/ 5 July 2013

Construction: Cheated cities gun for the builders

Construction: Cheated Cities Gun For The Builders

"It's a given that we [the municipalities] want our money back from the construction companies," South African Local Government Association (Salga) chief executive Lance Joel said this week.

He was referring to the inflated costs estimated to have been paid by local governments for the 2010 World Cup stadiums and related infrastructure as a result of co-operation around pricing and tender allocation.

Joel said the municipalities would do whatever was necessary to get back the money — which came out of public funds.

According to him, the association's rough estimate is that municipalities are owed at least R2.6-billion for the stadiums and related infrastructure.

The figure is computed using an inflation figure of 20%, which, he says, is what courts in the United Kingdom have estimated is the amount by which cartels generally inflate costs.

Documents in the Mail & Guardian's possession indicate that the estimate may not be far off.

It is alleged that an agreement was reached at a meeting in 2006 to include a 17.5% profit margin on the stadiums: Mbombela, Peter Mokaba, Moses Mabhida, Soccer City, Nelson Mandela Bay and Green Point.

Covering the costs
At the meeting, allegedly attended by Grinaker LTA, WBHO, Murray & Roberts, Group Five, Concor and Basil Read, it was decided which stadiums would be assigned to which companies.

In return, cover prices would be paid to the "losing" companies to cover the cost of their bids.

This week the local government association was consulting members about a proposal to be put to the Competition Tribunal that provision be made for settlement talks between municipalities and the construction companies about damages.

The R1.46-billion fine recommended by the Competition Commission will go into government coffers and will not benefit the municipalities directly.

It appears that provincial governments may also be considering how to proceed. Economic Development Minister Ebrahim Patel has said that competition authorities had to balance taking action against the companies involved for transgressing the law with the assurance that the major players in the sector will still be able to implement much-needed infrastructure projects.

"Salga can take the civil action route to claim for damages," said Joel, "but we would obviously like to avoid lengthy, drawn-out and expensive court battles". However, if it became necessary, it would "go that route … because it's public money that we believe is owed to municipalities".

Competition Tribunal
The Competition Tribunal is scheduled to hold public hearings in Pretoria on July 17 and 18.

Among the 140 projects listed are some related to private companies such as Sappi and Anglo Platinum. The South African National Roads Agency (Sanral) is the client in a number of projects, but it is not clear whether the agency will make a presentation to the tribunal.

PPC, also a client in some of the projects for which companies have been fined, is calling for a construction conference similar to the Convention for a Democratic South Africa (Codesa), which established working groups to hammer out problems and find solutions.

In a statement, PPC's chief executive, Ketso Gordhan, said: "By getting national government and the private sector together in one room … many problems currently facing the industry would be solved."

Gordhan believes that what is needed is a simple and transparent process for projects, with clear allocation of risk and a strong political will to take the projects forward. Officials with a knowledge of engineering were needed to head these projects.

PPC, like many other suppliers in the construction supply chain, stands to lose if infrastructure projects are delayed as a result of capacity constraints or a loss of confidence by government because of the findings of the Competition Commission.

Gauteng's MEC for infrastructure development, Qedani Mahlangu, and some MECs from other provinces have expressed concern about the evidence of cartel behaviour in the construction sector, "whose services we procure on an ongoing basis". Mahlangu said Gauteng was considering how to proceed.

Consulting Engineers South Africa (Cesa), concerned about the skills shortage, has set up a School of Consulting Engineering to assist with procurement and project issues.

Outgoing Cesa chief executive Graham Pirie believes corruption in the construction sector is "so endemic, it's systematic".

For this reason, Cesa has set up a war chest — to take legal action against members found guilty of corruption — and a hotline, run by Moore Stephens South Africa Forensic Services was launched this week.

The hotline will be run for a three-month trial period to see whether members of the construction and engineering sector make use of it.

Construction cartel executives took home millions
Affidavits submitted to the National Prosecuting Authority and in the Mail & Guardian
's possession identify at least two senior executives who attended meetings to co-ordinate the construction sector before 2000 and were still in their positions between 2006 and 2009.

That was the period when several companies were under review by the Competition Commission for anticompetitive behaviour, for which 15 companies have been fined.

Statements in affidavits and evidence placed before the commission say that the bulk of the collusion was over by 2000. But further evidence shows that two meetings — one related to roads, the other to stadiums — were held between 2006 and 2009.

During that period chief executive officers of listed companies took home millions of rands in salaries and bonuses.

The figures, which look at companies that paid the largest fines, do not include the value of shares issued or sold by executives.

The fines apportioned to the companies took into consideration the number of projects that were found to have contravened the law and the percentage of their turnover in the final year.

At WBHO, which settled 11 projects in the fast-track process, Mike Wylie, an executive, took home R24.85-million, John Abbott R11.89-million, Jacobus Botha, who joined in February 2009, R7.58-million, and Paul Theessen earned R708 000 in one year.

Murray & Roberts settled 17 projects. Among its executives, Brian Bruce earned R36.2-million, Roger Rees R23.4-million, Sean Flanagan R20.1-million, Keith Smith, who retired in 2008, R17.85-million, and Norbert Jorek, who resigned in 2007, R6.9-million.

Stefanutti Stocks, fined for 21 projects, listed on the JSE in 2007. In two years, Biagino Stefanutti earned R8.87-million, Willem Meyburgh R8.6-million, Dermot Quinn R5.26-million and Stephen Pell, who joined in August 2008, R1.57-million.

At Aveng, which was fined for 17 projects, David Robinson took home R32.5-million, Carl Grim R16.38-million, Dennis Gammie R14-million, Ben Fourie R13.68-million, Howard Jones, who retired in 2006, R4.17-million, Juba Mashaba R6.4-million and Angus Band R2.88-million.

Marius Heyns, chief executive officer of Basil Read, took home R37.3-million and Manuel Gouveia, who joined in May 2009, earned R2.3-million. Basil Read was fined for seven projects.

Mike Lomas of Group Five, which has yet to make a settlement, but is being held to account on four projects, earned R22.3-million during the period in question, Mike Upton R16.47-million, Paul O'Flaherty R12.6-million and Christina Teixeira, who joined in 2009, R3.3-million.

Announcing the R1.46-billion penalty imposed on the 15 construction companies on June 24 — the largest fine imposed by the commission on private companies, Competition Commission head Shan Ramburuth said the chief executive officers of the companies had told the commission that they were not aware of the anti-competitive behaviour of their senior managements.

WBHO, Murray & Roberts, Group Five and Aveng, in particular, have come out strongly against corruption in statements to the media, saying they regretted the "historical transgressions" and had launched investigations, adopted a zero tolerance approach or implemented training to avoid contraventions in the future.

Murray & Roberts told Independent Newspapers that the five executives/senior managers who were implicated had left the group, but their departure was not directly related to the investigation.

WBHO said in a statement that it had to go back five years and 2 200 tenders before potential competition issues were identified.

Of the executives whose names are known to the M&G, however, at least two, who are in senior positions in listed companies, were employed during the period in question and took home millions of rands in bonuses and benefits during that period.

The affidavits, not all of which are in the M&G's possession, will be used as evidence in a criminal investigation that is expected to be undertaken by the National Prosecuting Authority and the Hawks once the Competition Tribunal confirms the settlement agreement with the companies.

The commission investigation was a two-part process. In February 2009, the commission launched a probe into possible collusive tendering for the 2010 World Cup stadiums.

Then, on September 1 of the same year, following immunity applications that indicated more widespread corruption, it initiated another investigation relating to price fixing, market allocation and collusive tendering.

A total of 21 companies were investigated. The highest fines went to the listed companies: WBHO (R311.3-million), Murray & Roberts (R309-million), Stefanutti Stocks (R306.8-million) and Aveng (R306.7-million). Basil Read will pay R95-million and Raubex R58.8-million.

The contracting value of anti-competitive projects related to the World Cup are believed to be in the region of R13-billion. Group Five, Power Construction and Construction ID have yet to reach settlements with the commission.

The original version of this story attributed an income of R1.57-million to Nomhla Canca (a non-executive director) that infact referred to executive director Stephen Pell. The Mail & Guardian apologises for the error.