1. PORTFOLIO COMMITTEE ON PUBLIC WORKS Briefing on the collusion cartel in the construction industry By: Ms Hlengiwe Khumalo Acting CEO 15 March 2016

2. OVERVIEW

3. PRESENTATION OUTLINE OTHER (Annexures) Purpose
Background of the Competition Commission investigations
Outcomes of the Competition Commission investigations
Background of the cidb processes
cidb Regulatory Framework and prescribed sanctions
6. Outcomes of the cidb investigation
Progress on the way forward
OTHER (Annexures)
“A” – Code of Conduct
“B” – Letter from Werber Wentzel
“C” – Aveng court order

4. PURPOSE

5. I. PURPOSE
The purpose of this presentation is to brief the Portfolio Committee on the following:
Investigations conducted by the Competition Commission (CC) and the outcomes thereof;
Background of the cidb investigation and the outcomes thereof;
Procedural process to be followed as per the cidb Regulatory Framework;
Available sanctions that may be imposed by the cidb on the firms that are found guilty of collusion;
Legal challenges raised by the construction companies on the cidb regulatory framework; and
Progress on way forward. 5

6. BACKGROUND OF THE COMPETITION COMMISSION INVESTIGATION AND OUTCOME

7. II. BACKGROUND OF THE CC INVESTIGATION
In 2008, the CC initially conducted research in the industry following an outcry about the costs of the 2010 FIFA World Cup stadiums, including roads under Gauteng Freeway Improvement Programme(GFIP), dams, mines, e-tolls etc.
The CC uncovered evidence of possible collusion.
In February and September 2009 the CC initiated investigations in terms of section 49B (1) of the Competition Act, 1998 against major construction firms for the possible collusion in the industry.
In November 2009, the CC received approximately 160 Corporate Leniency Policy (CLP) applications. 7

8. BACKGROUND OF THE CC INVESTIGATION cont...
In February 2011, the CC launched a Construction Fast Track Settlement as a strategy to process and settle matters expeditiously.
The cidb provided information to the CC during the investigation process and CC undertook to provide the cidb with investigation report after the Competition Tribunal hearings. 8

9. III. OUTCOMES OF THE CC INVESTIGATION
Of the 21 firms participating in the CC’s Construction Fast-Track Settlement Process, 3 firms were not liable to settle due to prescription of claims; 18 firms entered into negotiations for settlement, with consent agreements filed with the Tribunal for 15 firms.
The remaining 3 firms (namely: Group 5, Power Construction and Construction ID) have not reached settlement with the CC. They have denied the claims made against them by the CC, rejected the settlement offer but remain under investigation. 9

10. OUTCOMES OF THE CC INVESTIGATION cont…
From the Settlement applications, the 21 firms further implicated an additional 22 firms that had not participated in the CC’s Construction Fast-Track Settlement Process; and are currently being investigated – post the completion of the settlement discussions with the 21 firms. 10

11. BACKGROUND OF THE CIDB INVESTIGATION

12. IV. BACKGROUND OF THE CIDB INVESTIGATION
Gobodo Forensic and Investigative Accounting (GFIA) appointed in May 2014; as the Investigating Officer (IO) as required in terms of Regulation 28 of the Construction Industry Development Regulations, 2004.
Scope of work was to carry out investigation services for a breach to the cidb Code of Conduct by:
Reviewing the Consent Orders and verifying whether the criteria in Regulation 28(3) were met;
Issuing letters to the CEOs of the 15 construction companies, affording them an opportunity to respond to the allegations; 12

13. BACKGROUND OF THE CIDB INVESTIGATION cont…
Reviewing and analysing the responses received from the construction companies;
Drafting and submitting investigation reports with recommendations to cidb for consideration and approval by the Board. 13

14. BACKGROUND OF THE CIDB INVESTIGATION cont…
In conducting the investigation on the alleged breach of the code of conduct, the cidb adopted the following two-pronged approach:
- Phase 1 – investigate the 15 construction companies that
admitted to collusive behaviour in terms of the Competition
Act.
- Phase 2 – investigation to be conducted on all construction
cartel cases uncovered by the Commission during their
investigation (including the prescribed cases and other
cases). 14

15. BACKGROUND OF THE CIDB INVESTIGATION cont… As part of phase 1, the cidb investigated the following 15 firms. The fines imposed by CC collectively totalling R1,46 billion for approximately 300 projects amounted to the value above R26 billion.
NO.
COMPANY
CIDB GRADING
FINE 1.
Aveng (Africa) Ltd 9
R  143.00 2.
Basil Read (Pty) Ltd
R94 936 248.00 3.
Esorfranki Pipelines (Pty) Ltd 8
R155 850.00 4.
Liviero Building (Pty) Ltd
R2 011 078.00 5.
Giuricich Bros Consortium (Pty) Ltd R 6.
Haw & Inglis Civil Engineering (Pty) Ltd
R45 314 041.00 7.
Hochtief Construction AG R 8.
Murray & Roberts Holdings Limited
R  455.00 9.
Norvo Construction (Pty) Ltd 6
R714 897.00
10.
Raubex (Pty) Ltd
R58 826 626.00
11.
Rumdel Construction Cape (Pty) Ltd
R17 127 465.00
12.
Stefanutti Stocks Holdings Ltd R
13.
Tubular Construction (Pty) Ltd 7
R2 634 667.00
14.
Vlaming (Pty) Ltd
R3 421 662.00
15.
WBHO Construction (Pty) Ltd R
TOTAL R 15

16. BACKGROUND OF THE CIDB INVESTIGATION cont…
The GFIA submitted 15 reports to the cidb on 30 June 2014 that provided the following recommendations:
  - that the Board considers instituting a formal inquiry, in terms of Regulation 29, into the prima facie breaches of the Code of Conduct by the 15 companies;
- that the Board considers each case on its own merits; 16

17. BACKGROUND OF THE CIDB INVESTIGATION cont…
On 3 July 2014, the reports were handed over to the legal advisor to analyse, review and consider the legal issues raised by the construction firms in response to the GFIA invitation for representation.
The 15 investigation reports and the charges were deliberated on 27 November 2014 and approved on 13 February 2015 by the Board. 17

18. Cidb regulatory framework AND PRESCRIBED SANCTIONS

19. V. CIDB REGULATORY FRAMEWORK
Code of Conduct for all parties engaged in construction procurement:
Section 29 (1) of the Construction Industry Development Board Act, 2000 makes provision for the enforcement of the Code of Conduct. The cidb may convene and conduct an inquiry into any breach of the Code of Conduct.
The Code of Conduct establishes a broad framework within which an action or default by any party to the procurement process may be judged. Any action or default which conflicts with the Code of the Conduct is deemed unacceptable and subject to sanction in terms of the Construction Industry Development Act and Regulations.

20. CIDB REGULATORY FRAMEWORK cont…
Amongst others, the Code of Conduct dictates that a contractor must not to engage in collusive practices that have direct or indirect adverse impact on the cost of the project to the employer.
Collusive behaviour is therefore a clear violation of the Code of Conduct.

21. PRESCRIBED SANCTIONS IN TERMS OF THE CID REGULATIONS
In terms of Regulation 29(18), the sanctions which the Investigating Committee may impose include the following:
Ordering the removal of the name of a contractor from the register in
accordance with section 19 of the Act where the charge relates to a
transgression of Section 18(1) of the Act;
(b) Issuing a warning to the respondent, which warning remains valid for a
period not exceeding one year;

22. PRESCRIBED SANCTIONS IN TERMS OF THE CID REGULATIONS cont…
(c) Downgrading the respondent’s current contractor grading designation in the register by a maximum of two grades, for a period determined by the Investigating Committee;
(d) Imposing a fine not exceeding R on the respondent;
(e) Restricting or prohibiting the respondent from participating in public sector construction works procurement for a period of time, which period may not exceed 10 years;

23. PRESCRIBED SANCTIONS IN TERMS OF THE CID REGULATIONS cont…
(f) Ordering the cancellation of the registration of the respondent and placing a prohibition on the re-application for registration by the respondent;
(g) 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;
(h) Ordering specific performance relevant to the charges brought against the respondent;
(i) Any combination of the sanctions referred to in paragraphs above. 23

24. OUTCOME OF THE CIDB INVESTIGATION

25. VI. OUTCOME OF THE CIDB INVESTIGATION
In March 2015, notices of the charges against 15 construction firms were issued in terms of Regulation 29 of the Construction Industry Development Regulations, for breaches of the cidb code of conduct.
After receipt of the charges, the following firms lodged in the High Court, a review application against the Minister and the cidb:
- Murray & Roberts;
- Aveng (Africa) (Pty) Ltd;
- Raubex (Pty) Ltd;
- Stefanutti Stocks Holdings Ltd; and
- WBHO (lodged a late application) 25

26. OUTCOME OF THE CIDB INVESTIGATION cont…
The court application brought against the Minister and cidb had two Parts:
- Part A – urgent application to interdict the cidb from proceeding with the formal inquiry.
- Part B – application to review the regulations issued by the Minister and the code of conduct published by cidb. 26

27. OUTCOME OF THE CIDB INVESTIGATION cont…
The following legal issues were raised:
Set aside certain provisions of the regulations promulgated under the cidb Act as ultra vires and accordingly declared unlawful and unconstitutional, for example:
- The Minister does not have the powers to compel the appointment of an investigative committee as set out in cidb Regulation 29;
- The investigative committee has no existence in law and no jurisdiction to conduct the inquiries; 27

28. OUTCOME OF THE CIDB INVESTIGATION cont…
The following legal issues were raised cont…:
- The Act does not empower the Board to take disciplinary action against registered contractors or to impose penalties as contemplated in Regulation 29(18) for breach of the Act, the Regulations and the Code of Conduct.
The legislature never intended any breach of the Code of Conduct to result in the penalties as envisaged in regulation 29 (18) which empowers the investigative committee to impose sanctions. 28

29. OUTCOME OF THE CIDB INVESTIGATION cont…
The following legal issues were raised cont…:
The following six principles in the Code of Conduct are too vague to attract the legislative force of law and are merely aspirational:
Behave equitably, honestly and transparently.
Discharge duties and obligations timeously and with integrity.
Comply with all applicable legislation and associated regulations.
Satisfy all relevant requirements established in procurement.
Avoid conflicts of interest.
Not maliciously or recklessly injure or attempt to injure the reputation of another party. 29

30. OUTCOME OF THE CIDB INVESTIGATION cont…
Possibility of names of the firms that concluded settlement agreements are not the exact entities registered with the cidb.
Questioning whether the Code of Conduct applied prior to 2009.
Questioning whether the Code of Conduct applied to projects outside of public sector procurement. 30

31. OUTCOME OF THE CIDB INVESTIGATION cont…
Outcome on Part A of the urgent interdict:
- Settlement agreements reached with four firms: that the cidb will postpone the formal inquiry that the parties will agree on an expedited court process on Part B.
Settlement agreement on Part A was made a court order on 12 May 2015.
All formal inquiry proceedings were thus suspended pending the review applications of Part B. 31

32. OUTCOME OF THE CIDB INVESTIGATION cont…
The four firms agreed to approach the Deputy Judge President of the High Court of South Africa, Gauteng Division (“the DJP”) to obtain an early hearing date for the review application on Part B.
WBHO was not a party to the settlement agreement reached on 12 May 2015 but agreed on the consolidation of expedited hearing of Part B.
The DJP allocated 7, 8 and 9 December 2015, for hearing of the review application. 32

33. OUTCOME OF THE CIDB INVESTIGATION cont…
The cidb and the Minister’s legal team received letters from the legal representatives of the construction firms on 20 and 23 November 2015.
The letters requested a postponement of the review hearings set down for 7-9 December 2015, to allow for discussion and settlement negotiations taking place under the auspices of South African Forum of Civil Engineering Contractors (SAFCEC).
On 24 November 2015, a reply letter to deny the request was sent as there was no substantive case made for the request for the postponement. 33

34. OUTCOME OF THE CIDB INVESTIGATION cont…
On 3 December 2015, the State Attorney on behalf of the Minister conceded to the request for postponement for a period of six months to allow further discussions and settlement negotiations under the auspices of SAFCEC to continue.
Based on the State Attorney’s letter, cidb agreed on the postponement on the same terms and conditions set out in the letter of the State Attorney. 34

35. PROGRESS ON WAY FORWARD

36. VII. PROGRESS ON WAY FORWARD
The court case postponed for six months period (until 2 June 2016).
The cidb to continue with its regulatory process after the expiry of the six months.
Current review of the cidb Act to consider the following:
Effective measures to transform and develop the construction industry.
Measures to prevent re-occurrence of collusive behaviour in the construction industry
Stronger punitive measures for transgressions
An agreement in terms of section 82 of the Competition Act, 1988 is being entered into, between the cidb and the CC, as approved by the Board at the end of January 2016.
The purpose of the agreement is to share information and ideas on how to prevent collusion in the future and also share lessons learnt during the investigation period. 36

37. THANK YOU