Lessons from the construction cartel debacle

2013-07-21 14:00

Khanyisa Qobo, Tamara Paremoer and Makgale Mohlala try to unravel the extent of the effects for which the cartel was responsible

The revelation of cartels in South Africa’s construction sector by the competition commission has captured the imagination of many stakeholders.

There has been applause that culprits have been “caught out”, shock at the extent of the conduct, and also indignation at the size of the penalties, which are deemed too small by some.

Given the reach and extent of the cartel’s conduct, few South Africans have been left unaffected.

Other African nations (13 to be exact) were also affected through 40 projects – a worrying reflection of the South African private sector’s commitment to development on the rest of the continent.

The resultant costs or harm is yet to be quantified, but the revelation of the cartels raises questions related to inflated costs, the quality of goods and services provided, and the inefficient use of resources.

The firms coordinated and planned who would win which tender and at what price. This was done through submitting “fake bids” (those that don’t meet the specifications and would thus be disqualified, or bids that are excessively priced relative to the designated winner) by the conspirators to ensure the victory of a predetermined winner.

In these instances, the agreement was that the winner would compensate the accomplices or subcontract work to them.

It has emerged that industry players also met regularly to allocate areas or markets for bidding and for the setting of prices.

The commission is of the opinion that the construction cartels have been operating for more than three decades, involving personnel at the highest level of firms. The cartels were also sustained by staff mobility trends within the industry – that is, cartel members moving jobs between industry firms.

The firms’ conduct contravenes Section 4(1b) of the Competition Act that relates to collusion. It is considered the most egregious competition-law offence.

In total, the commission uncovered cartel conduct in more than 300 projects across all levels of government in all nine provinces. A slight majority of these projects, 160 in total, fall outside the ambit of the Competition Act as they took place more than three years before the commission initiated its probe. The commission could only prosecute firms for the remaining 140 projects.

Although the vast majority, 75%, of the affected projects were in the private sector, the public sector projects were by far larger in value, accounting for 60%.

The projects span a wide range of sectors, from transport to education and, shockingly, to the not-for-profit sector.

The major achievement of this process is that cartels have been broken and the competition authorities are aware of the mechanisms used to perpetrate collusion.

Although there are no guarantees that the market will adjust in a favourable way for consumers going forward, consumers can at least be assured that prices in the industry reflect a competitive bidding process and fair market value.

For government and the private parties affected, this presents an opportunity to pursue civil claims for damages.

Although the pursuit of damages for a competition contravention is as yet untested in South Africa, we have recently seen significant activity on this front, notably the bread class action suit and the damages claim by Comair and Nationwide against SA Airways for an abuse of dominance.

The quantification of the loss or damages suffered remains the most challenging aspect of such a claim, but may be simpler in the construction sector as the harm can be easily traced to particular consumers.

The pursuit of civil damages would contribute considerably to the enforcement of competition law. If civil lawsuits succeed, this will have an important and deterring effect that complements the work of competition authorities. Private relief would also compensate parties directly.

There are many lessons to be learnt by all parties from this process.

For the commission, this is an opportunity to strengthen not only our investigative and prosecutorial tools as provided for in the Competition Act, but also our advocacy tools. Such tools may include impact assessments to quantify harm.

Additionally, the busting of the construction cartel provides an opportunity to develop cartel detection mechanisms that can be institutionalised.

For government, this is another opportunity to continue improving its procurement processes. For the corporate sector, this is an opportunity to clean house by reviewing the ethical principles underlying the way in which they do business.

»?Qobo and Paremoer head up policy in the advocacy and stakeholder division at the commission. Mohlala was the lead investigator in the construction fast-track project. Views expressed are not necessarily those of the commission

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