Tokenism and the Constitutional court findng on Viking Pony Africa Pumps (Pty) Ltd t/a Tricom Africa and Hidro-Tech Systems (Pty) Ltd and City of Cape Town
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Matters that relate to the economic status quo in South African necessitate a regard for this country’s history as a starting point. Historically, black people were kept on the margins of the economic system and were often seen as providers of cheap and exploitable labour. This led to high levels of poverty among black communities in South Africa.
However, the Constitution brought with it the pledge to transform South Africa, so as to make it a more equitable society. In giving effect to this pledge, the Constitution mandates the enactment of laws and policies aimed at empowering people who were historically disadvantaged by unfair discrimination. To this end, the broad-based black economic empowerment program, as well as the preferential procurement policies came into effect. Critical to realizing this constitutional imperative, is the need to root out fraudulent schemes designed to divert the economic benefits to historically empowered individuals through front legal entities. To this end, organs of state are obliged to investigate allegations of fraudulent misrepresentations given to secure preference. Upon detecting that a preference was in fact obtained on a fraudulent basis, they are also obliged to act against the person awarded the contract.
In the case of Vikings Pony Africa Pumps (Pty) Ltd v Hidtro-Tech Systems (Pty) Ltd, the issue of what role a state organ should play upon becoming aware of fraudulent misrepresentation by a successful tenderer was placed before the Constitutional Court. More directly, the question before the court was: what is the duty of an organ of state, when it is presented with “ostensibly true allegations that an enterprise to which a tender was awarded, fraudulently manipulated the preferential procurement scheme for the purpose of securing a preference”?
In brief, Vikings Pony Africa Pumps (Vikings) had represented to the City of Cape Town (the second respondent) that it had a 70% majority black shareholding. This it did to gain preference points and be awarded a tender as per the preferential procurement regulations. Hidro-Tech Systems (Hidro-Tech), an unsuccessful tenderer, drew the City of Cape Town (an organ of state)’s attention to the true nature of Viking’s black shareholding. The allegation against the latter company was that the black share holders were mere tokens or window dressing for the purpose of securing tenders since there was no correlation between their status as majority share holders, and their decision making powers or remuneration, including benefits, in Viking.
The City’s inaction to these allegations is what prompted litigation. In responding to the question before it, the Court held that the City, or any relevant organ of state, was duty bound to act against the body that has been accused of fraudulently misrepresenting for tender procurement purposes. To “act against”, the Court noted, has three prongs: (a) it directs that the relevant state organ investigates the conduct being complained of; (b) it requires the state organ to make a pronouncement of guilt or otherwise after a proper investigation has been conducted; and (c) it requires the state organ to impose a penalty or sanction where appropriate.
The Court went to great lengths in emphasizing that the law requires state organs to not be complacent in the face of fraudulent conduct complained of in the tender process.
Although obiter dictum, the Court was scathing of the allegedly widespread practice of tokenism or window dressing which defeats the very aim of economic empowerment sought to be achieved by the practice of preferential procurement. For instead of the previously disadvantaged majority share holders benefiting from programs that foster transformation, in actual fact the beneficiaries of these programs are the white “minority” shareholder, as was the case in Viking. The Court emphasised that having historically disadvantaged people merely majority shareholders was insufficient. Of greater importance, the Court continued, was the “exercise of control and the managerial power actually wielded by the historically disadvantaged individuals, in proportion to their shareholding”. Given the mischief that the preferential procurement laws and policies seek to address, namely the marginalization of the disadvantaged from the purview of economic decisions, it can only follow that their role be central and not peripheral in our transformative constitutional dispensation.
The clarity given to the obligation imposed on organs of state in rooting out fronting is to be welcomed.
Nyoko Muvangua
November 2010
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Published in: Centre for Constitutional Rights > Posts & Publications