South Africa is clamping down on small businesses that exploit unskilled workers to front as "black empowered" companies and clinch big deals.
Eleven years after apartheid ended, South African businesses have to comply with Black Economic Empowerment (BEE) regulations reserving some ownership and a specified number of jobs and contracts for the country's black majority. If a corporation is not BEE compliant, it cannot do business with government or bigger companies. And while most large companies have the resources and the will to comply, many small businesses are faking their BEE status to continue securing contracts.
"At the moment you have various forms of fronting," Johannesburg-based business analyst Reg Rumney told repoerters.
"The point of fronting is that it is an inevitable consequence [of BEE regulations]. Particularly for small business it is quite a burden. It's a complex thing to implement and at a small level it is even more difficult," Rumney said.
Newspapers recently reported of a firm that had been charged with fraud after it was discovered it had secured a multi-million-rand deal to supply sirens to the police service but lied about its empowerment status.
It listed a black woman, who sells sweets, cool drinks and cakes from a backyard room, as a 49 percent shareholder in the company. The woman said she was paid 1,000 rand (US$160) to spend seven days at the company's office.
"It is very exploitative," Rumney said. "There was one case of a man who was cleaning the cars at a company and didn't even know he had been listed as a director of the company."
Jeffrey Ndumo, director of BEE at the trade and industry ministry, said the government was in the process of introducing measures to combat fronting, including employing special agencies to verify a company's empowerment status and to list offenders.
"Companies have to realize that ready-mades are not out there. They have to get involved in uplifting those who are still crawling but who have enthusiasm," Ndumo said.
But he acknowlegded that BEE regulations were particularly difficult to implement for very small businesses.
"They are being hit with a regulatory burden and it has a cost implication for them. We want to reduce that burden and we are developing a separate code for micros that should be brought before cabinet before the end of [this month]."
Public Works Minister Stella Sigcau last month said fifteen companies, mostly small and medium enterprises, had faked their status on contracts worth 440 million rand with her department in the past two years.