Is BEE fronting bad for business?
Fronting, as relating to Black Economic Empowerment (BEE), still remains part and parcel of the challenges faced by procurement departments in all industries. Thinking on the issue is however, widely divergent. This article looks at what fronting is, why some businesses front, or do business with others that front and what the consequences may be.
To provide guidance on this issue the Department of Trade and Industry included a fronting index (draft) in Phase two of the Codes of Good Practice on Black Economic Empowerment. The intent with this index was to list a number of potential instances of fronting, graded according to severity. The more of these instances present at a business the higher the chance that actual fronting is taking place and the greater the negative impact on the business’ BEE score. Although this approach has a lot of potential, the specifics are still in need of refinement.
So where does this leave the issue of fronting and how should the concept be defined?
Typically, fronting takes one of two forms, both of which are intended to misrepresent or artificially inflate a company’s actual BEE status.
Arguably the most publicised form of fronting involves the appointment of black individuals to senior positions without their knowledge, or without the responsibilities and rewards typically associated with these positions being transferred to them. A common example would be appointing an unskilled labourer as a Director, but doing so only on paper.
The second form of fronting, which is also prevalent, involves the establishment of a new “marketing” operation. This operation is a separate legal entity which only performs limited marketing functions, or none what so ever. It does however, act as a sales agent for the original business, selling its products to clients with a stringent Preferential Procurement policy.
The idea being that the original company does not transform while the client gets to procure from a black supplier, albeit at a higher cost without true additional value. It is also not uncommon to find that the procuring party is fully aware of the fronting practice, but does nothing to address it.
Fronting actions generally stem directly from a drive to at least be seen to comply with BEE requirements, coupled with extreme misconceptions about BEE. Public knowledge of Broad-Based Black Economic Empowerment and the associated scoring systems (Generic Scorecard, Qualifying Small Enterprises Scorecard and Excepted Micro Enterprises) remain extremely low.
This drive to comply, when not taking the form of fronting, may also be in the form of Preferential Procurement policies that aggressively target procurement from black owned businesses. Although this focus on ownership may be related to a specific industry charter, it still indicates a lacking knowledge of the Broad-Based system to which all charters will in future be subservient. The more aggressive the procurement policy the more likely it also becomes that supplier fronting will be ignored.
In short then, it could be stated that fronting is intended to aid compliance with a system which is not properly understood by those engaging in the fronting.
This, conversely, is a direct threat to compliance given the entry of Verification Agencies.
These agencies, tasked with issuing BEE certificates and (to be) accredited by government to do so, will take an inflexible position with regards to fronting. Specifically since any deviation or inconsistency may jeopardise their own government accreditation.
In both of the fronting instances listed above, Verification Agencies should detect the fronting and reduce the fronting party’s score, or most likely withhold a score altogether. This in turn implies that any party procuring from the fronters will no longer gain a preferential procurement benefit. If however, it is found that the procuring party knew about the fronting, that business’s score will be further affected, up to the point of a scorecard being withheld.
Avoiding fronting in the first instance would therefore be of prime importance, as is informing suppliers of your company’s position on fronting. If fronting has already occurred all is not lost. Though attending to it is critical, which would normally involve gaining outside legal and business advice on restructuring so as to stop the fronting activity, whilst gaining a true BEE position. Management consultants and legal practitioners with solid references and knowledge of BEE would therefore be the preferred service providers in these instances.
Exceed Verification Agency
Direct Telephone: +27 (0) 86 111 5280
Facsimile: +27 (0) 21 915 6660