Supplementary memorandum from the Construction
Confederation
OFFICE OF
FAIR TRADING
(OFT) INVESTIGATIONS IN
THE CONSTRUCTION
INDUSTRY
We spoke about your current inquiry into the
OFT and I mentioned the concerns we have identified in relation
to its recent investigations into suspected bid rigging in the
construction industry. I realise that you cannot become involved
in the detail of, or influence in any way, the investigation but
it is throwing up some issues of principle about the way in which
the OFT is undertaking the investigations which might interest
your committee.
The issue of concern to OFT is bid rigging between
contractors. However, to a large extent, the majority of instances
of alleged bid rigging currently under investigation concern the
so-called practice of "cover pricing" which, for many
years, was prevalent in the industry. Cover pricing is essentially
when a bid is entered for the sake of bidding. They were often
put in to avoid upsetting a client and/or falling off an approved
tenderer's list but the contractor would try to price the job
too high to avoid getting the work. This often meant talking to
other bidders to find out what their offers were. Clients (including
public sector procurers) often encouraged or requested covers
too because it meant they could demonstrate there had been a competition.
With the advent of "best value", as opposed to lowest
price, as the key criterion for awarding contracts and the move
towards longer term relationships between contractors and their
clients, the practice was dying out. It is also clear that, at
the time it was most prevalent, the Competition Act 1998 had not
yet, or had just entered into force and that there was a good
deal of ignorance and confusion at that time as to whether it
was illegal.
There are four issues that I would like to bring
to your attention:
— we understand that this has
now become one of the biggest suspected cartel investigations
that the OFT has undertaken. Even so, it is not proven that there
was any real consumer detriment arising from the practice of cover
pricing, ie that customers and ultimately consumers paid a higher
price than they otherwise would have done if the cover pricing
information had not been exchanged. Moreover it is largely an
historic practice and hence the OFT is essentially shutting a
stable door after the horse has bolted. We do not challenge the
principle that cover pricing technically breaches competition
law but we do question the approach of the OFT which appears to
be to considering the practice in the same category as much more
serious "hardcore" pricefixing cartel agreements;
— this is the first time that
the OFT has undertaken a "plea bargaining" approach
to the expediting of an investigation, ie where companies plead
guilty and avoid a protracted legal process in return for a reduction
in the level of any penalty eventually imposed. However, the way
in which the OFT has approached this has resulted in companies
being unduly pressurised into making admissions of "guilt",
without, it would appear, being aware of the evidence available
to the OFT and unable to verify whether it is correct, accurate
or reliable. Moreover, those not prepared to do so are being unfairly
denied the opportunity to benefit from the reduction of penalty
offer mainly due to the fact that the tenders in question date
from up to six or seven years ago and most companies have no documentary
evidence that would enable them to verify their involvement one
way or the other. The OFT's offer also appears to be designed
to discourage an individual company's appeal of any final decision.
In particular, the OFT reserves the right to apply to the Competition
Appeal Tribunal for an uplift in fines and the fixing of costs
if a company appeals any final infringement decision. Such rights
of appeal are an inherent part of due process and it is wholly
inappropriate for the OFT to misuse its position in this way in
order to minimise its own exposure to potential cost and inconvenience
should it, for example, subsequently transpire that the evidence
presented is incorrect and that there is an entirely legitimate
basis for an appeal;
— OFT does not appear to understand
the financial characteristics of the construction industry and
has made a number of public statements threatening to levy fines
that are based on relatively high percentages of the total annual
turnover of the companies under investigation and certainly exceeding
the average 1-2% of total turnovers that they imposed in the past
on roofing contractors. This will almost certainly put a significant
number of companies out of business, threaten their supply chains
and reduce the industry's capacity to respond to current demand
for construction work. Construction contractors tend to have relatively
high turnover but low profit margins and thin balance sheets.
If maximum fines were imposed, these could represent at least
between five and 10 years' operating profit; and
— we have so far found the OFT
to be unresponsive to these concerns and reluctant to discuss
alternative ways of achieving their objective of eliminating and
deterring anti-competitive practices in the industry. The Dutch
competition authorities have recently been involved in a similar
exercise which we believe to have been more transparent and co-operative
with the industry. With specific reference to cover pricing as
opposed to other possible evidence of more serious forms of bid
rigging,
We consider the OFT's approach to this investigation
to be unduly harsh and disproportionate having regard to the lack
of competitive harm arising from the alleged infringements. There
must surely be an issue of principle about whether this is the
best use of the OFT's resources. We also consider that the consequences
of imposing penalties at the levels indicated by the OFT as being
likely to give rise to consequences that will cause significant
harm to the competitiveness of, and capacity within, the UK construction
industry.
As you will appreciate we are in contact with
OFT on these issues of principle and a number of other detailed
points about the current investigation. Nonetheless, I thought
you would find these observations on our experience to be helpful.
Please let me know if you would like any further information.
15 June 2007
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