Fronting
From Bhutannica
Defining Fronting
Though the phenomenon of fronting is widely accepted as a form of corruption, the principle obstacle to combating it in Bhutanese business seems to be the difficulty in actually defining what it is.
Structurally, fronting can be described as a business where the license owner is a Bhutanese but the business is run by a non-Bhutanese. This helps them get around the rule that only Bhutanese citizens are allowed to have business licenses in Bhutan. The non-Bhutanese partner brings the knowledge about the business, the know-how, the contacts and business connections and most importantly the financing. He also puts in the daily effort for running the enterprise. The role of the Bhutanese partner, ie, the ‘front’ can vary from being completely passive to having varying degrees of involvement such as helping around in the business or running around government offices to get jobs or orders or collect payments.
The term fronting is also applied to cases where civil servants, who are not permitted to do business, obtain a license in a friend or relative's name and conduct the business themselves. But generally the term refers to the illegal leasing of licenses to non-Bhutanese businessmen.
Fronting also occurs in the construction sector between Bhutanese contractors. Bhutan’s Construction Development Board (CDB) has elaborate rules designed to ensure quality among the contractors. These rules have largely backfired in the sense that it has inadvertently created a state of oligopoly of ‘Class A’ contractors that dominate the construction sector. A large number of contractors who are arguably as competent as ‘Class A’ contractors are thus excluded from bidding for and obtaining big contracts from the government. This has created an additional opportunity for the ‘Class A’ contractors to simply bid and win contracts and then further ‘subcontract’ it to non-Class A contractors for a commission.
Though the rule against fronting has been made by the government, the ministry responsible for the private sector, the Ministry of Economic Affairs does not seem particularly enthusiastic about combating fronting.
According to the ministry without the cooperation of the private sector the problem of fronting cannot be solved. “If they want the government to police everything, government machinery will become very expensive,” said economic affairs secretary, Dasho Sonam Tshering. “There are many loose remarks made on fronting, but they can’t be proved. Government rules do not permit fronting. We don’t have a mechanism to see if someone’s in fronting. If we want to [combat fronting], we have to work together.”
According to Dasho Sonam Tshering fronting has reduced a lot over the years and the private sector has matured and improved in time. “Slowly we’ll see companies which have a institutionalized management structure. They won’t be happy with a small commission, but will want to grow,” he said. “In due course, fronting will die a natural death.”
In reality, fronting has proliferated into every nook and cranny of the economy. Fronting used to be the privilege of the well-connected as licenses were not easily obtained. With the liberalization of trade in 2005 whereby licenses were easily issued, fronting has become an 'equal opportunity' practice. In the first 6 months of 2005 in Phuntsholing alone 1311 new trade licenses were issued with many people taking multiple licenses.
The practice of fronting is now believed to be deeply embedded in Bhutan's growing industrial sector. Many of the new factories in Bhutan are believed to be wholly or mostly owned by foreign partners though the licenses are wholly in the names of the Bhutanese partner. For example, the vanaspati industries in Nepal and Sri Lanka that were set up expressly for exporting to India to behefit from the differences in import duties of the raw materials were all set up by Indian companies. This was no secret as the governments of Nepal and Sri Lanka did not bar Indian companies from setting up their factories in their countries. There is no reason to doubt that despite the veneer of Bhutanese ownership, the same model has been followed in Bhutan as well.
Similar doubts dog the new steel and copper industries that have begun to seemingly effortlessly sprout.
Consequences of Fronting
Combating Fronting
References
- Unemployment growth in Bhutan, 9 December 2007
- Curbing Fronting
- Liberal Licensing Promotes Fronting, Kuenselonline, 27 July
- Behind the Fronting Phenomenon, 4 June 2008
- Resolutions OF THE 87TH SESSION OF THE NATIONAL ASSEMBLY OF BHUTAN, 2007
- Minutes of CDB Meeting discusses fronting among contractors, 1 September 2004
- Tricks of the Trade in Bhutan's Construction Industry, Bhutan Portal 15 April 2006
- Corruption Perception Survey 2007 , ACC
- Bhutan’s rupee shortage: mystery or mayhem? 3 May 2008
- Combating Corruption and Fronting (Struggles with fronting in the South African construction industry)
- Fronting = BEE?
- Vanaspati industry split over duty-free imports, Hindu Business Line, 29 November 2006
- Business Not As Usual, 2001