Collusion in Built Environment Investigation Outcomes: Council for Built Environment, Construction Industry Development Board & Competition Commission, with Minister

Meeting report

Opening Remarks

Mr Thulas Nxesi, Minister of Public Works, urged the Construction Industry Development Board (CIDB) to extend an invitation to Members of the Portfolio Committee to attend its upcoming annual national stakeholder forum, as there would be active engagements with contractors to listen to the challenges they faced. He also urged the National Competition Commission (NCC) to give a thorough background on the highly technical and very complex was sue of collusion. In his concluding remark, he suggested that the CIDB explain its role in relation to the enforcement of the code of conduct, as well as the progress report on the enforcement process.

The Chairperson clarified that the CIDB and Council for the Built Environment (CBE) were entities and not branches of the Department, and consequently the Department had an oversight function to perform over the entities. He also mentioned that a major concern was the permanent appointment of the acting Chief Executive Officers (CEOs) of the CIDB and the CBE respectively.

Briefing by Competition Commission

Mr Makgale Mohlala, Divisional Manager: Cartels Division, Competition Commission of South Africa (NCC) said that the entity was a statutory body saddled with the responsibility of regulating competition in the economy, eliminating monopolies, and investigating cartels. In an overview of the background, he said that the NCC had initiated investigations into the construction sector in 2009, and it had been concluded that bid rigging was widespread.

The Commission had received late applications pointing to entrenched collusion, and a fast track settlement process had been initiated in 2011 with the aim of inviting construction firms to voluntarily disclose rigged projects. The objectives of the fast track settlement process had been incentivising firms to admit their collusive conduct, encouraging truthful and comprehensive disclosure, strengthening evidence against non-settling firms, minimising legal costs related to prosecution, ensuring speedy resolution of cases, and setting the construction industry on a new trajectory.

The fast tracking settlement process had been subdivided into two phases. During phase one, 21 construction firms had responded and disclosed over 300 projects (160 prescribed and 140 non-prescribed projects). 15 of the 21 firms had concluded settlement agreements with NCC. The highlighted projects had included major infrastructure development projects in the country, such as national roads and the 2010 FIFA soccer world cup stadia.

Phase two of the process had focused on firms that had not participated in phase one, and consequently 24 firms which had not participated in phase one had been were implicated. The outcome of the phase two investigations was that seven firms settled seven projects, 11 firms with 19 projects were referred to the Competition Tribunal for prosecution, and 14 firms with 20 projects were not prosecuted. As regards the 14 firms that were not prosecuted, he said there was not enough evidence to prosecute some of the firms, some had voluntarily closed down, and others had been liquidated over time.

The rigged tenders had been worth R47 billion and were mostly public sector projects. The penalty was calculated on the basis of the number of projects settled per sub-sector, and the outcomes included efficient resolution of the bulk of the investigations, with a collective payment of fines worth over R1.54 billion by construction firms, issuance of 250 section 65 certificates -- which allowed any victim of collusion to claim for civil damages -- and fewer resources being allocated to deal with the complexity of investigations with limited outsourcing.

In his concluding remarks, Mr Mohlala emphasised that the fast track settlement approach had been an effective method of resolving cartel cases. All investigations in the construction sector had been concluded due to the fast track settlement process. The NCC’s approach had exposed an entrenched practice of collusion in the construction sector. There had been lessons from other competition authorities on the process, and its focus now was on prosecuting firms that had not settled.

Briefing by Construction Industry Development Board

Ms Hlengiwe Khumalo, Acting CEO: Construction Industry Development Board (CIDB) confirmed that the NCC’s investigations originated in 2008 as a result of the outcry about the costs of the 2010 World Cup stadiums, as well as the roads under the Gauteng Freeway Improvement Programme (GFIP), and some mines, among others. Consequently, it had uncovered evidence of possible collusion.

In February and September 2009, the Commission had initiated investigations in terms of section 49B (1) of the Competition Act of 1998 against major construction firms for possible collusion in the industry. She added that the Commission had received approximately 160 Corporate Leniency Policy (CLP) applications in November 2009 and a construction fast track settlement process had been launched in 2011 as a strategy to process and settle matters expeditiously. Whilst reporting on outcomes of the investigation, the acting CEO had affirmed that three of the 21 firms participating in the NCC’s fast track settlement process were not liable to settle due to prescription of claims. The remaining 18 firms had entered into negotiations for settlement and 15 firms had filed consent agreements with the Tribunal. The remaining 3 firms -- Group 5, Power Construction and Construction ID – had failed to reach a settlement and had denied claims made against them by the Commission. They had rejected the settlement offer but remained under investigation by the NCC.

From the settlement applications, 22 construction firms which had not participated in the Commission’s fast track settlement had been implicated by the 21 firms which had participated, and these 22 firms were currently being investigated.

Reflecting on the background of the CIDB’s investigation, she confirmed that Gobodo Forensic, Investigative Accounting (GFIA) had been appointed in May 2014 as the investigating officer, in accordance with CIDB regulation 28. The scope of work was to carry out investigation services for a breach of the CIDB code of conduct, by reviewing the consent orders and verifying whether the criteria in regulation 28(3) had been met. Letters had been issued to the CEOs of the 15 construction companies to afford them an opportunity to respond to the allegations.

The entity had adopted a two-pronged approach. The aim of phase one was to investigate construction companies that had admitted to collusive behaviour in terms of the Competition Act. Phase two was aimed at investigating all construction cartel cases uncovered by the Commission during their investigation. 15 firms had been investigated in phase one, and the fines collectively imposed by the NCC had totalled R1.46 billion for approximately 300 projects worth over R26 billion. GFIA had submitted 15 reports to the CIDB on 30 June 2014 and provided two recommendations. These were that the board consider instituting a formal inquiry in terms of regulation 29 into the prima facie breaches of the code of conduct by the 15 companies, and that the board consider each case on its own merits.

Ms Khumalo said that on 3 July 2014, the reports were handed over to the legal advisor for analysis, review and consideration of the legal issues raised by the construction firms, in response to the GFIA invitation for representation. The 15 investigation reports and the applicable charges had been considered on 27 November 2014 and approved by the board on 13 February 2015.

Regarding the CIDB regulatory framework, she mentioned that section 29 (1) of the CIDB Act 2000 made provision for the enforcement of the code of conduct, and the CIDB may convene and conduct an inquiry into any breach of the code of conduct. The code of conduct established a broad framework within which an action or default by any party to the procurement process may be judged and also dictated that a contractor must not engage in collusive practices that had adverse impacts on the cost of a project to the employer, and that collusive behaviour was deemed a clear violation of the CIDB code of conduct.

Ms Khumalo highlighted a total of nine prescribed sanctions in terms of the CID regulations. The first was ordering the removal of the name of a contractor from the register, in accordance with section 19 of the Act, where the charge related to a transgression of section 18 (1) of the Act. The second sanction dealt with the issuance of a warning to the respondent which remained valid for a period of not more than one year. The third sanction was the downgrading of the respondent’s current contractor grading designation in the register by a maximum of two grades, for a period determined by the investigating committee. The fourth and most controversial sanction was the imposing of a fine not exceeding R100 000 on the respondent. The fifth sanction dealt with the restriction of the respondent from participating in public sector construction works procurement for a period of time not exceeding ten years. The sixth sanction involved de-registration of the member from the register. The seventh sanction involved making a cost determination that the accused, the CIDB or the party who initiated the investigation, must defray all or part of the costs incurred to conduct the formal inquiry. Another sanction involved ordering specific performance relevant to the charges brought against the respondent. The ninth sanction involved a combination of any of the previous eight transactions.

Addressing the outcomes of the CIDB investigation, she mentioned that 15 notices in terms of regulation 29 of the CIDB regulations had been issued against the relevant construction firms in March 2015 for breaches of the entity’s code of conduct. Five firms -- Murray and Roberts, Aveng (Africa) (Pty) Ltd, Raubex (Pty) Ltd, Stefanutti Stocks Holdings Ltd and WBHO (a firm which had lodged a late application) -- had lodged a review application against the Minister and the CIDB after receipt of the charges. She explained that the lodged application had two parts: part A dealt with an urgent application to interdict the CIBD from proceeding with the formal inquiry; and part B involved an application to review the regulations issued by the Minister and the code of conduct published by CIDB.

Ms Khumalo highlighted legal issues raised, such as declaring the provisions of the regulations promulgated under the CIDB Act unlawful and unconstitutional, and also that the legislature had never intended any breach of the code of conduct to result in the penalties as envisaged in regulation 29 (18), which empowered the investigative committee to impose sanctions. Six principles in the code of conduct were too vague, hence the challenges in implementing the CIDB code of conduct. She identified other legal issues, such as the possibility that the names of the firms that concluded settlement agreements were not the exact entities registered with the CIDB, questions whether the code of conduct applied prior to 2009, and whether the code of conduct applied to projects outside of public sector procurement.

Reporting on outcomes of the urgent interdict, she mentioned that settlement agreements had been reached with four firms. The CIDB would postpone the formal inquiry, and the parties would agree on an expedited court process on part B. The settlement agreement on part A had been made a court order on 12 May 2015, and all formal inquiry proceedings had been suspended pending the review applications of Part B. The four firms had agreed to approach the Deputy Judge President (DJP) of South Africa, Gauteng Division, to obtain an early hearing date for the review application on part B. According to Ms Khumalo, WBHO had not been a party to the settlement agreement reached on 12 May 2015, but had also agreed on the consolidation of an expedited hearing of part B. The DJP had allocated 7-9 December 2015 for hearing of the review application.

As part of the outcomes of CIDB investigations, letters had been received by the CIDB and the Minister’s legal team from the legal representatives of the construction firms on 20 and 23 November 2015 to request a postponement of the review hearings slated for 7-9 December 2015, to allow for discussion and settlement negotiations taking place under the auspices of the South African Forum of Civil Engineering Contractors (SAFCEC). A reply letter to deny the request had been sent on 24 November 2015, as no substantive case had been made for the request for postponement. The state attorney had conceded to the request for postponement on behalf of the Minister on 3 December 2015 and based on the state attorney’s letter, the CIDB had agreed on the postponement on the same terms and conditions set out in the letter of the state attorney.

As a way forward, she confirmed that the court case had been postponed for six months and the CIDB would continue with its regulatory process after the expiry of the six months. A review of the current CIDB Act was necessary to consider effective measures to transform and develop the construction industry, to consider measures to prevent a recurrence of collusive behaviour in the construction industry, and also to consider stronger punitive measures for transgressions. An agreement in terms of section 82 of the Competition Act, 1988 was being entered into between the CIBD and the NCC as approved by the board at the end of January 2016. The essence of the agreement was to share information and ideas on how to prevent collusion in the future and also to share lessons learnt during the investigation period.

Input from Council for Built Environment

Mr Isaac Nkosi, Chairperson: Council for the Built Environment CBE), gave an insight into the mandates of the entity. The CBE would rely on the information provided by the Competition Commission and CIDB to commence its investigations into the registered individuals that had been part of collusive activities, as well as to establish the exact nature of transgressions. He clarified that only registered members of the council could be disciplined by the CBE code of conduct -- non-registered individuals would be disciplined by law enforcement agencies. The CBE would monitor delinquent individuals and monitor the disciplinary process to ensure that the appropriate disciplinary measures were adopted.

Discussion

The Chairperson inquired about the criteria used for making decisions not to probe firms that had closed down voluntarily. He said that Committee Members had expected the acting CEO of the CBE to make adequate contributions and give management views. He inquired about the judicial responsibilities of the CBE if the entity intended acting only on information from the CIDB and the Competition Commission. He also questioned if the CBE had had any prior experience of collusion as an entity.

Mr Nkosi responded that his presentation had been a mere overview and clarified that the acting CEO would address issues that had not been included in the CBE report.

The Chairperson then inquired about the duration of service of the acting CEOs of the CIDB and CBE. The CBE chairman had spoken on behalf of the whole entity instead of leaving out management issues for the acting CEO. While the Chairperson of the CBE had judicial responsibilities, the Committee was interested in information regarding the day to day operations, which should be furnished by the acting CEO.

Ms Priscilla Mdlalose, Acting CEO: CBE, apologized for the format and length of the presentation, saying that it had not properly addressed the agenda of the meeting. She asked the CBE manager of legal services to conclude the presentation.

Mr M Filtane (UDM) said that the CBE did not appear to be ready to address all the questions that might be asked by Members. He referred to the previous engagement with the CBE as “a circus,” adding that the Committee was not prepared for a re-enactment.

Mr K Sithole (IFP) said that the presentation by the CBE had been vague and nothing had been mentioned regarding a progress report. He concluded that the entity was in no way prepared for an engagement with the Committee.

Ms D Kohler Barnard (DA) said that the Committee had received substantial inputs from the CIDB and the Competition Commission, but no vital input from the CBE. The presentation was too short and unacceptable. She questioned the existence of the entity, as nothing was being done or managed by the entity.

The Chairperson said that the way forward would be suggested only after the legal advisor of the CBE had presented.

Adv Pieter Fourie, Legal Manager, CBE, said that the CBE was an appeal body against decisions made by professional councils. The appeals ranged from deregistration to sanctions and fines imposed. The appeals stemmed from guilty individuals sanctioned and rejected applications for registration, among others, and added that the fines were limited to R20 000 per charge. The CBE coordinated activities within the built environment. No official information had been received so far from any office of the environmental councils regarding investigating collusion. Preventive steps would be drafted, together with the CIDB and NCC. He also proposed that the proactive steps would include inviting built environment professional councils in order to ascertain the exact areas where collusions were being investigated.

The Chairperson inquired if there had been any appeals to the CBE in the previous four to five financial years.

Mr Fourie responded that there had been ten appeals in the previous financial year and 12 appeals two financial years ago. He confirmed that none of the appeals received had related to collusion issues.

The Chairperson said that there was a need for future engagements with CBE in conjunction with the Department and the Minister.

Ms Kohler Barnard inquired if the NCC had the legislative power to offer deals to firms where collusion was suspected or proven. She asked why offenders of the code of conduct had not been apprehended, especially the firms which had voluntarily closed down. As regards the R47 billion in tenders, she asked about the percentage of the total tenders that had been investigated annually. What measures were in place to mitigate collusion at the upcoming Commonwealth Games? Regarding the 22 firms which had failed to participate in phase one, she asked why the names had not been published. The firms that had failed to admit guilt should also be further investigated as it appeared that only firms that had admitted guilt were being prosecuted.

Mr Sithole said that at the CIDB’s earlier engagement with the Committee, it had been notified that the CEO had been acting for a couple of months. He also inquired why the names of the implicated 22 firms had not been published. He said that the CIDB and CBE were not dependent on the Department, which made it difficult for the Department to perform proper oversight functions. He asked why there had been delays in imposing fines on some firms. He affirmed that the fines imposed had been too little for the firms and suggested that the CIDB Act should be amended to give the Minister power over all entities.

Mr Filtane inquired about the settling process as regards phases one and two. He sought clarity on the method of prosecution being adopted and if socio-economic impacts had been identified where public funds were channelled wrongly. While agreeing that the R100 000 fines were too little, he asked about action being taken by the Department of Public Works (DPW) to ensure that owners of the three firms that had been non-compliant were brought to book. He asked about the measures in place to prevent firms from getting tenders until their respective legal issues had been finalised. Were the CIDB codes of conduct highlighted in contracts signed by the firms when being allocated tenders? Would the Minister would not experience a disadvantaged situation by conceding to the six months’ postponement to allow for further discussions and settlement negotiations under the auspices of SAFCEC to continue. He then sought clarity on whether the ‘marriage’ between the CIDB and NCC did not hamper the integrity of both entities, as their integrity was best retained if both entities were independent.

The Chairperson commented that the marriage of the entities did not pose a threat to the integrity of both entities.

Ms S Kopane (DA) expressed her shock about the way firms were getting away with non-compliance. She asked about future plans in place to ensure that enough resources were adequately allocated. She called for stronger punitive measures to be applied in the legislative review. She asked if any cases had been reported to the police so far and asked about the charges being paid to GFIA for investigations. Had any impact studies of collusive behaviour been conducted by the Department?

Ms P Adams (ANC) inquired why the NCC had only initiated a fast track settlement process in 2011 and how legal costs for prosecution would be minimised, as indicated. How would a speedy resolution of cases be facilitated? She asked about the issues of the limited outsourcing as well as the outsourcing process, and questioned if any lessons had been learnt from international bodies. Had a due legal process been followed in appointing GFIA as the investigating officer? Were the prescribed sanctions internationally coherent? She urged that investigations should be expedited, as defaulting firms kept getting tenders.

The Minister responded that the Public Finance Management Act (PFMA) required the CIDB to pursue the misuse of public funds. The relationship between both entities was to facilitate the sharing of information in the form of inter-governmental relations. He had agreed to concede to the six months postponement due to the consideration of costs of legal processes which were extremely expensive and time consuming and might last at least ten years, bearing in mind that the burden of proof must be furnished by the government, which then made the process very technical. He said that the non-compliant companies were “white companies with very few black employees at the management level that were still operating in the old apartheid mode.“ The CIDB code of conduct prevented the entity from any undue interference, which included the Minister.

As regards the allocation of enough resources for the CIDB, he mentioned that it would be uneconomical to spend a lot of resources on legal processes. However, defaulting firms would not be allowed to go free simply because they were influential. He said that the CBE might have been caught off-guard and might have assumed the meeting was a conclusion of the previous engagement.

The Chairperson clarified the issues around the misunderstanding about the report of the CBE. The misunderstanding was about the contribution of the CBE to the processes of the CIBD and NCC, and not about the agenda of the meeting. As a result, the agenda had been clearly communicated to the chairperson of the CBE prior to the meeting.

The Chairperson mentioned that an agreement had been reached that all entities under the Department acted as a juristic person, and entities were not branches of the Department. He then clarified the hierarchy of responsibilities across departments and ministries.

The Minister noted that the legislation had been compiled in a way that entities were too independent, which then made acquiring vital information very cumbersome. He added that a legislative review was long overdue.

The Chairperson advised Members that their responsibilities exceeded merely piling up legislation. They were also responsible for fishing out the unintended consequences of laws passed and the examination of their various strengths and shortcomings.

Ms Khumalo responded to the CIDB regarding inquiries and concerns. She confirmed that the legislative process governing the entity remained a major limitation, adding that the current code of conduct did not allow the CIDB to suspend from registers or take enforcement action while investigations were on-going. She confirmed that the CIDB had compiled the names of the 22 firms and would forward them to the Committee soon. She mentioned that some firms which were implicated in phase one were also implicated in phase two of the process. She also confirmed that slightly over R400 000 had been paid so far to GFIA in relation to the collusion investigations. GFIA had been appointed via an open tender, which made the appointment a legal one.

Ms Khumalo mentioned that the small fines imposed were the result of the limitations of the current legislation of the entity. She affirmed that some directors of the non-compliant firms were part of the process that had established the CIDB. The sanctions were very limiting, were not internationally benchmarked, and minimal in nature, so a review of the legislation was essential. The CIDB did not deal with tenders when firms got contracts from the government -- the role of the entity was to ensure that the code of conduct was adhered to by registered firms. Legal opinions were sought and there was no double jeopardy. Both the CIDB and NCC had separate pieces of legislation.

Mr Khomotso Hlongoane, Investigator, NCC, said that section 21 of the Competition Act allowed the NCC to investigate and prosecute firms only, and not individuals. There was no evidence so far that firms had liquidated themselves because they were facing investigation, and added that the liquidated firms were small companies between grades 3 and 6 on the register, and resource constraints could have played a part in their liquidation. He explained that settling implied negotiating terms and submitting it for judicial proceedings. He added that the objective of the fast track process was to short-circuit the process, as investigations were time and resource consuming. He informed the Committee that the list of firms implicated in phase two of the process had been compiled and was available. The NCC was making efforts to limit the rate of outsourcing.

The Chairperson mentioned that the CIDB should implement and use the current legislation and its provisions to its optimal capacity.

Mr Hlongoane said that impact studies on collusion in the construction sector would be conducted whenever investigations were concluded.

The Minister mentioned that the impact of overpricing was stealing the resources which might be used for other socio-economic development projects. He said that the issue of the appointments of the acting CEOs had been influenced by on-going disputes, some of which had been on-going for over a year.

The Chairperson thanked the Department and members for their active engagements.

The meeting was adjourned.