News / Legal Brief
Oct 4,2017
In the recent High Court case involving the Passenger Rail Agency of South Africa (PRASA) and Swifambo Rail Agency Proprietary Limited, Judge Francis set out certain useful guidelines on the “fronting practice” definition in the Broad-Based Black Economic Empowerment Act (B-BBEE Act) namely “a transaction, arrangement or other act or conduct that directly or indirectly undermines or frustrates the achievement of the objectives of this Act or the implementation of any of the provisions of this Act including but not limited to practices in connection with a B‑BBEE initiative:
The above wording is very wide and may have the unintentional effect of including bona fide B‑BBEE initiatives in the definition. The criminalisation of fronting practices in terms of the B‑BBEE Act adds to the seriousness of this issue for both existing and future B‑BBEE initiatives. In terms of the B‑BBEE Act a firm may be fined up to 10% of its annual turnover and individuals may be subject to a fine and/or imprisonment for up to ten years. In addition, the individual or firm may not contract any business with any organ of State or public entity for a period of ten years and will be entered into the register of tender defaulters maintained by the National Treasury.
The PRASA/Swifambo case related to the award of a tender to Swifambo by PRASA for the supply of locomotives to PRASA. The locomotives would be sourced by Swifambo from Vossloh, a company based in Spain. The Court decided to review and set aside PRASA’s decision to award the contract to Swifambo.
The Court found that the arrangement between Swifambo and Vossloh constituted to a fronting practice on the basis that:
The Court also found that the definition of fronting practice does not require a misrepresentation to the relevant State body of the true nature of the arrangement between the fronting parties. This is important as before 2013, fronting practices were covered by the common law criminal offence of fraud which requires a misrepresentation in order for a person to be convicted. The Court’s finding makes it easier for a fronting practice as defined in the B‑BBEE Act to be prosecuted.
The Court also found that a fronting practice did not require the exploitation of a black person. The fact that there was a financial benefit to Swifambo from the arrangement was accordingly not a defence. The relationship between Swifambo and Vossloh however amounted to the exploitation of the intended beneficiaries of the B‑BBEE Act, namely black people.
The case highlights the importance of ensuring that State and Parastatal tenders are structured in a way which complies with the B‑BBEE requirements of the tender and does not amount to a fronting practice. The Preferential Procurement Regulations under the Preferential Procurement Policy Framework Act provides guidance on the tender process including with regard to subcontracting arrangements. In terms of the Regulations, a successful tenderer may not subcontract more than 25% of the value of the contract to a firm which does not have an equal or higher B‑BBEE status level unless the subcontract is to an exempt micro enterprise (a firm with less than R10 million annual revenue) which has the ability and able to execute the subcontract. The successful tenderer also requires the approval of the relevant organ of State for any subcontracting arrangement entered into after the award of a tender.
The B‑BBEE Commission is currently investigating various firms for possible fronting practices. Given the serious consequences of fronting practices, it is vital that businesses carefully review their existing and future B‑BBEE initiatives including B‑BBEE ownership structures to ensure compliance with the B-BBEE Act.
NEWS / Legal Brief
Food-focused Market Inquiry Lift Off! The Commission officially launches Fresh Produce Market InquiryNEWS / Legal Brief
2023 Electricity Regulation Guide – South AfricaNEWS / E-Bulletin
The Hate Crimes and Hate Speech Bill is a step closer to becoming law