It seems the only thing that can’t be condoned in the construction industry is competition. The Competition Commission is busy chasing after South Africa’s construction giants, which it has accused of running a cartel dubbed “the party”, alleging that it has uncovered 65 cases of bid rigging.
However, it seems collusion and cartels exist at almost every level of construction products.
The commission has so far investigated the markets for long steel, mining roof bolts, concrete pipes, plastic pipes, wire mesh, reinforcing steel bars and pilings.
According to the commission the subsidiaries of the major construction companies have been implicated in the investigations.
This week the spotlight fell on the commission’s investigation into the wire mesh cartel, as the case came before the Competition Tribunal.
The hearing carried on without too much fuss on Monday and Tuesday, but on Wednesday there was high drama at the tribunal as testimony was postponed while the commission’s advocate, Gcobani Ngcangisa, consulted the commission about lodging an application to make Capital Africa Steel a respondent in the hearing.
Capital Africa Steel, which was initially a respondent, had argued that it was its subsidiary, Reinforcing & Mesh Solutions (RMS), that should be the respondent and the commission agreed to make the change.
It has since emerged that RMS is a dormant company whose assets were sold off in a transaction in 2008.
This means that there is no turn-over against which the commission can implement a penalty for anti-competitive practice, even though RMS is admitting it took part in meetings where prices were fixed, customers were shared and discount structures were discussed.
The commission’s decision to make the application seemed to stem from objections by RMS’s advocate, Gredha Engelbrecht, who took exception to Ngcangisa’s questions regarding the rationale behind the selling off of RMS’s assets in 2008 by Capital Africa Steel.
Engelbrecht argued that Capital Africa Steel was not a respondent to the charges and questions should be limited to RMS.
It is unclear whether the commission believes RMS was made dormant to avoid the fine, however it is entitled to go after a parent company and this would explain why Capital Africa Steel is now in its sights.
The Competition Commission referred its case against the four wire mesh manufacturers to the Competition Tribunal in December 2009. It alleges the four colluded by fixing prices and discounts and allocating customers between them from 2001 to 2008.
The four accused wire mesh producers are RMS, Aveng (Africa’s) subsidiary Steeldale Mesh, Vulcania Reinforcing and BRC Mesh Reinforcing, a subsidiary of Murray & Roberts Steel.
BRC Mesh Reinforcing approached the commission on September 26 2008 to apply for corporate leniency for its cooperation in spilling the beans on the wire mesh cartel.
This resulted in the commission launching its investigation in January 2009. Aveng has admitted to its role in the cartel and has settled with the commission, agreeing to pay a fine of R129-million that relates to the two complaints its subsidiary Steeldale is facing in the wire mesh and reinforcing steel bar cartel cases.
However this settlement agreement is still to be confirmed by the Competition Tribunal.
Vulcania is arguing that it did not take part in any cartel activity, even though its head, Sean Greve, admitted in testimony this week that he had attended the collusive meetings, shared price-sensitive information and entered into agreements not to poach customers from other competitors.
The commission alleges that the collusion took place in two forms.
The first was at meetings of the South African Fabric Reinforcing Association (Safra). Safra would prepare a price list, which would be distributed, to its members.
“A former Steeldale employee, a certain Costa Cassar, was closely involved with the formulation of the original Safra price list,” says the commission’s founding affidavit. “This list became widely known in the industry as the ‘Costa formula’.
“The agreed list was circulated to all respondents, who would then adopt it in their individual pricing by duplicating its contents on their letterheads,” says the affidavit.
According to the commission this practice ceased in July 2005, following legal opinion that it might violate the Competition Act. However, the collusion continued in the form of informal meetings of key stakeholders at pubs, restaurants, golf courses and airports in the East Rand.
The commission’s case was reinforced by testimony from the staff of BRC Mesh Reinforcing, such as former market and sales manager Pierre Griffin.
“The respondents, through their representatives, held various meetings and telephone discussions to fix the base price of reinforcing mesh, to fix the rate of discounts to be offered to customers and to allocate customers by agreeing not to compete,” said Griffin. “I point out that, to the best of my knowledge, the senior management of the respondents would always be informed of the decisions that were taken in these meetings and would sanction same.”
The case has been adjourned and the closing arguments will no longer take place on March 11 as planned due to the application to join Capital Africa Steel to the case.
‘The party is over’
The Competition Commission’s investigation into the construction sector has lifted the lid on a cartel dubbed “the party”.
According to the commission, South Africa’s major construction firms have, for many decades, held meetings to allocate tenders and police one another’s behaviour.
The cartel is alleged to include chief executive officers, executives and senior and junior managers.
The commission is currently investigating 65 bid-rigging cases involving more than 70 projects with an estimated value of R29-billion.
It has received 150 marker applications for corporate leniency, which allows guilty parties to agree to split on their fellows to escape punishment.
More than half of these leniency applications are from Group Five, with Aveng’s Grinaker-LTA and Murray & Roberts also lodging applications.
The sheer volume of cartel cases the Competition Commission claims to have uncovered in the construction sector has resulted in it announcing a “fast-track settlement” option whereby construction firms facing numerous cases can come forward, cooperate fully, declare all collusive activity and receive a reduced penalty.
Construction firms that do not apply for this option will be hit with severe penalties for each case in which they are prosecuted and found guilty.
However, the commission’s investigation does not stop there: it has also investigated the markets for numerous construction products such as long steel, mining roof bolts, concrete pipes, plastic pipes, wire mesh, reinforcing steel bars and construction pilings.
According to the commission, subsidiaries of the major construction companies have also been implicated in these investigations.
Piling up the evidence against construction companies
The Competition Commission this week referred its case against six construction companies for cartel activity in the piling sector to the Competition Tribunal this week.
Piling is a process used to stabilise the foundations of large structures such as buildings, bridges, substations and dams, to prevent them from collapsing.
The commission accuses Grinaker-LTA — an operating group of Aveng — Esorfranki, Rodio Geotechnics, Dura Soletanche Bachy, Geomechanics and Diabor of allocating tenders, customers and projects among themselves and fixing tender prices.
In this case it was Grinaker-LTA that applied for corporate leniency and agreed to spill the beans.
“The tenders were allocated in accordance with agreed rules and each allocation was recorded in a document called the ‘scorecard’ or ‘book’, which was intended to record the agreed percentage market share of each participant,” says the commission.
“There are indications that the conduct may have been in place since the 1970s.
“The conduct appears typical to that already uncovered by the commission in other construction-related areas and points to the far-reaching nature of such practices in the construction sector,” the commission states.