Construction firms facing inquiry by OFT over ‘price fixing’
A RECENT STATEMENT, on the 17 April 2008, from the Office of Fair Trading (OFT), about ‘rigged bids’ for building contracts reads like a listing of the UK construction industry. Although the investigation by the OFT originated from a specific complaint about irregularities that surfaced in a 2004 Nottingham hospital contract, it soon became apparent that ‘price-fixing’ in public contracts was widespread. Industry insiders believe that it may be pushing up the cost of schools and hospitals, by 10%. Limited and scarce resources has restricted the probe to just three areas of England, but many of the companies named by the OFT, including Balfour Beatty and Carillion, are also major players within the Scottish public-sector construction programmes.
The focus of the OFT investigation has been on “cover pricing”, the euphemism for deliberately losing a contract by placing a higher bid than one’s competitors. Building contractors claim this is a legitimate business practice when they do not want the job in question but wish to be considered for future work. This is disingenuous and devious. At best, it delivers a false and inaccurate impression of the competition. Often, it has involved collusion, which breaches the 2000 Competition Act. At worst, the winner makes payments to the companies that deliberately lose out, using fake invoices, usually for non-existent consultancy work. Alternatively, the winner may allocate sub-contract work on the main project in their direction.
The paradox, here, is that the privatisation and outsourcing of public sector construction work was driven by the inherent belief that it would provide the best value for the taxpayer. Presently, infringements being investigated are nothing more than allegations, but the vast swathe of companies admitting price-fixing (and pleading for leniency) indicates, quite clearly, that there is plenty of fire behind the smoke screen. It is imperative that the level of fines and penalties sends a strong signal to the industry about the seriousness of what, ultimately, amounts to swindling of the public. In the view of the writer, the worst offenders deserve to be ejected, unceremoniously, from the approved contractor’s lists.
On the positive side, ‘single-stage competitive tendering’, in which the criterion was the lowest price, is gradually giving way to a more rigorous and exacting process of pre-qualification for the tendering of contracts, involving long-term framework caveats and agreements. Where there is scope for collusion, it is essential that checks exist in carrying out due diligence by removing or impinging upon improper links between contractors, even if this marginally increases the cost of the tendering process. Better that, surely, than paying an artificially inflated price following a bogus competition.
The UK construction industry has enjoyed steady economic growth since 1994, and employs approximately three million people. It has benefited from increased public investment in schools and hospitals, largely through the operation of the PFI scheme. The 2012 Olympic Games in London, and Glasgow’s Commonwealth Games in 2014, offer a further construction boom, but there are issues the industry must get to grips with. Illegal cartels, and the operation of price-fixing mechanisms, damage the economy by pushing up the costs of buildings that are picked up by the taxpayer. It has to stop.
Notes from the OFT Report:
. The OFT listed some of the biggest names in the business – companies such as Balfour Beatty, Carillion, Kier and Henry Boot. It is alleged that such companies had engaged in cartels that led to inflated contract prices.
. Major public bodies – local authorities, health services and government departments – are among those who have paid more on behalf of taxpayers than they need have.
. The OFT said it had issued a Statement of Objections (SO) against 112 firms in the construction sector after one of the largest ever Competition Act investigations.
. Cover pricing arrangements have previously been found by the OFT and the Competition Appeal Tribunal to be illegal and unlawful, and in breach of the Competition Act 1998.
. The SO allegations cover a diverse range of projects, including tender for schools, university and hospital projects.
Contracts
. Contracts currently being undertaken by Balfour Beatty include facilities management at Hunterston B and Torness nuclear plants, worth £50-million annually, a share in the £480-million final link of the M74, the final phase of restoration of the Forth bridge valued at £74-million, and the two Ambulatory Care and Diagnostic Centres in Glasgow.
. Carillion has recently sealed a deal with South Ayrshire Council to build six schools in the region under a shared £76-million PPP project. Its first education PPP contract in Scotland was the £100-million Renfrewshire Schools project for the construction of nine new schools. It has also been involved in converting a 5-mile stretch of the A74 near the border.
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Filed under: balfour beatty, carillion, cartels, competition act, competitive tendering, contract tendering, cover pricing, office of fair trading, pfi, ppp, price fixing, rigged bids, uk construction industry
