Financial Mail - Investors Monthly - - Contents -

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

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