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[2016] ZACT 88
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Competition Commission v Isipani Construction (Pty) Ltd and Another (CR128Nov14) [2016] ZACT 88; [2016] 2 CPLR 516 (CT) (18 July 2016)
NON-CONFIDENTIAL
VERSION
COMPETITION
TRIBUNAL OF SOUTH AFRICA
Case
No: CR128Nov14
In
the matter between
:
COMPETITION
COMMISSION
Applicant
And
ISIPANI
CONSTRUCTION (PTY)
LTD
First
Respondent
NEIL
MULLER CONSTRUCTION (PTY)
LTD
Second
Respondent
Panel
:
A Wessels (Presiding Member)
:
M Mokuena (Tribunal Member)
:
A Roskam (Tribunal Member)
Heard
on : 17 August 2015
Last
submission received : 30 September 2015
Order
Issued on : 18 July 2016
Reasons
Issued on
:
18 July 2016
Reasons
for decision
Introduction
[1]
This case
involves
a
complaint referral by the Competition Commission ("the
Commission") in terms of section 50(1) of the Competition Act
,
89 of 1998 ("the Act"). The
Commission's case before us was that the First Respondent, lsipani
Construction (Pty) Ltd
("lsipani") had entered into a
collusive agreement with the Second Respondent, Neil Muller
Construction (Pty) Ltd ("NMC")
in respect of two separate
tenders, in contravention of section 4(1)(b)(iii), alternatively
section
4(1
)(b)(i)
and/or section 4(1)(b)(ii) of the Act.
[2]
The issue of merits has since been settled since lsipani has admitted
the collusive conduct alleged in the complaint referral.
[1]
[3]
Thus the only remaining issue that falls to be determined by the
Competition Tribunal ("Tribunal") is that of the
administrative penalty to be imposed on lsipani in terms of section
59 of the Act.
[4]
We note that the Commission sought no penalty against NMC, as it
applied for, and was granted, conditional immunity on 11 April
2011
in terms of the Commission's Corporate Leniency Policy ("CLP").
[2]
[5]
As we discuss below, the defence taken by lsipani is two-fold:
(1)
whilst it admits the contravention of
section 4(1)(b)(iii) of the Act by engaging in the conduct of two
separate instances of cover
pricing, it alleges that the Commission's
insistence on the maximum penalty of 10% of its turnover for each
contravention is unjustified
in the circumstances; and
(2)
that the upper threshold of 10% of
turnover should be reserved for the most egregious contraventions of
the Act, within which, it
alleges, cover pricing does not fall.
Background
[6]
As part of the Commission's fast track settlement process of cartel
activity in the construction industry, the Commission
,
on 01 February 2011 issued an invitation
in terms of section 21 of the Act to all firms in that industry, to
engage in settlement
of contraventions of the Act ("the
Invitation").
[7]
Under the Invitation, firms were required to apply for settlement by
disclosing all construction projects that were subject
to collusive
practices. The collusive
conduct,
in the context of the Invitation, included collusive tendering or
"bid rigging" (which would include cover pricing).
[8]
A cover price is normally a price provided by a firm that does not
wish to win a particular tender, to a competing firm that
does wish
to win that tender, to enable the firm that wishes to win the tender
to submit a lower price. A cover price may however
also be a price
that is provided by a firm that wishes to win a tender to a firm that
does not wish to do so. In the latter case
the cover price is given
to enable the firm that does not wish to win the tender to submit a
higher price than its competitor for
the same tender.
[9]
lsipani described the (latter) practice as follows:
"From
time to time,
a
construction
firm would be invited to tender for
a
project it did not wish to tender
for, due to the location, nature, profitability or difficulty of the
project
,
or
simply the availability of capacity to take on the project.
Being
invited to tender usually means that one is on the client's tender
list. The fear that construction
firms
have
s
that if they do not submit
a
bid in response to an invitation,
they will be taken off the tender list and accordingly not be invited
by the
client
to tender for future projects. Construction firms therefore felt that
they had no choice but to supply
a
tender price for every tender that
they were invited to participate in, even though they did not have
the capacity to take on the
project
should their bid be the successful
one.
Thus
a
firm
might, in such circumstances, request
a
cover
price from
a
competitor.
The firm has made an independent decision not to compete for
a
tender,
but nevertheless wishes to submit
a
bid.
It is however important to the firm that the bid
not
succeed, and in order to ensure that it
does
not,
the price that is bid
-
the
cover price
-
is
above that
of
the
competitor from which the price has been requested. "
[3]
[our
emphasis]
[10]
The Tribunal questioned Mr Arangies, the Managing Director of lsipani
since 2010, about his knowledge of the interaction between
lsipani
and its competitor, NMC, at the time of the collusive conduct. Mr
Arangies explained this interaction as follows
:
"They
[NMC] would have phoned my office and spoke to my colleague that was
responsible for tenders and they would ask that
we've been invited
for this tender, but they are not interested and will he give them
a
cover
price, once they phone
him,
to get that."
[4]
He initially went on to testify that it was clear to lsipani what
NMC's intention must have been when it requested a cover price.
[5]
Upon further questioning by the Tribunal he however said
"/
wasn't part of the conversations.
So,
I'm
not 100% sure if they [NMC] said that they aren't interested in the
work. I can't, sorry.
"
[6]
[11]
Mr Arangies further testified that
"
We[lsipani] wanted the work. We tendered for it. We worked out the
tender and then they [NMC] said give
us
a
price
higher than yours
....
So,
in
both instances we wanted the work
...."
[7]
He confirmed that to his knowledge lsipani gave NMC an inflated price
above its own tender price.
[8]
[12]
As stated above, lsipani has admitted that it contravened the Act by
engaging in collusive conduct by providing cover prices
to NMC for
two separate tenders. These contraventions occurred between August
and November 2010 when lsipani provided cover prices
to NMC in
respect of two separate tenders. The first tender, in August 2010,
related to the construction of a private building
in Stellenbosch,
also known as the 'Tienie Louw Project". The second tender, in
November 2010, related to alterations and
additions to the
multi-storey building at the University of Stellenbosch's engineering
faculty ("the University of Stellenbosch
Project").
[13]
We note that lsipani did not participate in the above-mentioned fast
track process for construction firms to settle contraventions
of the
Act, notwithstanding the fact that it was aware of its involvement in
cover pricing in both construction projects, and of
the settlement
process initiated by the Commission.
[9]
It must be stressed that the fast track settlement process was highly
publicized.
Appropriate
penalty
[14]
Section 59 of the Act empowers the Tribunal to levy administrative
penalties for contraventions. The relevant sections of the
Act reads,
"(1)
The Competition Tribunal may impose an administrative penalty only
-
(a)
for a prohibited practice in terms of
section 4(1)(b)...
;
(2)
An administrative penalty imposed in terms of subsection (1) may not
exceed 10% of the firm's annual turnover in the Republic
and its
exports from the Republic during the firm's preceding financial
year."
(3)
When determining an appropriate penalty, the Competition Tribunal
must consider the following factors:
(a)
the nature, duration, gravity and
extent of the contravention;
(b)
any loss or damage suffered
as
a
result of the contravention;
(c)
the behaviour of the respondent;
(d)
the market circumstances in which the
contravention took place;
(e)
the level of profit derived from the
contravention;
(f)
the degree to which the respondent
has co-operated with the Competition Commission and the Competition
Tribunal; and
(g)
whether the respondent has previously
been found in contravention of this Act.
[15]
In calculating the administrative penalty we will follow the approach
adopted by the Tribunal in the
Competition
Commission v Aveng.
[10]
In
that case the Tribunal identified a six-step approach for determining
a fine in accordance with section 59 of the Act. We will
be using
these steps to determine the appropriate fine for lsipani. These
steps are as follows:
15.1.
Step one:
determination
of the affected turnover in the relevant year of assessment;
15.2.
Step two:
calculation
of the 'base amount,' being that proportion of the relevant turnover
relied upon;
15.3.
Step three
:
where the contravention exceeds one year, multiplying the amount
obtained in step 2 by the duration of the contravention;
15.4.
Step four
:
rounding off the figure obtained in step 3, if it exceeds the cap
provided for by section 59(2);
15.5.
Step five
:
considering factors that might mitigate or aggravate the amount
reached in step 4, by way of a discount or premium expressed as
a
percentage of that amount that is either subtracted from or added to
it;
15.6.
Step
six
:
rounding off this amount if it exceeds the cap provided for in
section 59(2). If it does, it must be adjusted downwards so that
it
does not exceed the cap.
[11]
[16]
The
Commission
contended that lsipani must be given the maximum penalty of 10% of
its annual turnover for each instance of cover pricing.
[12]
[17]
lsipani disagreed with the Commission's contention that it should be
fined separately for each admitted instance of cover pricing.
lsipani
alleged that when it was discussing or providing a cover price to NMC
in August 2010, there was no indication that the
November 2010 bid
could even have been made or that lsipani was not aware of the
November 2010 bid
.
lsipani
thus argued that the fine must be calculated as one and not two
self-standing contraventions of the Act.
[18]
The fact is that lsipani admitted two separate instances of cover
pricing. The first instance relates to the Tienie Lauw Project
and
the second to the University of Stellenbosch Project.
[19]
We agree with the Commission that each instance of a cover pricing
constitutes a separate self-standing infringement of the
Act. This is
consistent with the approach followed by the
Office
of Fair Trading
and
the
Competition
Appeal
Tribunal
in
Kier
Group PLC and others v Office of Fair Trading
[13]
where each of the Appellants were fined separately for each cover
pricing infringement.
[20]
However, we have the discretion based on the facts of each case
in the interest of fairness and the doctrine of
proportionality to
decide how to levy an appropriate administrative penalty pursuant to
section 59(3) of the Act. In this case
we have decided to levy a
single administrative penalty in respect of the two separate
incidences of cover pricing. In our decision
we were cognizant of,
the fact that there was a second, separate contravention of the Act
in our final calculation of the single
penalty amount.
[21]
We now tum to deal with each of the above-mentioned six steps to
determine the penalty.
STEP
ONE
[22]
The above-mentioned Tienie Lauw Project and the University of
Stellenbosch Project fall within what would be classified as
building
projects. Both the Commission and lsipani agreed that lsipani
generates revenue from building contracts and therefore
the relevant
market is the market for construction services.
[23]
The Commission argued that lsipani
'
s
total turnover for its financial year ended 30 June 2012 should be
used for the calculation of the penalty in respect of each
of the
contraventions.
[24]
lsipani argued that the appropriate year to use would be its
2011financial year and that only a part of its turnover, i.e.
turnover excluding negotiated contracts, should be used for the
calculation of the penalty.
[25]
Two issues fall to be decided under this step. First, the appropriate
year for the determination of the turnover. Second, whether
the
penalty should be based on total turnover (as contended by the
Commission) or whether a distinction should
be drawn between tendered and
"non-tendered" (or negotiated) turnover (as contended by
lsipani).
Appropriate
year of turnover
[26]
The Commission submitted that the relevant year should be determined
with reference to when the collusive practice ceased.
The relevant
year that the practice ceased will be dealt with in more detail below
in step three, since the Commission submitted
that the collusive
arrangement between the parties, or the effects of lsipani's
contravention of section 4(1)(b)(iii) of the Act
did not cease at the
date of the agreements with NMC, but endured beyond that time.
[14]
The Commission therefore argued that lsipani's 2012 financial year is
the relevant affected turnover year.
[27]
lsipani was of a different view and submitted that the relevant
financial year to use should be 2011, based on the fact that
(i) the
conduct took place between August and November 2010; and (ii)
lsipani's financial year end is 30 June.
[15]
Therefore, according to lsipani, the conduct took place (and ended)
in the 2011financial year. lsipani furthermore argued that
the
Commission referred incorrectly to the
Aveng
decision
to find application to the provision of "simple cover pricing".
lsipani contended that it is preceded by the
rationale that the
affected turnover
"is
based on sales of the products or services that can be said to have
been affected by the contravention".
[16]
[28]
We submit that, although not expressly considered in the
Aveng
decision
[17]
,
the act of cover pricing is an offence in terms of section
4(1)(b)(iii) of the Act and thus falls to be determined under the six
step process as set out in the
Aveng
decision.
[29]
In the
Aveng
decision the Tribunal held that the relevant year
of assessment is
"the last financial year of the period for
which we have evidence that the cartel existed."
[30]
The Commission contended that the practise of cover pricing involved
a reciprocal obligation to provide lsipani, in this instance,
with a
cover price at a later stage, if required. Mr Arangies confirmed this
under cross examination: -
MR
QUILLIAM
: Okay. Following
from the August 2010 and the November 2010 tenders for the
university, based on your understanding of simple cover
pricing as
well as the indirect benefit that you
have alluded to if in the future lsipani could at least approach NMC
for
a
reciprocal
benefit of the same, would you provide me with the cover price,
merely the question. If such
a
situation arose, would you ...
let's just ask it this way. Was there
any opportunity in the future that lsipani approach NMC to cash in at
this indirect benefit?
MR
ARANGIES
: Yes, it might be.
MR
QUILLIAM
: Let me just
understand the question. So, it certainly is possible based on what
you've just said that lsipani could have approached
NMC to provide it
with
a
cover
price on
a
certain
bid.
MR
ARANGIES
:
Yes.
MR
QUILLIAM
: Following the November
2010 tender. Is that correct?
MR
ARANGIES
:
Yes.
[18]
[31]
We concur with the Commission that the reciprocal benefit of the
conduct to lsipani ceased only when lsipani abandoned this
benefit,
which it did on 23 November 2011. In this regard lsipani, having
taken legal advice pursuant a Commission letter of 23
November 2011
in which it was accused of bid rigging, ceased all communication with
NMC and any involvement in cover pricing.
[19]
[32]
We have further considered the fact that the effects of this conduct
on competition would have endured for as long as the intention
of NMC
being retained on the university's tender list was realised, which,
although we do not have a precise date for this, went
beyond November
201O
;
NMC's
intent, according to lsipani
,
was
to remain on the university's tender list for future building
projects whenever they occurred.
[33]
Thus given the evidence that the conduct took place in the year 2010,
but was only ceased in November 2011, the turnover for
the 2012
financial year should be used for calculating the penalty.
Total
turnover or only "non-tendered" turnover
[34]
The Commission contended that the penalty should be based on
Isipani's total turnover.
[35]
lsipani however argued that a distinction should be drawn between
tendered and "non-tendered" (or negotiated) turnover.
According to Mr Arangies negotiated contracts occur where a client
selects its builder of choice and negotiates a contract with
that
builder. He further contended that cover pricing does not arise in
respect of these contracts. Based on this logic lsipani
contended
that the affected turnover should be calculated on the basis that
only turnover resulting from invited tenders should
be considered and
not lsipani's overall annual turnover. This would significantly
reduce lsipani's turnover to be used for the
calculation of the
administrative penalty.
[36]
We disagree with lsipani's argument that only turnover resulting from
invited tenders must be used for the calculation of the
administrative penalty. The CAC confirmed that affected turnover can
be used in the initial determination as to a penalty to be
formulated
in terms of section 59(3)
.
[20]
There is no basis to deviate from the Tribunal's previous
interpretation that affected
I
relevant
turnover means the line of business or the market in which the
contravention has taken place.
[21]
As pointed out in
Aveng,
affected
turnover must however not be conflated with a relevant market
approach - the former does not demand the rigour or precision
required of the latter.
[22]
[37]
Thus we conclude that lsipani's total turnover for its financial year
ended 30 June 2012 of R[...]
[23]
should be used for the calculation of the administrative penalty.
STEP
TWO
[38]
The next step is to calculate the base amount, i.e. that percentage
of relevant turnover to take into account in the calculation.
[39]
The issue
inter a/ia
is how cover pricing, as a specific class
of cartel conduct, viewed in the context of other collusive conduct
such as price fixing
and market division, should be treated for
purposes of determining administrative penalties.
[40]
The Commission suggested a base amount of 17% for each contravention.
lsipani suggested a base amount of 10%.
[41]
As per the
Aveng
decision we considered the available evidence
relating to (i) the nature, gravity and extent of the contravention;
(ii) any loss
or damage suffered as a result of the contravention;
and (iii) the market circumstances in which the contravention took
place.
[42]
Contraventions of section 4(1) of the Act constitute
per
se
offences
and are considered the most serious of the contraventions of the Act.
Of these contraventions bid rigging is seen as more
harmful than even
price fixing because of the fact that it is so much easier for the
cartel members to enforce.
[24]
[43]
We further agree with the Commission's argument that cartel conduct
was so pervasive in the South African construction industry
that the
appropriate administrative penalty (i.e. the percentage of the
relevant turnover to be used in this step) should be sufficiently
high to constitute an effective deterrent to lsipani, as well as
other firms, from engaging in such collusive conduct in the future.
[44]
This approach would suggest that the percentage on which to calculate
the base amount should be closer to the 30% upper bound.
However, in
this case given that lsipani did not directly profit from the cover
pricing since it was ultimately unsuccessful in
winning the two
tenders in question, the gravity of the conduct is reduced from what
it might have been otherwise. This however,
does not mean that
lsipani's conduct did not harm the competitive process, as we explain
below.
[45]
In the two instances in 2010, where lsipani provided NMC with cover
pricing, the alleged intention of NMC, according to lsipani,was
to
submit a bid at a higher price than lsipani in order to ensure that
it did not win the tender, but remain on the University's
tender list
to be invited to tender for future projects. lsipani, on the other
hand, in both instances submitted bids with a view
to being awarded
the tenders, although in the end it was unsuccessful in both
tenders.
[25]
[46]
The harm of this practice can be explained with reference to the
customer, the University of Stellenbosch. The University uses
a
closed tender process in terms of which it only invites pre-selected
contractors to tender. On lsipani's version, by colluding
with NMC,
it enabled NMC to bid for a tender that it could not perform. By
colluding NMC provided the University with false information
on its
pricing, capabilities and capacities, therefore deliberately
misleading the customer since it was not able to properly and
honestly bid for the tender. More importantly, NMC tendered at an
inflated price above that of its competitor which gave the customer
a
false sense of the level of competitive prices for each project.
[47]
lsipani submitted that the fear existed that by not tendering the
pre-selected contractors may be excluded from future invitations
to
tender. Thus, absent cover pricing, the non-bidding firm may be
removed from the tender list and be replaced with a firm that
is able
to submit a competitive bid. The harmful effect of this to
competition is that it excludes other
more competitive firms from being placed on the University's tender
list, and thus undermines
not only the current tender process, but
also future competitive tender processes.
[48]
This echoes the sentiments expressed by the CAT in
Kier
where
the CAT analyzed the harm associated with simple cover pricing as
follows:
"Some
of the effects there mentioned may also occur where an unwilling
bidder, rather than requesting
a
cover price, simply decides to have
a
stab at formulating
a
bid which is sufficiently high to
ensure that he does not win. Such
a
bid would hardly be regarded as truly
"competitive': and the anticipated number of competitive bids
may therefore still not
necessarily be received by
the client even though no cover price
has been provided. On the other hand, as the OFT points out, the
bidder may risk losing credibility
if his inflated bid is very out
of
line with other bids. Cover pricing
therefore provides protection from that particular element of
competition and is thereby capable
of providing an illicit advantage
in relation to future tendering exercises
.
In the absence of cover pricing,
companies who were invited to bid but did not want the work would
either have to take the credibility
risk associated with an
artificially inflated bid
,
or
decline the invitation to tender at the appropriate time. In the
latter case the client would normally be in
a
position
to
invite
a
substitute tenderer who might
well be interested in obtaining the
work, and would therefore submit a competitive bid.
It
is an unlawful practice which at the very least may deceive the
customer about the source and extent
of
the
competition which exists for the work in question, and which is
capable of having anti-competitive effects
on
the
particular tendering exercise and on future exercises."
[26]
[49]
Furthermore, based on the number of contraventions admitted to by
numerous construction firms to date, it is clear that the
practice of
cover pricing was pervasive in the construction industry at the time.
In fact it was so prevalent that Mr Arangies
claimed
to have not taken up the Commission's invitation because he did not
consider that cover pricing was a contravention of the
Act.
[27]
Throughout these proceedings lsipani maintained that cover pricing
was a practice so common that it was even mentioned in University
lectures - Mr Arangies testified to this effect
"one
of my partners studied
a
degree
in construction science and they learnt the
terminology
in university'.
[28]
[50]
All that the above demonstrates is the widespread and blatant
disregard by the South African construction industry in general
for
competition and the Act for an extended period of time, as borne out
by the large number of contraventions of section 4(1)
of the Act by
numerous firms in the construction industry to date, including many
instances of cover pricing.
[51]
Given all of the above, we are discounting the base figure that might
otherwise have been applied to a collusive bidding cartel,
from 30%
to a base amount of 12%. This gives a figure of R[...] as the base
amount.
STEP
THREE
[52]
In this step we consider duration.
[53]
As already stated above, according to the Commission the collusive
agreements included a benefit that NMC would reciprocate
a cover
price to Isipani, when needed; and the objective of the collusive
arrangements being NMC remaining on the customer's tender
list, was
only realised or abandoned after the conclusion of the collusive
agreement. The Commission therefore contended that the
effects of
each of the collusive agreements lasted longer than a year and that
the agreements
I
benefits
I
effects
only ceased later when the terms or purpose of such collusive
agreements had been fulfilled or abandoned. This occurred
when
Isipani abandoned this benefit by repudiating the collusive
agreements on 23 November 2011.
[29]
[54]
The Commission relied on
Competition
Commission vs RSC Ekusasa Mining (Pty)
Ltd:
[30]
"Quite
clearly the legislature contemplated the practice as having
ceased
when its effects have ceased.
..
The choice of the term 'ceased'...suggests
a
practice that
is
on-going or continuous in nature. and that has ended
.
and not an act which occurred only in
a
moment in time.
Even
if the initial agreement precedes the cut-off date, if the
subsequent
acts of execution have effects that succeed it. the practice has not
'ceased' but is continuing
after
the cut-off date and therefore is not barred in terms of section
67(1). Whether there are effects, and what constitutes 'effects',
is
a
matter
for evidence in each case."
[55]
lsipani argued that the collusive conduct ceased in November 2010. It
therefore suggested a multiplier of 1.
[56]
Mr Arangies was asked if there were other tenders by the University
that NMC and lsipaniwere invited to tender for following
the November
2010 project, to which he responded as follows:
"Ja,
I can't remember
now.
"
[31]
[57]
He went on to acknowledge at least two further tenders of the
University from which lsipani received income, i.e. (i) project
number 199 US Library; and (ii) project number 222 US Food Sciences.
He could however not confirm or deny that NMC was on those
tender
lists.
[32]
[58]
Furthermore, as stated in paragraph 30 above, Mr Arangies confirmed
that the conduct in question could result in a future reciprocal
benefit to lsipani.
[59]
We concur with the Commission that the conduct ceased only when the
effects of the conduct and the benefits to lsipani ceased.
The
evidence was that the benefits to lsipani ended only on 23 November
2011 when it ceased and abandoned all collusive conduct.
[33]
[60]
Based on the above, the duration of the first contravention is [•••],
i.e. [••.]. This can be translated
into a multiplier of
[•.•]. Applying this multiplier gives an amount of R[...].
STEP
FOUR
[61]
The
"preceding financial year'
should, generally, be the
most recent completed financial year before the imposition of a fine.
According to the Commission, the
relevant year for calculation of the
10% cap is lsipani's 30 June 2014 financial year, since lsipani's
2015 financial statements
have not yet been audited.
[62]
lsipani however submitted that the Tribunal should consider using an
earlier year's turnover for the purposes of determining
whether there
should be a rounding down. lsipani submitted that the collusive
practices ended in 2010 and it has taken a number
of years for the
case to be heard before the Tribunal and lsipanihas since
significantly increased its turnover
.
The Tribunal was therefore requested to
not use the years in which it increased its turnover but rather the
older years when the
turnover was significantly lower.
[63]
We concur with Commission that the year 2014 is the relevant year for
purposes of applying the 10% cap. 10% of lsipani's turnover
for its
financial year ended 30 June 2014 is R[...]. Thus the above figure of
R[...] need not be rounded off
.
STEP
FIVE
[64]
We next consider if the above amount should be adjusted either
upwards or downwards by a percentage depending on the balance
of the
mitigating and/or aggravating factors present.
[65]
We do the above by considering
inter
alia
the available evidence relating
to the behaviour of the respondent; the level of profit derived from
the contravention; the degree
to which the respondent has co-operated
with the Commission and the Tribunal; whether the respondent has
previously been found
in contravention of this Act; as well as the
fact that there was a second, separate contravention of the Act given
the November
2010 cover pricing occurrence.
[66]
The Commission argued that the aggravating factors in this case, at
the very least, counterbalance any valid mitigating factors.
The
Commission therefore contended that no discount should be applied in
terms of this step.
[67]
lsipani,on the other hand, argued that the amount be reduced by a
mitigation factor of 75%.
[68]
We have found some mitigating and some aggravating features of
lsipani's behaviour. We first deal with the mitigating features.
[69]
The mitigating features of lsipani's behaviour are that (i) lsipani
is a first time offender of the Act
;
and
(ii) it was common cause that lsipanidid not directly profit from the
cover pricing in question, since it was not awarded any
of the
tenders in question. We have further considered that lsipani accepted
that what it did was illegal under the Act by pleading
guilty to the
conduct.
[70]
The above must however be weighed up against the fact that the
conduct of cover pricing is harmful to competition and future
competition, as explained above.
[71]
Although Mr Arangies testified that cover pricing was so endemic at
the time of the contravention that lsipani was simply unaware
that it
was illegal, he recognised
that
ignorance of the law can never be a defence in respect of
culpability.
[34]
Cover prices
were provided by experienced businessmen in the construction industry
that ought to have known that engaging with
a competitor on price was
a contravention of the Act. Many construction firms have admitted to
cover pricing being an infringement
of the Act and have settled
matters with the Commission on this basis.
[72]
An aggravating factor in this case is that a procurement director,
being a high level employee of lsipani was involved in the
collusive
arrangement. Furthermore, by his own admission the CEO of lsipani was
aware of the practice of cover pricing and aware
of the Commission's
above-mentioned invitation for firms in the construction industry to
settle contraventions of the Act as part
of a fast-track settlement
process. However, this invitation was ignored.
[73]
We therefore find Mr Arangies' averment that when lsipani contravened
the Act - by openly discussing tender prices with its
competitor in
the market - it acted in ignorance of the law, not to be a credible
argument. No mitigation is given to this.
[74]
lsipani further argued that a substantial penalty will set its BBBEE
initiative back by at least 3 years, as the adverse effects
of the
proposed penalty on lsipani's business and on future contracting
opportunities will mean that there will be no dividends
declared
within wh
i
ch
to repay the loan of the BBBEE participants. This would further
impact on lsipani's BEE status and its ability to tender for
Government projects.
[75]
More specifically, lsipani stated that it needs to retain sufficient
net assets in order to secure future work. For this reason
lsipani
declared minimal dividends
,
because
it wished to achieve a certain asset current liability ratio and
wishes to be registered as a CIDB grade 9 contractor, which
would
enable it to tender for Government work of a certain level.
[35]
It further submitted that it required R40 million capital available
for the purposes of this CIDB grade 9 rating
.
[36]
[76]
It further argued that lsipani's prospects of having sufficient
available capital to be legible for registration as a CIDB
grade 9
contractor, would be materially jeopardised by the Commission's
proposed penalty and further, that a very large penalty
would affect
dividend flow (and therefore it would take a longer period for the
BBBEE shareholders to buy their shares).
[37]
[77]
The Tribunal does not consider this argument to be a credible factor
in mitigation of lsipani's sentence. An administrative
penalty would
not exclude lsipani from tendering for Government work. Mr Arangies
confirmed that lsipani currently bids for Government
contracts under
a CIDB grade 8 grading. Government may however want to take note of
firms, like lsipani, that have been involved
in collusive conduct
when Government designs future tender processes and awards future
tenders.
[78]
As far as the capital requirement is concerned, we note that this is
only one of many factors taken into account when applying
for a CIDB
grade 9 classification. There is furthermore no evidence to suggest
that lsipani could not gain the benefit of a financial
sponsorship to
make up any shortfall to fulfilling the capital requirement and
strengthen its grading, if it chooses to do so.
[79]
The final aggravating factor is that lsipani is guilty of a second,
separate contravention of the Act, i.e. the November 2010
cover
pr
i
c
i
ng.
Since we have based our above calculations only on the first
contravention, this is a significant aggregating factor.
[80]
We
i
ghing up
all the mitigating and aggregating factors we reduce the amount of
R[...] by [...
]%.
Th
i
s
means that lsipani is liable for a penalty of R21 783 153.40 for both
contraventions.
STEP
6
[81]
The above figure is less than 10% of lsipani's total turnover for the
financial year ended 30 June 2014
.
There
is thus no need for any rounding off
.
Order
[82]
lsipani has admitted to have contravened section 4(1)(b) of the Act
by engaging in two separate instances of cover pricing
with NMC.
[83]
lsipani is ordered to pay an administrative penalty of R21 783 153.40
for both above-mentioned contraventions of the Act.
[84]
We make no order as to costs
.
11
July 2016
DATE
______________________
Ms
M Mokuena
Mr
A Roskam and Mr A Wessels concurring
Tribunal
Researcher:
Derrick Bowles
For
First Respondent:
Adv
.
Fagan
SC instructed by Werksmans Attorneys
For
the Commission:
Mr Layne Quilliam
[1]
Answering Affidavit paragraph 3.
[2]
Government Notice No. 628 of 23 May 2008, published in Government
Gazette No. 31064 of 23 May 2008.
[3]
lsipani's Answering Affidavit page 52 and 53 para 14 to 17.
[4]
Transcript page 87.
[5]
Transcript page 87.
[6]
Transcript page 87.
[7]
Transcript page 100.
[8]
Transcript page 100.
[9]
lsipani confirmed in its Answering Affidavit at page 54 para 20 that
it was aware of the Commission's investigations as well
as the fast
track settlement process.
[10]
The Competition Commission vs Aveng (Africa) Limited t/a Steeledale
and others (84/CR/DEC09)
[11]
Competition Commission v Aveng at para 133.
[12]
Founding Affidavit para 34.2.See also Calculation of Proposed
Penalty document dated 24 August 2015, provided by the Commission
in
response to a request by the Tribunal (“Commission Calculation
Document).
[13]
[2011] CAT 3
[14]
Transcript page 3.
[15]
Answering Affidavit para 27.
[16]
Competition Commission vs Southern Pipeline Contractors and others
(23/CR/Feb09) at para 44.
[17]
Which concerned the fixing of prices and levels of discount.
[18]
Transcript page 34.
[19]
See Answering Affidavlt page 62;Transcript page 35.
[20]
CAC, Southern Pipeline Contractors and another v The Competition
Commission, paragraph 52.
[21]
Tribunal, The Competition Commission v Southern Pipeline Contractors
and another, paragraph 44-45.
[22]
Competition Commission v Aveng (Africa) Ltd 84/CR/Dec09 par 37.
[23]
Certain information has been claimed as confidential by the
Respondent and has thus been removed from the Tribunal's public
reasons.
[24]
See Areeda and Hovenkamp, Antitrust Law, paragraph 2005b.
[25]
There were seven bids for the Tienie Lauw Project ranging from R12
280621 to R14 077 000; and eleven bids for the University
of
Stellenbosch Project, ranging from R26 692 370 to R29 746 800.
According to lsipani, its bids were not the lowest on either
project
and it was therefore not awarded either tender. NMC's bids were
allegedly higher than that of lsipani. Although neither
of these two
parties directly benefitted by winning the tenders, we have
explained how these parties' conduct would be harmful
to competition
not only in relation to the immediate tender but also future
tendering exercises.
[26]
Kier Judgment page 33 para 96, page 34 para 99.
[27]
Answering Affidavit, pages 53 and 54, para 18 to 21.
[28]
Transcript page 14.
[29]
Answering Affidavit page 61, para 41.
[30]
(65/CR/Sep09) at para 146 and 150.
[31]
Transcript page 31.
[32]
Transcript pages 31 to 33.
[33]
Answering Affidavit page 61, para 41.
[34]
Respondent Heads of Argument, para 51.
[35]
Transcript pages 11and 12.
[36]
Transcript page 12.
[37]
Transcript page 12 and 13.