/ 25 April 2009

Cartel construction

The lid has been lifted off South Africa’s construction sector and it doesn’t look pretty.

Price-fixing, tender-rigging, division of markets: these are just some of the dirty tricks that South Africa’s competition authorities have uncovered so far and there is a lot more to come in the sector — which was valued at nearly R110-billion last year.

According to a source close to the Competition Commission, the next six months could see it refer between 10 and 15 separate investigations into collusive practices and cartel activities uncovered in the construction sector to the Competition Tribunal.

Already the commission has uncovered a concrete pipes cartel that had operated since 1973 and involved some of the biggest names in South Africa’s construction sector.

This means that every concrete pipe laid in South Africa in 34 of the past 36 years has had a cartel margin added to its price.

It is difficult to calculate the value of the cartel margin over such a long period of time, but early estimates seem to suggest that it could be as much as a 10% to 15% mark-up.

The commission’s investigations have uncovered anti-competitive practices in a wide range of construction sectors, such as steel products, concrete products, water pipes and construction contracts.

But the commission is also investigating bricks, cement, bitumen, ready-mix and aggregates such as gravel and sand.

“The signs are that such anti-competitive behaviour is indeed widespread in the construction sector,” said competition commissioner Shan Ramburuth.

The commission is hoping that as the spotlight on the sector burns brightly, fuelled by the prosecution of high-profile cartels, it will receive a flood of leniency applications from cartel members who break ranks and realise that there is no honesty among thieves.

“This is going to be a multi-year investigation process,” said Ramburuth. “I think two things will happen: we will get more people coming forward for corporate leniency and there is also likely to be a deterrent effect on the practices in the construction sector.”

Where corruption is uncovered the commission will hand over all evidence to the National Prosecuting Authority for prosecution.

The commission has been focusing on the construction sector for more than two years now, after pinpointing it as an important sector during its strategic planning exercise.

The commission has been consulting the Dutch competition authorities, which conducted a similar investigation into Holland’s construction sector that resulted in more than 1 374 prosecutions and 486 leniency applications.

The Dutch investigations found that the cartels’ existence resulted in an average 10% mark-up on products.

Ramburuth said that one of the major factors influencing the decision to focus on construction was the large amount government spends on infrastructure projects, such as the Gautrain and 2010 stadiums, as well as large private projects, such as the Coega smelter and the Richard’s Bay aluminium smelter.

But the commission’s powers are limited to fixing anti-competitive practices and applying the maximum administrative fine. If its work is to have the maximum impact government and corporate South Africa need to come together to go after the cartels with civil claims for damages. “The Competition Act allows for private claims for damages,” said Ramburuth.

But numerous calls to municipalities, parastatals and government departments this week by the Mail & Guardian highlighted the fact that few of these bodies were contemplating civil claims against the concrete pipes cartel that operated for 34 years.

The Department of Trade and Industry could not confirm whether it was taking action, but said the matter would have to be handled by the state attorney’s office.

Asked if Rand Water would take legal action against the members of the cartel, spokesperson Luthando Kekana said it was investigating the matter and that it would make a statement when the process had been completed.

City of Cape Town spokesperson Charles Cooper said that determining the financial values of excessive payments over such a long period would be problematic, particularly since a large portion of such materials are obtained through third parties which are construction agents for the city. But he didn’t rule out the city taking legal advice on the matter.

Transnet spokesperson John Dludlu said that it was considering the implications of the Competition Commission’s findings. “We will decide on the way forward once we have appraised all the relevant facts and sought legal advice on the matter,” he said.

The Department of Water Affairs and Forestry, the City of Johannesburg and the eThekwini municipality had not responded to the M&G‘s questions by the time of going to print.

Plastic pipes
In October 2007 DPI Plastics filed a merger application with the Competition Commission, but during the investigation into the proposed merger with Incledon Cape the commission discovered that the two companies had been involved in price-fixing and bid-rigging.

The commission prohibited the merger and DPI Plastics approached it for leniency in exchange for providing evidence of a cartel operating in the plastic pipes market.

The commission has since referred its investigation to the Competition Tribunal after allegedly finding evidence of bid-rigging, price-fixing and market allocation against nine players in the sector.

Besides DPI Plastics, the cartel is alleged to include Swan Plastics, Marley Pipes Systems, Petzetakis, Amitech South Africa, MacNeil Agencies, Flo-Tek Pipes, Andrag and Gazelle Plastics.

In June last year the Competition Commission raided the offices of Highveld, the South African Iron and Steel Institute and Cape Town Iron and Steel Works as part of its investigation into allegations of price-fixing in the steel industry.

The request for an investigation into the steel industry came from the Department of Trade and Industry.

Less than a month later Scaw Metals approached the commission for corporate leniency, offering to provide evidence of the existence of a steel cartel.

The cartel is alleged to have met regularly to exchange pricing details and fix prices and discounts for reinforcing bars, wire rods, sections, roofing bolts and fencing products, as well as colluding on the price for which it bought scrap metal.

“The information submitted to the commission further suggests that the alleged conduct affected the allocation of work to some major construction projects in the country,” said the commission.

It is expected that this investigation will be referred to the Competition Tribunal in the next few months.

Concrete pipes
In December 2007 the Competition Commission received a leniency application from Rocla, a subsidiary of Murray & Roberts, South Africa’s construction giant.

In exchange for corporate leniency Rocla provided the commission with evidence of a cartel in the precast concrete market that had been operating since 1973 and involved 10 companies from the sector.

It transpired that Rocla and Infraset, a subsidiary of Aveng, agreed to set up a cartel in 1973 and in the following 34 years had colluded with their competitors, Southern Pipeline Contractors, Concrete Units, Grallio, Cobro, Cape Concrete, Concrete Walls, Craig Concrete and D&D.

The cartel fixed the selling prices of pipes, culverts and manholes, divided the markets for these products up geographically between them and rigged tenders.

They had also rigged a bid to supply precast concrete sleepers to certain projects, one of which was the Gautrain.

While Rocla received leniency for coming forward, Aveng agreed to settle with the commission, forking out an administrative penalty of R46-million, which was 8% of Infraset’s turnover.

Aveng chief executive Roger Jardine, who was nine when the cartel was established in 1973, had been in the hot seat for just less than two weeks when Aveng received the summons from the commission.

“With hindsight I am really glad that subpoena came so early in my tenure,” he said. “When this issue broke we were all clear that we had to deal with it transparently, cooperate with the commission and pay the fine.”

Jardine said it would have been naïve of him to think that a sector as large as construction couldn’t be affected by anti-competitive practices and that although he had instituted a compliance review and compliance programme throughout Aveng and its subsidiaries this was not something that was going to be cured overnight.

He said that two Infraset staff involved in the cartel’s operations were suspended and their disciplinary hearings are pending.

Murray & Roberts executive director Millard Arnold said that the cartel activity came to light when a new managing director joined Rocla and discovered things that did not seem right to him.

He took it to Murray & Roberts chief executive Brian Bruce, who agreed and ordered that it be investigated. This led to the discovery of the cartel and the subsequent leniency application.

“Once we had discovered it we went straight to the Competition Commission and we have complied every step of the way,” said Arnold.

He said that only one Rolca staffer who had a role in the cartel remains employed by the company — because he had a minor role and was instrumental in exposing the cartel. “All of the others have gone,” said Arnold. “Most had already retired.”

He said that Murray & Roberts has since implemented a company-wide Competition Act education policy and that this was important because at some subsidiaries staff did not see any problem with sharing their pricing structure with competitors.

Arnold said that under apartheid there were state-sanctioned cartels like the cement cartel, of which the cement pipe cartel is a by-product, and that this was the way that business was done in South Africa then.

The commission is seeking the full 10% of turnover fine for the remaining eight members of the cartel.