Supplementary evidence submitted by the
Construction Confederation
I wrote to you on the 15 June 2007 and 14 March
2008 about the Office of Fair Trading investigation into so called
"cover pricing" in the construction industry. Following
our conversation earlier this week, I am writing again to update
you on the current situation and to highlight our serious concerns
about the OFT's handling of their announcement on Thursday 17
April.
OFT issued a Statement of Objections to all
112 companies involved in this investigation last Thursday and
issued a press release naming all the companies involved. Although
the OFT's press release itself was generally measured in tone,
throughout much of the day the OFT made a number of misleading
and sensationalist claims in the media through briefings to journalists
and interviews that are likely to have damaged the construction
industry's reputation, and that of the named companies, and may
have far reaching consequences.
In particular the OFT made three unfounded allegations:
— that companies named in the
SO were engaged in more serious bid rigging involving compensation
cases. In fact, we understand there are only allegations involving
12 contracts (out of 244) and nine companies (out of 112). Although
the OFT's press release did acknowledge that it affected a "minority"
of cases, the repeated references to compensatory payments was
clearly intended, on a completely unfounded basis, to exaggerate
the prevalence of this practice. By failing to distinguish between
those companies that were involved in compensatory payments and
those that were not, all the companies named have now been "tarred"
with that brush in the eyes of their clients;
— that all forms of bid rigging,
including the alleged cover pricing, in this case have resulted
in prices being increased by up to 10%. OFT has failed to provide
any evidence to substantiate this claim and relies on completely
unrelated generic studies carried out in the past by reference
to hard core price fixing cartels. We maintain that the historic
practice of "cover pricing", such as it was, did not
give rise to higher prices for clients;
— that cover pricing operated
as a cartel "arrangement" involving the allocation of
contracts on a rotation basis—the examples given by the
OFT to the media of a typical cover pricing arrangement was completely
misleading as it suggested that there would only ever be one proper
bid being made with all the other tenderers submitting cover prices.
This is wrong and misleading—in most cases there may have
been one or more cover prices but there were also a number of
competing bids from other tenderers which meant that the tendering
process and the final price was subject to a competition; and
— that it had received evidence
of cover pricing involving many more companies on thousands of
tender processes. By making this statement but not actually bringing
formal allegations, it means that these unsubstantiated claims
can not be properly challenged and are unproven, yet they are
seriously harming the industry's reputation. If the OFT genuinely
had evidence of further infringements the companies involved and
the industry should have had the right to defend themselves against
such charges. Clearly the OFT chose not to bring formal charges
as its evidence for those other contracts was too weak.
We have challenged the OFT on each of these
points but at the time of writing they have not responded.
This has left public sector clients angry and
confused. For example:
— the Local Government Association
is demanding recompense for the alleged price hikes; and
— Bolton Council has postponed
the award of a major framework contract and other public sector
projects have been or are likely to be stalled.
It is particularly surprising that the OFT took
this line given that they have only this week had to publicly
apologise and pay a £100,000 settlement to Morrisons over
sensationalist and defamatory allegations that were not justified
by reference to the facts. This was not therefore an isolated
incident.
Because of this confusion, we have been attempting
to persuade the Office of Government Commerce and the Department
for Business Enterprise and Regulatory Reform to issue some appropriate
guidance to public sector clients who will clearly be confused
and unsure on how to react. So far they have failed to respond.
We are continuing to press them on this point.
Our original evidence to you set out a number
of shortcomings in public sector procurement (paragraphs 14-22).
The practice of "cover pricing" was for the most part
a symptom of inadequate procurement regimes within the public
sector.
As we have indicated before, changes in procurement
practices (notably the reduction in single stage competitive tendering
and award of contracts on lowest price) have meant that the practice
of "cover pricing" has been virtually eliminated. The
fact that the OFT has been given free reign to damage the industry's
reputation in this way is likely to have a perverse effect on
the industry's competitiveness and may well have some effects
on capacity. Already, we understand that a number of companies
under investigation have been placed in administration or ceased
trading. It is too early to say where the long term damage will
have been done.
5 June 2008
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