黑洞社区

Last Thursday at 7am, after a four-year investigation, the Office of Fair Trading accused 112 construction firms of bid rigging. There were a wide range of reactions.

The 38 firms that had been notified that they were under investigation, but were not charged, were delighted. Much of the national media put the story at the top of its news list and construction鈥檚 official spokespeople did their best to explain to journalists why things weren鈥檛 as bad as they looked. The general public was no doubt gratified to find its prejudices about cowboy builders validated, and many clients must have felt something similar.

And the firms named? For a few, the news came as a bucket of iced water down the neck. One source says the OFT broke the news to it in an email a few minutes before its Thursday announcement. He says: 鈥淲e received very little notice, which we understand is to minimise the disruption to share prices, but by 10am the phones were going mad. We had calls from clients asking for reassurance. There were also calls from the media since the story broke at seven. We鈥檙e now just trying to keep a low profile as we鈥檙e worried that our logo will be unfairly associated with the worst accusations.鈥�

But for many of the accused, which include some of the industry鈥檚 best-respected names, the feeling must have been a strange mixture of anxiety and relief. The anxiety is the result of the damage done to their good standing, the size of the fines they may face and the long and expensive fight they will have to endure if they try to defend the charges. The relief because the OFT鈥檚 war of nerves is over. Now everyone knows where they stand.

How did we get here?

The war broke out in an office in Nottingham in 2004. An accountant conducting an internal audit on a 拢30m construction project for the Queen鈥檚 Medical Centre in the city noticed some irregularities in the bidding. The hospital鈥檚 board held an inquiry and then referred the case to the OFT, which began looking into refurbishment contracts awarded to a contractor in Derby. Over the following years, that investigation grew into the biggest in the watchdog鈥檚 35-year history.

A chronology of the inquiry is given in the timeline below. The way it moved in sudden escalations is explained by the OFT鈥檚 method of investigation, which is calculated to apply psychological pressure to senior managers. If they come clean at an early stage, and inform on companies that do not, they may be forgiven their trespasses and escape with only reputational damage. If they fight and lose, they may face a fine of 10% of turnover, which would snap the spine of many firms. So every chief executive that cracks casts suspicion on many others, some of whom will have been involved in other trades and will be part of other commercial networks 鈥� and the investigation widens to accommodate them.

In the end, the OFT amassed enough evidence of anti-competitive behaviour between 2000 and 2005 to proceed against 112 firms, including Balfour Beatty, Carillion, Kier, Rok and Willmott Dixon.

What is the OFT鈥檚 case?

The competition authority鈥檚 initial findings are contained in a 1,755-page document called a 鈥渟tatement of objections鈥�. They cover about 拢3bn worth of tenders, mainly on local authority work. The gravity of the situation is apparent when you consider that English councils let work worth 拢14.5bn in the six years concerned; this means that about 20% of all council contracts by value may have been tainted. And by tainted, the OFT means inflated by as much as 10%. The contractors in the dock range from 拢7.5bn-turnover Balfour Beatty to local contractors. All stand accused of collusion, but for some the charges are more serious than for others.

Most firms are being charged with cover pricing. This is when a company gets together with a rival to find out its price for a contract, then submits a bid that is higher. The company making the bogus bid does not want to win the scheme; it just wants to stay on the client鈥檚 tender list for future projects. For obvious reasons, cover pricing is illegal under the Competition Act (1998).

The allegation that contractors have been profiteering from bid rigging is graver. The distinction between that and cover pricing is brought out by Stephen Ratcliffe, chief executive of the Construction Confederation. 鈥淟et鈥檚 be clear, in cover pricing there is no intention to make a single penny at the taxpayer鈥檚 expense, just an attempt by busy contractors not to win work without upsetting the client.鈥�

Of greater concern is the allegation that a about nine firms have been involved in a form of cover pricing that involves making compensation payments to losers. This means that a group of firms can carve up the work in a region between themselves.

Is it still going on?

In addition to the struggle that firms now have to enter into with the UK鈥檚 competition authorities (of which more overleaf) the industry has to fight a propaganda war to win over public opinion. The general line is given by Ratcliffe, who says: 鈥淚n recent years, the industry has gone to great lengths to stamp out the practice.鈥� Others point out that it tends to occur in simple lump-sum contracts, and that the use of more complex procurement routes, such as two-stage bidding and PFI, have made it obsolete.

A more aggressive variant of this argument is run by Don Ward, the chief executive of Constructing Excellence, who says: 鈥淚n part, cover pricing is a symptom of poor client practice. It is facilitated both by lowest price tendering and by rigid prequalification 鈥榬otas鈥�, where bidders are fearful of not putting in a bid for fear of being excluded from future work.鈥�

These points are made by John Samuel, group finance director of Renew Holdings, which is parent of Allenbuild and the former owner of Bullock Construction. Both companies were named in the inquiry. Renew鈥檚 turnover is 拢500m and Allenbuild鈥檚 is 拢180m. He says: 鈥淭here is no question that cover pricing was widespread during the period the OFT investigated, but we, like other firms, tightened up procedures to stop it. The move away from fixed price to negotiated work ends the need for this type of tendering. We had lawyers look at our procedures in 2006 and what was needed to be changed was changed.

鈥淲e believe the OFT鈥檚 objective isn鈥檛 to levy fines that will damage a business critically, but we don鈥檛 know for sure.鈥�

What happens now?

Contractors鈥� first response to the statement of objections has been to go to their lawyers. 鈥淐ompetition lawyers will be taking time to digest the contents, analyse the evidence, and look at the nature and the level of the penalty that is likely to be imposed,鈥� says Alan Davies, competition partner at Pinsent Masons.

We believe the OFT鈥檚 objective isn鈥檛 to levy fines that will damage a business critically, but we don鈥檛 know for sure.

John Samuel, Renew Holdings

Companies have until the end of June to submit a written response to the statement of objections, and have until the end of July to discuss it directly with OFT investigators. The watchdog will then take all of these responses into account, a process that could take as long as six months.

In early 2009, it will publish its verdict, naming and fining the companies it believes to be guilty of bid rigging. Contractors will then have a further two months to launch an appeal to the Competition Appeal Tribunal. This process, says Adam Aldred, competition lawyer at corporate law firm Addleshaw Goddard, could take years. 鈥淭he tribunal typically deals with cartel investigations within one to two years. But given the number of companies caught up in this, I don鈥檛 think we鈥檒l see companies paying fines until 2011 or 2012.鈥�

Not only that, says Aldred, but there are questions as to how the tribunal will administer the appeals. 鈥淧otentially, there will be so many people appealing that the tribunal might not have the resources to deal with it,鈥� he says. 鈥淚t will be an enormous headache for it if people decide to appeal.鈥�

In theory, companies found guilty of cover pricing could be fined 10% of their turnover, but will the fines necessarily be that large? OFT deputy cartels director Deborah Jones says that if the industry is able to prove that cover pricing is no longer used, the fines need not be so punitive. 鈥淚f it鈥檚 the case that we don鈥檛 need a deterrent because the industry is already cleaned up, then that would be a factor we would take into account. But we鈥檇 certainly want some hard evidence of that, backed up with fact.鈥�

However, the information the OFT has is that cover pricing is still common practice in some areas. 鈥淲e鈥檙e hearing statements from industry representatives that life has moved on and we would very much hope that that is the case,鈥� says Jones. 鈥淏ut at the same time we have people saying this is still rife.鈥�

For their part, contractors insist they are maintaining their sang-froid. John Dodds, chief executive of Kier, says: 鈥淪hares haven鈥檛 plummeted, but why should they? What evidence has the OFT actually got? The answer is none. The news, despite its sensationalist coverage in the media, has not had any significant impact on us. I saw one explanation on the BBC breakfast programme of what cover bidding was and it was complete rubbish.鈥�

Garvis Snook, chief executive of Rok, adds: 鈥淚t was a big story for the media but the City has known about it for years.鈥�

How many firms will fight?

Lots, according to Aldred. 鈥淧eople are really up for a fight. There is likely to be a protracted legal battle.鈥�

This assertion is backed up by the number of companies that have rejected the OFT鈥檚 鈥渇ast track鈥� leniency offer. Aldred says: 鈥淥f the 75 or so companies offered leniency in exchange for a guilty plea, only 40 accepted it. Plenty look ready for a fight, and for its part the OFT does not look hungry to settle. And there will be plenty to argue about over the next few months; before the OFT comes to a final decision sometime in 2009, and then on appeal to the Competition Appeal Tribunal. Don鈥檛 expect closure before 2011.鈥�

Then there is the question of whether firms that admit guilt can be sued by their clients for the money they spent on rigged bids. Aldred again: 鈥淲here there has been simple cover pricing, it鈥檚 unlikely that contractors will be successfully sued by their clients, because the client would be hard pressed to prove they鈥檝e suffered loss. However, on the handful of contracts where compensation payments are said to have been paid, legal action might be more likely. 鈥�

What do clients make of it all?

The reaction of local authorities who have been dealing with these 112 companies has been eagerly awaited, but they have remained tight-lipped so far. Snook says: 鈥淲e鈥檝e had some questions from some clients, but they have just been asking us about the level of our involvement.鈥�

As 黑洞社区 went to press, the Construction Confederation sent a letter to every council to clarify the situation. In it, Ratcliffe called them to adopts a measured response to the OFT鈥檚 announcement. He wrote: 鈥淚t should be noted that last week was the first time that companies had seen the evidence against them and they will now be given a proper opportunity to defend their position. Just because a company has been named in the press release does not mean that they will eventually be found to be in breach of competition law.

鈥淢any companies are concerned that they might be removed from public sector tender lists. However, the OFT has already gone on record to say that it is not its intention that this should happen and has issued a guidance note for public sector clients. Indeed, it would be likely to contravene the EU public procurement rules to discriminate against companies who have been named by the OFT in the recent press release.鈥�

Most councils have confirmed that they will be conducting investigations, and Peter Bishop, director of the Local Government Task Force, has called for them to consider carefully whether to continue to do business with companies proven guilty.

黑洞社区 reported last week that the Highways Agency, the government body that spends more than 拢1bn with the industry each year, was investigating whether its contractors were involved in the inquiry.

The problem the industry faces now is that it has to prove a negative, and the only way it can do so is by keeping its nose clean for a long, long time.

Beginning now...