Voices

When it comes to B-BBEE fronting things are changing, but too slowly

2018-11-01 00:56

Fronting is not only preventing South Africa from transforming its economy, but from growing and developing it, too.

But what is fronting, exactly? The Broad-Based Black Economic Empowerment (B-BBEE) Act was amended in 2013 to, among others, define a fronting practice as a transaction, arrangement or act, or conduct that, directly or indirectly, undermines or frustrates the achievement of legislated B-BBEE objectives.

The B-BBEE Act was amended because it had become apparent that black economic empowerment wasn’t working as envisaged, primarily because of fronting and the absence of a monitoring institution.

One of the things the amendment did was establish the Broad-Based Black Economic Empowerment Commission as South Africa’s B-BBEE regulator.

It took a while to set up the commission, but since we started our work in April 2016, 408 of the 474 complaints (86.07%) lodged with us by the end of August this year have involved alleged fronting practices

In dealing with these practices, we employ both compliance and enforcement strategies against fronting practices, and I am pleased to say it is having an effect.

Employing the compliance strategy means that when we identify incidents of fronting, we start by in some instances by giving the involved parties time to rectify the situation.

Many willingly comply, and if the remedial instructions are met with reluctance, then that is when the matter will be referred for formal investigation and prosecution.

Some of these matters relate to invalid B-BBEE certificates, or trust deeds that are not aligned to the B-BBEE Act.

However, some of matters are immediately referred for investigation without applying the corrective mechanism due to nature of the facts presented.

Here are some of the ways in which fronting practices can manifest under the B-BBEE elements:

Ownership

When black people are brought into an enterprise as part-owners or shareholders, but discouraged or inhibited from substantially participating in the enterprise’s core activities, they are, essentially, tokens.

This is a fronting practice. So is discouraging or inhibiting black people from participating in the running of a business at a level that is commensurate with their on-paper level of involvement, such as their shareholding.

Also, often empowerment deals are structured so that the level of debt that black shareholders owe cannot be reasonably repaid.

This means they can never be viewed as substantive owners because they will not be able to fully own their shareholding.

If it is unlikely that black people are, through a share sales deal, going to acquire practical ownership of a share of a business, this, too, points to a fronting practice.

Management control

Transforming the South African economy also means broadening the extent of control black people have over how the economy is managed.

That’s why appointing black people only as board-level or non-executives just for B-BBEE points recognition is seen as fronting.

We want to see many more black people with executive power.

Another fronting practice is not giving black shareholders control that tallies with the level of their shareholding, while employing them at executive level or as owners, but not allowing them to be placed in charge of implementing operational and strategic decisions, is also fronting.

Skills development

When entities try to have B-BBEE points counted for skills development without supporting evidence, such as claiming they are training black people with disabilities, without submitting medical certificates proving disability is also a form of fronting.

The skills development scorecard requires entities to direct 6% (3% for qualifying small enterprises) of payroll towards the skills development of black people.

What also often happens here is that businesses attempt to get these B-BBEE points for absorbing learners on a learnership or internship before the trainee has completed their training.

This is not allowed. Trainees must first complete the learnership or internship before bonus points may be counted.

Also, businesses need to submit a workplace skills plan that has been approved by the appropriate sector education and training authority (Seta) if they want the training to be counted, and the training must focus on critical skills.

Often entities recognise points without the relevant Seta having approved the workplace skills plan, pivotal report and annual report.

We want black people to gain the skills they need to actively participate in the economy so that it becomes an equal playing field.

Enterprise and supplier development

An entity that uses the names of black people purely to acquire a certain B-BBEE status so that it can gain government work or benefit from any deal or scheme, is fronting.

According to the law, black people mentioned in a deal must receive, through the deal, income that matches their stated participation in it.

Some businesses that have a high B-BBEE rating due to their level of black ownership have been brought into deal tenders simply so that their favourable B-BBEE status can be leveraged and the work gained.

When the deal is sealed, their involvement ceases or is curtailed. This is fronting, too.

The nature of some enterprise and supplier development initiatives also point to a fronting because they are not intended to improve the operational and financial stability of the beneficiary entity.

An example of this is when entities advance a loan to a beneficiary entity and every time during B-BBEE measurement the whole loan amount is recognised as outstanding even when the black entity has repaid a portion.

Socioeconomic development

Businesses often confuse and conflate corporate social responsibility and socioeconomic development.

They are not the same thing. The rules on socioeconomic development are aimed at giving black people in rural and underdeveloped areas access to the economy through income generating means.

This is far from charitable initiatives that are often implemented or disguised as socioeconomic development.

Corporate social responsibility schemes are most-often a good thing, but trying to present them as socioeconomic development is also a type of fronting.

Things are changing, but too slowly

It does look like fronting is coming to a slow end. In many cases we have found that businesses really believed they were doing the right thing, but they were given poor advice or implemented a model that was designed to work against the B-BBEE Act.

I want to remind business, and the public sector, that we at the B-BBEE Commission are here to help you interpret B-BBEE legislation.

We do it for free, speedily and confidentially. I urge you to come to us. Slowly, we are getting there.

Let’s keep top of mind that the codes of good practice, and the B-BBBEE Act, are expressly aimed at driving South Africa towards an inclusive economy that benefits all 56-million of us South Africans.

Surely it is entirely reasonable to expect that when our economy is fully inclusive, black people as defined in the B-BBEE Acts will enjoy the greater part of the economic growth and wealth.

Hence, it is important for the private and public sectors to remember the B-BBEE Commission is here to help and advise on how to better implement the legislative requirements.

In so doing, we have employed clarification services, and we respond to queries in an average of three, or at the outset, five, days. Since 2016 we have dealt with about 5000 queries, some telephonic.

Lindiwe Madonsela is acting senior manager: Advocacy, Education and Awareness at the Broad-Based Black Economic Empowerment Commission

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December 9 2018