Cartel's damage was widespread

IN THE aftermath of the Competition Tribunal’s confirmation of the settlement agreements reached by the colluding construction companies last week, it is worth reflecting on the damage the cartel did to South Africa.

Collusion, which contravenes section 4.1b of the Competition Act, is considered the most egregious of competition law offences. At its core, it simply redistributes wealth from consumers to cartel members by inflating prices with no improvement in quality or efficiency.

Cartel conduct not only affects prices in any specific market, it distorts prices in the entire economy and affects the way resources are allocated. Widespread collusion also breeds mistrust of market outcomes as well as scepticism of the ability of companies to meet consumer demands efficiently.

Collusive practices undermine the principles of a fair and efficient economy — the main objective of the competition authorities.

In this case, the construction cartel operated for more than 30 years. They used various mechanisms to keep the arrangement, including paying a “loser’s fee”.

This happened in roughly 84 projects, where cartel members that won rigged bids compensated the losing companies.

It worked like this: firstly, construction firms would predetermine which of them would win a particular tender. This “winner’’ would then include additional fees in its bid, in excess of the initial value of the project cost, which may already have been inflated.

The winning company would then pay a portion of that extra fee to each of the losing cartel members as a reward. These loser’s fees ranged from R50000 per company for smaller projects to R1-million for larger projects. So in at least 84 cases, consumers were directly subsidising payments to companies for losing rigged tenders.

When it comes to the 2010 World Cup stadiums, we know that the cartel members agreed to a 17.5% profit margin.

In a project involving the construction of a railway line, cartel members agreed to a 12.5% markup. Although we cannot determine the extent of the overcharging without establishing the markup across all projects, these two examples provide clear evidence of attempts to fix profit margins.

In total, the Competition Commission uncovered cartel conduct in about 300 projects, across all levels of government in all nine provinces.

The cartel’s conduct extended to both private and public sector projects. A slight majority of these projects, 160 in total, fall outside the ambit of the Competition Act as they took place more than three years before the commission began its investigation.

The commission could prosecute companies only for anticompetitive conduct in the remaining 140 projects.

The extent of the harm is clear from the geographic dispersion of the projects. Of the projects, 40 had an effect in 13 other African countries: 10 SADC countries and three in west Africa.

In South Africa, KwaZulu-Natal and Gauteng were the provinces worst affected with 80 and 67 reported incidences of collusion respectively. Next were Western Cape (26) and Limpopo (22) projects.

Although the vast majority of affected projects were in the private sector, 75%, the public sector projects were far larger in value, accounting for 60% of estimated total project value.

The projects span a wide range of sectors, from transport to education and, shockingly, even the notfor-profit sector. The view that the construction cartel operated largely in relation to World Cup stadiums is therefore misleading. The fact is that less than 3% (seven) of the 300 projects related to World Cup stadiums.

To get a further idea of the widespread economic impact, consider that 58% of the projects affected commercial enterprises in sectors that contribute significantly to our national income, namely retail (21%), manufacturing (18%) and mining projects (18%).

The construction cartel also affected all modes of transport: 20% of the total projects fell within this sector. This meant an inefficient redistribution of profit from other income and job-producing sectors.

It is hoped that the Competition Commission’s settlements will prove to be a deterrent to companies in other sectors as well.

There has been an expression of remorse from some, with executives publicly expressing regret for their companies’ conduct.

We hope that breaking this cartel will lead to a deepening of our competition culture.

• Qobo and Paremoer head up policy in the advocacy and stakeholder relations unit at the Competition Commission

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