OFT construction investigation
The Office of Fair Trading ("OFT")
has issued a Statement of Objections ("SO") in
its much publicised investigation into alleged anti-competitive
tendering practices in the UK construction industry. The
OFT named 112 companies in its press release as having
allegedly been engaged in certain bid rigging activities.
The SO is only an intermediary stage
in the investigation and represents the provisional findings
of the OFT. It sets out the OFT's case against the companies
involved and will be the first time that many of the companies
will have seen the evidence against them. The SO is made
available only to the companies that are caught up in the
investigation and its purpose is to enable each company
to exercise its rights of defence.
The OFT has not at this stage imposed fines on any company but the SO does
provide some guidance on how fines will be calculated. It is only when the
final decision is published – probably in early 2009 - that the actual
fines will be announced. In the meantime, each firm will have more than 2 months
to prepare written representations in response to the SO and, if it wishes,
an oral hearing with the OFT case team.
Cover pricing is an outdated industry-wide
practice that went on for many years and wasn't generally
understood to be illegal by the participants at the time.
For the most part, cover pricing did not have an effect
on competition in the sense of increasing prices to customers.
The purpose of taking a cover price was to enable the company
in question to provide a bid that appeared plausible but
would not win the work. Yet it would still be close enough
to the winning bid so that the firm could stay on the tender
list. Crucially, during the tender process there would
almost always still be a number of competing tender bids
so the winning price would be a competitive price.
As the OFT admits, the bulk of the alleged
infringements involved this type of cover pricing rather
than a more aggravated form involving "compensatory
payments", evidence of which the OFT said that it
found in a "minority" of cases.
The maximum fine that the OFT can impose is 10% of the global turnover of a
firm but it will usually be significantly less. The industry has called on
the OFT to take into account the minimal effect, if any, on competition arising
from the practice of cover pricing and to take a proportionate response when
calculating the level of penalties. If penalties are set at a disproportionately
high level, it would arguably have a negative effect on competition if contractors
were to be put out of business.
