The Competition Commission (CC) briefed the Committee on how the “fast track” process had been used to deal with its investigation into collusive conduct in the construction industry. Firms involved in collusive conduct had been invited in 2010 to come forward voluntarily to settle these contraventions. The aim had been to incentivise firms to implicate those involved, by offering leniency. The advantages were that legal costs would be minimised, and the industry would become more competitive. A total of 21 construction firms had applied for settlement, and it was found that there had been 300 separate contraventions. Three of the 21 firms had been found not to be liable because they had been granted leniency, and a further three decided not to settle – one was still in negotiations with the CC, and the other two would be prosecuted. The “fast track” project had run concurrently with the corporate leniency process.
The way in which the CC’s penalties had been calculated was explained to the Committee, indicating a sliding scale had been applied to the percentage of annual turnover, ranging from 1% to 12%, based on the number of contraventions, but also taking into account such aspects as the number of contracts won or lost, the size of the contract, and whether the firm had settled any claim for damages. The total amount paid in settlement was R1.47bn. There was now an opportunity for clients of the projects to consider civil damages. None of the firms implicated had taken the option of settling claims before the matter went to the Competition Tribunal. Now that the Tribunal had issued consent agreement certificates, the firms had admitted to collusion and any client could use that certificate in a civil court to claim damages.
The CC had decided to complement its investigative work by intervening from an advocacy point of view. To deter bid rigging from happening, it had provided training for 1 200 procurement officials at all levels of government, as well as at state-owned entities, to enable them to identify this type of conduct in the tendering process. This included 266 procurement officials in the Public Works Department throughout the country, as their important role in South African procurement was recognised by the CC. It had also drafted and introduced a Certificate of Independent Bid Determination, in which bidders declare that they have not communicated among themselves prior to submitting their bids. It had become a legally binding document. Anti-bid rigging training had also been conducted at the Public Administration Leadership and Management Academy (PALAMA), and the objective was to make this type of training a continuous process.
The Construction Industry Development Board (CIDB) said it appreciated the work done by the CC, because if it had not been done, the CIDB – which is recognised as the regulator of the industry – would not have known that this collusive conduct was happening. The CIDB considered this a “dark past” of its own history, pointing to the need to strengthen its Code of Conduct. The Code dictated that a contractor must not engage in collusive practices which had a direct or indirect adverse impact on the cost of the project to the employer, and collusive behaviour was therefore a clear violation of the Code. The CIDB considered collusion in the industry unacceptable. Action would be taken through proper processes, so that whatever was done, the integrity of the CIDB could not be questioned. Sanctions would have to be commensurate with the damage which had been inflicted, so that offenders were suitably punished and deterred from unacceptable conduct in future. There were nine different forms of sanction which the CIDB could impose, and these included ordering the removal of a contractor from the register, downgrading a respondent, imposing a fine of up to R100 000, restricting or prohibiting the respondent from participating in public sector construction works procurement for up to ten years, and ordering the cancellation of a respondent’s registration, and placing a prohibition on re-application for registration. An issue to emerge from the weak governance situation at the CIDB was its integrity level, as most of the people involved in governing the industry came from within the industry itself, and this represented a real, or potential, conflict of interest.
Members’ questions and comments focused strongly on the need for the regulations to be revised so that the CIDB had more “teeth” to deal with the operators in the construction industry, as well as the professionals associated with the industry. Collusion among the big companies meant that small, emerging contractors were effectively sidelined, and this was inhibiting the entry of new participants into the industry. It was also slowing down the pace of transformation.
The Chairperson welcomed the Deputy Minister of Public Works, Mr Jeremy Cronin, the Director General of the Department, Mr Mziwonke Dlabantu, and the delegations from the Competition Commission (CC) and Construction Industry Development Board (CIDB).
Competition Commission presentation
Ms Trudi Makhaya, Deputy Commissioner of the CC, introduced the Commission’s presentation by saying that it would indicate what had been achieved in uncovering the inappropriate conduct in the construction industry, and the penalties that had been imposed. She added that other approaches would have to be considered in terms of policy and monitoring mechanisms to ensure this type of collusive behaviour would not happen again.
Mr Oliver Josie, Deputy Commissioner of the CC, gave the background to the investigation, pointing out that the construction industry was one of the priority areas for the Commission, particularly in regard to investigating cartel conduct. It was already looking into complaints coming in from municipalities around the country relating to the escalating costs of building the World Cup stadiums. In late 2009, a company had taken advantage of the CC’s corporate leniency policy, and had provided extensive information on bid-rigging in the industry. This had prompted the CC to look at the widespread collusion in the construction sector. Cartel conduct was penalisable by law, as it amounted to an agreement between firms in the same line of business which would lead to price fixing, market allocation or collusive tendering. With the “Fast Track” project, one of the conducts investigated was collusive tendering, or bid rigging.
It had been found that firms tendering for public and private sector contracts would exchange information with other “tenderers”. This was clearly a punishable offence, in terms of the Act. These firms would actually exchange “cover prices”, where the one not wanting the business would submit an inflated tender so that the other would get the contract – usually at an inflated price as well. In some instances, the successful tenderer would compensate the other bidder for submitting a “cover price.”
Aware that multiple contraventions were involved, the CC realised it needed to find an efficient way to conduct its investigations. After considering approaches used in other parts of the world, it decided on a “fast track” process, and firms involved in collusive conduct had been invited in 2010 to come forward voluntarily to settle these contraventions. The aim was to incentivise firms to implicate those involved, by offering leniency. The advantages were that legal costs would be minimised, and the industry would become more competitive.
Mr Josie said 21 construction firms had applied for settlement, which meant a lot of information had to be analysed. It was found there had been 300 separate contraventions, and in terms of the Act, the CC had to separate conduct that was prescribed from conduct that was not prescribed – which was a period of three years from the initiation of a complaint. The CC had initiated a complaint in February and September of 2009, so the prescription period went back to those months in 2006. Three of the 21 firms had been found not to be liable because they had been granted leniency, and a further three decided not to settle – one was still in negotiations with the CC, and the other two would be prosecuted. The “fast track” project had run concurrently with the corporate leniency process. Firms were penalised for both disclosed and undisclosed contraventions.
The investigation had culminated in July 2013, and the matter had gone to the Competition Tribunal for it to make consent agreements, between the CC and the firms willing to settle, an order of the Tribunal. Phase 2 would involve the prosecution of those firms that had decided not to settle their contraventions.
The way in which penalties had been calculated was explained to the Committee, indicating a sliding scale applied to the percentage of annual turnover, ranging from 1% to 12%, based on the number of contraventions, but also taking into account such aspects as the number of contracts won or lost, the size of the contract, and whether the firm had settled any claim for damages. The total amount paid in settlement was R1.47bn.
Mr Mziwodumo Rubushe, Head of Advocacy: Consumer Commission, said the investigations had identified which government departments and state-owned enterprises had been affected, and a decision had been made to engage with them and to indicate their right to institute civil damages claims. There had also been engagement with other stake holders in the private sector.
Mr Josie said there was now an opportunity for clients of the projects to consider civil damages. None of the firms implicated had taken the option of settling claims before the matter went to the Competition Tribunal. Now that the Tribunal had issued consent agreement certificates, the firms had admitted to collusion and any client could use that certificate in a civil court to claim damages.
A number of legal challenges had been presented by the firms, mostly involving the period of prescription and the methodology involving turnover which had been used in imposing penalties.
Mr Rubushe said the CC had decided to complement its investigative work by intervening from an advocacy point of view. To deter bid rigging from happening, it had provided training for 1 200 procurement officials at all levels of government, as well as at state-owned entities, to enable them to identify this type of conduct in the tendering process. This included 266 procurement officials in the Public Works Department throughout the country, as their important role in South African procurement was recognised by the CC. It had also drafted and introduced a Certificate of Independent Bid Determination, in which bidders declare that they have not communicated among themselves prior to submitting their bids. It had become a legally binding document. Anti-bid rigging training had also been conducted at the Public Administration Leadership and Management Academy (PALAMA), and the objective was to make this type of training a continuous process.
Construction Industry Development Board presentation
Ms Lindelwa Myataza, Deputy Chairperson of the CIDB, and chairperson of the task team on collusion in construction cartels, said the presentation would deal primarily with the Board’s responses to the CC’s findings. It would also articulate the range of sanctions available to the CIDB, in terms of the Act.
Ms Hlengiwe Khumalo, Acting CEO of the CIDB, said she would focus on the procedural process to be followed in terms of the DIDB’s regulatory framework, the available sanctions for firms found guilty of collusion, and the Board’s commitment to prevent corruption and collusion. Fifteen companies had been fined, with ten of them registered as grade 9, 3 as grade 8, one as grade 7, and one as grade 6 – in other words, those involved in collusion were mostly large firms.
During the Competition Tribunal processes, the CIDB had accepted that anti-competitive practices in the industry were widespread and went back a long way, but the intention of the Competition Commission had not been to apply punitive measures, but rather to prevent future collusive practices through the corporate leniency policy and the “fast track” process. During the hearings, there appeared to have been a lack of adequate information owing to the alleged unavailability of relevant personnel due to retirement and resignation. Most of the funds received through collusive practices had been recorded under “plant hire” in the firms’ financial statements. Most firms had said that measures had been put in place, including training, to prevent future contraventions, but some had not yet implemented disciplinary proceedings within their own firms. The CIDB appreciated the work done by the CC, because if it had not been done, the CIDB – which is recognised as the regulator of the industry – would not have known that this was happening. The CIDB considered this a “dark past” of its own history, pointing to the need to strengthen its code of conduct.
In 2011, the CIDB had conducted its own research into the firms involved in collusions, and had found that they accounted for 45% of the total construction of projects valued at over R100m. The approximately 300 projects implicated had a combined value of more than R26bn.
Ms Khumalo briefed the Committee on the CIDB’s regulatory framework, and described the Code of Conduct which applied to all parties engaged in construction procurement. The Code dictated that a contractor must not engage in collusive practices which have a direct or indirect adverse impact on the cost of the project to the employer, and collusive behaviour was therefore a clear violation of the Code. The procedural process for investigations and disciplinary hearings involved the appointment of an investigating officer, who had to report to the CIDB on the matter within 30 days, and an independent investigating committee which included people with relevant expertise and a qualified legal representative. Questions had been asked as to why the CIDB had remained quiet when so much focus had been placed on collusion in the industry through the CC’s actions, but the Board procedural processes required that they wait for the Competition Tribunal complete its work before the CIDB could take action.
There were nine different forms of sanction which the CIDB could impose. These were:
• Ordering the removal of a contractor from the register;
• Issuing a warning to the respondent, which could be in effect for up to a year;
• Downgrading a respondent by a maximum of two grades;
• Imposing a fine of up to R100 000;
• Restricting or prohibiting the respondent from participating in public sector construction works procurement for up to ten years;
• Ordering the cancellation of a respondent’s registration, and placing a prohibition on re-application for registration;
• Making a cost determination that the accused, the CIDB or the party which initiated the investigation, must defray all or part of the costs incurred in the inquiry;
• Ordering specific performance relevant to the charges brought against the defendant;
• Any combination of these sanctions.
As part of its plans for 2014-15 involving its commitment to prevent corruption and collusion, the CIDB was developing and piloting requirements for transparency and integrity systems. These would be ready by the end of the year. It would also develop and submit an anti-corruption model to the Board by March 2014. A further initiative was investigating the feasibility of identifying a best practice for integrity management systems, which could lead to recognition of such systems for grade 5 to 9 contractors.
The CIDB considered collusion in the industry unacceptable. Action would be taken through proper processes, so that whatever was done, the integrity of the CIDB could not be questioned. Sanctions would have to be commensurate with the damage which had been inflicted, so that offenders were suitably punished and deterred from unacceptable conduct in future. Since May, the Board had appointed a task team, developed the terms of reference for the appointment of an investigating officer and investigating committee, arranged for a declaration of conflict of interest to be signed by board members, and approved the appointment of a legal advisor and the terms of reference for the officer and committee. Given the magnitude of the task facing the Board, the task team had recommended the appointment of a senior legal counsel to ensure all the proper processes were followed.
The Board needed advice around issues of conflict of interest, and needs to understand the scale and scope of the investigations which it will be embarking on. There were complex matters to be considered, and the CIDB’s own regulations had shortcomings, including contradictions in the legislation. For instance, the registrations of some of the companies involved had lapsed and had not been renewed, and the question was: what should the CIBD do next?
Director General’s comments
Mr Mziwonke Dlabantu, Director General of the Department of Public Works (DPW), said there had been engagement with both the CIDB and CC on a number of occasions in order to improve procurement controls within the organisation. Meetings had been held at board and officials level, the last of which would be held within the next two weeks, at the request of the Minister, to deal with the issues and prevent further collusion taking place. The DPW realised that there were systemic problems involving the governance structure of the CIDB, including the appointment and constitution of the Board itself, which affected its ability to protect the public against the practices which had been identified. There were also systemic weaknesses within the DPW relating to its oversight over its own institutions, from both a policy and performance point of view.
An issue to emerge from the weak governance situation at the CIDB was its integrity level, as most of the people involved in governing the industry came from within the industry itself, and this represented a real, or potential, conflict of interest. The DPW wanted to help the CIDB to address this. At a general governance level, there needed to be a coordinated inter-governmental approach involving all the various departments and the entities reporting to them.
Deputy Minister’s comments
Mr Jeremy Cronin, Deputy Minister of Public Works, paid tribute to both the CC and CIDB for their excellent and inspiring reports. The fines of R1.47bn which had been imposed indicated the sheer scale of the challenge, but they represented only the tip of the iceberg of what was a deep-seated problem. Although the DPW was often singled out over corruption, and rightly so, this was a problem that affected both the public and private sector. Furthermore, South Africa was not the only country where collusion was being investigated – the same process was being carried out in the Netherlands, United Kingdom, Canada and Hong Kong (where a court had ruled that collusion was an acceptable behaviour!)
The CC had looked at the way in which collusion had impacted on price escalations, particularly in the public sector, which affected taxpayers. The CIDB, for its part, had to consider how it could give more effect to its developmental role, as collusion strangled the development of new players and constrained diversity in the construction sector.
Ms A Dreyer (DA) said plea bargaining had resulted in reduced fines. How had this been of benefit to the CC? What would the fines have been if there had not been plea bargaining? Where had the R1.47bn in fines gone to? Instead of paying fines, could the construction firms involved have been given the option of building schools or other infrastructure?
Mr Rubushe said the Competition Commission had been asked why it had involved itself in something like the “fast track” process. It had considered the matter, and realised it would have cost the CC about R54m to investigate each collusive project – and appeals could have added a further R102m. This had informed the decision to adopt the “fast track” process, which had provided the advantages that clients could now claim civil damages, and processes had opened up for the CIDB to take appropriate action in the future. The issue of time had been important, as it would have taken two years to investigate just one case, and with 300 cases to be investigated, it was far better to have followed the “fast track” process.
All the fines were paid to the National Treasury, and not to the Competition Commission.
Firms could not be offered the option of building schools or other infrastructure, as the Act was prescriptive in this regard, and allowed only for the imposition of fines of up to 10% of the previous year’s turnover. Any other form of sanction would therefore be ultra vires.
Ms P Ngwenya-Mabila (ANC) said she was concerned that the CIDB had been operating without a legal adviser. Why was it taking so long to appoint an investigating officer and investigating committee? What was the future role of the CIDB? Did it have the capacity to carry out the investigative work performed by the CC? What systems did it have in place to deal with the regulation gaps which could affect collusion issues in the future?
Ms Khumalo said the task team appointed to deal with collusion had advised the Board that as this was the first time the CIBD would be dealing with an issue of such magnitude, it needed to tread very carefully. It recommended that it needed strong legal advice to ensure it did not falter in applying its regulations, and this support was required specifically to deal with the construction cartel issues. This did not mean that the CIDB did not have access to legal advice if it needed it.
The Board appointed its investigating officers and the investigating committees for a three-year term, and in this case, the current officers’ term expired at the end of August. With the CC presenting its findings only at the end of July, and considering the amount of time it would take to finalise the investigation, it was decided to extend the investigating officers’ contract until they had completed the work on the cases they were dealing with. This meant the CIDB had to start the parallel process of appointing a new officer and committee to handle the many other issues it needed to investigate. The appointments would have to be advertised in the state tender bulletin, and then in the press, with the bid period closing after a month.
Ms Khumalo said the CIDB did not have the capacity to deal with the collusion issues on its own. This was why it was working closely with the DPW to assist it, and why it had appointed legal advisors for support.
The CIDB had plans to deal with the regulation gaps, and the DG had mentioned that the DPW would be looking at the legislative framework from a policy point of view. Some of the people involved in drafting the original legislation which led to the establishment of the CIDB were former CEOs of the companies it was dealing with today.
Whereas the Consumer Commission looked into anti-competitive behaviour in any sector of the economy, the CIDB adopted a holistic approach to all issues affecting the construction sector, particularly those involving compliance with its own prescripts.
Ms N November (ANC) said that although 1 200 officials had been trained to deal with collusive practices, she was worried that not all municipalities had been covered, particularly the smaller ones.
Mr Rubushe said most of the municipalities had been covered, but the process was not yet complete. The CC had started with the large metros and cascaded down to the district municipalities. Only Polokwane and the Northern Cape were outstanding. Results of the training were already being seen, with complaints already coming in from municipalities over incidents of collusive tendering.
Mr K Sithole (IFP) wanted to know why three of the firms implicated in collusion had refused to settle. Now that the CC had completed its investigations, what was the CIDB going to investigate?
Mr Oliver said two of the companies had challenged the Commission’s interpretation of the prescription rule, and would be prosecuted. The third was challenging the evidence, as well as the prescription rule, although it still wants to pursue a possible settlement with the Commission.
Mr L Gaehler (UDM) said the Deputy Minister had been right to refer to the impact which collusion had on the development of contractors. He also called for a review of the CIDB’s policies which, he claimed, were “brutal” when dealing with emerging contractors, and resulted in their being downgraded and remaining in the lowest grades.
Ms Rushube agreed that the collusion of the cartel had resulted in emerging contractors being excluded, and was restricting new entrants into the industry, because they could see that those already in the industry were not progressing. The CIDB grades were saturated at the lower level, and the Board was looking at steps to address the situation.
Ms N Ngcengwane (ANC) expressed concern that although the value of the projects involved had been R26bn, the fines had totalled only R1.47bn – despite the fact that these companies had been deliberately “milking the government dry.” Considering that the implicated firms dealt with 45% of the major construction projects, and the National Development Plan (NDP) included many large projects, what was the CIDB”s “Plan B”? When would the investigating officer be appointed? How was the CIDB going to deal with industry members being both “players and referees” through their involvement with the Board? What was going to happen with the construction companies that had refused to settle? She echoed Mr Gaehler’s concern that a lack of transformation within the CIDB was restricting the growth of small emerging contactors.
Ms Rubushe said that historically, the “referees and players” situation had existed in the construction industry. This was an issue which the DPW, in its oversight role, was considering. The lack of transformation in the industry was concerning. The CIDB was looking beyond just dealing with collusive activities in future, such as establishing a register of professionals associated with the industry. Those construction companies involved in collusion were not working alone, and this was why the professionals themselves had to be considered.
Mr P Mnguni (COPE) said that although there seemed to be an awareness of the direction to be taken, the transformation agenda had been damaged by the anti-competitive behaviour, and in this respect the presentations had been disappointing.
Mr J van der Linde (DA) asked why the names of all the entities involved in the collusion activities had not been listed in the presentation, and whether the CC would be looking at other projects, such as the Kimberley prison.
Ms Rubushe said that although some of the names had been listed, because there were 300 cases involved, it was not possible to list all the entities involved in the presentation. The CIDB’s projects in future would not be limited to anti-competitive activities
Mr Gaehler supported the Director General’s view that those implicated in collusion had been responsible for the drawing up of the regulations governing the construction industry. This had resulted in the legislative gaps which allowed grade 9 level companies to bid for any contract, but which imposed requirements making it impossible for grade 1s to bid for the large contracts. He suggested that the Committee request the DG to convene a stakeholders’ indaba, pioneered by the DPW, no later than December 2013. New regulations were needed to resolve the situation. His proposal was supported by Ms Ngwenya-Mabila.
Deputy Minister’s closing remarks
Mr Cronin said that as the range of punitive measures was being worked out, there would be a huge outcry on the basis that the “big players” were needed to roll out the government’s massive multi-year infrastructure programme. These companies had paid out R1.47bnin fines, but none had yet gone into liquidation. They had been operating with large surpluses, some of which had been earned through corrupt and collusive behaviour. Apart from the fines, the government was looking at a range of other issues. A strategic approach covering all government entities was required. It was looking strongly at bringing criminal cases against individuals, and not just corporate bodies, so that not only the “small guys” ended up in prison. There was also the matter of civil cases, where many metros had lost significant amounts of money – the Cape Town stadium was an example.
One had to ask what the companies themselves had done to take disciplinary action internally. Had they taken action against the individuals involved, or had they received only “a slap on the wrist”? This was an area which the CIDB could investigate. SARS and the Treasury were looking into the way in which large construction companies were “off-shoring” to avoid their tax responsibilities. While this was not illegal, should these companies be benefiting from the large contracts?
De-registering or non-registering might be a ploy to avoid investigation, so it was necessary to ensure that the regulations affecting those not registered really had “teeth.” This should include compliance within government departments, in registering their projects. If this had been in place earlier, the collusive behaviour would probably have been picked up a lot earlier.
The role of the CIDB was not necessarily to promote the interests of the emerging contractors, but rather the public interest in the construction sector. The fact that the lowest grades were heavily populated with small contractors was not unique to South Africa – it was the same all over the world. It was dangerous to promote emerging contractors against the “emerged,” as this approach quickly became racialised – transformation was a “slippery” word. Small operators were needed, and there was a place for diversity of capacity, and the big operators needed to be transformed. If one looked at the grade 9s, were the particular skills and capacity required for the developmental needs of South Africa being taken into account? The CIDB’s founding regulations needed to be changed in order to make it a “developmental” board. The DPW looked forward to receiving recommendations from the Committee on how to move forward quickly on the matter.
The Chairperson expressed concern at the absence of the media, as the Committee was representing the public, and there was a need to create awareness that ordinary people were suffering as a result of collusion, because the cost of building materials was going up. That was why the “big guns” should be exposed.
The meeting was adjourned.
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