Business

Leaks show construction's rotten core

Lloyd Gedye

It is an industry rife with corruption, fraud, racketeering and collusion, all sanctioned by the leadership of SA's biggest construction companies.

'When a project was allocated, it was priced in the normal manner and a maximum of 12.5% profit was added.' (Madelene Cronje, M&G)

That is the picture painted in affidavits taken in 2011 by the Hawks and National Prosecuting Authority from the construction firm Stefanutti Stocks Holdings. The affidavits were leaked this week.

The collusion detailed in them, as yet untested in court, took several forms, such as dividing up markets, asking for "cover prices" and the use of "tender fees" or "losers' fees". Several current executives of Stefanutti describe how this collusion took place while they were working for other companies.

Division of markets
"The organised system occurred in quite a formal manner, through meetings at various contractors' premises, attended for the most part by one or two managing directors from each company … the participants agreed which company would be awarded a particular tender and a schedule of project allocations was maintained on the basis of perceived market share of the relevant organisations." – A former Grinaker-LTA managing director

READ MORE: Construction: Collusion may be industry's fatal flaw

"When a project was allocated, it was priced in the normal manner and a maximum of 12.5% profit was added … these practices prevailed for many years in the civil engineering construction industry and, in my view, became the operating norm amongst major contractors … they were largely secretive and industry confined." – A former Group Five general manager

Cover prices
"A request for a cover price (a 'safe price') was generally made when a contractor wanted to submit a tender but also wanted to make sure that the contract would not be awarded to him because of his internal constraints, but wanted to remain on the specific clients' tender list for future tenders." - A former Grinaker-LTA managing director

Tender fees and losers' fees
"Essentially, the competitors on a specific tender agree that each tenderer would allow a pre-determined amount in his tender to be distributed to all the 'losers' upon award of the tender … the tender fee amounts varied widely between R100 000 and R5-million per tenderer … to my best recollection, invoices were generated for certain of these transactions … I recall that generic references, for example 'plant hire', [were] used to account for the loser's tender recovery fee." – A former Grinaker-LTA managing director

"The practice of adding tender fees was prompted … by the sheer cost of participating in tenders and the perceived industry need to 'claw back' some of those associated costs. The level of tender fees depended on the size of the contract and generally ranged between 1% to 3% of the tender value." – A former Group Five director

Widespread collusion
"To me, it was clear that it was expected of a managing director in LTA and later Grinaker-LTA to participate in anti-competitive behaviour. This was not behaviour designed by specific individuals but rather company practice and was sanctioned by top management" – A former Grinaker-LTA manager

"I suspect that my lack of specific knowledge, up until I achieved managing director status, is largely attributable to the fact that such practices generally took place at senior directorship level. As an employee, one was expected to adhere to this process, failing which your effectiveness could have been seriously compromised, which could have resulted in demotion or at least stagnation in your career." – A former Grinaker-LTA managing directo


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