Archive for category Fronting
Proposed amendments to the B-BBEE Act
Posted by Keith in BBBEE Knowledge, Fronting, Interpretations, True Empowerment on November 25th, 2011
Proposed amendments to the Broad-Based Black Economic Empowerment Act (B- BBEE)
Cabinet approved the publication of the Broad-Based Black Economic Empowerment Act (B-BEE) Amendment Bill for public comment.
The proposed amendments to the Act intend to achieve the following objectives:
(a) Align the Act with other legislation impacting on the B-BBEE and with the codes
(b) Establish the B-BBEE Commission to establish an institutional environment for monitoring and evaluation broad-base black economic empowerment
(c) Provide for the regulation of the verification industry by the Independent Regulatory Board of Auditors
(d) Deal with non-compliance and circumvention by introducing offences and penalties
The proposed changes to the B-BBEE codes of good practice:
(a) Enterprise Development (ED) and Procurement to be elevated with each requiring sub-minimum and enhanced recognition for ED targeted at key sectors in IPAP and the New Growth Path
(b) Penalty provision for non-compliance with Enterprise Development and Procurement elements of the B-BBEE scorecard, and discount from overall score
(c) The points of ownership element should be broadened to include designated groups in the main points, creating greater incentives for genuine broad-based ownership such as employee share ownership, co-operatives and community ownership
(d) Setting sub-minimums/threshold for each element of the scorecard save for the adjusted ownership element
(e) The Qualifying Small Enterprises scorecard will be adjusted and certain elements made mandatory.The thresholds for Exempted Micro Enterprises will be reviewed
(F) The Employment Equity element to receive adjusted recognition and to be aligned to the Employment Equity Act (targets, Reporting and Definitions).
(g) Skills Development Element to be aligned to the New Skills development Strategy and the New Growth Path and
(h) Targets in the Ownership Skills Development Procurement and Enterprise Development will be adjusted.
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Comments:
In general, EconoBEE welcomes the proposed changes. We need to see the actual bill to analyse it in more detail, but in general, all the recommendations we have sent to the dti and BEE Council have been addressed.
We like that B-BBEE is being aligned with other acts, in particular the PPPFA which comes into effect on 7th December 2011.
More than a year ago we recommended to the minister that he establish an office of the BEE Ombudsman, to handle issues of interpretations, valid certificates, fronting, disputes. This is now being done via the establishment of a commission.
We also welcome IRBA as the overall regulatory body for verification. The verification industry has always had problems, starting with ABVA, and subsequently SANAS has struggled to handle our volume of enquiries and sort out various issues. We hope that IRBA will be fully staffed to handle the increased workload.
We were one of the first companies to raise the issue of invalid certificates, fronting and other non-conformances. We therefore welcome the approach that fronting will be penalised, and that the B-BBEE Commission will be tasked to investigate this.
In principle,we also welcome any proposed adjustments to the weightings and targets of the elements or the definitions. We have always like the fact that B-BBEE stands for “broad-based” implying it affects all aspects of the economy, and not necessarily only narrow based ownership.
We look forward to seeing the proposed bill and will make representations
Comments by Rob Davies dti minister during his budget vote
Posted by Keith in BBBEE Knowledge, Enterprise Development, Fronting, General, Interpretations, True Empowerment on April 20th, 2011
Minister Davies spoke about B-BBEE during his budget vote: He said the following:
“Regarding economic empowerment more generally, the BEE Codes of Good Practice were promulgated 4 years ago and we are now in a better position to assess their impact. The Presidential Advisory Council has made several policy recommendations to allow for greater participation by black people in productive activities and to tackle what is now emerging as increasingly complex practices of fronting. To this end, the dti and the Presidential Advisory Council are focusing on reviewing the BEE Codes of good practice and possibly amending the BBBEE Act. This could entail, amongst others, refinements to ensure greater policy coherence in the application of BBBEE across government and to strengthen access to procurement opportunities through the now approved and aligned PPPFA regulations. We are also looking at ways to strengthen our efforts to combat the fraudulent practice of fronting.”
Business Day – 20th April 2011 is reporting as follows :
“Department of Trade and Industry acting director-general Lionel October said yesterday the recommendations of the advisory council — now being considered by the economic cluster of government departments — would shift the focus of BEE away from equity investment and ownership towards productive activities.
Currently, companies scored high marks on the BEE scorecard for black ownership, which gave them a high overall score even when they performed poorly in areas such as enterprise development and procurement.
A proposal being examined by the economic cluster is that minimum scores would be required for enterprise development and procurement — or the overall score would suffer. This would compel companies to aim for achievement in all areas.
Mr Davies said what was under consideration was that points would be deducted from the overall score if minimum scores for enterprise development and procurement from small companies were not achieved.
It would also not be enough to merely hand over money for an incubator or enterprise development project. Companies would have to be actively involved in fostering small businesses.
“In Asia, small and big businesses have a symbiotic relationship where big business gets a lot of input from small business and works hard to ensure that it has the required capacity and the technology,” Mr Davies said.
Complex forms of fronting also had to be addressed.
“We have seen that people who participate in ownership deals imagine that they have one thing, but then when they look at the fine print, they have something else,” Mr Davies said.
“There is now a whole industry of lawyers and accountants who are structuring these deals in particular ways.”
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The above is not too different from our crystal ball gazing in our previous newsletter. This is what we said:
The dti has been looking at revising the codes, and recently issued a tender for companies, presumably law firms to take this further. Once the service providers are appointed, the process will take many months or even years to evaluate and then re-evaluate the B-BBEE codes. We are quite sure that this will not result in “canceling” B-BBEE, but gazing into a crystal ball we expect in one or two years time to see the following:
Ownership
Ownership indicators will change to award more points to broad-based and employee ownership schemes. Individual ownership will be awarded less points. Less emphasis will be placed on direct voting rights and more emphasis placed on a new form of economic interest to ensure that new owners get direct benefit out of their investment. To date many companies do not declare dividends so a minority owner has no benefit, other than when he sells his shares, and in private companies there is no good way to value shares like the JSE does.
Management Control
Will be worth less points than present. Currently one new black director can be “worth” up to 6 points. This is seen as only benefiting a few, it is not broad-based enough. Management may be reduced to 5 points or even consolidated into the Employment Equity element reducing the number of elements to 6.
Employment Equity
Definitions will be cleared up. Allowing a significantly more objective measure of “senior, middle and junior” management employees. More points will be awarded. There is a possibility to have the definitions expanded to broaden the reach of the management levels. It should be noted that as from next year the targets for EE go up anyway.
Skills Development
Skills is anticipated to be the biggest beneficiary of the re-evaluations and will certainly be worth more points. Additional indicators, similar to the excellent construction charter will be created. This will include a more detailed breakdown including mentorships and bursaries. The cost of Skills Development will not be a major discussion point, rather what does that spend get used for. The cost will therefore be targeted in more specific and beneficial areas.
Preferential Procurement
As from next year the targets for procurement go up anyway. Definitions and interpretations, especially around exclusions – imports, third party will be cleared up. The procurement element cannot change substantially as it is the theoretical driver behind Black Economic Empowerment.
Enterprise Development
Points may drop slightly. More indicators like those in the construction charter will be added. Some “easy” points, may decrease in importance. Mentorships for developing enterprises will be added. Increased emphasis will be placed on the type of beneficiary ensuring better Enterprise Development opportunities and not generic spend with any qualifying beneficiary.
Socio-economic Development
Points may drop slightly in favour of the EE and Skills elements.
QSEs may find that the “easy” points on ED and SED will have less value.
The thresholds on EMEs will rise.
The charters will also have to be re-evaluated, so there may be a recommendation to decrease the number of gazetted charters
Let’s re-look at this in two years time and see how accurate we were.
Dear Minister
Posted by Keith in BBBEE Knowledge, Charters, Fronting, Sarcasm, True Empowerment, Verification, politics on March 9th, 2011
Dear Minister,
Please advise urgently.
My client is a QSE BEP. If he follows the BEP scorecard his ED target is R22 500 because ED is based on leviable amount. His SED target is R11250.
If he follows the codes of good practice his ED target is R2800 because we will use indicative profit and R1400 for SED.
If he follows the BEP scorecard he will need to pay R33 750 for both ED and SED, but if he follows the codes his cost is R4200 – a differential of R29 550.
Since the dti and SANAS are still seeking clarity, apparently now from the DG, and you have not any statement either, I need to know if the dti will condone my client following the codes that most suit him. The precedents have of course been set and we all know that SANAS will not regard this as a non-conformance and dti will not withdraw the certificate…….
On the other hand I’ve got some clients who are NOT in the construction sector but tend to like the lower adjustment for gender so are going to follow the construction/BEP codes. Is this also okay?
I know of a company that signed the final gazetted forestry charter but wants to follow AgriBEE and will use generic until that happens. Is this ok?
Now that I think of it, another client who has a turnover of over R1billion would like to follow the QSE scorecard for tourism. Also, a difficult client (you know how clients are) likes the Construction generic ownership element, the freight transport management control (for QSEs), the codes for EE, the QSE codes for Skills, and forestry for the other elements. Can I please have special permission to change the codes to suit my difficult client? He also wants to use a verification agency that had a pre-assessment letter in Feb 2010 but has now expired.
Another client would like to use ArcelorMittal as their verification agency. According to SANAS, ArcelorMittal has been accredited (for legal metrology, specifically weighing instruments), and the client feels that since ArcelorMittal, like SANAS, has no BEE certificate, they are a good organisation to do their BEE verification. Is this possible?
Minister, in any event we know that the dti/BEE Council will never be able to identify and really does not care about fronting, but being law abiding I’d like your approval to recommend fronting to my clients, who are being hamstrung by my honesty.
Yours sincerely
Keith
Suspect scorecards – is Serra Fronting?
Posted by Keith in Fronting, Verification on October 31st, 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.
More suspect scorecards and fronting practices
Posted by Keith in Fronting, Interpretations on October 29th, 2010
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?
Make sure your prospective BEE Ownership Partner has a BEE certificate.
Posted by Keith in Accreditation, Fronting, Ownership, Scorecard points, True Empowerment on October 6th, 2010
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.
Fronting
Posted by Keith in Fronting, Verification on August 20th, 2010
There are two types of fronting taking place.
Fronting Activity 1:
The first, and most important, and most harmful is where a company allocates, or pretends to allocate shares to a black person, and puts him on the board, with the express intention of misrepresenting their business.
This is wrong, but happens in reaction to requests from predominantly government and public enterprises for details of the black ownership of the entity.
It is becoming commonly accepted that to do business with government or a public enterprise, you need to have anywhere between 25% and 60% black ownership.
There is no consistency: Various public enterprises and government departments have different requirements. Even within the same department, tenders have different requirements.
All public tenders are governed by the PPPFA (preferential procurement policy framework act) which lay down procedures and process from evaluating tenders. It even states that all tenders must take into account the empowerment credentials of each tenderer. It does not give any specific details on how those empowerment credentials will be evaluated, which is why each tender document looks different.
There is no clear interpretation of black ownership. As a result many unethical companies are creating front companies that are 51% black owned – where in some cases the black ownership has no idea he is even a shareholder, or has signed a proxy giving the other owners full rights to run the business as they please. There are cases where the new owner is only a temporary owner, and HAS to sell the shares back to the company some time in the future. While the ArcelorMittal deal is not necessarily fronting, this is exactly what their share deal is doing.
Fronting Activity 2:
The second type of fronting relates to the B-BBEE scorecard/certificate. A scorecard is usually only asked for by private enterprise, and measures the entities B-BBEE status against a wide rage of indicators – that is why it is called “broad-based”. Some companies will misrepresent their B-BBEE status to obtain a higher score than they would otherwise achieve. One recent example is of Shield Chemicals who forged their B-BBEE certificate – a fraudulent activity.
Because a certificate is based on up to 30 indicators, it becomes more difficult for a company to front, and it becomes easier for an analyst to identify that fronting. If a company used the dubious ownership methods mentioned previously, a consultant or rating/verification agency would quite easily pick it up and award zero points to the company as we estimated with the ArcelorMittal deal. The indicators are cleverly interlinked – if a company earns zero points on ownership and employment equity, it would be unusual, though not impossible if it earned full marks on management control and skills development, and these specific indicators would be checked by the rating agency.
Conclusion:
A verified scorecard becomes a public document that is scrutinized, and is more likely to be caught out if fronting than where a company submits a tender to a government department, and includes falsified information. It is most likely that the customer will identify an invalid scorecard, or even a competitor. A verification agency will also examine certificates to see if there is an indication of fronting.
Most incidences of fronting are due to fronting activity 1, not 2. A broad-based scorecard is less likely to be fronting than a share certificate.
The best way to reduce fronting is for government to follow the B-BBEE scorecard approach.
Fronting should be criminalised
Posted by Keith in BBBEE Knowledge, Fronting, True Empowerment on August 19th, 2010
See http://www.busrep.co.za/index.php?fArticleId=5607784
Parliament wants to criminalise fronting. My point is it is fraud, and action can be taken, especially is a company director commits fraud.
I don’t think the dti has the capacity to stop it. I think a good way is to name and shame, like I did on Monday to Shield Chemicals.
Another point is there is fronting going on, not only in the B-BBEE space, but on government tenders which has nothing to do with B-BBEE. Parliament, and the public are more concerned about irregular tenders and fronting than a forged B-BBEE certificate. And in this case the dti is the wrong department to do something about it. Tendering and government procurement is the realm of the Treasury Department.
The anger of many people directed at B-BBEE is completed mis-placed. The responsible act is the PPPFA.
27th January 2010 and Fronting
Posted by Keith in Accreditation, BBBEE Knowledge, Fronting, Verification on August 16th, 2010
1st February was a landmark day in the history of B-BBEE in South Africa. It was from that date onwards that only certificates issued by accredited verification agencies, or those in possession of a valid pre-assessment letter, would be valid.
Prior to that date other certificates, even if issued by a non-accredited agency or self ratings or BEE consultant swould be acceptable.
It is therefore quite interesting to see how many certificates were produced by consultants in the final three days before the deadline. We have seen more certificates dated 27th,28th,29th January than any other date! (30th January was a Saturday explaining why the 27th and 28th January were such popular dates). When I see a certificate dated 27th or 28th January, I examine it in a little more detail. This is not to say it should be rejected, but I am sceptical over the volume of certificates produced over that time. I look especially for certificates that do not use decimals in their calculations, or those where all the points have been earned for any one element. The mix of how points were earned is another indicator of fronting. For example if a company has earned all 23 points on ownership, but gets less than 2 points for management control, there is sufficient reason to want to double check the data. The codes do say that the measured entity must hold suitable evidence or documentation to prove their score. If they do not have the proof, then the entire scorecard must be rejected.
We do have a letter from the dti confirming that certificates produced prior to 1st February 2010 remain valid. If your verification agency does not accept certificates produced by non-accredited agencies prior to 1st February 2010, email us and request a copy of that letter.
Fronting is misrepresentation of one’s BEE position and is considered fraud. We have come across an interesting situation recently. In this case, they did not choose the 27th January date for their BEE Certificate, but used 30th November 2010 as the date on their certificate! Back-dating a scorecard is one thing, but forward-dating it is a recipe for getting caught out! A bit more research showed that they used the identical certificate last year with a date of 30th November 2009l. The certificate purported to be from EMEX (a very reputable verification agency), and was obviously forged. Investigations are continuing, and it is currently impossible to state who is at fault here, but there is no doubt that this certificate is not valid, and does not give the true BEE situation of the company.
Cyril Ramaphosa is very confused
Posted by Keith in BBBEE Knowledge, Fronting, True Empowerment on November 19th, 2009
Business Report has an article quoting Cyril Ramaphosa. He is complaining about lock-in clauses and the fact that the BEE codes have a “once empowered always empowered clause” that encourages businesses to offer loans to “BEE partners”, and lock them in for up to 10 years. Often the partner cannot repay the loan so the business repossesses the shares but does not lose their BEE points because of the “once empowered, always empowered” clause.
This is what he says – unfortunately he is wrong about the “once empowered always empowered” clause. It simply does not exist! What does happen is companies DO have lock-in clauses, and they have sometimes re-possessed the shares when the partner could not repay the loan. Group 5 is a case in point, and it is something that I do not like, so on that point we do agree with Mr Ramaphosa. However there is no “once empowered always empowered” clause in the codes of good practice.
There was lots of talk about it: The concept was if a company lost its back shareholders they would retain the points they had earned before the shareholding was lost. This would have been a way for unscrupulous companies to front by making life intolerable for their investors, find a pretext to get rid of them and retain their points. In extreme cases a company could have sold (given) shares today to a black beggar, taken the shares back tomorrow and continued as if it had the black shareholding forever.
Were this the case, then Mr Ramaphosa’s point would have been valid. The true situation is that the codes do recognise specific situations where the company has lost its black shareholding, and does make fair allowances for both parties. This is known as “Recognition of ownership after loss or sale of shares.
This clause, par 3.5 of code 100, statement 100 explains that under certain circumstances a company can recognise SOME of its points if teh sahres are lost or sold, under very specific circumstances. The example above does not count as being an accecptable circumstance. Some of the rules are:
1) The shareholder must have held his shares for more than 3 years
2) Value must have been created in the hands of the shareholder
3) Transformation must have taken place in the enterprise
Under those circumstances only about 40% of the points (this is a complicaed calculation) that had been earned can be recognised by the company, and they can only be recognised for as long as the period that shareholder originally held those shares.
This is very different to a “once empowered always empowered” clause. Cyril’s biggest complaint about the “once empowered always empowered” rule is the black parties do not benefit at all from a failed deal. Clause 2) above makes it clear that a company can only recognise continued ownership if the black partners had value created in their hands. So, if there was no value created, the company cannot recognise any points from that failed deal.
It should also be reconignised that companies earn maximum points only if shares are being paid off during the period of the deal. If no shares are paid for then the company will lose up to 8 points on its scorecard. This should be an incentive to companies to try to ensure their partners do benefit financially and can start paying off the loans immediately in order to improve their scorecard.
This clause, the recognition of ownership after loss of sale of shares, seems fair enough and protect both sides. There was the celebrated case of Mzi Khumalo who held shares in Basil Read and sold those shares to restructure his protfolio. This was a perfectly valid business deal and he was fully entitled to sell shares he owned. Basil Read, on the other hand suddenly found themselves without a black sharehholder and since there shares are tightly held had great difficulty in findind shares for another partner to purchase. It makes business sense to offer a substantial discount to a partner in order to encourage him to stay for the “long haul”. If the discount is sufficiently large then the business partner would be eager to purchase, knowing that he cannot sell for say ten years (the lock-in clause Cyril talks about).
In the above press article a BEE consultant refers to the financial sector charter stating that it does have such a clause. However the FSC does not exist as a legal document, and is not a legal sector code so it cannot be used as a reference point. One of the many reasons that the FSC cannot be finalised is because it uses definitions different to those in the codes.
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