The man who cried "BEE".
Fronting has become a major concern and it is time something is done about it. A company that fronts is committing a crime. It is fraud and they are stealing business from good, honest, hard working businessmen. Fronting is bad and is seriously harming the very important and worthwhile cause of Broad-Based BEE.
The dictionary definition of fronting is "a person or thing that serves as a cover or disguise for some other activity" and BEE fronting is defined as "a deliberate circumvention or attempted circumvention of the B-BBEE Act and the Codes" and commonly involves reliance on data or claims of compliance based on misrepresentations of facts, whether made by the party claiming compliance or by any other person.
|We have prepared some indicators to help stop fronting
To stop fronting please take the time to familiarise yourself with some of the major fronting indicators.
There are two common forms of fronting taking place.
Fronting Activity 1:
The first, and most important, and most harmful is where a company allocates, or pretends to allocate shares to a black person, puts them on the board, with the express intention of misrepresenting their business. This is wrong, but happens in reaction to requests from predominantly government and public enterprises for details of the black ownership of the entity.
It is becoming commonly accepted that to do business with government or a public enterprise, you need to have anywhere between 25% and 60% black ownership.
There is no consistency: Various public enterprises and government departments have different requirements. Even within the same department, tenders have different requirements.
All public tenders are governed by the PPPFA (preferential procurement policy framework act) which sets procedures and process for evaluating tenders. It even states that all tenders must take into account the empowerment credentials of each tenderer. It does not give any specific details on how those empowerment credentials will be evaluated, which is why each tender document looks different.
There is no clear interpretation of black ownership. As a result many unethical companies are creating front companies that are 51% black owned – where in some cases the black owner has no idea he is even a shareholder, or has signed a proxy giving the other owners full rights to run the business as they please. There are cases where the new owner is only a temporary owner, and has to sell the shares back to the company some time in the future.
Fronting Activity 2:
The second type of fronting relates to the B-BBEE scorecard/certificate. A scorecard is usually only asked for by private enterprise, and measures the entity's B-BBEE status against a wide rage of indicators – that is why it is called “broad-based”. Some companies will misrepresent their B-BBEE status to obtain a higher score than they would otherwise achieve. One recent example is of Shield Chemicals who forged their B-BBEE certificate – a fraudulent activity.
Because a certificate is based on up to 30 indicators, it becomes more difficult for a company to front, and it becomes easier for an analyst to identify that fronting. If a company used the dubious ownership methods mentioned previously, a consultant or rating/verification agency would quite easily pick it up and award zero points to the company - as we estimated with the ArcelorMittal deal. The indicators are cleverly interlinked – if a company earns zero points on ownership and employment equity, it would be unusual, though not impossible, if it earned full marks on management control and skills development, and these specific indicators would be checked by the rating agency.
A verified scorecard becomes a public document that is scrutinized. As a result, a company is more likely to be caught fronting, than if they submit a tender to a government department and include falsified information. It is most likely that the customer will identify an invalid scorecard, or even a competitor. A verification agency will also examine certificates to see if there is an indication of fronting. If you know of fronting please take the lead and report it. If you are not sure contact us and we will give an objective response and report it to the appropriate authorities.
Most incidences of fronting are due to fronting activity 1, not 2. A broad-based scorecard is less likely to be fronting than a share certificate.
The best way to reduce fronting is for government to follow the B-BBEE scorecard approach.
|How to Structure your BEE Ownership Deal
Johannesburg 15 September 2010
|Fronting and Enrichment – the solution
Government tenders awarded to tenderpreneurs, and enrichment via dodgy ownership deals causes a lot of anguish for many South Africans. Currently government tenders are awarded on the basis of many factors: price, performance and “empowerment credentials”. This loosely translates to asking a company for its black ownership and details of its directors.
Section 10 of the B-BBEE act makes it compulsory for organs of state and public entities to take into account the B-BBEE status of the supplier in setting up preferential procurement policies. Virtually no public entity is doing this. Those that do not are in breach of the constitution. A tender, license or disposal of state assets can only be awarded to a business if government takes into account the B-BBEE status of the tenderer. The act states further “..and as far as is reasonably possible apply any relevant code of good practice issued in terms of this act.”
Although the act does not give a clear definition of “take into account” or ” reasonably possible apply”, and does not state how it should be applied, what is clear is that every state entity MUST at least ask for a valid B-BBEE certificate, and should give their own reasonable interpretation of how they are going to apply the codes to their particular tender or license.
Any government agency that does not do this is in breach of the act and therefore in breach of the constitution.
The act was signed into law in January 2004, and the Codes of Good Practice were gazetted in February 2007, so government has had more than 3 and a half years to implement its own policies.
There is no discretion at to whether or not government applies this clause.
Once they do, the affect will be that all organs of state will be asking all suppliers for their valid B-BBEE scorecards. This will result in government focusing on broad-based issues, rather than the old, discredited and annoying narrow-based method that they currently use. It will result in more compliance and improved transformation.
|Not sure how to get a BEE Scorecard
Let us manage it for you - contact us now.
| How did Guptas qualify for BEE steel deal?
Andile Ntingi - City Press
The Gupta brothers, friends of President Jacob Zuma, are embroiled in a saga over their eligibility to benefit from empowerment.
Soon after the news that the Gupta brothers had acquired a part of ArcelorMittal SA’s (Amsa) R9-billion empowerment deal last week, eyebrows were raised as to how Ajay, Atul and Rajesh, who immigrated from India in 1993, could be benefiting from black economic empowerment meant for South Africans disadvantaged by apartheid.
The Guptas defended their acquisition of a share of the deal that is being allocated to local black people by the steel producer.
Family spokesperson Gary Naidoo said: “The Guptas’ participation in the Ayigobi consortium is not premised on them being black in the definitional sense.
“It must be noted that the BEE legislation does not prohibit non-blacks from participating in BEE companies or consortiums.”
The view concerning the participation of non-blacks in BEE companies was shared by Keith Levenstein, chief executive of BEE consultancy firm, EconoBEE.
While there is demand for a BBBEE Scorecard someone will be taking advantage, shouldn’t that someone be you...
26 August 2010
In this issue
- Fronting Exposed
- Fronting and Enrichment – the solution
- How did Guptas qualify for BEE steel deal?
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