State moves to close the door on fronting

2011-06-11 13:30

Government is planning to amend BEE legislation to clamp down on fronting, which gives companies that misrepresent their empowerment credentials a competitive edge over their rivals when bidding for lucrative state tenders.

Lionel October, the director-general of the Department of Trade and Industry (DTI), told City Press that consultations were currently taking place among government departments to devise solutions that would eliminate loopholes in the BEE Act.

The act was introduced in 2003 to transfer a larger share of South Africa’s economic wealth from whites into the hands of black people.

However, fronting has been blamed for slowing the pace of ­deracialising the economy and hampering efforts to create a larger pool of wealthy black entrepreneurs.

October said: “We are going to make changes to the BEE Act and the BEE codes of good practice to prohibit fronting. We are going to define categories of offences in the act that amount to fronting.

“After we have made fronting explicit in the act, we will set up a special investigations unit to deal with fronting because it is fraud.”

He said government was also mulling establishing a BEE ombudsman to investigate complaints and make rulings.

“The ombudsman will investigate complaints around BEE where people have been unfairly treated.

“Some of these complaints could be related to badly structured BEE transactions where black partners get smaller profits or do not benefit as was agreed,” said October.

He added that the DTI would get comments from other government departments within the next four weeks and it would then draft a bill that would be put before Parliament and would be open for public comment.

October added that the proposed legislation would give the state power to impose tough sanctions on offenders, including barring fronters from doing further business with the public sector.

According to Treasury documents, government plans to spend R165 billion this year on procuring goods and services.
But state-procurement spending has been less successful in trickling down to black-owned businesses, which are supposed to get preferential access to state contracts.

South Africa has seen some of the worst forms of fronting with unscrupulous white-owned companies making their low-level staff – such as cleaners and drivers – shareholders without their knowledge in order to improve their BEE scorecards.

In some cases, blacks willingly act as fronts to win tenders from government and then pass on the contract to a white-owned company which eventually does the work for higher loot than the original black bidder.

Thabo Masombuka – a former director of BEE charters and partnerships at the DTI, and now an executive director at BEE consultancy firm Siyakha – said government has in the past not been tough enough in clamping down on fronting as unscrupulous businessmen have been getting away with defrauding the state for years by misrepresenting themselves.

He said part of the state’s inertia has resulted from the fact that BEE legislation is silent on fronting, giving fronters a loophole to misrepresent themselves without any consequences.

“Fronting is effectively fraud because you are misrepresenting the facts in order to gain BEE points so that you gain advantage over competitors when bidding for tenders.

“Government must link fronting to the Companies Act and terminate licences or deregister companies that engage in fronting. Imposing fines or cancelling contracts has not been effective in combating fronting because companies budget for fines anyway or they reinvent themselves and continue doing business in the private sector,” Masombuka said.

He also proposed a much more lenient punishment than the harsher restraint-of-trade alternative.

“For serious offences, where hundreds of millions of rands are involved, government must take away licences immediately.

“However, it could also look at introducing a demerit system, similar to the one the state is introducing for reckless drivers, where you lose points if you commit offences repeatedly until you ultimately lose your licence,” Masombuka said.

He said fronting and other forms of BEE fraud were setting the country back in its efforts to economically empower black people.

“Fronting misleads us because it creates a perception that a significant number of blacks are being empowered, whereas this is not true and we are still faced with a huge backlog.

“We may end up not accelerating investment in skills and enterprise development because we think we have made progress,” Masombuka said.

Gavin Levenstein, the chief operating officer of BEE consultancy EconoBEE, welcomed the proposed ombudsman.

He said companies that were suspected of fronting would now be forced to provide their financial records to the ombudsman when they came under investigation.

“It is not easy to catch out companies that are involved in fronting. Some companies deflate their turnover to make themselves smaller than they really are to win tenders.

“It is not easy to get their financial information because they are not listed. They will now be forced by the ombudsman to submit this information,” said Levenstein.

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