Construction, cartels and collusion — surely not in our backyard?

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The construction sector is a major driver in the New Zealand economy. As with any market sector, those businesses that best meet customer demand — with competitive prices, and quality goods and services — will thrive.

In this way a competitive market is self-regulating, with consumers benefiting from the pressure to lower prices and raise quality. However, there will always be businesses that try to play outside the rules — by colluding with competitors, abusing market power or by misleading consumers.
Overseas, anti-competitive conduct in the construction sector is prevalent, and here in New Zealand, recent research commissioned by the Commerce Commission showed that there is a low level of understanding within the sector of what kinds of conduct and communications between competitors may be unlawful.

The research showed that many businesses are not aware of the consequences of breaching the Commerce Act, nor what the Commission’s role is.
The Commission is now taking a proactive approach to improve understanding of the Commerce Act, and help businesses that compete in the construction industry understand their obligations and change behaviour that may be putting them at risk of breaking the law.

What type of behaviour is unlawful?
A business may have some good reasons to talk with its competitors — for example, to discuss industry-wide issues and practices, or to share knowledge and technical information.
These discussions are fine. However, businesses need to remember that they are competing for customers, tenders and contracts, and should be careful to avoid colluding with their competitors as this would be illegal.

“Cartels are organised criminal syndicates. Brown paper bags filled with cash. It’s ongoing and organised crime . . .”
Wrong. A cartel is any kind of agreement between two or more competitors that affects or has a purpose of affecting price. So it’s much wider than just where an exact dollar value is fixed.

Any discussions with competitors about prices (including any components of price such as discounts, margins or surcharges), allocating customers (including by geographical area), tenders and output restrictions (such as production volumes) should be avoided. Agreements in these areas are likely to breach the Commerce Act.

Cover pricing — helping out a mate?
The Commission’s research also indicated the practice of cover pricing is occurring in the sector. Cover pricing involves competitors talking to each other to come up with a believable but not genuine bid for a job.

Cover pricing mostly occurs between “friendly” competitors, when one of the parties does not want to win a job, or is too busy to prepare a tender, but may want to stay on the project manager’s tender list.
It may also occur when a project manager asks a contractor to put in a cover price, because they want to prove to their client that a favoured contractor’s price is competitive.

“It’s perfectly normal business practice . . . It’s not collusive, it’s just business.”
Wrong again. Cover pricing is based on secret communications between competitors on prices to be charged and, therefore, puts participants at risk under the price fixing provisions of the Commerce Act.

For this reason, the Commission strongly advises businesses against taking part in cover pricing discussions under any circumstances.
In addition, cover pricing may be misleading or deceptive conduct under the Fair Trading Act, especially where a tenderer has signed an undertaking that its tender has been prepared independently.

A nod or a wink is enough
There doesn’t need to be a formal written agreement between competitors for there to be a breach of the Commerce Act. It can be just an understanding — a “nod or a wink” — reached between two or more competitors about how at least one of them will act, or not act.

Even an attempt by one party to make a collusive agreement can breach the Commerce Act. And parties who are not in competition but are involved in the agreements (such as consultants) are also liable if they facilitate such agreements.

At what cost?

There are heavy penalties for breaching the Commerce Act — up to $10 million for companies and up to $500,000 for individuals per breach, as well as the cost of court action. Even private indemnity insurance won’t help.
Adverse publicity will make matters worse, as your customers could end up choosing to go elsewhere.

Practical tips

How can you avoid putting yourself or your business at risk of an allegation of anti-competitive conduct?

When engaging with your competitors:
• don’t discuss prices, discounts or any other matters relating to pricing,
• don’t discuss or come to any agreement about bids for contracts, allocating customers or geographical areas within New Zealand, or restricting output, and
• if you are approached by another business to discuss any of the above matters, you should raise an objection straight away. Leave the discussion immediately.
Also, consider introducing a compliance programme into your workplace to promote awareness of competition law, and ensure staff take precautions to avoid putting themselves at risk.

Where to find further information

If you or one of your employees is involved or has been involved in an anti-competitive agreement, you can apply to the Commission under its leniency policy for immunity from prosecution. See www.comcom.govt.nz/cartel-leniency-policy.

For more information visit the Commerce Commission’s web site at www.comcom.govt.nz. To contact the Commission’s call centre, call 0800 94 3600.