June 21 2011 at 09:12pm

Business Report - Donwald Pressly

A major review of the broad-based black economic empowerment (BEE) legislation and the associated codes of good practice is being carried out to put an end to “the complex problem” of fronting and to encourage “incubation” of smaller companies by bigger ones.

It is envisaged that companies will actually lose points if they do not assist in mentoring and training staff of smaller companies. This would mean that they would have a smaller chance of getting government contracts.

Following President Jacob Zuma’s announcement in his budget vote speech to the National Assembly last week, in which he said Trade and Industry Minister Rob Davies would be piloting the review project, Davies said yesterday that his deputy director-general, Sipho Zikode, was leading a team of economic cluster departments in changing the Broad-Based Black Economic Empowerment Act of 2003.

Davies said the BEE advisory council had recently expressed a number of concerns about the consequences of the existing legislation and the codes. They also believed that BEE needed to function in terms of the Economic Development Department’s New Growth Path initiative.

“The issue of fronting has become a much broader issue than we thought it was… there is complex fronting (taking place).” He said government departments were faced with contracts where they believed there was empowerment of black companies “but there is nothing of the kind”.

What was happening on the ground was a complex form of fronting, which was much like tax evasion. Asked if he could put a financial cost of fronting on the table, Davies said he could not do so. “We are developing proposals in the cabinet process,” he noted, adding that much of this could not be divulged at this stage.

Once the proposals were thrashed out in the economic cluster departments, they would be put to the cabinet for approval.

One proposal was to deduct points that applied to winning state contracts where there was not active “incubation” by larger companies of smaller black companies. He noted there were only about 35 of these incubation experiments on the go in South Africa whereas a country like Brazil had “literally hundreds” of examples of incubation.

Department of Trade and Industry chief director Nomonde Mesatywa recently told Business Report that the advisory council was considering the possibility of criminalising fronting.

Davies said yesterday that at the moment fronting was currently only an offence in terms of the common law offence of fraud, noting that the government was looking at ways to give it legal teeth.

EconoBEE chief executive Keith Levenstein welcomed the plan to tighten the BEE codes and point system to ensure real enterprise development.

“A lot of companies have been looking at loopholes to try and earn undeserved points,” he said.

Fronting, he explained, did not only apply to companies that put a token black person in as a shareholder to appear empowered, but could apply to an illegal drug company, for example, which set up a front company to launder its money.

There was, he said, a tendency to deliberately misrepresent a company’s empowerment credentials to earn more points “on the scorecard”.

DA deputy trade and industry spokesman Jacques Smalle said fronting had become “a significant problem” and he welcomed Davies’ moves to deal with the issue. “The application of equity targets and the accompanying tender allocation policies have had many adverse side effects that aren’t confined just to fronting.”

The irregular allocation of tenders and the phenomenon of “tenderpreneurship” were, with fronting, the adverse effects of BEE policies that required proper regulation.

While the BEE regime was becoming “increasingly difficult to administer”, his party believed the policy could work if it was made transparent.

All tender allocation processes should be open to public scrutiny and there needed to be a stronger emphasis on allocating state tenders to small and medium-sized enterprises.

He said the DA would support redrawing the current BEE policies to benefit more people – as opposed to a small number of people.