Picture: BUSINESS DAY
Picture: BUSINESS DAY

REPORTS that the Hawks are investigating serious tender irregularities in a number of large construction projects have resulted in South Africa’s biggest listed construction and engineering firms bringing down the shutters, citing confidentiality agreements with the Competition Commission and other parties.

The Hawks subsequently distanced themselves from the reports, saying they were not entirely accurate, but they have confirmed that large tender irregularities are being investigated, and it seems this includes the Cape Town World Cup soccer stadium project, which saw a cost escalation to more than R4.3bn, from an initial price tag of R2.9bn.

Investigations into the construction industry started in mid-2009, when the commission raided the offices of the country’s major cement producers. It now says it expects to reach settlements by the end of the year with "most" of the companies that co-operated with a fast-track process, but that excludes those companies that reserved their rights. Concluding the saga could end up taking five years or more.

According to Werksmans Attorneys, which released an instructive document on anticompetitive behaviour last week, one of the most common competitive transgressions is that of "cover pricing". In its simple form, this is a ploy used by colluding firms to give the impression of a competitive bid process. "Hard-core" cover pricing involves money or subcontracting agreements changing hands as compensation for the "losing" bidder.

According to Werksmans, simple cover pricing has been standard practice in construction the world over for years. So, to many industry participants involved in this practice in South Africa, "the fact that competition authorities regard it as a contravention came as a surprise".

In the UK, the Competition Appeal Tribunal found recently that although simple cover pricing is clearly illegal, it causes "much less harm" than hard-core cartel conduct. Werksmans says there are no South African precedents available to set a guideline for the likely view of the practice that local competition authorities will take.

However, it expects the commission’s approach will be to view cover pricing arrangements as a "hybrid practice", which amounts to both "collusive tendering and a form of price-fixing" in terms of the Competition Act.

That would indicate that some of the country’s biggest construction groups are in for a caning. Yet they would appear to have some scope to mitigate the damage, or at least mount a plea for leniency based on ignorance and their co-operation with the authorities once the abuses were exposed.

After all, construction and engineering companies often form syndicates to fulfil megaprojects such as the Gautrain or the Cape Town Stadium. The sheer size, cost and complexity of such projects demand this, but it can become difficult to maintain Chinese walls and differentiate between bids in such circumstances.

The government is often criticised by business for micromanaging competition issues and trying to use competition law to achieve unrelated policy goals. This stems mainly from the fracas over Walmart’s multibillion-rand acquisition of Massmart, which was opposed by three Cabinet ministers. But it also applies to the hostile takeover by Japanese firm Kansai Paints of South African industrial coatings company Freeworld Coatings.

In the latter case, the state was seen to "extort" concessions that were not merger-specific, and the Competition Tribunal later set aside a divestiture condition imposed by the Competition Commission. This has led to valid criticism that the system lacks expertise and that the authorities are overreaching.

Even so, big companies do themselves no favours by failing to ensure they comply with the law. Construction companies in glass houses cannot afford to throw stones.