Multinational accused of BEE fronting
The giant multinational company Servest is being investigated for fronting, allegedly pocketing more than R3-million for a contract and the black-owned company with which it partnered received a total of R404 000 — for doing
It is one of 112 cases the Broad-Based Black Economic Empowerment Commission has in its sights.
Rovhupfa Garden Services, owned by 50-year-old Michael Mugwagwa, laid a complaint against Servest in July, just after the commission invited submissions.
He claimed that Servest, which specialises in hygiene, cleaning, building management and security services, had been using his small company as a front in at least two deals he is aware of.
Mugwagwa established his company in 2008, but it remained dormant until a former colleague told him that Servest wanted to give him a contract with Imbumba Aganang Facilities Management, the company that manages the department of international relations and co-operation building in Pretoria.
Before Mugwagwa’s involvement, Imbumba put out a tender for plant maintenance services for the building, which was awarded to a company called Sonke in 2010. Sonke in turn was bought by Servest, which didn’t meet the black economic empowerment requirements to run the contract.
Enter Mugwagwa. Servest introduced the small business owner to Imbumba in 2011 and allegedly instructed him to sign an addendum to the existing contract Imbumba had with Sonke. According to the addendum, which was signed by the then chief operating officer of Imbumba, Ipeleng Mkhari, and Mugwagwa, Rovhupfa Garden Services would take over looking after the plants from Sonke.
Mugwagwa told the Mail & Guardian that neither Servest nor Imbumba provided him with the full contract, and that he was given only the addendum.
Mugwagwa said he was told by Servest that his involvement would be limited to invoicing Imbumba and that he would have no part in maintaining the plants, despite having signed an agreement to do just that.
In turn, he maintains, he would have to pay Servest for renting the existing pot plants in the building, placed there by Sonke, since Servest had arranged for Mugwagwa to get the contract.
This is how the deal allegedly worked: Rovhupfa would invoice Imbumba every month for R68 000. Servest would then invoice Rovhupfa for the same amount, and pay Mugwagwa R5 000 a month for his trouble.
According to a rental agreement between Servest and Mugwagwa, which the M&G has in its possession, Servest’s charge for renting the pot plants comprised 95% of the value of Rovhupfa’s contract with Imbumba.
A letter from Servest’s legal officer, Anisha Naidoo Umichand, dated September 9, says Mugwagwa’s share of the 16-month contract amounted to R80 000. Servest took the lion’s share of the contract — just over R1.1-million.
“Rovhupfa cannot deny that it has benefited substantially from its relationship with Servest for a period exceeding five years,” the letter reads.
Another email from Servest’s legal division, sent in May this year, confirms that Servest introduced Rovhupfa Garden Services to Imbumba.
In 2013, Merle Williams, Servest’s client relations director, asked Mugwagwa to sign a new pot plant rental agreement with Servest, according to the complainant.
“Merle told me my contract had been extended and I had to go to Servest to sign my contract. She gave me a 21-page contract that she had already signed,” Mugwagwa said.
The new contract, which has been in effect since 2013, stipulated that Rovhupfa would now be paid R9 000 a month and Imbumba would be billed for R72 000. Servest would then bill Mugwagwa’s company R63 000 a month for renting the pot plants.
To date, Servest has made nearly R2.2-million from this second contract, with Mugwagwa earning R324 000.
In the same year that Mugwagwa signed the new rental agreement with Servest, Imbumba recommended extending his contract for another four years.
“A meeting was conducted with the relevant supplier … Based on excellent service delivery and continuity of the service, Imbumba would like to recommend that Rovhupfa Garden Maintenance is extended for a period of four years,” reads a letter from Imbumba supervisor Eugenie Parker.
But Mugwagwa said he was never part of any meetings with Imbumba, and claims that the company instead consulted Servest on many occasions.
According to an email from Parker, dated April 20 2016, Rovhupfa Garden Services had a joint venture contract with Servest, something Mugwagwa said he was not aware of.
“I didn’t know this. All I knew was that I was renting the pots from Servest but even that was finished as I was given a letter of ownership for them,” he said.
He is referring to a letter he received from a former Servest executive in 2015, which noted him as the new owner of the pot plants he had been paying for ever since signing the addendum in 2011.
Imbumba allegedly refused to provide him with the joint venture contract when he requested a copy of it.
“The contract between Imbumba and Rovhupfa is a joint venture with a Servest contract and therefore requires the presence of a Servest representative. Please would you clarify what exactly you would like to meet about for Imbumba to determine why your joint venture partner should not be present?” reads Parker’s response to Mugwagwa’s request.
But he decided to do some digging this year, after receiving a call that raised his suspicions.
“Merle approached me to sign a contract for landscaping in 2014. Nothing happened for a year until I [received a call from an] Atterbury employee asking why I wasn’t on site,” he says.
The call related to a landscaping contract Servest had requested he sign for the Newtown Junction shopping centre in Johannesburg, which was being managed by Atterbury Property Developments.
When Mugwagwa approached Servest, he was told that the landscaping contract had been given to another company but that he could assist with a maintenance contract that the company already had in place. He was given a 30% shareholding in a joint venture with Servest.
Documents show that Mugwagwa invoiced Servest just over R200 a month for maintaining the Newtown Junction gardens. On querying the amount with Servest, he found out that he should have been receiving more than R2 000 a month, according to an email from one of Servest’s managers.
Again his involvement was only on paper; he did none of the work.
Atterbury did not respond to questions regarding its relationship with Servest and Rovhupfa.
Mugwagwa said it was only when he started withholding money from Servest this year that he found out that the company had a closer relationship with Imbumba. He began asking Imbumba questions, alleging that his company was being used as a front for Servest.
Following a meeting between Imbumba and Mugwagwa on Wednesday, at Imbumba’s behest, the company’s general manager, George Bisset, referred the M&G to Servest for a response.
“It would appear to us that Servest will be best placed to address these allegations. We do not intend to deal with the specific allegations or queries referred to in your mail,” he said.
He did confirm that Rovhupfa Garden Services had a contract with Imbumba but denied any knowledge of Rovhupfa paying over nearly 90% of the contract’s value to Servest.
He would not comment on why Imbumba had held many meetings with Servest without Mugwagwa being present, or why he was told that he had a joint venture with Servest, of which he had no knowledge.
Alex Berndl, Servest’s group sales and marketing director, denied Mugwagwa’s allegations.
“Servest is unable to agree with allegations listed in the main body of the mail as there are many inaccuracies, according to our records of discussions held with Rovhupfa,” he said.
At first Berndl denied any knowledge of the complaint being investigated by the commission. But after another request for comment, he confirmed that the company’s legal department was dealing with the commission and he could not comment.
Using ‘window dressing’ can land you in jail
Within three months of getting stuck into what it was tasked with, the Broad-Based Black Economic Empowerment (BEE) Commission has received a flood of complaints.
The commission started its work in June after new BBBEE codes were enacted. By the end of September it had received 134 complaints, 84% of which involved alleged fronting.
Most of the complaints seem to relate to the transport, mining and construction sectors.
According to the BEE Act, fronting practices often take the form of “window dressing”, which presents black people as directors, shareholders or beneficiaries so that an entity appears to have proper broad-based BEE status.
Entities usually do this to score more points to qualify for a government tender or a required licence to operate in sectors such as mining.
Fronting practices come in many forms and shapes, with companies getting more creative about ways to skirt the system.
Amendments to the broad-based BEE legislation include penalties and prohibitions for entities that fail to comply.
If an entity is found guilty by the commission — of fronting, for example — the parties could be fined up to 10% of their annual turnover or face imprisonment for up to 10 years.
Parties could also have their contracts with government or government entities cancelled, and may be excluded from doing business with the government or any government entity for a period of up to 10 years.
According to the regulations for handling complaints, issued by Minister of Trade and Industry Rob Davies in June this year, once the Broad-Based BEE Commission’s investigations are completed, the findings or recommendations will be published and featured on the commission’s website. — Athandiwe Saba