The R1.7bn profit pie

2014-11-16 16:00

Construction firms allegedly divided up tenders, deciding who would bid on which stadiums and who would supply cover prices for them

About R1.7?billion in profit is what seven of South Africa’s largest construction companies stood to earn by allegedly colluding on the tenders for the country’s 2010 World Cup stadiums.

The companies, which are alleged to have rigged tenders for six World Cup stadiums, allegedly agreed to price a 17.5% profit margin into their bids, the margin being significantly higher than the usual profit margins in the construction sector.

According to the Competition Commission, the winning bids for the six stadiums were worth more than R9.8?billion, making the total profit share R1.7?billion.

A PricewaterhouseCoopers (PwC) report from December last year on the South African construction industry states that net profit margins of 5% to 6% were achieved by local construction companies on the back of the global economic boom in the run-up to the 2010 World Cup.

It also states that these profit margins have since contracted to 2% to 3%, making the 17.5% seem exorbitant.

Construction of soccer stadiums: Building in a fat margin

On September 27 and October 6 2006, two meetings were held at the head office of Wilson Bayly Holmes Ovcon (WBHO), where seven senior executives representing six of South Africa’s largest construction companies are alleged to have agreed to rig the tenders for the six stadiums.

At these two meetings, they are alleged to have divided up the stadium tenders, deciding who would bid on which stadiums and who would supply cover prices for which ones.

A cover price is a price that will come in higher than the bidder, who it was decided would win the tender. It is aimed at making it look like the tender process was competitive.

It is also alleged that at the two meetings, the construction company executives discussed which companies would partner with each other on which stadiums and which construction companies not present at the meeting could scupper their collusive plans.

According to the commission, present at the meetings were WBHO’s CEO, Mike Wylie, and managing director of WBHO’s building division, Louwtjie Nel; managing director of Aveng’s civil division, Schalk Ackerman; managing director of Concor Trevor Robinson; CEO of Group Five Mike Lomas; chief operating officer of Basil Read Kobus von Biljon; and senior estimator at Murray & Roberts Phillip Taylor.

If the commission’s case against the six construction companies is successful, it will once and for all discredit the argument that rogue mid-level managers conducted the collusion, as almost everyone present at the meeting was a senior executive.

The commission referred its case against the six companies to the Competition Tribunal this week.

The implicated companies are WBHO, Basil Read, Stefanutti Stocks, Group Five, Aveng and Murray & Roberts. The last will not be facing a potential fine as it was granted leniency for this case, while Aveng chose to settle under the commission’s fast-track settlement process.

WBHO, Basil Read, Stefanutti Stocks and Group Five chose not to settle under this process. This means they could face large fines if the tribunal finds them guilty after a hearing process, for which the dates still have to be set.

The Competition Act allows the tribunal to impose a maximum fine of 10% of group turnover.

Based on the 2013 financial year, the four companies could pay combined fines of R1.58?billion.

According to the PwC report, WBHO had a turnover of R5.9?billion last year (a R590?million fine), Group Five R2.3?billion (a R230?million fine), Stefanutti Stocks R1.3?billion (R130?million fine) and Basil Read R6.3?billion (R630?million).

WBHO said this week: “WBHO is firmly of the view that its conduct in this context did not constitute a contravention of the Competition Act and, on this basis, refused to settle this complaint as part of the fast-track settlement process.” It said it was confident it would “be able to refute all the allegations made by the commission at the hearing of the matter”.

Stefanutti Stock’s Willie Meyburgh said the company had settled all outstanding matters arising from the commission’s investigation into the construction industry and the World Cup stadiums, in particular.

Group Five said it had lengthy discussions with the commission “and having not reached consensus on the allegations made against Group Five, the company informed the commission that it has elected to assess its position upon review of the commission’s referral to the Competition Tribunal”.

Track record

In July last year, the Competition Tribunal approved settlement agreements with 15 construction companies under the Competition Commission’s fast-track settlement process.

These 15 companies agreed to pay a collective fine of more than R1.46?billion for 90 construction projects that were colluded on.

The commission said at the time there were another 25 construction companies that had been implicated in the collusion, which had not yet settled with the commission.

In total, the commission’s investigation into the construction cartel identified 300 construction projects worth R46?billion, which showed evidence of collusion.

Ninety of these projects were settled under the fast-track settlement process, 70 were not settled and 140 fell outside the three-year time frame for prosecution.

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