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Inside the construction cartel's 'breakfast club'

Apr 22 2018 06:43
Dewald Van Rensburg

New testimony in the ongoing construction cartel prosecution case has revealed the almost humdrum
day-to-day mechanics of rigging tenders on everything from hotels to the Lesotho Highlands Water Project and the Gautrain.

A witness for the Competition Commission has even revealed how cartel members fought with each other because other members were trying to “rip out the guts” of the Gautrain by demanding an embarrassingly high cover price from other cartel members.

Evidence from Kenneth Jones, a now unemployed former general manager at construction firm Aveng’s subsidiary Grinaker, has been cross-examined during the past two weeks.

The hearings deal with the geotechnical subsector of the construction industry – the companies that prepare the ground for large structures by installing reinforced concrete piles and do large-scale grouting to stop water from flowing into foundations.

These hearings, however, still stem from the original 2009 revelations about widespread cartel activity in the construction sector, which has led to major settlements along the way.

According to Jones, the geotechnical cartel involved the companies Esorfranki, Dura-Soltanche Bachy, VNA Piling, Geomechanics, Diabor and Rodio Geotechnics.

They allegedly rigged contracts regarding hotels, stadiums and private industrial facilities.

Jones was retrenched last year and told the tribunal that he was now basically unemployable.

“I have been in geotechnical engineering for more than 30 years. All the people in this country who are involved with geotechnical engineering, and certainly the bigger players, all know that it was myself and Mark Laidlaw who went to the Competition Commission and started this process,” said Jones.

“So there is absolutely no chance that any of those guys will employ me. It does not matter what I say here, and I am fully aware of that.”

According to Jones, the collusion in the sector started as far back as the 1970s.

Jones testified that his company got involved in the collusion via a joint venture with Rodio on the Lesotho Highlands Water Project in the early 1990s.

In KwaZulu-Natal and Gauteng, the cartel was formalised with the nominal competitors dividing work among themselves using written “scorecards”.

The scorecard would note each tender a member of the cartel got and would be used to calculate who was “ahead” or “behind” on their allocation of work.

In Johannesburg, there were allegedly two different “books” – one for allocating grouting contracts and one for piling contracts.

The organising principle was to maintain everyone’s market share, claimed Jones.

Companies that were not part of the club and who made inroads into the market were called “terrorists”, said Jones.

“There are two ways of making sure that a particular party gets a job. You either cover them, or you may not submit a bid at all – that often happened,” said Jones.

Sometimes the companies would pay each other compensation for losing tenders on purpose, which they called “add-ons”, he said.

According to Jones, there were regional “scorecards” for at least KwaZulu-Natal and Gauteng, where rival companies’ tenders were racked up to determine who should get the next one. The conspirators allegedly called it “The Book” and would refer to the arrangement as the “book club” or the “breakfast club”.

Some of the meetings were held in guest houses in the Johannesburg suburbs of Auckland Park and Fourways, Jones said. On other occasions, they met at their companies’ office or had breakfast meetings in restaurants.

The geotechnical cartel stopped its meetings in 2006, said Jones.

According to Jones, the cartel ended in a “happy divorce” and the companies would still occasionally rig tenders that they were invited to bid for.

Meetings were held once a month and sometimes more often than that, he said.

DON’T OVERDO IT

As a general rule, the cover prices that colluders who wanted to not get the tender provided would be at least 5% higher than the price that was being “covered”.

According to Jones, “we would try and keep the prices reasonably market related” so that the cartel would not be found out.

“The risk was always that the professional teams [of clients] would realise that there was something wrong because the prices were too high. By pricing too high or unrealistically and out of proportion, the cartel would be exposing itself.”

This apparently came to the fore when one of the cartel members demanded a very high cover price for a piece of Gautrain work.

Even if they were only going to submit a cover price, they still needed to prepare some tender documentation and come to a price, said Jones.

The price for the Gautrain job that Jones’ company came to was R50 million. They then offered to cover this price for their competitor.

Dura then allegedly came back demanding that they cover them for R60 million, Jones said.

“We felt that was excessive. Our term was ‘they were ripping the guts out of it’, and we felt that it would be embarrassing for us to put in a cover price of that magnitude.”

He recounted that this caused heated arguments, and executives from the different companies shouted at each other over the phone.

Jones’s testimony, including the anecdote about the Gautrain, is contested by other parties.

Dirk Vetten, a lawyer at the proceedings for Esorfranki, accused Jones of fabricating evidence.

SETTLEMENTS

There have been a number of settlements from the geotechnical companies already.

There have been three settlements from the group, with Dura paying a R1 million fine and Geomechanics paying R1.65 million.

Rodio has settled for just under R900 000, but Esorfranki is opposing the case.

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