Opinionista Trudi Makhaya 14 April 2014

Plus ça change…

Imposing fines on companies that undermine competition in illegal ways serves many purposes, including deterring companies from engaging in such behaviour in the future. Yet when one considers the justifications put forth and the belligerence displayed by some firms (or to be fair, their leaders) in the construction sector, there is substantial cause for concern.

Last Wednesday I had to suffer through a long tirade by a senior executive about the lack of understanding of free market principles by ordinary South Africans. A victim of a bad case of too much bubbly/ too little hors d’oeuvres, he unleashed this lecture without the slightest acknowledgement that many ordinary businesspeople in his sector, namely construction, did not much appreciate the principles of the free market for a long time, given their fondness for tender rigging and other forms of collusion.

The competition authorities are still processing cases related to the construction collusion scandal. You will recall that fifteen firms entered into settlement agreements with the Competition Commission, wherein they admitted to instances of collusion. In exchange for frank disclosure, they received lighter penalties than they would have in the absence of such a settlement. However, there were cases of collusion that were not covered by that fast-track settlement process for various reasons. The firms may have been disputing the facts as they were understood by the Commission. In other instances, the collusion might have been uncovered before the fast track settlement process was embarked upon but were put on hold to allow that process to take its course.

Last Friday Business Day ran a cover story on one such a case, involving a tender issued by Transnet for the upgrade of the Sishen-Saldanha railway line. The Competition Tribunal, in assessing the settlement put before them by the Commission and WBHO, raised certain doubts about the fullness of the disclosure provided by the firms implicated in the collusion.

In the aftermath of the uncovering of the collusion scandal in the construction industry, many leaders in that sector have vowed to improve their business practices and to ensure that it never happens again. Imposing fines on companies that undermine competition in illegal ways serves many purposes, including deterring companies from engaging in such behaviour in the future.

Yet when one considers the justifications put forth and the belligerence displayed by some firms (or to be fair, their leaders) in the construction sector, there is cause for concern. Add to that some of the questions that are being raised by the Tribunal on the truthfulness of the firms coming forward to settle matters with the Commission, the picture gets murkier.

To what extent have these companies distanced themselves from collusion and other anti-competitive practices? There are industry leaders still peddling the story that the collusion had to do with managing limited capacity to build World Cup stadia. Even though these stadia represent less than 5% of the 300 projects that were revealed during the fast-track process. In a climate where some industry leaders cloak themselves with empty free market rhetoric (whilst they reject its basic principles) or complain about being subjected to a ‘lynch mob’ (when many members of the public think the fines imposed on them were rather low), there is little to inspire confidence that cartels will not form again, at the expense of ordinary South Africans.

This is an anxiety that stretches beyond the construction industry. In the fifteen years that the post-Apartheid competition authorities have been in place, cartels have been uncovered in crucial industries such as bread, cement, glass, air cargo and steel. South Africa boasts solid anti-trust legislation. According to the World Economic Forum (WEF) Global Competitiveness Report of 2013-2014, it is ranked eight out of 148 countries for the effectiveness of its anti-monopoly policy. And awareness has been raised about the harmful effects of these practices. However, international literature and experience has shown that cartels reconstitute themselves even after having been uncovered and penalised.

During the fast-track settlement process covering the construction industry, the Tribunal probed the companies before them on how they intend to eradicate these market distorting and illegal practices from their operations. It was interesting to note how few of the companies had taken action against the executives directly involved in collusion. In fact, in some instances, the executives were still involved in bidding for tenders.

The Tribunal suggested a few measures to be put in place to enhance accountability measures in industry, such as the development of a charter of principles that executives and directors sign to demonstrate explicit commitment to a different way of doing business. This is important in an industry where many executives who came before the Tribunal declared that they had no idea that collusion was going on, in spite of its pervasiveness. A clear commitment, alongside other pro-active developmental initiatives, would help the industry to regain the trust it has lost. Like the Tribunal, I think that such a charter could be implemented for the economy at large. This is just not a matter of government-business trust, but also the legitimacy of business in society’s eyes.

Across the sectors that are prone to restrictive practices, the Commission will need to ensure that its screening and monitoring mechanisms can detect future wrongdoing. Our much-admired competition law is only effective if the probability of getting caught is high.

There is a need for determined leadership from the private sector’s side too. This will be out of self-interest. Just under half of the projects that were rigged were commissioned by private sector clients. If corporate South Africa is concerned about the cost of doing business, it can start by sweeping its own backyard of practices that raise that cost. It will also be interest of growth and development in the country. Government would not pay too much for key infrastructure. Households, especially poor households, would better afford basic commodities such as bread. DM

Trudi Makhaya, former Deputy Competition Commissioner, is an independent economist and strategist. A Rhodes scholar, she has also worked at Deloitte and Genesis Analytics.


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