Construction watchdog launches $11bn probe

Construction watchdog launches $11bn probe
February 1 2011
Independent Newspapers

South Africa's watchdog launched what is likely to be the country's biggest probe into bid rigging by building firms, further spooking investors who have punished the sector over fears that infrastructure spending may have stalled. Photo: Independent Newspapers

By Gugulakhe Lourie

Johannesburg - South Africa's watchdog launched what is likely to be the country's biggest probe into bid rigging by building firms, further spooking investors who have punished the sector over fears that infrastructure spending may have stalled.

The country's Competition Commission said on Tuesday it will investigate 65 construction companies related to bid rigging on up to 70 projects worth a total 79 billion rand ($11 billion).

Leading construction firms Murray & Roberts , Group Five , and Grinaker LTA, a unit of industry leader Aveng have agreed to cooperate with the commission in return for leniency.

“Major firms in the sector... have held meetings to allocate tenders and police each other's behaviour through a structure referred to as `The Party',” the commission said in a statement.

News of the bid-rigging comes amidst a sharp sell-off in construction stocks since late last week, sparked by concerns that delayed government infrastructure spending will further hurt the industry.

“It's almost like a perfect storm. One of the things that tends to be forgotten in good times is that this is a very cyclical sector,” said one construction analyst who declined to be identified.

“And clearly we are in a dark side of the cycle and it is coming quite hard at the moment.”

The South African construction industry, which avoided the worst of the global economic crisis due to big World Cup projects in 2010, is now having difficulty finding new projects, as both the government and the private sector hold back on spending.

Johannesburg's index of construction and materials companies was down 3.8 percent at 13.24 GMT, having earlier hit its lowest since May 2009.

Shares of Murray & Roberts, the country's second-largest building firm, were down 4.4 percent at 29.74 rand as of 1343 GMT.

The company has lost about 3.3 billion rand ($460 million) in market value in the last three trading day, after warning it would fall to a first-half loss.

Murray & Roberts has said it would be hurt after planned government power projects had been “substantially delayed”.

The tough outlook could also mean job cuts in the construction industry, potentially undermining the government's target to create 5 million new jobs by 2020, said Stephen Meintjes, an analyst for Imara SP Reid.

“There is uncertainty. The catalyst to a turnaround is going to be government resumption of infrastructure spending,” he said.

Fitch Ratings expects state-owned enterprises to help support an improvement in Africa's biggest economy, although the economy will still remain subdued, the ratings agency said in a report on Monday.

Pretoria Portland Cement , a cement maker, was another big loser. The company was down 3.7 percent at 30.06 rand, adding to a 4.4 percent decline on Monday, when it warned demand from the building industry is likely to remain weak.

Aveng , Africa's biggest builder by market value, slid 4 percent to 36.50 rand on Tuesday after it warned that first-half earnings are likely to fall by as much as 20 percent, citing tighter domestic margins and payment delays on some contracts. - Reuters