23 Aug Definition of Fronting in public procurement clarified – the case of PRASA v Swifambo
Here at Advance, we are gratified to read the detail of the High Court judgment found in the case of The Passenger Rail Agency of South Africa (“PRASA”) vs Swifambo Rail Agency (Pty) Limited (“Swifambo”) earlier this year. In our view, this judgment is a triumph for B-BBEE as the term ‘fronting’ and the definition in the B-BBEE ACT, 2013, now has a definite substantive context. We have grappled for many years to be able to exclude the fronting definition with certainty in the myriad of circumstances in which our clients find themselves.
For those who are not aware yet, in this case the high court has provided guidelines for the ‘fronting practice’ definition of 2013, through its exposé of a large fronting arrangement in the form of Swifambo, a B-BBEE company who were the alleged suppliers of locomotives for PRASA.
PRASA brought an application to the Gauteng high Court following a dispute with Swifambo, its supplier, related to an agreement for the purchase of locomotives in 2013. In this judgment, the court dealt harshly with the notion that Swifambo intended to, and did, procure all of the locomotives to be supplied in terms of the agreement from Vossloh, a multinational locomotive manufacturer based in Spain, without itself actually adding any procurement value to the process.
The court found that there were a number of options available to Vossloh to increment its own lack of black ownership. In order to participate effectively in the tender process, Vossloh, as a multinational entity, could have applied under the Department of Trade and Industry’s equity equivalent investment programme to be exempted from the B-BBEE ownership component by contributing to the programme’s initiatives promoting the empowerment objectives, as outlined in the Codes. Instead Vossloh made use of Swifambo, a shelf company with no capabilities, no resources, no technical ability and no staff. Swifambo’s only offering to Vossloh was its B-BBEE status, and since Vossloh had full control over Swifambo, appointing Swifambo’s management committee was also at Vossloh’s disposal.
The review found that there was sufficient evidence that proves that the arrangement between Swifambo and Vossloh constituted fronting, where Swifambo received monetary compensation in exchange for the use of their B-BBEE rating, thus making them a token participant in the agreement. There was no transfer of skills or any economic empowerment during or after the agreement.
The judgement set guidelines on the interpretation and application of the new ‘fronting practice’ definition.
Section 1 of B-BBEE Act defines the term ‘fronting practice’ as “[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 – … (d) involving the conclusion of an agreement with another enterprise in order to achieve or enhance broad-based black economic empowerment status is circumstances which –
- there are significant limitations, whether implicit or explicit, on identity of suppliers, service providers, clients or customers;
- the maintenance of business operations is reasonably considered to be improbable, having regard to the resources available;
- the terms and conditions were not negotiated at arm’s length and on a fair and reasonable basis.”
The court made a number of useful clarifying statements about the purpose of our B-BBEE legislation, saying inter alia, that, “The public has a clear interest in the social and economic rights sought to be give (sic) effect to in the B-BBEE ACT. At the core of B-BBEE is viable, effective participation in the economy through the ownership of productive assets and the development of advanced skills.
The court also spoke of the concept of “substantive empowerment”, as a measure and benchmark in evaluating whether fronting is manifest or not. The court stated that a lack of substantive empowerment was evident due to Vossloh maintaining complete control over the business and Swifambo’s role being reduced to “minor administrative activities”. It states, “There is no substantive empowerment evident under the agreement…There is no transfer of skills during the agreement or after.”
In the scenario , the relationship between Swifambo and Vossloh amounts to a fronting practice and is a criminal offense under the B-BBEE Act.
This is a meaningful judgment because it directs us as consultants to ensure that in any tender process that our clients, namely the bidders, do not fall foul of the substance of what the court has said. We can certainly debate whether legally this judgment will enjoy precedent in the variable structures through which companies tender for public business, but fundamentally it is clear to us that whether a company tenders through a subcontractor arrangement with a black owned company, or through an unincorporated joint venture, that there has to be a palpable demonstration of substantive empowerment to the BEE partner. It is not sufficient for, as the court says, there to be an “inherent limitation on the identity of suppliers, service providers, clients or customers … where Vossloh is performing 100% of the work in a foreign jurisdiction, and Swifambo has no knowledge of or access to any of Vossloh’s suppliers, service providers, clients or customers.”
For more information please contact our public procurement department – email@example.com.