Fronting - a blessing or a curse?

Since 1996 Government procurement was significantly transformed, or rather reformed, to not only ensure that preference is granted to previously disadvantaged individuals, but also to curb fraudulent procurement practices. The granting of preference was seen through the incremental adoption and promulgation of legislative and regulatory reforms applicable to all organs of state. These government reforms, however, have contributed to the development of a new phenomenon commonly known as ‘fronting’. The question being asked these days is: “Is fronting good or bad?” Fronting is defined as “not being as honest as possible about something”. It happened in the past that fronting occurred where a tender was awarded and the black beneficiaries obtained only short-term financial benefits, but in the long term NO EMPOWERMENT took place, rendering the scheme unsustainable and defeating the purpose of black economic empowerment. On the other hand, owing to South Africa’s history, a substantial number of black shareholders and small to medium enterprises (SMEs) do not have access to funding and collateral to enable them to start their own operations and need partners to provide such support. By engaging such partners a form of relationship is created, which can also be classified as a form of fronting and raises the question: “When is fronting permissible and when is it bad?” In an attempt to address this question the Preferential Procurement Policy Framework Act (PPPFA) and the Broad-Based Black Economic Empowerment (B-BBEE) Codes provide for penalties and even blacklisting of companies who obtained preferences based on misinformation. It also determines that ownership can only be claimed if the shareholders or directors of a company are actively involved in the day-to-day management/running of the company or exercise management control in such company. With these types of prescripts government is attempting to ensure that if ‘fronting’ does take place, BEE groups are involved in both the operation and also strategic level of the company, thus ensuring proper and sustainable skills transfer, empowerment and resultant financial benefits, and not only be providers of so-called blue collar services. In order to detect fronting, one must have the ability to test preference claims during the bidding process and then consistently monitor any change during the award of a tender. This is an extremely expensive and time-consuming process, which can eventually exacerbate the already cumbersome and tedious bureaucratic government procurement process. An alternative approach to promote SMEs when awarding major contracts could be to force the conclusion of joint ventures/consortia requiring so-called big firms to conclude agreements with smaller firms and submit such agreements as part of the tender, indicating how the SMEs will participate in strategic decision making and operational involvement, the level of profit sharing and, very importantly, how participation and profit sharing will increase over the contract term to the benefit of the SMEs. On this basis the profile of the bidder is determined upfront and the management and monitoring arrangements are put in place before the tender is awarded. All of the above attempts, if restrictively interpreted, can be regarded as forms of permissible ‘fronting’. Can it therefore be regarded as ‘wrong’? The answer is a simple ‘NO’. The writer’s respectful opinion is that there are two types of ‘fronting’: negative fronting and positive fronting. Negative fronting is not permissible because it usually relates to the so-called rent-a-black-person scheme, where preferences are claimed purely on black shareholding of which the relevant black participants do not participate in the strategic and operational management of the company and no sustainable empowerment takes place. Positive fronting is acceptable because it is structured with the main aim of skills capacitating and sustainable empowerment, with built in provisions of increased profit sharing as skills are developed. Tenders are opened for bidding with the requirements being transparent, fair, equitable and competitive. Therefore, the test for positive fronting is based on four criteria: Does the bidder profile allow the following? Structured fronting, i.e. consortium or joint venture agreement? Yes/No Skills development? Yes/No Sustainable empowerment? Yes/No Incrementally increased profit sharing linked to skills development? Yes/No

If at least 3 of the requirements are answered in the positive = positive fronting Conclusion There is a fine line between the two types of fronting. Negative fronting is unacceptable and all attempts must be made to avoid it, while positive fronting is acceptable if it complies with the test of being in the form of structured agreements, based on skills development, includes sustainable empowerment outcomes and links increased profit sharing to skills development. In order for positive fronting to be successful, good governance arrangements related to reporting and monitoring must be agreed to and put in place.