Fronting under the BBBEE Act

Fronting under the BBBEE Act
06 Mar 2020

A fronting practice is defined in the Broad-Based Black Economic Empowerment Act 53 of 2003 as amended (the “BBBEE Act” or the “Act”) as:

“a transaction, arrangement or other Act or conduct that undermines the achievement of the objectives of the Act.” Section 1(c) of the Act, refers to the “conclusion of a legal relationship with a black person for that enterprise achieving a certain level of broad-based black economic empowerment compliance without granting that black person the economic benefits that would reasonably be expected to be associated with the status or position held by that black person.”

Any person who knowingly engages in a transaction that undermines the BBBEE Act would be guilty of an offence under section 130 of the Act.

The matter between Swifambo Rail Leasing v PRASA (1030/2017) [2018] ZASCA 167 a fronting practice came under the spotlight.

The Passenger Rail Agency of South Africa (“PRASA”), the respondent. PRASA is an organ of State, funded by National Treasury. It is mandated to provide rail services throughout South Africa. On 25 March 2013, and under a tender process, PRASA decided to conclude a contract with Swifambo for the purchase of locomotives.

On discovering the fraudulent conduct of Mr Montana and others (erstwhile officials), a newly reconstituted board of control of PRASA applied to the Gauteng Local Division of the High Court to have the contract declared invalid and for an order setting it aside.

Swifambo’s bid did not comply with the requirements of the request for proposals in several material respects. First, their tax clearance certificate submitted by Swifambo did not have a VAT number in addition to further irregularities. Second, no broad-based black employment equity (“BBBEE”) plan for procurement of goods and services for the duration of the contract was submitted, as was required by request for proposals. Third, the bid did not comply with the local content requirement as the locomotives were to be designed and manufactured in Spain. Fourth, there was no evidence that Swifambo and its shareholders had previous experience in the rail industry or that it had previous experience in the supply of locomotives nor did it show the capacity to manage a project of the size put out to tender.

Fronting

PRASA alleged that Swifambo was a ‘front’ for Vossloh, who would not have been able to bid itself because it was not based in South Africa. In Esorfranki Pipelines (Pty) Ltd v Mopani District Municipality [2014] ZASCA 21; [2014] 2 All SA 493 (SCA) (para 26) this Court described fronting as a:

‘fraud on those who are meant to be the beneficiaries of legislative measures put in place to enhance the objective of economic empowerment’.

The Court confirmed that Swifambo took part in a fronting practice.

Delay

The High Court found that the nearly three-year delay in bringing the application was unreasonable, but that given the public interest in State-owned entities not being corrupt, and the enormous cost to the country incurred through the tender process, the period for bringing the application should be extended and the delay condoned.

In State Information Technology Agency SOC Ltd v Gijima Holdings (Pty) Ltd [2018] ZACC 40; 2018 (2) SA 23 (CC) the Constitutional Court held that where the State or an organ of State seeks to review its own decision, the PAJA is not applicable. Instead, any application for review that it may bring would have to be based on the principle of legality. At common law, such a claim must be brought within a reasonable period – without unreasonable delay.

In Cape Town City v Aurecon SA (Pty) Ltd [2017] ZACC 5; 2017 (4) SA 223 (CC), which confirmed the decision of this Court in Aurecon South Africa (Pty) Ltd v City of Cape Town [2015] ZASCA 209; 2016 (2) SA 199 (SCA) – In Aurecon (SCA) this Court said that if the period of delay started only when the entity wronged became aware of the wrong, this would

automatically entitle every aggrieved applicant to an unqualified right to institute judicial review only upon gaining knowledge that a decision (and its underlying reasons), of which he or she had been aware all along, was tainted by irregularity, whenever that might be. This result is untenable as it disregards the potential prejudice to [the tenderer] and the public interest in the finality of administrative decisions and the exercise of administrative functions’ (para 6).

This statement was approved by the Constitutional Court (para 42) on appeal to it.

Conclusion

Accordingly, the appeal is dismissed. Even if there are delays, it is in public interest to avoid corrupt activities in public enterprises. Fronting is a severe aspect which the courts are clarifying with each case they hear. Ethical business practices are therefore vital – contact an expert at SchoemanLaw for assistance today.

See also:

(This article is provided for informational purposes only and not for the purpose of providing legal advice. For more information on the topic, please contact the author/s or the relevant provider.)
Nicolene Schoeman-Louw
Nicolene Schoeman-Louw

Mrs Nicolene Schoeman – Louw founded the firm in 2007, aged 24, and is now the Managing Director of the firm. Nicolene is an admitted Attorney of the High Court...

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