Construction: Collusion may be the industry's fatal flaw
The state has been caught between a brick and a hard place in its crackdown on long-running cartels in South Africa’s construction industry.
The rot appears to run deep and wide in South Africa’s construction sector following recent damning allegations of decades-long collusion, yet prosecuting authorities may struggle with the implications of action against what appears to be a hard-hat mafia.
With the industry in crisis as a result of investigations into a long-running construction cartel and multibillion-rand fines on the table, many of the sector’s top executives and managers could face jail terms.
All of this is a result of the Hawks, the National Prosecuting Authority (NPA) and South Africa’s competition authorities investigations into collusion in the sector. Twenty of the country’s largest construction firms are under investigation by the competition authorities for running a cartel over a number of decades and roughly 20 more ancillary players will also face the music after being fingered by the larger players.
The investigations have left the sector scrambling, with construction firms attempting to minimise the impact on their bottom line and executives and managers trying to avoid going to jail.
Yet, with South Africa involved in one of the most significant infrastructure rollouts in the country’s history, the state is faced with the dilemma of whether to pursue the guilty parties with the appropriate vigour and potentially decimate the industry.
This week, with the leaking of a set of affidavits handed over in 2011 by senior staff members of Stefanutti Stocks Holdings to the NPA the picture has become even murkier.
The leaking of the affidavits has led to calls for guilty firms to be blacklisted, but a survey of the affidavits leaves no doubt that these practices are so widespread that there would be very few companies left in South Africa with the ability to handle major construction projects if the blacklisting is carried out.
The affidavits detail the extent of the collusion and cartel activity. They paint a picture in which most senior managers and executives in all the major construction firms could face potential jail time for their involvement in activities that can be defined as fraud, corruption or racketeering.
The affidavits finger senior executives and managers in South Africa’s biggest construction companies, including Murray & Roberts, Group Five, Basil Read, Aveng, WBHO and Stefanutti Stocks, as well as a number of smaller players.
So far, only one senior executive from Stefanutti Stocks Holdings, Schalk Ackerman, has been granted Section 204 immunity by the NPA.
In the affidavits, copies of which the Mail & Guardian has in its possession, a picture is painted of Ackerman as a ringleader of sorts, actively involved in most meetings that were set up for collusive purposes.
Most of the activities described in the affidavits relate to a time when Ackerman was an employee of Grinaker-LTA, a subsidiary of the Aveng group.
However, Ackerman points out that these collusive practices had been in place for a “very long time” and that it was “expected” of a managing director to take part.
The M&G attempted to get comment from Ackerman, but he was prevented from doing so by his Section 204 agreement with the NPA.
Some of the country’s most prestigious construction projects, including Soccer City, the Greenpoint Stadium, the Coega Development Project, Nelson Mandela Bridge, the Gautrain, the Durban International Conference Centre, Nasrec Stadium, the Royal Bafokeng Stadium, Clearwater Shopping Mall and a number of large mining and manufacturing construction jobs have been listed in the affidavits as affected by the rampant collusion that has allegedly dominated the construction sector for at least the past two decades.
The knock-on effect of a potential blacklisting on the South African economy would be immense and would seriously dent government’s public sector infrastructure-build projects.
In addition, if every executive or manager in the construction sector was prosecuted to the letter of the law for their involvement in collusive practices that amounted to criminal behaviour, more than half of the sector’s leadership could be removed in one fell swoop.
The Hawks-led investigation into the construction cartel also has serious ramifications for the Competition Commission’s investigation.
The commission can grant companies immunity if they co-operate and inform on fellow colluders. This can result in a lesser fine or no fine at all.
Several major construction firms have tried pleading with the commission for the lightest fines possible, but now that senior executives or managers could face criminal prosecution and lengthy jail terms, this co-operation could dry up.
It is just this kind of threat that resulted in Stefanutti Stocks seeking Section 204 immunity from the NPA for its senior executives, most of whom have collusion that took place while they were employed at some of the other major construction companies in South Africa. A lawyer representing one of the construction firms said that the criminal investigation was likely to have a “chilling” effect on the commission’s investigation.
A source close to the commission said the affidavits had “muddied the waters” around jurisdiction and would create complexity for the commission.
“The players are now turning on each other,” said the source.
The M&G understands that the commission will announce the results of its investigation in a matter of months.
Stefanutti Stocks chief executive Willie Meyburgh said it had proactively engaged with the NPA because the Competition Act did not provide for indemnity from prosecution to individuals.
“After our approach to the NPA, we understand that other construction companies did the same,” said Meyburgh.
“Our engagement with the NPA involved our employees making full disclosure in their affidavits about their knowledge of cartel-like behaviour and its criminal implications.
“Stefanutti Stocks’ contribution to the investigation was in many respects unique because many of these employees were in fact working for other construction companies at the time the offences were committed,” said Meyburgh.
“Stefanutti Stocks acknowledges and takes responsibility for having participated in the unlawful conduct which has been a feature of the construction industry for a number of years.”
Meyburgh said the company could not comment further, as it had been instructed not to disclose the evidence without the express authority of the NPA and the South African Police Service, as it would jeopardise the indemnity process.
Aveng Group chief executive Roger Jardine described collusion and anti-competitive activities as a “thorn in the side of our economy” and said it appeared to have been “entrenched” in the construction sector.
Jardine said these practices must be rooted out as a matter of urgency. “We need not only the right skills but also the right ethics and values if South Africa is to thrive and jobs are to be created,” said Jardine. “This goes to the heart of the society that we want to build.
“The Aveng Group takes all of these allegations extremely seriously and we have gone to great lengths to eliminate any such behaviour.
“There is no place for corruption, collusion, deals-for-friends or nepotism in the construction industry and in the economy at large,” said Jardine. “Call it what you like, such behaviour is unacceptable in any sector.
“South Africa is on the verge of one of the most significant infrastructure rollouts in our country’s history. A growing economy needs a strong and vibrant infrastructure and engineering sector.”
WBHO said this week that it “strongly rejected” any suggestion that it or its executives were involved in any criminal conduct.
“WBHO is currently engaging in confidential discussions with the Competition Commission pursuant to the commission’s invitation to the construction industry,” the company said.
“These discussions involve a relatively small number of projects and WBHO hopes to conclude this process shortly, at which stage we will be in a position to provide more information.”
Basil Read said that it was co-operating with the Competition Commission.
“The investigation is still underway and the company cannot comment any further on the matter until the investigation is concluded by the commission,” it said.
Murray & Roberts said it had “zero tolerance” for anti-competitive behaviour and collusive misconduct and pointed out that it was the first company to bring this conduct to the attention of the Competition Commission.
“Murray & Roberts has engaged in extensive internal investigations, with the assistance of independent, external legal advisers, to uncover the conduct,” said Ed Jardim, the group communications executive for Murray & Roberts.
“We are confident that any historical conduct of this nature has been rooted out and that Murray & Roberts is a very different company today.”
But, unlike the picture painted of sector-sanctioned collusion in the Stefanutti affidavits, Murray & Roberts pinned the blame on the “isolated and independent action of individuals”.
Group Five had not responded to the M&G at the time of going to print.
Hawks spokesperson Paul Ramaloko confirmed the investigation, but said he could not discuss it. “This case is bigger than people think,” said Ramaloko. “We are going to take our time and do a thorough investigation.”
The NPA said it was unable to comment on the police investigation.