Fronting hijacks skills transfer and a broad empowerment base
September 12, 2004
Fronting supposedly represents a black economic empowerment entity when in substance it is not.
The practice began when firms introduced affirmative procurement policies in their acquisition of goods and services from businesses owned by black people to accelerate the empowerment process.
Established companies would enter into agreements with black people to establish "marketing companies" to secure business from the affirmative procurement supporters.
A classical fronting structure would have the following:
The empowerment company, with more than 51 percent black ownership and management, plays a front-end role that involves the marketing business of the established company under the guise of a new marketing company, which wins the tenders;
The empowerment company's focus is on those companies that require empowerment credentials. The established company focuses on the rest of the market that does not require credentials.
There are no operational assets in the new marketing company. All the operational capacity rests with the established firm. Therefore, operational work is outsourced to the established business without the involvement of black people 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 percent to 10 percent of the total contract value they successfully secured;
The black people receive impressive job titles, which do not correlate with their skills. For instance, there may be a black technical director reporting to a non-black manager, or a black gardener as managing director.
The incidents of classical fronting are actually declining as observed from empowerment ratings undertaken. However, sophisticated models of fronting are now being created using complex equity instruments and restrictive terms in shareholders' agreements aimed at camouflaging the fronting structure.
The other type of front is termed "the opportunistic intermediary", which is an entity that is in a company's value chain and does not add 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 empowerment policy, not because of sound economic principles. If empowerment was not a requirement for doing business, then these companies would not exist.
Why is fronting undertaken? The major reason is that fronting does not require established businesses to transform themselves in any meaningful manner. Such companies are in the bargaining stage of empowerment.
The reason for black people to engage in fronting practices is the windfall that accrues to them in commissions without much sweat on their part. The money involved can be quite astronomical, which makes it all the more attractive to front.
The effect is that business goes on as usual for the established company, the black party gets his commission without any major effort, and the firm supporting affirmative procurement inherently foots the bill.
The major risk of fronting is that it sets the empowerment process up to be another bubble, because the objectives of integrating black people into the mainstream 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.
A further risk is that if fronting persists, it would deny black people the opportunity to be involved in the technical aspects of any industry and instead forces them to be involved in its support functions.
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 companies that empower other black people.
The artificial structure also diverts the economic stimulus of empowerment initiatives by creating a bottleneck, which only enriches established companies and the few fronting blacks who receive a fraction of the benefit.
Therefore, empowerment opportunities that would have powerful trickle-down effects to empower the broad base of blacks are hijacked by fronting.
|
|
