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BBBEE fronting probed

Oct 16 2016 07:41
Justin Brown

The vast majority of complaints that the Broad-Based Black Economic Empowerment (BBBEE) Commission has received since October last year concern fronting, acting commissioner Zodwa Ntuli said this week during the Gambling Indaba in Johannesburg.

Ntuli said that, out of 134 objections received by the commission, 112 – 84% – were about fronting.

“Fronting has become an entrenched practice,” she added, and went to define it as “a transaction that undermines the implementation of any provisions for black people, with the result that economic benefits do not flow to black people and terms are not negotiated at arm’s length [a deal ensuring that both parties are acting in their own self-interest and are not subject to any pressure or duress from the other party]”.

The watchdog commenced operations on April 1.

The biggest sectors from which complaints stemmed were the transport sector with 31 objections, followed by mining with 20 and construction with 12.

Charmane Russell, spokesperson at the Chamber of Mines, said the organisation was unaware of the nature of the mining-related complaints and their sources, which made them difficult to comment on.

“We would, however, be keen to understand these better and to engage with the acting commissioner on the matter,” Russell said.

“The mining industry is fundamentally committed to transformation, and the Chamber of Mines believes the industry has been at the forefront of transformation efforts in the economy.”

Ntuli said the commission was investigating all complaints submitted and would issue its first ruling soon.

With South Africa being one of the world’s most unequal societies, the need to equalise income distribution and ownership of productive assets was dire, she added.

Some of the penalties that the commission can recommend include: cancellation of contracts; exclusion from doing business with government for up to 10 years; a fine amounting to up to 10% of the entity’s annual turnover; a maximum of 10 years’ imprisonment; and the business concern’s inclusion on Treasury’s tender defaulters’ register.

“There is a need to move from ‘tick box’ approaches to create real BBBEE value, because black people continue to face challenges in accessing finance for BBBEE deals,” said Ntuli.

Corporates financed deals and repayment was expected from dividends, she added.

“Shareholders’ contracts place onerous conditions linked to funding. Factual control in transactions remain with white shareholders in shareholder contracts, undermining black ownership,” she added.

There was an incorrect practice of recognising foreign nationals as “black people”, said Ntuli.

The commission also found black people who were “willing frontees”, who received passive shareholding for financial benefit.

In some cases, people such as gardeners, people who did not exist and those who did not even know that they had been appointed were made directors of companies to comply with empowerment legislation.

“Corporate governance and minority shareholders’ rights are not respected,” Ntuli said.

“Black partners usually do not have enough financial reserves to fight these matters in court.”

Other trends that Ntuli identified in empowerment deals were complex structures intended to dilute or strip BBBEE partners of their value and rights.

Ntuli said that, in setting up the BBBEE rules, the commission had consulted extensively with Zimbabwe and other African countries.

The commission divides entities into three categories, with the largest having a turnover of R50 million and more. It will keep a register of all BBBEE transactions.

Key elements of BBBEE are ownership, management control, skills development, supplier and enterprise development, and socioeconomic development.

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