Fronting, owner drivers and BEE ratings . . .

The most powerful BEE measurement to date has been a rating by the Johannesburg-based company Empowerdex. Its rating role will be overtaken to a certain extent by the introduction of BEE Codes for the economy’s different sectors and Empowerdex will then become a validation agency more than a judge. Kevin Mayhew spoke to the company’s CEO Vuyo Jack about BEE and its introduction into the freight sector. FTW: With BEE, what are the pitfalls? Where are people going wrong in terms of thinking that they can ‘manipulate’ the system? VJ: Well, the first issue is really around ownership, how people structure their deals. People can structure deals that give legal shareholding without necessarily giving substance to the shareholding. They might also give voting rights but not the financial benefits attached to the shareholding, which is another sophisticated way of preventing some of the provisions of BEE through elaborate structures which ultimately do not help black shareholders at all. They therefore find themselves eternally indebted to the founders because the way it has been structured may not have the prospect of paying that debt back. Voting rights We try to make sure that doesn’t take place by saying that we will measure the voting rights that are exercised by black people and we will also measure the economic interest that accrues to them. We look at the value of the shareholding and if it is unencumbered. Joint ventures Then of course you still have joint ventures being put together. Instead of companies transforming, they look at a joint venture to get contracts with government, but there is not really much transformation happening at the back of the joint venture. That becomes some kind of ‘branching’ structure. There are some economic benefits that are good for black people, but they are limited, and it doesn’t make sure that they are integrated into the mainstream of the economy, because in such a joint venture they may not necessarily be doing the actual work or acquiring skills. So, while there is value to that selling, you also want to make sure the work is in the operational capacity so that your empowerment shareholders can do the core of what that job requires. FTW: Could this lack of substance be a problem in the freight industry? VJ: I suppose it could because of the capital outlay that is needed to buy the trucks and equipment to enter the market. Therefore the companies that are formed could be merely to retain existing business. While on the surface it may look good, there needs to be much more substance regarding how it is actually integrating black people into the mainstream economy in the freight business without owning, leasing or operating vehicles. FTW: Empowerdex obviously has a way of measuring BEE. What are your measures and categories? VJ: You get a wide range of companies that set up because they want to get government business and have no intention of empowering black people, which we call fronting. Then you get unintended fronts where black shareholders and operators want to structure something using the expertise of the existing company which obviously wants to protect itself. It therefore ties the black company in so tight that it is beholden to the mother company. So the intention may not have been fronting but that is the effect. We call it unintended front, and the way to deal with that is to relax the terms so that you allow some breathing space for the black party to actually gain the experience and do the work. FTW: Owner drivers are obviously a big thing in the freight industry. Have you found that they are working well? V: I think there are different stages. In the initial phases there is a heavy reliance on the company that has come up with the scheme. Then, over time, the idea with owner drivers is that they should give more power to the drivers. But the problem is that the owners struggle to mentally lose the boss/employee relationship. Getting finance for equipment and vehicles is also a problem and the company implementing the scheme generally has a strong mental hold over the owner-driver as it is usually the reason vehicle finance is provided. There are also administration problems to meet requirements for what are effectively small businesses. Many former employees turned entrepreneurs in this way need good business advisers to make them sustainable. They need to understand that they do not own the truck if it is leased and they must manage cash flows very well or they will be in trouble. It is therefore critical in the first two years to make sure they are operationally viable, otherwise the whole purpose of it being a BEE scheme is destroyed. Once they graduate from this initial phase then the key question is whether they are exclusively dependent on that company. If so there is no way that it will be sustainable because if you have one client you are effectively an employee with more responsibilities than if you were formally employed. FTW: Does Empowerdex have an accreditation, if I can call it that, specifications system? VJ: Basically it will go into companies to measure their contribution to Black Economic Empowerment, and then they will get a certificate. From that certificate they will be able to show their level of contribution reflected as a rating. Once the sector BEE codes kick in, it is going to be a verification agency because you verify against the certified criteria that are set out by the code. FTW: Are you finding companies are coming to you first and saying “are we doing it right”, or are they going to the legal people that act as auditors and afterwards you rate them once the BEE company or structure has been established? VJ: In different ways, some people start a deal, and before they sign off a deal they may seek opinion from Empowerdex. Some people structure a deal and after the fact come to us and say they want us to rate them. Personally, I think it makes sense for us to look at it before a company or structure becomes operational, but some people want to rush into the deal. FTW: Can you institute legal action against companies you think are not operating in the spirit of the BEE objectives? VJ: No, we are not that sort of body. We want people to feel relaxed, to come to us without fear of being pressured into anything, but merely measured against benchmarks that have been established and are now the measure until the sector codes are in place.