11 September 2019 by and Dispute Resolution Alert

Can the real bidder please stand up: Fronting under the Broad Based Black Economic Empowerment Act

South Africa’s first democratic government set out to redress the gross inequalities of the past. Parliament, in 2003, enacted the Broad Based Black Economic Empowerment Act, No 53 of 2003 (Act). The fundamental objective of the Act is to advance economic transformation and enhance the economic participation of black people in the South African economy.

The Act seeks to achieve Board Based Black Economic Empowerment (BBBEE) by ensuring viable economic empowerment of all black people through diverse but integrated socio-economic strategies such as:

  • increasing the number of black people that manage, own and control enterprises and productive assets;
  • facilitating ownership and management of enterprise and productive assets by communities, workers, co-operatives and other collective enterprises;
  • human resource and skills development;
  • achieving equitable representation in all occupational categories and levels in the workforce;
  • preferential procurement from enterprises that are owned or managed by black people; and
  • investing in enterprises that are owned or managed by black people.

The Act is mindful of any deliberate circumvention or attempted circumvention of its precepts, known as “fronting practice”.

Fronting practice is defined in the Act as a transaction, arrangement or other act or conduct that undermines the achievement of the objectives of the Act. Section 1(c) refers to “the conclusion of the legal relationship with a black person for the purpose of that enterprise achieving a certain level of Broad Based Black Economic Empowerment compliance without granting the black person the economic benefits that would reasonably be expected to be associated with the status or position by that black person”.

The issue of fronting was considered in the Supreme Court of Appeal (SCA) case of Swifambo Rail Leasing (Pty) Ltd v PRASA (1030/2017) 2018 ZASCA 167. In this case, the Passenger Rail Agency of South Africa (PRASA), pursuant to a tender process, entered into a contract with Swifambo Rail Leasing (Pty) Ltd (Swifambo) for the purchase of locomotives. Prior to the tender process, a Spanish company, Vossloh España S A U (Vossloh) inspected PRASA’s fleet and made recommendations as to what PRASA needed in respect of the locomotives. After the bid was awarded, Swifambo and Vossloh entered into a contract in terms of which Vossloh would supply all the locomotives to Swifambo and in turn, Swifambo would supply the locomotives to PRASA.

PRASA raised an allegation of fronting, claiming that Swifambo was a front for Vossloh and Vossloh was the real bidder. In analysing whether PRASA’s allegation was indeed true, the SCA considered whether Vossloh would have been able to bid itself having regard to the fact it was not based in South Africa and therefore not BBBEE compliant. The SCA found that Vossloh was not eligible to bid.

As part of its bid documents, Swifambo described Vossloh as a sub-contractor and stated that the only relationship between the two was Vossloh’s obligation to deliver the locomotives. The SCA, however, found that the obligation was not the true contractual relationship but rather that Vossloh was discharging the main obligation, being the supply of the locomotives to PRASA.

The SCA held that “Swifambo personnel played no role insofar as PRASA was concerned, and so there were no skills transfer and no change of asset holding. Vossloh had complete control over every aspect of the contract between Swifambo and PRASA, including the appointment of members of the steering committee overseeing the transaction and commissioning of locomotives. Swifambo’s real role was undoubtedly to enable Vossloh to become the real bidder for the tender”.

The SCA’s decision illustrates that businesses should carefully consider whether their corporate structures and arrangements uphold the provisions of the Act otherwise they run the risk of losing their contracts for directly or indirectly circumventing the Act’s legal precepts.

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