Construction cartel: Construction Industry Development Board report, plus 2013 Strategic Plan

Public Works and Infrastructure

23 April 2013
Chairperson: Ms M Mabuza (ANC)
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Meeting Summary

The Construction Industry Development Board (CIDB) presented its report on the investigation by the Competition Commission of alleged collusion between and among construction companies. The Competition Commission was set up by the Competition Act (No. 89 of 1998) to investigate, control and evaluate restrictive business practices, abuse of dominant positions and mergers in order to achieve equity and efficiency in the South African economy. The Competition Commission used the Corporate Leniency Policy (CLP) to encourage the firms involved in cartels in the construction industry to come forward in exchange for immunity. The Competition Commission received 160 CLP applications by November 2009. The Construction Fast Track Settlement process was also launched in February 2011 to expedite matters as it aimed to incentivise firms to admit to anti-competitive conduct in exchange for clemency by the Competition Commission. This led to the discovery of additional 131 rigged projects to the tune of R26 billion, bringing the total number of incidents to 291. The 21 firms that participated in the settlement process had implicated an additional 22 firms who would also be investigated in the near future. Rule 14 of the Competition Commission, which prohibited the sharing of information prior to the Tribunal’s finalization, prevented CIDB from getting further information from the Competition Commission, but it would schedule a meeting with all entities concerned with issues of collusion to discuss the possible implications of the outcome of the Competition Commission’s investigation report.

Members raised concerns on the incentives given to the construction firms, noting that this was a form of compensation for wrong doing. They asked about the role of the consultants in the collusion and whether they were being investigated. They asked if the Competition Commission had powers to prosecute and requested further clarification on the role of the CIDB in the investigation process. Members decried the role of these firms in milking the country dry, and agreed that they must be punished. Members made a decision to invite all the entities involved in the investigation of the construction firms to the next meeting.

The Strategic Plan and Annual Performance Plan of CIDB focused on the achievement, challenges, strategic priorities, focus areas and budget for the 2013/14 financial year. CIDB had concluded the amendments of the Construction Industry Development Regulations and had approved, for gazetting, the Standard for Indirect Targeting Enterprise Development and requirements for Contractor Performance Reports. CIDB, was unable to achieve 17 out of 54 targets set in 2012/13 due to process and production issues. The strategic priorities for the 2013/14 financial year included the provision of contractor and client support through CIDB provincial offices, improvement of the Construction Registers Service through business process excellence, improvement of compliance to and maintenance of CIDB prescripts. It aimed to combat fraud and corruption and promote uniformity of construction procurement systems in the organs of the state.  The key programmes that CIDB would focus on in 2013/14 were the Construction Registration Service, Construction Industry Performance, Procurement and Delivery Management, National Contractor and Development Framework and the Chief Executive Officer’s office, which would promote the relationship with stakeholders through national and provincial stakeholder forums. The total budget for CIDB for the 2013/14 financial year was R122 million, an increase from R114 million allocated to it in the 2012/13 financial year.

Members thought the plan lacked specifics, that the priorities were and not measurable, and the Annual Performance Plan did not meet expectations, and were concerned about the apparent mismatch between the Strategic and Annual Performance plans. They questioned the non achievement of 17 targets and hoped the failure would not be repeated in 2013/14. They asked what “other objectives” and “goods and services” stood for under the programme and budget of CIDB. They questioned transformation had actually taken place in the construction industry, and the level of compliance with the CIDB regulations. They wanted to know how CIDB intended to pursue the Anti-Corruption strategy, particularly since its past monitoring had failed. They wanted to know if CIDB could do anything to improve the quality of learners entering the industry, needed more details on women-owned and youth-owned enterprises, and how it would improve its work in this financial year.
 

Meeting report

Construction Industry Development Board briefing on the Competition Commission investigation into the Construction Cartel
Mr Bafana Ndendwa, Chairperson, Construction Industry Development Board, stated in his introductory address that the Competition Commission (CC) had reported to the Construction Industry Development Board (CIDB) on its investigation into the allegation of collusion between and among construction companies. He noted that the findings of the Competition Commission would have serious impact on the construction industry as well as the nation’s economy at large.

Ms Hlengiwe Khumalo, Acting Chief Executive Officer, CIDB expanded on the role of the Competition Commission and its findings of the Commission on the allegations of collusion in the construction sector. The Competition Act (No. 89 of 1998) set up the Construction Commission and empowered it to investigate, control and evaluate restrictive business practices, abuse of dominant positions and mergers in order to achieve equity and efficiency in the South African economy. The CC could negotiate agreements with other regulatory authorities, participate in their proceedings and advise, or receive advice from any regulatory authority, all in a bid to ensure consistent application of the Act across all sectors. The Competition Commission was an independent entity but its decisions could be appealed to the Competition Tribunal and the Competition Appeal Court. The construction industry was one of the commission’s priority sectors. There was a specific division dealing with cartels and its core functions were to investigate cartel complaints and administer the Corporate Leniency Policy (CLP).

Ms Khumalo stated that the presentation was going to focus on cartels. The Competition Commission conducted research into the construction industry following an outcry about the costs of the 2010 FIFA World Cup Stadiums, and uncovered evidence of possible collusion. The Competition Commission thereafter initiated investigations against major construction firms for possible collusion in the industry in February and September 2009. In November 2009, the CC received approximately 160 Corporate Leniency Policy (CLP) applications. The CLP was a policy used in busting cartels as it encouraged firms involved in cartels to come forward in exchange for immunity.

Ms Khumalo indicated that the Competition Commission, in February 2011, launched a Construction Fast Track Settlement to process matters expeditiously. The Fast Track Settlement process was introduced in order to incentivise firms to admit their anti-competitive conduct, encourage disclosure by firms involved in bid rigging, strengthen evidence against other firms, minimise legal costs and time spent on complaints, give firms that disclosed their involvement in bid rigging better financial settlement terms, and set the construction industry on a new competitive trajectory. Due to the introduction of the Fast Track Settlement process, an additional 131 rigged projects to a tune of R26 billion, involving 21 firms, had been brought forward, thus bringing the total number of investigated projects to 291. The projects included stadiums, roads, dam mines and shopping centres in both public and private sectors.

She noted that the 21 firms that participated in the settlement process had also implicated an additional 22 firms, who would be investigated after the completion of the settlement discussions with the initial 21 firms, which was likely to happen in mid-May 2013. The Competition Commission would thereafter file the Consent agreement with the Tribunal at the end of May 2013, and the Tribunal would finalise it in June/July 2013.

She also noted that CIDB was unable to get further information from the Competition Commission because of Rule 14 of the Competition Commission, which prohibited the sharing of information prior to the finalisation at the tribunal stage, which was after the Tribunal had confirmed the Consent Agreement by issuing “an order.” All other stakeholders, including CIDB, would thereafter be able to take steps relating to the possible transgressions of their own Acts and Codes. For CIDB, Regulation 28(10) of the CIDB Regulations, 2004 permitted the CIDB to have access to the findings of any investigation conducted by any organ of the state on issues relevant to the statutes of CIDB. However, the CIDB would schedule a meeting for the first week of May, with all entities concerned with collusion, to discuss the possible implications of the Competition Commission’s investigation report.

Discussion
Mr K Sithole (IFP) commended the presenters for shedding light on the events in the construction industry. He asked about the identity of the companies involved, noting that it was important for the Committee to know this as it would help with the Committee’s deliberations. He further asked when the final report of the findings would be ready for the consideration of the Committee.

Mr Ndendwa replied that the report of the findings of the Competition Commission was expected after June/July. He also noted that it was not the CIDB who was conducting the investigation, but the Competition Commission.

Mr L Gaehler (UDM) commented that the investigation of collusion within the construction industry had started from 2009, but probably ought to have gone back much earlier. He would have liked the investigation also to include the provinces. He noted that it tended to be the corrupt players who managed to get contracts with officials. He suspected the collusion also involved the consultants who played major roles in deciding the conditions of any tender. He asked if these consultants were also investigated, and why most of the projects were going to the big companies. He also asked if there were possibilities of extending the investigations to other government projects. He firmly believed that this situation must be addressed.

Mr Ndendwa remarked that the consultants only recommended, but did not award contracts. The departments and municipalities were responsible for the award of contracts, although this did not preclude the consultants from having participating in the collusion.

Mr Gaehler responded that there were possibilities of collusion in the whole recommendation process by consultants, and this was due to the shortage of personnel in government departments.

Mr Ndendwa agreed that consultants could collude and noted that there was a dire need to look critically at the activities of those consultants.

Ms A Dreyer (DA) asked whether the Competition Commission had the powers to prosecute, as this was not part of the functions laid out in the presentation.

Mr Ndendwa replied that the investigation report that was being expected would shed more light on the powers of the Competition Commission.

Ms Dreyer asked if the professional bodies to whom these corrupt firms and individuals belonged could investigate and punish them.

Mr Ndendwa responded that the professional bodies could act on the report of the investigation and punish erring members.

Ms C Madlopha (ANC) questioned the rationale for incentivising the corrupt firms, noting that it was a form of compensation for wrong doing. She wanted to know what would happen if the companies did not respond to the Competition Commission, and if the Competition Commission would only focus on the complaints process. She felt strongly that the corrupt firms must be prosecuted.

Mr Ndendwa replied that the Competition Commission had been authorised to invite the firms, who had no option other than to respond. He also stated that after the Competition Commission had concluded its investigation on the anti-competitive behaviour of these firms, several independent agencies would take an interest in pursuing cases further against these companies. Even if these companies got clemency from the Competition Commission, it did not mean they would get clemency from other agencies.

Ms Madlopha was worried that these agencies would act based on the recommendations of the Competition Commission and they would be able to start their own investigation from scratch. If the Competition Commission did not do its work well, the other agencies would not achieve much. 

Ms N Ngcengwane (ANC) decried the role played by the big construction companies in milking the country dry. She asked about the involvement of the Department of Public Works’ engineers in the bid and contract award process, and if they had provided estimations prior to the contract award. She further asked if these companies were still submitting bids for new contracts.

Mr Ndendwa responded that they would still be submitting bids as any measure to stop them would send the wrong signals to others who might also be considering coming forward to the Competition Commission.

Ms P Ngwenya-Mabila (ANC) asked for clarification on the role played by CIDB in monitoring the Competition Commission, as well as the assistance CIDB was giving to Small and Medium Enterprises (SMEs) to ensure they were not abused by the big companies. She asked about the starting, and intended completion date, of the investigation and whether the big companies were cooperating in the investigation process.

Mr Ndendwa replied that the start date of the investigation, as contained in the terms of reference of the Competition Commission, was from September 2006 and the investigation would continue till a later date.

Ms N Madlala (ANC) asked about the identity of the people sitting on the Tribunal and what would happen after the findings at the Tribunal.

The Chairperson asked for the identity of the corrupt companies as she agreed that they should face the wrath of the law.

Mr Ndendwa replied that the Competition Commission was bound by Clause 9, which prohibited the sharing of information prior to the finalisation at the Tribunal Stage. He further stated that the Committee should wait for the report to be released in July as this would name the companies.

Ms Mabila proposed the invitation of all the entities involved in the investigation of the construction companies to the next meeting.

The Committee accepted the proposal.

Construction Industry Development Board briefing: Strategic Plan and Annual Performance Plan 2013/14
Ms Hlengiwe Khumalo, Acting Chief Executive Officer, Construction Industry Development Board, indicated that her presentation was going to focus on the achievements and challenges of the past fiscal year as well as the strategic priorities, focus areas and budget for the 2013/14 financial year.

Ms Khumalo listed the achievements of CIDB as including the amendments of the Construction Industry Development Regulations, which would improve contractor registration requirements while maintaining the integrity of the register; the approval, for gazetting, of the Standard for Indirect Targeting for Enterprise Development; the approval, for gazetting, of CIDB requirements for Contractor Performance Reports (for Grades 2 to 9); the extension of the quarterly SME Business Conditions Survey to monitor “access to credit” as a business constraint, as well as the launch of the National Contractor Development Programme and Guidelines.

Ms Khumalo stated that the non achievement of the targeted turnaround time for the processing of Grade 2 to 9 applications and Grade 1 applications, at 21 days and 48 hours respectively, delay in the National Infrastructure Maintenance Strategy (NIMS) project implementation and the non-finalisation of the Anti-corruption model were some of the challenges faced by CIDB. The overall performance index showed that 17 out of the 54 targets set in 2012/13 would not be achieved, due to new system problems and the consultations process underway to finalise the standards.

She also highlighted CIDB’s strategic priorities for the 2013/14 fiscal year. These included the provision of contractor and client support through CIDB provincial offices, improvement of the Construction Registers Service through business process excellence, improvement of compliance to and maintenance of CIDB prescripts while also combating fraud and corruption, and the promotion of uniformity of construction procurement systems in the organs of the state. Other priorities were monitoring and evaluation of the performance of the construction industry, improvement of the performance of the sector, improvement of infrastructure delivery skills and management practices in the construction industry and strengthening of relationships with stakeholders.

Ms Khumalo also emphasised the key programmes that CIDB would concentrate on in 2013/14. These included the Construction Registration Service which focused on the maintenance of an efficient registrations service and production of high standard of data quality in the registers. Construction Industry Performance area would focus on the monitoring and evaluation of the performance of the construction industry, the development and promotion of best practice guides and the improvement of infrastructure delivery skills. Procurement and Delivery Management would focus on the improvement of the construction procurement skills through the enhancement of the Infrastructure Delivery Management Toolkit and enforcement of compliance to CIDB’s regulation. She pointed out that the provincial offices would work on implementing the National Contract Development Framework, and on monitoring and evaluating it. CIDB, through its provincial offices, would also provide support to contractors, clients and partners. The Chief Executive Officer’s office would promote the relationship with stakeholders through national and provincial stakeholder forums.

She indicated that CIDB had received an allocation of R122 million for the 2013/14 financial year from the Department of Public Works. The Growth and Contractor Development programme was allocated R29.7 million. Construction Industry Performance, Procurement and Delivery Management, Construction Registers, and the CEO’s office were allocated R9.5 million, R10.8 million, R21.7 million and R11.2 million respectively. The “Other objectives” programme was allocated the sum of R40 million. With respect to staffing, 233 positions were approved and were spread across the various programmes of CIDB. She concluded that the Accounting Authority was committed to providing oversight role to assist CIDB to achieve its objectives in an effective and efficient manner. (See attached presentation for more detailed graphs and tables on the budget).

Discussion
Ms A Dreyer stated that the presentation lacked specifics and the priorities were very vague, hence not measurable. She referred to the 17 out of 54 targets that were not achieved, stating that it was an indictment of the CIDB. She asked why such a high figure of 6% of the total staff would be based at the Chief Executive Officer’s (CEO) office.

Ms Khumalo apologised for the lack of details in CIDB’s presentation, stating that CIDB was given specific guidelines on how the presentation should look, had been forwarded to the Department of Public Works (DPW) and had been approved by it. The comments of the Committee in relation to the details would be taken into consideration for future presentations.

Ms Khumalo said  that the staffing attached to the CEO’s office comprised the Communications Department, Corporate Governance, Risk and Internal Audit and all these reflected in the CEO Office’s budget. The fees for the board were also part of the CEO Office allocation.

Mr Rodney Milford, Programme Manager, CIDB, added that one third of CIDB’s target for 2012/13 was not achieved because of process and productions issues, noting that targets which were linked to the production of deliverables would be achieved in the 2013/14 financial year. Compliance targets that had not been achieved would also be achieved in 2013/14.

Ms Ngwenya-Mabila wanted to know the number of women and people with disabilities working with CIDB and how many positions were vacant out of the 223 approved positions.

Ms Ngwenya-Mabila requested clarification as to what “other objectives” in the programme meant, and what the budget for goods and services entailed. She asked for the underlying reasons behind the key challenges confronting CIDB, noting that it was not enough to just simply the challenges without telling the committee the reasons behind them. She cited the example of the delay in the implementation of the National Infrastructure Maintenance Strategy. She also asked why some of the issues mentioned in the strategic plan were not mentioned in the Annual Performance Plan.

Ms Khumalo stated that the allocation for “other objectives” in the budget was actually for the Corporate Services Department. The Corporate Services Department comprised Human Resources, Information Technology, Supply Chain Management and Financial Management. She agreed that a large amount of money was going to the Goods and Services classification in the budget. However, she noted that expenditure on procurement formed the bulk of spending under goods and services, and that people had been trained on guidelines to be followed as far as the expenditure on goods and service was concerned. She said that six out of the 223 positions had not been filled, and whether these would be filled depended on the availability of funds in the middle of the fiscal year.

Mr Milford added that NIMS was delayed because of the failure to secure funds on time from DPW. He added that the strategic priorities in the Annual Performance Plan (APP) were cascaded into short term goals, and the Plan set out a schedule of short term targets. 

Ms Ngwenya-Mabila insisted that the Strategic Plan and APP were supposed to show some similarities and sought further clarification on the contradictions.

Mr Ndendwa replied that the APP focused on the yearly short term plan, but that it was in line with the Strategic Plan. He added that CIDB would check back on the observation and report back to the Committee.

Mr Sithole asked if the CIDB executives had seen any transformation in the construction industry. He requested further clarifications on the postgraduate conference being planned by the CIDB.

Mr Milford replied that the Minister of Public Works tasked the CIDB and all other entities attached to it to hold a transformation summit on the construction industry and this was held in September 2012. A transformation forum and nine task teams had been established to address specific issues around transformation. He added that the postgraduate conference had been sponsored for the past nine years and it was now held every alternate year. CIDB would organise one this year.

Mr Gaehler enquired about the plans CIDB had in order to meet its target for the financial year with respect to its registration programme. He wanted to know when the new amendments were going to be implemented. He further asked if the municipalities were adhering to CIDB’s regulations.

Ms Kabelo Ntisa, Acting Programme Manager, CIDB, replied that the level of compliance to CIDB’s regulations varied at different levels, but that the compliance had been strengthened.

Mr N Magubane (ANC) asked what the plan of CIDB was to deal thoroughly with fraud and corruption in the 2013/14 financial year. He commented that monitoring and evaluation had totally failed, and wanted to know how CIDB intended to change that.

Ms Ntisa replied that CIDB had a dedicated service provider who helped CIDB on issues relating to fraud and corruption

Ms Madlala wanted to know when CIDB intended to finish work on the Anti-corruption model.

Ms Ntisa replied that the draft of the Anti-Corruption model was in place but CIDB was still busy with consultations before the model could be finalised.

Ms Ngcengwane referred to the challenges CIDB was facing and asked what CIDB was doing to improve the quality of learners entering the construction and engineering field.

Ms Ngcengwane added that the Committee needed to get proper details about women-owned and youth-owned construction businesses in order to effectively address the issue of equity in the construction industry.

Mr Milford replied that information around black and women ownership was available on CIDB’s website while that on disable people could be made available to the Committee. He added that CIDB was looking at providing mandatory experiential learning on public sector contracts. CIDB was collaborating with the Department of Education to extend learning to opportunities for professional candidacy phase. CIDB was also looking at other initiatives to strengthen learning.

Mr Gaehler responded to CIDB’s reply on achievement of targets, stating that the Committee was asking CIDB what it would do differently in 2013/14 in order to ensure that CIDB’s targets were met. He further asked when the new regulation be implemented.

Mr Ndendwa replied that the failure to achieve last year’s target was due to issues with the Contractors Registration Model (CRM) systems as well as unforeseen issues. He noted that CIDB was going to improve on its management as well as monitoring and evaluation in 2013/14.

Ms Ntisa added that CIDB was presently meeting with DPW to finalise the new regulations.

The Chairperson stated that the explanation that DPW provided guidelines on the presentation of the APP was unacceptable, noting that the guidelines ought to be corrected if it was not satisfactory.

The meeting was adjourned.
 

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