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Fronting Part 1 Fronting is the representation of an entity as a black economic empowerment entity when in substance it is not.

. The practice of fronting began when companies introduced affirmative procurement policies to facilitate their acquisition of goods and services from entities owned by black people in order to accelerate the BEE process. The established companies, in order to retain their business from companies supporting affirmative procurement, would enter into agreements with black people to establish marketing companies to secure business from the affirmative procurement supporters. The classical fronting structure would have the following components: The BEE company, which has more than 51% black ownership and management, plays a front-end role which involves the marketing business of the established company under the guise of the newly established marketing company and the winning of the tenders; The BEE company focus is on those companies that require BEE credentials. The established company focuses on the rest of market that does not require BEE credentials. There are no operational assets within the new marketing company, all the operational capacity rests with the established company. Therefore the operational work is outsourced to the established business without the involvement of the blacks from the newly-established marketing company; The majority of the economic benefits flow to the established company, and the economic benefits flowing to black people are essentially a marketing fee that ranges from 5 10 % of the total contract value they successfully secured; The black people receive impressive job titles within the marketing company which do not have any correlation with their skills. For example in certain instances there may be a black Technical Director reporting to a non-black Technical Manager or a black gardener of the non-black owners of the established business being appointed as the Managing Director of the new company. The incidents of classical fronting are actually declining as observed from the BEE ratings that are undertaken. However sophisticated models of fronting are now being created utilizing complex equity instruments and restrictive terms in shareholders agreements which are aimed at camouflaging the substance of the fronting structure. The other type of front is what is termed the opportunistic intermediary The opportunistic intermediary is an entity that is in a companys value chain and does not add any substantive value. Effectively these companies operate on the last leg of the value chain that interfaces with the entities supporting affirmative procurement. They form part of the value chain because of BEE and not based on sound economic principles applicable within that sector. If BEE was not a requirement for doing business then these companies would not exist because under normal circumstances they would not be required in the value chain.

Why is fronting undertaken? The major reason for fronting by established businesses is that it does not require them to transform themselves in any meaningful manner. These companies are in the bargaining stage of BEE. The reason for black people to engage in fronting practices is the windfall that accrues to them of about 5-10% without much sweat on their part. The money involved can be quite astronomical which makes it more attractive to front. The ultimate effect of fronting is business goes on as usual for the established company, the black party gets his fronting commission without any major effort and the company supporting affirmative procurement is inherently footing the bill. The major risk of fronting is that it sets the BEE process up to be another bubble, because the objectives of BEE of integrating black people into the mainstream of the economy will not be met. With fronting there is no substantive skills building or transfer to black people because fronting does not require the operational involvement of blacks in the strategic parts of the contracts that are won. The further risk is that if fronting practices persist it would deny black people the opportunities to be involved in the technical aspects of any industry but instead forces them to be involved in the support functions of that industry. Ultimately there is a cost that is borne by the economy in the form of economic benefits that accrue to the fronting companies and these would not be filtering down to genuine BEE companies which empower other black people. The artificial structures of fronting also diverts the economic stimulus of BEE initiatives by creating a bottleneck which only enrich the established companies and the few fronting blacks who only receive a fraction of the benefit. Therefore BEE opportunities which would have powerful trickle-down effects to empower the broad base of blacks are high-jacked by fronting.