Thursday, July 4, 2013

Construction graft just tip of the rubble


The commission's limited prescription period means a lot of rot may have gone under the radar.
FNB Stadium in Soweto is one of the projects where evidence of collusion has been shown. (Oupa Nkosi, M&G)
Fifteen construction companies who made a fast-track settlement agreement with the Competition Commission after being found guilty of bid rigging, appear to have been let off relatively lightly — financially and legally — with a R1.46-billion collective settlement.

The market rally in the construction sector on Monday suggested that investors agree, although the shares of Group 5, which had not yet reached an agreement, dropped slightly on Tuesday, but recovered on Wednesday.

In terms of the Competition Act, wronged companies hoping to initiate civil claims will be able to raise projects only between September 2006 and February 2010, and claimants will be bound by the Competition Commission's findings.

But the affidavits submitted by two senior construction officials, which outline the projects they undertook between 1998 and 2005, give an idea of the scope of those not reviewed. In one case, the projects amounted to R1.29-billion and in another, R765.5-million.

Not all these projects listed above necessarily involved collusion, but as an indication of the scope of the problem, of the 300 cases investigated by the Commission, more than 160 projects had occurred after 2006 and so could not be included.

Over this period, the two officials who had worked for various construction companies were involved in contracts that included work for Volkswagen, the V&A Marina Phase, Coega, Scorpion Mine in Namibia, Durban shipyards, Sapref and Engen refineries, and the Ushaka Marine Park.

Reaching settlements
It was announced on June 24 that 15 construction companies, seven of them listed, had reached settlements with the Competition Commission and agreed to penalties of R1.46-billion for bid rigging and collusive tendering. Three companies had not settled, namely Group 5, Construction ID and Power Construction.

Company officials can still be prosecuted for criminal offences, however, the question remains whether there is any appetite to pursue jail time for the senior staff of these companies, which would be costly and, as some have said, might discourage full disclosure by companies in other sectors, such as health, which are also under investigation.

Documents presented to the Competition Commission, some of which are in the Mail & Guardian's possession, reveal that the bulk of the organised collusion had come to an end by 2000 and ad-hoc collusion continued until about 2005, with occasional co-operation occurring as recently as 2008.

That means the real collusion, which was sufficiently organised for a committee to be set up to co-ordinate tender-project allocations, was long over by the time the committee's investigation began.

A list of those who headed this committee is named in documents, and include Willie (Willem) Meyburgh, the chief executive of Stefanutti Stocks Holdings, who in a legal statement admitted that in 1999 he was approached to become part "of an elite group" of construction industry leaders to participate in the co-ordination of the civil engineering construction industry.

He was not immediately available for comment. In a legal statement, Stephen Pell confirms co-ordination of bids. He denied to Mail & Guardian that he had a key role in co-ordinating bids between 1999 and 2000.

Criminal investigation
Both Pell and Meyburgh name chief executives and senior managers in their submissions, which will form part of the criminal investigation.

The committee, which has handed its findings over to the Competition Tribunal for further public hearings, discovered that R19-billion of the projects in dispute were private-sector projects and R28-billion were public-sector projects.

The South African Local Government Association said on Wednesday that it plans to pursue damage claims against companies involved in the construction of the Fifa World Cup stadiums.

Competition Commission head Shan Ramburuth estimated that the costs could have been inflated by between 10% and 30%, which on the Johannesburg Stadium at 30% amounts to R680-million.

The fact that the investigation is limited to a three-year period does not detract from the commission's two-year accomplishment in orchestrating the settlement.

It is bound by the restrictions of the Competition Act, which attempts to give certainty to companies by introducing a ­prescription clause.

Period of prescription
Justin Balkin, director in the competition department at Edward Nathan Sonnenberg, said: "From a prescription perspective, a complaint in terms of the Competition Act may not be initiated more than three years after the practice has ceased. If conduct falls outside the period, no competition-law finding may be made in respect of such conduct.

"A criminal contravention arising from the same conduct has its own period of prescription. For example, prescription in relation to fraud is 20 years. On this basis, a respondent can be criminally liable for conduct that has prescribed in terms of the Competition Act."

Balkin said it was important to note that admissions made in a consent agreement did not absolve respondents from criminal liability arising from that conduct.

On the matter of civil damages, the person (which includes a company) who has suffered loss or damage as a result of a contravention of the Competition Act may claim civil damages for any loss suffered, but is limited by any findings made by the Competition Tribunal and the issue of prescription.

"So, even if the construction companies have admitted to conduct that has prescribed under the Competition Act, no civil damages will be claimable in respect of such conduct," he said.

Any party seeking damages has only three years after the tribunal's finding to lodge its complaint, failing which that claim itself prescribes.

Asking for favours
Schalk Ackerman, who worked for Grinaker-Ltd and is now a director of Stefanutti Stocks said in his affidavit: "In the early 2000s, to the best of my knowledge, this (the co-ordination of the allocation of projects) had stopped. Notwithstanding the termination of the organised system, contractors continued to collude on tenders on a less frequent, ad-hoc basis up until 2007, and possibly 2008.

"This conduct would occasionally take the form of a contractor asking the others for a favour to be allowed to win or not win a tender (ie. a request for a cover price)."

A request for a cover price was made when a company submitted a tender, but wanted to make sure that the contract would not be awarded to it because of internal constraints. The cover price would cover the cost of it tendering.

Ackerman said tender fees were still included in cover prices until about 2004, but related only to larger projects, of which he said there were about 21. The recovery fees were allegedly hidden in invoices in various forms including "plant hire".

The practice came to an abrupt end in 2004 over a Coega harbour project, when a contractor did not pay the recovery fee. It was then agreed that the companies would carry their own losses.

Ironically at least two submissions suggest that much of the project allocation was prompted by skills shortages, where companies were concerned that they would lessen their chances of winning future projects by not tendering, but took part knowing full well that they could not provide the skills for the project if they won. Their bids were purposely drafted to ensure they did not win.

Soccer World Cup stadiums construction
Deputy competition commissioner Trudi Makhaya said the investigation was launched in 2009 in connection with the Soccer World Cup stadiums construction and then expanded to other projects beyond that sector.

Evidence before the commission suggests that the World Cup projects, including Soccer City, Green Point Stadium and a number of others, were affected.

There is an undertaking that the National Prosecuting Authority will not pursue criminal investigations until the tribunal process has been completed.

Group 5 and the commission were deadlocked over four projects in which Group 5 has been implicated by other companies, but the company disputes "factual and evidentiary discrepancies".

It received corporate leniency for the 25 projects it submitted ­information on.

The Black Business Council in the Built Environment this week called for the 15 companies to be blacklisted from participation in government's R4-trillion infrastructure-development programme and other public-sector construction projects.

Minister urges restraint
In terms of the industry oversight body, the Construction Industry Development Board, such blacklisting is possible. The board's acting chief executive, Hlengiwe Khumalo, has said it will launch its own investigation.

Economic Development Minister Ebrahim Patel has urged restraint, in spite of saying that the inflated pricing would have had an impact on job creation and on the infrastructure programme and that the government would take it up with the companies.

Patel said the companies involved were the largest in the sector and the "government was seeking to ensure an appropriate balance between the actions that were necessary to stamp out collusion and necessary price fixing while still ensuring that the company has the necessary capacity for both state and private sector to ensure structured programmes continue".

The companies with the highest settlements, based on a percentage of annual turnover for the February 2011 financial year, were WBHO with R311-million, Murray & Roberts with R309-million, followed by Stefanutti with R306.8-million and Aveng with R306.5-million.

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