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Time for change in construction

On February 1 2010 the Competition Commission issued a call to the construction industry to participate in a fast-track settlement.

On February 1 2010 the Competition Commission issued a call to the construction industry to participate in a fast-track settlement to address bid rigging in the sector.

At the time many questioned whether the commission was over-reacting or even exaggerating what may have been a case of a few rogue elements in the sector. But the commission insisted then that the conduct was widespread. Two months into this unprecedented process, the extent of the rot in this South African business sector is coming to the fore.

The deadline for firms to file an application to participate is April 15, and so more is yet to come. But there is no doubt now that the culture of collusion in the construction sector is so endemic that no single prosecution is going to root it out. The challenge is how all the firms in the industry, working with the competition authorities and the government, fundamentally change the course for the sector.

Procrastination, denial and technical legal defences will just prolong the inevitable coming into the public domain of the embarrassing activities of some of our national construction icons. We have to go beyond our narrow firm or individual interests to change the industry for the better.

The first steps towards this have been taken, which is to get people to talk about the past and face up to it. Since the announcement of the fast-track process, it is striking that industry players are now talking freely about the arrangements. We have had people talk about “the party”, the “black book” and the “policemen”. These arrangements were a system through which all the major construction companies coordinated the collusion, agreeing at the highest levels who would do which contracts.

At regular meetings lists of contracts were drawn up and it was agreed who would “win” the business, as well as the margins to be added on. The firms not allocated business would deliberately bid even higher, “covering” the bid of the one meant to win.

Running totals were kept in “black books”, along with compensation payments. When the allocations worked well no actual payments to compensate the losers would be made but the running totals were kept. Because they could not trust each other, one of the firms was appointed a “policeman” to determine the price for a project and to monitor the process. And, because even the policeman could not be trusted, second and third policemen were sometimes appointed to police the police.

Reinforcing steel-related work
Similar arrangements were referred to by different names, such as the “civils club” and or the “cricket club scores”. There were arrangements in, or alongside, industry forums as well as in a range of construction activities and products such as reinforcing steel-related work, different concrete products and pilings.

To illustrate how much this has been part of the way the industry has worked, in some cases involving construction products we are now finding that, even after cartels have been uncovered and prosecuted, the firms have been rigging bids again. This indicates just how difficult some in the industry find it to conduct business without such arrangements.

In big projects, such as the 2010 stadiums, the way in which conducting business occurred at different stages and levels is now evident. Although initially information came out in bits and pieces, the broader picture is emerging. It resembles the picture that had been painted for us by some close to the process several years ago.

The Gauteng Freeway Improvement Programme and similar major road-building projects also figure highly. At a time when tolls to pay for the road upgrades are causing consternation, widespread coordination in the tenders for this work is coming to light.

We obviously still need a strong construction industry, one that invests in capabilities, builds infrastructure and creates jobs. Retribution will not build the additional roads we need. This needs to be based on a renewed trust between business and the government if we are to get the country working again.

And the people involved have not all moved on—nor could they have, given the extent of the practices and the number of people. Indeed, if we recognise how far-reaching it is we must acknowledge that this requires a coming to terms. Treating it as the aberrant behaviour of a few rotten apples does not help. We believe that real leadership involves facing up to this.

Seeking solutions
We mention all these activities to make the point that many people are in fact coming forward, seeking solutions. They are crossing the psychological barrier rather than waiting and hoping that nobody will ever find the skeletons. However, we are concerned that many smaller firms have not got to this point and may miss the boat in terms of the fast-track settlement opportunity.

Our process is aimed at balancing the needs to deter such conduct in the future with making it very attractive for firms to cooperate with the commission now to clear the decks. In one sense it is about a transition from old ways of working in apartheid South Africa, which has been happening only in fits and starts. In politics we have had a well-managed transition from the past but in business we are stumbling upon it as we go along.

Getting on to a different footing is more about the right principles and not just continuing with business as usual. It is about leadership going beyond just taking refuge in legal advice or merely introducing competition compliance training. Of course the latter is a very important part of the process. But, in our experience, those involved in collusion ultimately knew it was wrong.

The time is right as the country desperately needs business to step up to the plate, as required in the New Growth Path. It is at these times that the hackneyed term “captains of industry” has real meaning.

We want to emphasise that it is also important for small and medium-sized firms to recognise that they cannot just hope to come along later to plead for lenient treatment. They have to take the initiative on this issue now.

The jury is still out on whether the leadership in the construction sector as a whole will cross the psychological barrier—taking responsibility for the past and working towards a competitive industry.

Lastly, we believe the government needs to ensure better procurement processes, including enabling greater participation, so that the majors are not the only avenue into infrastructure projects, and better regulation will support effective competition rather than exclude firms. Competition is ultimately about a genuine process through which entrepreneurs have the real ability to offer their goods and services to discerning buyers.

Tembinkosi Bonakele is the deputy commissioner and Simon Roberts is the chief economist of the Competition Commission

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