I KNOW I am digging a hole for myself by not joining the lynch mob that howls daily for construction industry bosses to be fired, fined, banned or jailed following the decision by the competition authorities to fine them R1.4bn for collusion, mainly in the run-up to the Fifa World Cup here in 2010.
I guess I don’t get it. South Africa was awarded the World Cup in May 2004. In July 2006 — more than two years later and with the clock ticking — a meeting of executives is held at the offices of WBHO, one of the big constructors, according to City Press on Sunday. There they decide to divvy up the building of the stadiums, targeting a profit margin of 17.5% each.
Bloody idiots. What were they thinking ? Here’s what I think they were thinking (and no, I am not related to anyone in the industry, as one journalist inquired of me the other day).
The men meeting that day were faced with an almost impossible challenge. Of course, if what they were about to do was criminal, they must not escape prosecution. But the country needed five brand new football stadiums (Johannesburg, Durban, Cape Town, Port Elizabeth and Nelspruit) in three-and-a-half years. There was an immovable deadline (the Confederations Cup), not a sod had been turned, tendering for each would cost them, collectively, more than R1bn and take their best people about a year, the penalty clauses for late delivery were crippling, the client kept changing its mind and the unions were threatening to use the World Cup as a bargaining chip in successive wage rounds. In addition, these companies were involved in other work — the Gautrain, huge airport expansions in Johannesburg and Cape Town, and road projects that seemed to go on forever.
If they had not had their meeting that fateful day, how would things have panned out? What if WBHO had bid on all the contracts and won them all on price? Would it have finished them on time or would it still be putting the finishing touches to Nelspruit? In a completely non collusive world, winning them all would have been perfectly feasible.
The decision to collude around 17.5% profit margins would, I think, have been reached with the penalties in mind. Slip by a week and a lot of that would have gone. A month (not unheard of in construction — look at Eskom’s Medupi) and you might not have been paid at all. As it was, the stadiums were all built on time and, for a while, South Africa basked in the glory of a “successful” World Cup. The confessions of collusion spoil that, but what would we rather have had? I don’t think these firms could have competed “honestly” for all that work and come close to finishing it on time.
The fact is that much of the world’s industrial economy has been built by cartels, some secret and many tolerated. Sometimes it is impossible not to collude or, put another way, sometimes collusion may be in the national interest. Why else would an African National Congress stalwart such as Ketso Gordhan, now CEO of PPC, the cement producer, be calling for an ” Infrastructure Codesa” ? What he wants is an agreement on what is to be built and how it is to be priced. In other words, he wants the firms involved to discuss things like, um, price. He does not see it this way, but what he suggests is a form of collusion. The crucial difference is that this time it would be mediated by the client — the state. I think Gordhan’s idea is terrific.
According to the state’s own figures, construction industry profit margins are the lowest in the economy. And by City Press’s calculations on Sunday, if the target margin was 17.5% and the stadiums cost R15.4bn, then the raw profit to the builders would have been R2.7bn. Given that they have now been fined half of that by the Competition Commission in what was, in effect, a plea bargain and have become the nation’s whipping boys in the process, they must be wishing they’d rather tried their luck in the courts.
As it is, they’re now going to be sued and investigated until the cows come home. And it’s not just the construction industry that’s in trouble. The quantity surveyors who failed to query the remarkable uniformity in margins need to explain themselves too. And the architects who commissioned the quantity surveyors. The builders are going to wish they hadn’t so meekly agreed to hand the Competition Commission R1.4bn. They’ll need at least that again to fund the legal bills they’re going to be getting.