Black Economic Empowerment (BEE) fronting has become a major problem in South African businesses, and could have been going on since the inception of the legislation.
“Fronting is a very serious issue and it’s been on government’s agenda for a long time. We’ve seen the creation of the advisory council in various mechanisms to create penalties and monitor fronting,” Wayne Van Rooyen from Grant Thornton told CNBC Africa on Friday.
“A company that is found guilty of fronting can go to jail for up to 10 years and suffer a further 10-year penalty of not being able to do business with government.”
According to South Africa’s Department of Trade and Industry, fronting is a deliberate or attempted circumvention of the B-BBEE Act and the Codes.
That commonly involves reliance on data or claims of compliance based on misrepresentations of facts. These can either be made by the party claiming compliance with the codes or by any other person.
Van Rooyen explained that government taking BEE fronting seriously is a step in the right direction.
President Jacob Zuma recently condemned fronting at the first national summit on broad-based black economic empowerment (B-BBEE), which is currently underway in Johannesburg. He added that fronting was unforgivable and discrediting the country’s empowerment picture.
However, BEE legislation in the past did not have enough monitoring to make sure policy requirements were implemented, despite the score card system and various measurement tools.
“What we’re seeing is a move that focuses on the development of black people and specifically an emphasis on black ownership in the economy, which was a somewhat diluted focus over the last five years,” Van Rooyen added.
He explained that a negative consequence of the BEE policy is that once a focus on ownership has been taken, the grassroots empowerment that the entre policy stemmed from is forgotten.
“It seems to me that we’ve moved away from broad-based empowerment into narrow-based empowerment again, but the benefit that that has is for the black-owned businessman,” said Van Rooyen.
“He now qualifies as a level one or a level two contributor, whereas before he was required to make all of the same contributions expected of other organisations in the other six elements.”
While changes to the BEE codes are still under discussion, there have been some new variations. Companies with less than 50 million rand in revenue would previously have been measured according to the ordinary codes of good practice. They will now be measured on the less strict Qualifying Small Enterprises (QSE) codes of good practice.
“There’s a very strong emphasis on skills development in the new codes. There was talk initially of increasing the target from three per cent to six per cent – that’s the amount of money that companies must spend on training – we don’t know if that will come through. We’ll wait for the final codes to see if that happens,” said Van Rooyen.