Publication: Mail and Guardian Issued: Date: 2004-07-09 Reporter: Reg Rumney

Fronting a Slippery Issue

 

Publication 

Mail and Guardian

Date 2004-07-09

Reporter

Reg Rumney

Web Link

www.mg.co.za

 

The eThekwini Council has discovered - through a forensic audit of contracts from the eThekwini municipality for Durban's uShaka Marine World - that two directors of a joint venture that had won a tender were, in fact, salaried employees - that had no idea that they were directors and had not received any share of the profits.

Suddenly, fronting, which has been around for a while, is in the news. The usual experts are calling for stern measures, including blacklisting, and independent monitoring and a host of other things. Intuitively, we know that fronting is wrong and should not be allowed. It is mendacious, and misspends money meant to deracialise the economy. The key concept is pretence : a "front" company or person pretends to be something else.

Forensic audits should be done, where possible, to ascertain that companies that win tenders have not deliberately misled those awarding tenders. Black economic empowerment (BEE) companies tendering for work need to be scrutinised more carefully by those putting out the tenders.

But let us not be simple-minded about this. Fronting is the proverbial "grey area". It will not vanish. It is not always easy to discover. The blatant eThekwini case raises a number of interesting issues. Apart from pretence, the difference between fronting and genuine empowerment often boils down to sincerity, or lack of it.

Clearly, the contractors did not intend to empower anyone through the venture. They simply listed the two employees as directors, without knowing those employees. What if the employees concerned had been aware that they were being used? What if they had been paid a little money for their names to be used? Surely that would still be fronting, since having your name on a letterhead is not actual empowerment, and your are pretending to be more than you are?

Take it a step further. What if the two people had not been employees, but black businessmen, paid more than a little bit of money for their names to be used to get the tender? Would that be fronting?

Some commentators use the concept of "economic interest" to differentiate a fronting operation form genuine empowerment. This means, simply put, that the black stake in a BEE company is real and bears actual dividends. So the argument is that a company that is black-controlled - with the black shareholders having voting rights of , say, 35% but not ownership of 35% - is a front. In the case of New Africa Investment Limited (Nail), for instance, the black shareholders owned only 5% of the shares, but controlled the company through a system of voting and non-voting shares.

To me this stretches the concept of fronting. Control - rather than ownership - was the target in the early days of BEE because of the difficulty the BEE partners had in raising funds for big stakes. The ultimate aim of black control was racial transformation. Nail did not pretend to be black owned, merely black-controlled. Did the black owners of the shares do well out of the company? Certainly. In that sense they had a real "economic interest" - although it wasn't 35%.

Did the white owners of non-voting shares in Nail think the company was a front? I think not, otherwise they would not have insisted on the enfranchisement of the non-voting shares. They preferred having ordinary voting shares to Nail being an empowerment company.

Let us look at a few more examples to show the complexity of the issue.

What if a black individual owns 100% of a company, but employs mainly whites in his company? Is he a front? I would argue not, although he, along with majority white-owned companies, will have to be judged on the government's score-card approach, which includes affirmative action.

Then there are the agencies. A parastatal decides it will no longer buy stationery from a large, white-owned supplier. A 100%-black-owned and black-run firm bids and wins a tender to supply it on the basis of its empowerment. It then buys all the requires stationery from the supplier and on-sells it to the parastatal. Since the black-owned firm adds its own mark-up to the price that the supplier used to charge, the price will be raised. In economic terms this is "rent-seeking", but is it fronting? There is no pretence that the black-owned company is making the stationery.

In the past the emphasis was on equity transfer in order to redress ownership imbalances. Ownership of nothing is nothing, however. I have mentioned in a previous column how dud companies were passed off by white owners to black people in empowerment's name.

The black businessman who employs whites is , I would argue, more likely to sustain an entrepreneurial career than the agency that on-sells stationery. In both cases, however, there is some operational involvement and some business risk. Compare that to a "tied" agency, where the nominal black owner is simply a conduit for the supplier. There is little risk, but also little empowerment. There is a pretence, not of ownership but of empowerment.

In grappling with the concept of fronting, we are grappling with some of the central issues of BEE.

Reg Rumney is director of the BusinessMap Foundation.

With acknowledgements to Reg Rumney and the Mail & Guardian.