Changing the behaviour of construction firms
Builders are crooks. It’s a phrase commonly used by frustrated homeowners and, sadly, though it probably applies to only a few companies, the tardy actions of a few taint the industry. But these are small builders, often fly-by-nights who abandon their work and disappear if they receive an upfront payment. Few, if any, belong to the Master Builders Association, so apart from a civil claim there is little that ripped-off homeowners can do.
However, recent events reveal that the big boys, the JSE-listed construction companies, are guilty too, and the financial numbers are huge. Latest is a looming battle at the competition tribunal involving alleged collusive tendering by Group Five on a SA National Roads Agency (Sanral) contract to rehabilitate National Route Five in the Free State. The commission has indicated it will push for the maximum penalty — 10% of annual turnover.
Fining listed construction companies guilty of rigged tenders is all very well, but is it going to change their behaviour? Murray & Roberts has already paid R309m for contravening the Competition Act, Wilson Bayly Holmes-Ovcon (WBHO) R311m. The roots of the problem stretch way back. In 2009 the competition commission launched an investigation into the construction industry, resulting in 15 companies paying penalties totalling R1,46bn. However, that apparently did not stop illegal practices. It may have hurt smaller construction companies but the large listed players can absorb the fines.
Now the City of Cape Town has lodged a R428m civil damages claim against a number of companies it alleges colluded on tenders for building the Green Point Stadium. The allegation is that Group Five had collusive agreements with WBHO and Murray & Roberts, which resulted in Group Five submitting a lower bid price so it could win the tender for construction of the stadium. Tenders for big projects like this are big money for construction companies. So they refer prices to each other to decide who is going to win the tender.
Surely there is enough construction work in SA, and the rest of Africa, for construction companies to operate legally. The infrastructure programme in SA has been spluttering but in time it must come through. There are many large capital projects that cannot be ignored. Africa is crying out for large infrastructure projects, necessary to speed up trade through building roads and rail links.
Even lower-margin, low-cost housing in SA provides opportunities, with government promises to build more low-cost homes. But what happens? Some of the building programmes have disappointed the new homeowners. Shoddily constructed “new” houses have collapsed only months after being erected.
It’s not only big money but also share price performance that rewards the listed construction companies. Cannon Asset Managers CEO Adrian Saville cites WBHO as one of only a handful of companies to beat the downturn from 1997 to 2013 through above-average growth in earnings. But that is history. On March 17 Group Five’s share lost nearly 4% after allegations of collusion.
In the end it will take more than talk about profits and share prices to clean up the industry. More costly is the damage to reputations. That sticks. Guilty companies will be under close scrutiny when tenders go out.
Recent events reveal that the big boys, the JSE-listed construction companies, are guilty too