PRICE-FIXING
How construction bosses got off
THE head of the Competition Commission, which has fined 15 construction companies a total of just less than R1.5-billion for collusion, says it is now up to the boards and shareholders to “put the squeeze” on the executives of these firms.
It was found that the companies had colluded to drive up the price of contracts for public infrastructure projects worth R28-billion, most notably the stadiums for the 2010 Fifa World Cup.
But this week’s settlement has left a bitter taste in the mouth and the general consensus is that the culprits of private sector corruption have once again been let off lightly. Instead of praise for its work, the commission has taken a hammering.
Commissioner Shan Ramburuth, easily one of the most impressive, honourable and intelligent public sector office holders we have, says he can “kind of understand” the sentiment and “the moral outrage from which it comes”.
But the job of the Competition Commission is to stop anti-competitive behaviour. And as far as the construction sector is concerned, its investigation has made a giant contribution to this.
“I don’t want us to be overreaching our role here. We’ve done our bit; we’ve done what we needed to do in terms of our responsibility and our mandate. It is far more important for us to end the cartel than to fine.”
Ramburuth says “the bigger question” is whether the investigation and exposure of the guilty firms will be enough of a deterrent to stop it happening again — and, he says, it began having that effect the moment the commission decided to investigate the industry in 2009.
“The existence of the Competition Act and the activities of the competition authorities got these companies to understand the consequences of not complying with the law and therefore clean up.”
He says the fines, more than R300-million each for four firms, are “not to be scoffed at”.
But they were scoffed at, not least by the market. When the fines were announced, the share prices of the offending companies immediately went up, sending the clear message that they were much lower than expected.
And, certainly, in the context of the billions extra that taxpayers have had to pay for the World Cup stadiums and other infrastructure projects because of the collusive practices of these stalwarts of the local construction industry, R300-million does not sound like sufficient compensation at all.
Ramburuth says the commission had little choice but to agree to a lower settlement figure in exchange for full disclosure.
But the trouble is that the public was expecting a lot more. There were reports that multibillion-rand fines were on the table and that executives could end up behind bars. Why raise such expectations if the commission is going to meekly settle?
“I’m not so sure we raised public expectations,” says Ramburuth. “We had to have a trade-off between, on the one hand, all these cases, their complexity and the protractedness of the legal processes, and, on the other, exposing the culprits, bringing an end to cartels and ensuring that this behaviour doesn’t happen in the future. In weighing all that up, we put out an offer to firms to come clean in exchange for lower fines.”
He ascribes the hype around penalties to analysts making calculations on the basis of the maximum fine allowable — 10% of a company’s turnover. “Then that gets reported. We don’t put that out.”
Of course, whether the fine is R300-million or R1-billion, it will not be paid by the executives who perpetrated the scams. Whether the bill is paid by cutting labour costs — in other words, retrenching staff — or by shareholders, it is not going to dent the pockets of the real culprits. Even fewer of these executives are going to end up in jail.
Ramburuth says holding individuals accountable is not what the Com- petition Commission is about. “We might like to, but we can’t.”
The law does not provide for it. Legislation has been drafted to provide for individual criminal liability, but as things stand there is nothing the commission can do. He says this is the responsibility of the National Prosecuting Authority, but it agreed to wait for the current commissionled process to be concluded before deciding what to do.
He does not know what it intends to do, but as far as he knows “the door has not been closed on possible prosecutions”.
Of course, the executives of these companies have been lining up to say that the culprits have long since left.
“A lot of this was bequeathed on the current generation,” says Ramburuth. “But there are people who were involved in that period who are still working in the industry.”
Nor does Ramburuth buy the argument that they did not know what was going on.
“There’s a tendency for senior executives to say ‘We didn’t know’ and to use the rotten apples argument. When have you ever heard a CEO saying: ‘We don’t know how come we made so much profit, therefore we’re not going to take our bonuses.’ They’ll never do that.
“But when it comes to taking responsibility for anti-competitive behaviour, they’re quite happy to say ‘We didn’t know’.”
He says the people who should be holding individual executives accountable are their boards and shareholders, but this is not happening.
“What we’ve seen here is a breakdown in corporate governance. Boards and shareholders have an important role in holding firms accountable for how they operate in the marketplace.”
They need to “tighten up” their corporate governance, he says.
“For them to say they didn’t know what was going on is not good enough. Why didn’t they know? That’s an important part of the system and it needs to work.”
Ramburuth thinks the reputational damage incurred is a far bigger disincentive for breaking the rules than monetary fines.
“Firms are going to think very hard with respect to the reputational harm that being exposed for doing this sort of thing costs. If boards and shareholders put the squeeze on executives who cost them this, it would be a sufficient disincentive.”
The argument has been made that tendering for large infrastructure projects is cripplingly expensive and that a certain amount of cooperation by bidding companies is justified to avoid losing the R20-million cost of submitting a bid that fails.
Ramburuth says the law provides for a certain amount of “horizontal interaction” between competitors if it leads to “pro-competitive, proefficiency gains”.
“The law accepts that, for things to work more smoothly, competitors might have to meet to sort out certain things. But that is not what happened here. What happened here was colluding about things like margins and allocations. The meetings of the construction firms went way beyond what the law provides for.”