The national and European authorities are determined to wipe out all cartel activity in British construction, and they have to means to do it, too. You have been warned
The Competition Appeal Tribunal recently upheld the OFT’s decision to fine a group of roofing contractors for bid rigging (see 4 March, page 16). Afterwards, Sir John Vickers, chairman of the OFT, commented: “Evidence on cartel activity in the construction sector is mounting. This is likely to be the first in a series of construction cartel cases”.
His is the latest in a long line of warnings to the construction industry – the OFT has recently made similar noises in its annual plan for 2005/6 (see 12 January, page 52). The watchdog’s policy division has confirmed that its construction focus is driven by “a number of live competition enforcement cases”, which pick up on two of its chosen priorities – construction and public procurement.
The OFT has made clear that it will punish violations severely, possibly with fines of up to 10% of worldwide turnover. The double-glazing and roofing companies that have so far been caught out have had to hand over more than £2m; and with a solid track record so far for having cartel decisions upheld by the Competition Appeal Tribunal, the OFT will be confident of taking more enforcement action.
But the problem in the UK is as nothing compared with cartel behaviour at the European level. More than one-quarter of all European commission cartel decisions have related to the construction industry, and have resulted in a staggering total of €1.5bn (£1bn) fines. Whether it is beams, pipes, bars, tubes, cement or roofing felt, European companies have tried to cartelise the lot. The commission may have started gently, imposing a fine of €1m (£700,000) on a roofing-felt cartel in 1986, but by 2002 it had slapped a fine of €250m (£170m) on one company and its second largest overall fine, of €78m (£330m), on a plasterboard cartel.
It was in the plasterboard case that Mario Monti, the former commissioner for competition, singled out the construction industry for special attention. He stated that: “The building industry is the pulse of the economy. The substantial amount of the fine reflects the size of the market, the impact of the illicit agreement on the consumer and the repeated infringement of the competition rules by two of the companies.
The commission is focusing its drive to stamp out cartels on the key sectors of the European economy, where its action can directly improve the wellbeing of consumers, as is the case here.”
And if ever there was an indication of things to come, look no further than the Netherlands, where a special team has been set up to tackle cartel activity in the construction sector. By 2003, the team had imposed 26 fines on construction companies in six cartel cases involving price-fixing, market-sharing and bid-rigging. In fact, evidence of cartels in the construction industry proved to be so abundant that a special leniency procedure had to be introduced in 2004 to cope with nearly 400 notifications, involving, to date, fines of some *135m (£90m) for nearly 350 construction companies.
If developments in Europe are anything to go by, the UK construction industry has every reason to be wary. This is partly because of the fines imposed by the authorities, but also because regulators are increasingly confident of having their decisions upheld in court. The industry can expect more prosecutions, and if found guilty, a firm can then be sued by those that have suffered loss.
Added this, the authorities have improved their effectiveness by creating a special court designed to cartel claims, and enforcement has become a central pillar of the European commission’s modernisation programme.
And although companies face the risk of financial loss, individuals engaged in cartel activity in the UK may also be liable to criminal prosecution. If found guilty, they could face prison sentences of up to five years, fines and, for directors, disqualification from office. With the competition authorities buoyed by their recent successes, the risks for the construction industry are increasingly tangible. The need to review business practices and consider educational programmes to ensure long-term compliance with the rules has never been more pressing.
Salim Gunny is a solicitor in the competition law team at CMS Cameron McKenna