Archive for October, 2010
Serra® Services is a company that provides washroom products and services. According to their web site,
“the company was established in 1985 and grown to create a competitive position in the washroom industry. According to independent market surveys, Serra® branded products are the preferred choice in seven (7) out of ten (10) “A” Grade buildings.”
I cannot find a definition of an A grade building but it appears to be similar to premium, top class office blocks etc. For example in March 2010, Redefine (a leadng property company issued a press release that it had acquired R520 million worth of A grade buildings), and there are hundreds of such properties.
Serra ® Manufacturing is part of the Serra®Group. It manufactures the washroom equipment that Serra® Services sells to these “A” grade buildings, and probably to lower grade buildings as well. They are the preferred choice in 70% of A grade buildings.
I know they offer services that include replenishing washroom supplies like soap dispensers etc and have monthly income from some of these customers.
Yet both Serra® Services and Serra ® Manufacturing state they are EMEs – i.e each entity, Serra ® Manufacturing and Serra ® Services has an annual turnover of less than R5 million – less than R416 000 per month!
Is this suspect?
1) Note how both scorecards use the same company registration number, even though they have different company registration numbers.
2) Both certificates are produced by SEIFSA, a non-accredited agency. The certificate produced in July 2010 is signed by the “analyst”, Charl Cilliers, but there is no signature of an officer from Serra ® or their accountant. The codes are clear: Only an accredited agency or the companies auditor of financial officer may sign EME certificates after 1st February 2010. The certificate is therefore invalid.
3) I do not believe that this company, that boasts of having its products in 70% of all A grade buildings is an EME in the first place. Note how they have even trademarked their company name. A R5 million per annum company does not do this.
This looks very much fronting, and joint blame must lie with Serra ® and SEIFSA which did not check with their accountant, or even use any initiative to decide if the company can indeed have a turnover of less than R5 million per annum. SEIFSA deserves criticism for continuing to sign verification certificates when it has no mandate to do so.
We have written to Serra ®, querying their turnover. There has been no response.
Fronting is defined as misrepresenting your BEE score. There is another method that people are using to front. In many cases people think that if they give a scorecard that on the face of it is correct, it will not be fronting.
Companies with holding companies are now beginning to use the scorecard from the holding company as their certificate. On the face of it this seems ok. The codes allow a consolidation and if they send a holding company’s scorecard, many people will regard it as perfectly correct. However a holding company is not the operating company and the codes allow a consolidated scorecard, not necessarily one from the holding company.
The problem with a holding company is its turnover is generally quite small. It receives dividends or management fees from its operating entities. It has large assets – being the value of the businesses it owns, but its turnover may well be less than R5 million. This is how people front. They produce an EME certificate showing the business to be an EME – level 4, and ignore the operating companies.
On the face if it the certificate is 100% correct. The holding company is indeed an EME. However, who is your supplier? The supplier is the name of the company and the company registration number that appears on the invoice supplied by the supplier to you. This is the operating company, not a holding company. The certificate you need is the one that uses the operating company’s data, which may well be a generic and non-compliant. When the company is confronted they often feign ignorance or apologise that they supplied the wrong scorecard, and promise to supply the correct one.
This is fronting. It is a deliberate attempt to supply a scorecard that misrepresents the true BEE situation. If you ask for a certificate from your supplier and they give you the wrong certificate, they are fronting and could be guilty of fraud.
Here is a good example: Look at www.zealous.co.za Their web site shows them to have at least two businesses: Zealous Automotive and Zealous Pressure Castings. The web site reports that Zealous Automotive alone employs 160 employees and the land is 12000m2 . The holding company is Zealous Holdings. The scorecard for Zealous Holdings (Pty) Ltd, same address, is that of an EME. They are trying to use this certificate as the valid one to all customers. They have to know full well that the holding company does not supply their customers and that it does not earn income.
Simple mistake or deliberate to misrepresent their BEE position?
We are seeing more and more queries of scorecards. Not because there is necessarily fronting but because more people are checking the scorecards.
We have been at the forefront of checking scorecards: we have discovered fronting and reported it. We have discovered mistakes, and asked the agency to correct it. We have raised queries that we satisfactorily resolved. We continue to try to check every scorecard received: We look at the entity – it is an EME, QSE or generic. Does it belong to a sector code and is it done correctly.
In the news lately has been the Kelly Group (www.kelly.co.za). Reports were that they changed/manipulated their employment equity credentials. Latest reports (http://www.fin24.com/Companies/Kelly-denies-fudging-BEE-status-20101019) are that they deny the charges.
This is the Kelly Certificate Expiry 19 May 2011-1 that was produced for them. On face value there is nothing wrong, other than it is surprising to see each element with a completely round number. We usually see ownership, employment equity and skills development calculated to two decimal places and in this case they earned 18, 10 and 12 points respectively for those elements. (They earned full points for procurement, otherwise we would have expected to see decimals as well).
We have asked them for their full report.
On a personal level, we sincerely hope that there is nothing to back up the allegations and we currently have no reason to believe that Kelly’s certificate is invalid. What we are pleased about is that people are checking certificates. This self-monitoring mechanism is what we always had in mind when we stated that the dti does not absolutely need another law to criminalise fronting. We stated that fronting IS fraud, and that it is not the customer or verification agency that will always catch fronting, but the opposition, or other involved people. Obviously the BEE consultant and then the verification agency is the first step to stopping fronting, or misrepresentation or even mistakes. Thereafter the media and other people will question the company’s credentials.
When someone talks of B-BEE, there is a distinct trend to looking at the scorecard or certificate. This is good news.
We come across hundreds of black owned companies, all hoping to invest in your business. They tout themselves as being the ideal BEE partner. We have seen hundreds of deals, and companies advertising their new BEE partner. Our usual approach is to calculate the points they will earn as a result of the deal.
In addition we also look to see if this ideal BEE partner themselves have a BEE certificate, and invariable they do not. As far as I am concerned a company that sets itself out to be a BEE Partner, should also make the effort to obtain their own BEE certificate. Unfortunately this seldom happens. We could name hundreds of companies that think they are an ideal BEE partner, because they are majority black owned, but if they don’t bother to get their own BEE certificate, I have to suspect that they are not genuine about transformation and B-BBEE. If they were genuine surely they would want the whole world to know what their own BEE credentials are. In many cases they have not even bothered to do a self-assessment.
Often the company web site talks about empowerment, but seldom do they put their own BEE Certificate on the site, yet they use their “empowerment” credentials to get business, and to make deals.
If you do not have a BEE certificate showing at least level 4, you do NOT have good empowerment credentials.
Try the following exercise: Google “Black owned investment company”, and then look at each of their web sites, and see how many businesses are hoping to be BEE partners, but have no BEE certificate on their site.
The PIC has now stated that they are unhappy with the ArcelorMittal deal. They specifically ask why the BEE deal was not broad-based. See http://www.businessday.co.za/articles/Content.aspx?id=122763.
We were the first BEE Consultancy to express reservations about the deal, by calculating the number of points that AM would earn via the deal. Our concern then, and now is AM chose to call this a broad-based deal when it hardly earned 5 points on the scorecard. They had various clauses in their deal that were unenforceable, showing really poor knowledge of B-BBEE and the codes. At one point they have stated that after the deal is completed they will call in a verification agency to evaluate their BEE score. Our view has always been that you evaluate your score BEFORE doing the deal, and getting a verification agency only to verify the points earned. You never call in a verification agency to help you see how many points you have earned, AFTER the deal. It is obvious that the deal was never intended to be broad-based.
At the same time we have noticed that some government departments are using the B-BBEE level as a criterion for awarding grants. We have recently asked the Public Protector to investigate why government departments, organs of state and public enterprises invariably do not use B-BBEE as a criteria in doing business. There now seems to be a distinct trend to slowly using B-BBEE principles, which we sincerely welcome.
We believe that this new approach to empowerment is going to remove a lot of the negativity around BEE, and ensure that the right people benefit, in the right way.