B-BBEE frontingNo clear guidelines defining B-BBEE fronting practices have been available since the Broad-Based Black Economic Empowerment Act 53 of 2003 as amended (“B-BBEE Act”) became law.  Despite this, the criminalisation of fronting practices adds to the seriousness of this issue for both existing and future B-BBEE initiatives.

A useful guideline on the “fronting practice” definition in the B-BBEE Act was established by Judge EJ Francis in 2018 in the High Court case involving the Passenger Rail Agency of SA (Prasa) and Swifambo Rail Agency (Pty) Ltd.

B-BBEE fronting

Fronting is defined in Section 1 of the Act as follows:

“fronting practice” means a transaction, arrangement or other act or conduct that directly or indirectly undermines or frustrates the achievement of the objectives of this Act or the implementation of any of the provisions of this Act, including but not limited to practices in connection with a B-BBEE initiative—

(a)    in terms of which black persons who are appointed to an enterprise are discouraged or inhibited from substantially participating in the core activities of that enterprise;

(b)    in terms of which the economic benefits received as a result of the broad-based black economic empowerment status of an enterprise do not flow to black people in the ratio specified in the relevant legal documentation;

(c)    involving the conclusion of a legal relationship with a black person for the purpose of that enterprise achieving a certain level of broad-based black economic empowerment compliance without granting that black person the economic benefits that would reasonably be expected to be associated with the status or position held by that black person; or

(d)    involving the conclusion of an agreement with another enterprise in order to achieve or enhance broad-based black economic empowerment status in circumstances in which—

  • there are significant limitations, whether implicit or explicit, on the identity of suppliers, service providers, clients or customers;
  • the maintenance of business operations is reasonably considered to be improbable, having regard to the resources available;
  • the terms and conditions were not negotiated at arm’s length and on a fair and reasonable basis.

Swifambo Rail Agency deal

The Prasa/Swifambo case related to the award of a tender to Swifambo by Prasa for the supply of locomotives to Prasa. The locomotives would be sourced by Swifambo from Vossloh, a company based in Spain. The court decided to review and set aside Pasa’s decision to award the contract to Swifambo.

Guidelines defining B-BBEE fronting practices

The court found that the arrangement between Swifambo and Vossloh constituted a fronting practice on the basis that:

  1. Swifambo was merely a “token participant”, which had received monetary compensation in exchange for the use of its B-BBEE rating by Vossloh.
  2. Vossloh maintained completed control of the operations of the business (including the appointment of members of the steering committee) and Swifambo’s role was limited to minor administrative activities. There was no transfer of skills to Swifambo.
  3. Vossloh had chosen not to take advantage of the “equity equivalent” programme whereby multinationals earn B-BBEE ownership points by contributing to an approved programme instead of having a B-BBEE shareholder. Vossloh had, instead, used Swifambo as a vehicle to tender for the locomotive contract, even though Swifambo had no resources or technical capabilities, operational capacity, staff or other resources and its business operations were accordingly improbable. It was effectively a shelf company.
  4. The true nature of the relationship between Swifambo and Vossloh was that Swifambo was a front for Vossloh and had effectively sub-contracted 100% of the work required under the Prasa contract to Vossloh.

The boards and executive management of all companies which are parties to existing B-BBEE schemes should take note.  Fronting practices constitute a criminal offence which carries heavy penalties.

Read the full article here.