Hopes are running high in the black business community that the Black Economic Empowerment Commission (BEEC) established late last year will bring fronting to an end.
The watchdog’s acting commissioner, Zodwa Ntuli, has vowed to vigorously tackle fronting – where a façade is created that black businesspeople are accumulating wealth, only to emerge later that the bulk of riches actually goes to white owners pulling the strings in the shadows.
At the heart of fronting is a deliberate attempt to exclude black people from participating in shareholdings, management structures and supply chains of industries. Hence, 20 years after apartheid, black involvement in the economy is still woefully low.
Black business activists have condemned fronting as a form of institutionalised racism that poses a risk to SA’s long-term economic and political stability as it entrenches poverty and inequality.
While some may argue that the real trigger of racial tensions is the weak economy, resulting in many people fighting for few opportunities, the current race debate centres around the economic exclusion of black people.
Had there been a concerted and sustained effort to boost black participation in the economy, we wouldn’t see a resurgence in left-wing ideologies, driven by the Economic Freedom Fighters (EFF) and the growing militancy of lobby groups like the Black Management Forum (BMF) and Black Business Council (BBC) – all vocal about the inclusion of black people in executive managements of big corporates and the opening up of private sector supply chains to black suppliers.
Fed up with fronting, government criminalised the malpractice as it undermines broad-based black economic empowerment (B-BBEE). The department of trade industry (dti), which the BEEC falls under, describes fronting as a deliberate circumvention or attempted circumvention of the B-BBEE Act and BEE codes of practice.
Ntuli’s office has the regulatory powers akin to those of the Competition Commission. The BEEC can impose hefty penalties on companies and businesspeople found guilty of fronting.
Penalties range from a fine of 10% of a company’s annual turnover to 10 years’ imprisonment for perpetrators. Guilty companies could also be blacklisted or excluded from bidding for government tenders.
Will this strike fear in the hearts of unscrupulous businesspeople?
I believe the establishment of the commission will exterminate crude forms of fronting (there are well-documented cases of white owners making their domestic helpers and gardeners shareholders in their companies – without their knowledge – while starving them of the financial benefits associated with being investors in a thriving enterprise).
But while certain conditions exist, fronting will not be completely rooted out. Black South Africans get caught up in fronting, unwittingly or willingly, mainly because many black-owned companies, particularly small businesses, have limited access to capital, skills, technology and markets, and therefore don’t have the muscle to compete on their own.
Short-sighted, opportunistic short-cutters aren’t in short supply in SA. There will always be pliable black people willing to sell their skins for a quick buck – without caring whether their actions enrich wealthy white-owned companies unwilling to embrace real and lasting transformation.
Opportunistic fronting kills black entrepreneurship, is a drag on economic growth (as it holds back people with potential to fully participate in the economy), and encourages dependence on white business for mere crumbs.
As long as black people have limited access to the means of production, black entrepreneurs will remain vulnerable to fronting and government will be restricted to tackling the symptoms instead of the disease.
Over three months ago, I participated in a radio interview with Ntuli on the establishment of the BEEC and how it planned to curb fronting and the circumvention of the B-BBEE Act.
A number of listeners called in, recounting how they were invited to be BEE partners of white companies, only to be ditched after the tenders were secured.
In most of these cases, the black partners weren’t compensated when the tenders were won.
The dti has identified three methods used to circumvent black empowerment legislation:
Window dressing – black South Africans are introduced to an enterprise on the basis of tokenism and may be discouraged or inhibited from substantially participating in the core activities of the enterprise or are participating in a way which is not in accordance with their stated levels of participation.
Benefit diversion – economic benefits received by an enterprise for having a particular BEE status do not flow to black South Africans in the ratio specified by law or the relevant structure documents.
Opportunistic intermediaries – an entity with a relatively high BEE score is inserted into the supply chain to increase the BEE score of a procuring entity.
Getting caught fronting will ruin a company’s reputation, especially in a climate where the economy is tanking and race relations are at an all-time low since 1994.
*Andile Ntingi is CEO and co-founder of GetBiz, an e-procurement and tender notification service.
This article originally appeared in the 7 April 2016 edition of finweek. Buy and download the magazine here.