculated according to the different points earned and allocated through the transformative progress made in each element.

To get a high BBB-EE score, companies must fulfil five codes, which include ownership, skills development, management control, enterprise and supplier development.

Fronting

Servest was investigated for fronting, allegedly the company pocketed more than R3-million.

Servest, which specialises in hygiene, cleaning, building management and security services used a small company as a front in at least two deals. In 2018 there were about 112 similar cases that the Broad-Based Black Economic Empowerment Commission had in its sights.

Fronting carries some really serious penalties including reputational risk, fines, imprisonment and removal of access to markets.

So, what is fronting?

  • Where a Black Person is given a title (such as director or shareholder) but does not get the powers associated with it;
  • Where the economic flows from a BEE transaction differ between what the legal documents say and what actually happens;
  • Where the contracts are not commercially reasonable. This could be because the contract has significant (and unfair) limitations, is not likely in reality or was not an arm’s length on a fair and reasonable basis.

Verification agencies and procurement officers have an obligation in terms of the Act to report fronting, but anyone can lay a complaint or report something suspect.  Furthermore, the B-BBEE Commission is obligated to operate impartially and without fear or prejudice.

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