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SA competition head seeks building industry reform

Mar 03 2016 06:38
Franz Wild

Tembinkosi Bonakele (Photo: Competition Commission website)

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AVENG LIMITED [JSE:AEG]

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Johannesburg - Competition Commissioner plans to seek “serious reforms” in the construction industry three years after some of the biggest companies were fined for colluding on stadium building before the 2010 Soccer World Cup.

Commissioner Tembinkosi Bonakele said he plans to make recommendations about overhauling the regulation of builders working for the government after an extensive review of the industry.

“We’re not looking for tweaking here and there, we think the entire industry needs serious reforms,” Bonakele said in an interview in Cape Town last week. “There’s a very tight network. How do you dis-incentivize collusion? What kind of punishment? What would stop people, beyond just a competition investigation and so on?”

Slowing growth

The renewed push to crack down on the industry comes as the slowest economic growth since 2009 slashes profits and market valuations for companies including Aveng [JSE:AEG], Murray & Roberts [JSE:MUR] and Group Five [JSE:GRF]. The seven-member FTSE/JSE Africa Construction & Building Index has slumped 53% over the past two years and Aveng has posted three consecutive annual net losses.

The Competition Commission in 2013 fined 15 construction companies a combined R1.5bn, for allegedly colluding on bids for projects in the run-up to the World Cup.

“Systems and processes are in place that are aimed at preventing any form of collusive behavior happening again,” Murray & Roberts said in an emailed response to questions while Group Five said it has “consistently expressed deep regret” for its previous behavior and has put in place mechanisms to prevent it happening again. Aveng declined to comment.

“This is completely untrue and we cannot believe the commissioner could have said this,” WBHO Construction, said in an e-mailed response to questions.

Bonakele said his team plans to start the review after it settles the outstanding cases from the commission’s collusion investigation. This includes litigation against Group Five.

Close relationship

Executives, project managers and engineers from different companies frequently work together, making it easier for them to develop the kind of close relationship where collusion takes place, Bonakele alleged. In exchange for not competing, companies often promise to use each other as sub-contractors, he alleged.

The recommendations will include ideas on how to structure a tender to pre-empt collusion to ensure the government, which commissions many of the projects, doesn’t pay too much, Bonakele said.

“If you are going to be issuing tenders as a state in an environment like that you should know it’s likely to happen,” he said. “We need to think about how do clients protect themselves. How do you design a tender in such a way so that it’s collusion proof.”

The government hopes to spur sluggish economic growth, which Finance Minister Pravin Gordhan last week predicted would be 0.9% this year, with investment in infrastructure. Many of the state’s planned projects have still not been commissioned.

“I’m worried about the impact on the economy,” Bonakele said. “There’s something about how the industry operates that worries me. How do we fix the culture? They know each other very well. There’s just a culture of working together.”

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