• Date Posted: December 10 January 2015
  • Author: Deon Oberholzer

Growth Industry: BEE fronting

Look out for a big rise in BEE fronting and circumvention. The prediction comes from Deon Oberholzer, Group CEO of Gestalt, a leading BEE Consultancy.

Amended codes with much tougher BEE requirements are now in full force. As the more rigorous dispensation dawns on us, says Oberholzer, many firms will realise they may have left it too late to embrace the new system and achieve acceptable BEE status in 2017. The B-BBEE Commissioner reported in October 2016 that 84% of the 134 investigations and complaints her office was looking at were about fronting.

Non-compliance could endanger the business of BEE laggards supplying government, state-owned enterprises and big corporates committed to empowered procurement.

Two responses appear likely.

Says Oberholzer: “Some will desperately fast-track real empowerment at the last minute. This is still possible, given the right advice and strong senior management buy-in.

Others will be tempted to cheat.”

Numerous avoidance schemes rearing their ugly head , but Oberholzer highlights four basic structures.

  1. The 51% ‘black-owned’ qualifying small enterprise (QSE)

This scheme fabricates black ownership via “a powerless and easy to remove BEE grouping” – perhaps a development trust, a vaguely defined broad-based trust or employee trust in a cascading ownership model that exploits the modified flow-through principle built into BEE legislation. As a result, an effective 26% shareholding is inflated, creating 51% ‘black ownership’.

Oberholzer notes: “Majority black ownership creates procurement advantages when bidding for tenders. Furthermore, a ‘black-owned’ company can save costs and fatten margins as it is exempt from other BEE provisions and does not need to invest in the development of black people.

Verification and oversight are avoided. A sworn affidavit is acceptable proof of compliance.”

  1. Black intermediaries

Here, black-owned intermediaries, agents or distributors are created with the sole purpose of channeling client orders to a white company.

The white company offers its products and services via the black company with no significant price or service disadvantages.

Oberholzer explains: “As long as revenues of the black-owned intermediaries are kept under the R50 million exemption level, only a sworn affidavit is required, avoiding any need for verification or oversight. The white company can ignore BEE codes, remain non-compliant and continue in business.

Blackco needs a black owner on paper. All staff can be white. A non-performing Blackco can easily be terminated.”

  1. Black-owned’ procurement hubs

Here, black ownership is fabricated for a supply chain business.

The hub takes orders and buys specified products from a predetermined supplier at a predetermined price and arranges delivery. All invoicing is via the ‘black-owned’ hub. In reality, the customer can maintain existing relationships with white-owned suppliers by making use of the hub for a small premium. The hub can also act as a logistics company, thereby delivering the product to the white company.

Oberholzer points out: “The scam addresses a supply chain challenge for companies that are expected to channel 40% of their procurement spend to black-owned companies and 12% to black women-owned companies.

Goods procured through this arrangement are automatically rendered black. The scheme can be used to procure goods from non-compliant local companies or to ‘shield’ imports that do not qualify for exclusion from BEE procurement.”

He believes other forms of circumvention can also be expected and predicts the emergence of “an informal but active secondary market for government tenders”.

He says Human Settlements Minister Lindiwe Sisulu has already warned small black contractors and developers to stop onselling government housing tenders to big firms for easy money. She reiterated that Government wants small black business to grow into big black business, not remain pawns in the status quo.

Oberholzer says that fundamental shifts in the structure of our economy to empower black business will be difficult to achieve in an environment where BEE fronting and circumvention are rife.” The sad part of all of this is that real transformation is critical to heal our society and open the economy and it is often much more effective to do things right than to try to get away with doing it wrong.

Gestalt offers unique solutions for maximum BEE compliance, using cost effective solutions while ensuring maximum business benefit.[/vc_column_text][/vc_column][/vc_row]