How mining companies suffered because of construction cartel’s rigged railway tender

2014-04-10 08:40

There is a construction cartel “levy” on every ton of South Africa’s iron ore that travels the 861km of railway line to the port in Saldanha for export.

This emerged yesterday at a settlement hearing before the Competition Tribunal.

WBHO admitted that in 2006 it had rigged the tender for the R449 million upgrade of the railway line between Sishen and Saldanha.

It’s co-conspirators were Murray & Roberts subsidiary, Concor, and Aveng subsidiary, Lennings DEC Rail Services.

WBHO has agreed to pay a R10.2 million fine within 30 days and its legal team argued in its defence that the railway upgrade was a “very risky, very difficult” project.

The contract was for the upgrading of the even loops on the track, which would allow Transnet to run trains with as many as 342 wagons on it.

It also involved some signalling work and construction work.

Competition Tribunal chairperson Norman Manoim said the real victims in this case appeared to be the iron ore mining companies as Transnet would have just upped its tariffs according to the cost of the upgrade to the rail line.

Academic studies have calculated cartel margins as being somewhere between 15%-25%, but with construction contracts this figure is likely to be lower.

City Press reported last year that the construction cartel decided on a 12.5% margin on the 2010 Football World Cup Stadiums, according to Competition Commission affidavits.

Even at 10%, a cartel margin on the R449 million rail tender could be as high as R45 million which has been added to the cost of transporting iron ore in the country.

It also emerged during the Competition Tribunal hearing that Murray & Roberts are in negotiations with the Competition Commission to settle its part in the conduct.

Lennings received immunity after spilling the beans on the collusion.

Tribunal member Yasmin Carrim said the fine for WBHO was very low, especially considering that railway lines were built to improve economic growth in the country.

The fine of R10.2 million, which equates to a mere 0.3% of WBHO’s civil engineering sector turnover in the financial year of 2010 is as a result of an error on behalf of the Competition Commission.

During negotiations between the construction giant and the commission, a commitment was given to WBHO that it could settle this case under the penalty terms of the fast-track settlement process, even though the commission’s investigation predated that process.

This means the fine is substantially lower than it could have been.

A legally permitted maximum fine of R340 million could have been levied on WBHO’s civil engineering business.

One thing that was made clear by the commission during the hearing is that Murray & Roberts’ fine could be substantially higher as it would not be settling its conduct in this case on the terms of the fast-track process.

Murray & Roberts had a turnover of R2.6 billion from its construction business in 2010, but it is not clear what percentage of this was for its civil engineering business.

Manoim raised questions about Transnet’s procurement practices after it emerged that the tender was divided into three parts, very late in the process, and then awarded to two of the three colluders. The third was brought in as a subcontractor by both.

Manoim recommended that the commission followed up with Transnet.

“Sometimes the tenderer is responsible for the ultimate outcome of the tender,” said Manoim. “It sounds like Transnet didn’t know its own industry.”

Manoim suggested that perhaps Transnet was creating a conducive environment for collusion without even realising it.

City Press has contacted Murray & Roberts and Transnet for comment, but did not receive any response by the time of publication.

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