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Author: Jeanette Clark|

24 June 2013 12:18

R1.46bn proposed fine for construction industry

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Firms react to penalties.

PRETORIA - The Competition Commission’s investigation into the construction industry has uncovered widespread anti-competitive practices in the industry – showing collusive behaviour in pricing and project allocation.

This ranges from cover pricing where firms submit “bogus tenders” in order for one firm to win the tender, to other practices such as “losers fees” where companies would pay a fee to the losing bidder. The investigation also revealed meetings to divide markets and agree on margins, coordination of tenders and subcontracting used to compensate losing bidders.

In a press conference to the media on Monday, Shan Ramburuth (pictured), Competition Commission Commissioner, stated that in total 300 projects were investigated, valued at a total of R47bn. In the end settlements were reached on collusion pertaining to only 140 projects as the law only allows the commission to levy penalties with respect for projects that were concluded after September 2006. Before this date transgressions are beyond the prosecutorial reach of the Competition Act.

Moneyweb understands that the 140 projects include the following six World Cup stadia: Mbombela, Peter Mokaba, Moses Mabhida, Soccer City, Green Point and Nelson Mandela Bay, where evidence came forth of meeting to organise tenders and set margins. The full consent agreement, containing these details, has been lodged with the Competition Tribunal.

In total, 21 companies took part in the fast-track process in which companies were promised leniency in exchange for their coming forward to divulge details on deals in which anti-competitive practices had taken place. Of the 18 companies where negotiations for settlements took place, settlements were reached with 15 companies.

The three companies where settlements have not been reached include Group 5, Power Construction and Construction ID.

Ramburuth made it clear that for the companies that decided not to take part in the fast-track process, but have been implicated, investigations will now follow in the due course of the authority and responsibilities of the Competition Commission.

He said that if companies, with which settlements have been reached for certain projects, have been implicated in other projects and this comes out in the investigations, the law will follow its course and these firms won't be exempt from further penalties.

Collectively, the 15 companies have agreed to proposed penalties totalling R1.46bn – the largest collective fine proposed yet by the Competition Commission. The Competition Tribunal will have to confirm, deny or amend these penalties.

The proposed penalties are the following:

   Company

Fine

1.

Aveng (JSE:AEG

R306 576 143

2.

Basil Read (JSE:BSR)

R94 936 248

3.

Esorfranki (JSE:ESR

R155 850

4.

G Liviero

R2 011 078

5.

Giuricich

R3 552 568

6.

Haw & Inglis

R45 314 041

7.

Hochtief

R1 315 719

8.

Murray & Roberts (JSE:MUR)

R309 046 455

9.

Norvo

R714 897

10.

Raubex (JSE:RBX)

R58 826 626

11.

Rumdel

R17 127 465

12.

Stefanutti (JSE:SSK)

R306 892 664

13.

Tubular

R2 634 667

14.

Vlaming

R3 421 662

15.

WBHO (JSE:WBO)

R311 288 311

Reaction from construction companies

Murray and Roberts (M&R) stated that it had agreed to pay the penalty of R309m in full and final settlement of all matters being investigated. Henry Laas, Group Chief Executive said the settlement was reached “after an exhaustive process”.

“The investigation and its subsequent burden on our reputation have weighed heavily on our employees and stakeholders. To the best of our knowledge, there is no anti-competitive conduct present within the Group and the Board and management continue to set the vision for and commitment to a morally and ethically sound culture within Murray & Roberts. We support a fully competitive culture in the industry.” M&R added that most of the conduct identified during the fast-track settlement process related to persons no longer employed within the group and largely to companies acquired by M&R in 2006/7.

Aveng stated that the amount agreed upon (R306.5m) is to be settled in three annual payments of equal amount, commencing on 1 July 2013, or within 30 days from the date of confirmation of the settlement agreement as an order of the Tribunal, whichever is the later.

CEO Roger Jardine said that any anticompetitive and unlawful practice by anyone within any industry is “unacceptable and must be rooted out”. “We need to restore trust between the construction industry and its public and private sector clients, the various regulatory authorities and the general public. Such behaviour cannot be tolerated if we are to build a modern, competitive economy.”

WBHO said that it is was studying the documents and that it had to go back five years and 2 200 bids to find the first contravention. “We note that, as the largest company in our industry, our fine of R311m is 3.9% of turnover. We note that in our building division, which generates R5,0bn per year, there were no contraventions in the Gauteng and Western Cape, where 75% of this turnover takes place. WBHO has Compliance Training and Self-Certification of executives in place to prevent non-compliance of competition regulations in the future. The board and management are totally committed to upholding ethical business standards.”

Basil Read said that it has adopted a rigorous, on-going competition law compliance policy to ensure that incidents like this do not happen again. “This includes thorough competition law training of employees throughout the group, on a regular basis,” it said. Chief Executive Officer Marius Heyns said: “I am pleased that the Group adopted a proactive stance to dealing with these issues. This regrettable chapter in Basil Read’s history has now ended, and the company looks forward to continuing to compete effectively, efficiently and in compliance with the law.

Group 5 released a statement in the afternoon saying that it has cooperated proactively since 2009 and was the first company to approach the commission regarding construction sector collusion. It added that it learnt late on Friday, June 21 that the commission sought a proposed administrative penalty, which is higher than previously anticipated. “The group has as yet not reached settlement with the Commission on four projects due to factual and evidentiary discrepancies between the Commission and Group Five on these projects,” it stated, adding that it still has time to settle on the same penalty terms as the companies that had reached settlement under the fast-track process.

See the detailed bid rigging contraventions for each company below (click to enlarge):

Only the first step

Ramburuth stated that the commission has been in discussions with the National Prosecuting Authority (NPA) regarding the findings of the investigation, but that it has an undertaking from the NPA that it will not proceed until such time as the process is concluded – meaning when the tribunal decides on the penalties imposed.

Minister of Economic Development Ebrahim Patel said one of the key gains out of the fast-track settlement process was the fact that the cartel has now been dismantled. He mentioned that the settlements agreed upon is only the first step in cleaning up price-fixing and collusion in the industry.

“There are a number of other processes that cabinet and the relevant ministers will have to apply their minds to,” he said. These include possible actions by the Construction Industry Development Board (CIDB) where companies are registered to tender for public sector projects, the fact that the state is entitled to take steps if it feels it has suffered losses due to the anti-competitive behaviour and if any other laws have been breached the relevant law enforcement agencies will look into that.

Patel said competitive behaviour in the construction industry can help to lower the cost of the public sector infrastructure build aimed at boosting economic growth in the country and that it can also reduce the private sector’s cost of doing business.

“The collusion and the price-fixing affected both public and private sector projects,” he said, adding that out of the R47bn value of the projects investigated, R19bn was for private sector projects.

Topics: Competition Commissions, Construction, Shan Ramburuth, Group 5, Power Construction, Construction ID, NPA, Aveng, Basil Read, Giuricich, Esorfranki, G Liviero, Murray & Roberts, WBHO, Stefanutti, CIDB
Who's Who
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NAME:  Jeanette Clark
BIO: Moneyweb's Pretoria correspondent.
EMAIL:  jeanette@moneyweb.co.za

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