Johannesburg - The 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.
“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," he said.
“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 added.
He said the 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 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
R165bn 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.
Fronting fraud
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 a 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 rand
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.