/ 18 July 2013

Tribunal hearing reveals extent of construction collusion

Construction project management is said to be one of the most challenging and one of the most rewarding professions in the built environment.
Construction project management is said to be one of the most challenging and one of the most rewarding professions in the built environment.

It also revealed many of the mechanisms used by the companies to facilitate the fraud.

The hearings held by the tribunal in Pretoria to decide if it would approve the settlement agreements arrived at through negotiations by the Competition Commission and 15 companies, saw companies revealing how payments were hidden on company books.

It was heard that cover pricing was also common, and the bid rigging, such as the dividing up of the World Cup projects, were also widespread and took place in other projects. Meetings were held between large construction companies around, not only the World Cup stadiums, but road projects in about 2006.

Cover pricing saw companies submitting bids where the prices offered by each company was known to competitors, and this generally happened when the other two bidders did not want the job.

Tender, or "losers" fees were paid to companies for the cost of submitting dummy tenders. These were hidden by a number of companies in their books under "plant hire". It appears that auditors did not query these payments.

In one case, Esorfanki said it had paid out half-a-million rand in fees to two companies for submitting dummy tenders on a project. It placed these expenses under plant hire.

In many cases companies said they paid fees but could not find the evidence of the payments because "it's hard to know how they were recorded in financial statements without knowing the full amount".

Cover pricing
Neil Cloete, chief executive of G Liviero & Son, on Thursday said the cover pricing was “endemic” in the period under review by the tribunal – namely 2006 to 2009.

He was responding to questions from the Tribunal about what action was being taken against an employee who was involved in project that contravened the Competition Act. His response came as justification of why action had not been taken against the manager concerned. "We have taken the view that simple cover pricing was endemic in the construction sector at the time [2006], not only in South Africa but around the world,” Cloete said.

He said the last payment made in this regard by his company was in 2006.

The Competition Commission said cover pricing, even if it was bilateral, meant buyers were still being subjected to distorted pricing.

No action has been taken against any staff, although Murray & Roberts and WBHO have launched investigations, looking into bonuses paid to staff who have been implicated. One company said it was first awaiting the outcome of the tribunal hearings.

The tribunal chairperson Norman Manoim began to smile wryly after two days of being told by company after company that the staff involved in the Competition Act contraventions had retired or moved to the opposition, making action against guilty staff impossible. Manoim repeatedly asked the question: “Have you taken action against the staff member responsible for the project."

“Are they all gone? Is there no one left?,” he asked one company representative eventually.

In two cases, companies said a staff member involved in a project, found to be in contravention of the Act, was still employed, but “had no authority to sign off contracts” but were still advising on projects.

The Competition Commission, in painstaking detail, broke the calculations that led to imposed administrative fee of almost R1.5-billion. It's important to note that the fees came, not from each company’s annual profits for 2010, but from the divisions in which the contravention took place – usually civil engineering and the general building divisions.

Manoim’s question about whether companies had not engaged in collusive behaviour by bidding for projects when they did not have the capacity, went unanswered.

Rumdel Construction did say there was concern that if a project did not get three bidder, it would not go forward, which is why Rumdel and other construction companies sometimes tendered for projects they did not want – just to make up the numbers.

When the tribunal asked why clients were not informed that companies did not have the capacity, one company representative said in hindsight, they should have approached government and clients to inform them of this.

Louwtjie Nel, chief executive of WBHO, said companies had not benefitted from the collusion as the public perceived. "Prices were not as severely inflated as is being reported in public. If they had been the margins would not be where they are today," he said.

All the companies apologised for their actions between 2006 and 2009, and in terms of an agreement with the Competition Commission, were taking steps to improve staff education and internal processes.

In a lighter moments, one company representative was describing this period as “one of the bleakest in the company’s history” when the lights went out briefly. Manoim responded that things couldn’t be any bleaker than that.

The companies issued with fines are Aveng, Basil Read, Esorfranki, G Liviero, Giuricich, Haw & Inglis, Hochtief, Murray & Roberts, Norvo, Raubex, Rumdel, Stefanutti Stocks, Tubular, WBHO and Vlaming.