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Multi-firm cartels: Collusive tendering in furniture removal markets in SA

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Mohlahlego Cornelia Matumba

Firms engaging in a cartel are attempting to increase their joint profits through an agreement to suppress competition among themselves. The harmful effects of cartels are related to the number of firms involved, the size of the affected market, and the durability of the cartel.1 Cartelist often agree on the strategy for pricing, supply to the market or market allocation and they face the critical challenge of coordinating the behaviour of all cartel participants around the agreed strategy. This includes monitoring the behaviour of cartel participants to identify and prevent defections from these collusive strategies and preventing entry or expansion by non-cartel firms.2 Overcoming these challenges is easier in some industries than others. Where there are only a few firms involved, collusion is easier to sustain both by simplifying the coordination issues and by increasing firms’ gains from collusion. However, in a case where there are many firms involved the likelihood of coordination is difficult, and the arrangement may be more difficult to maintain.3

The Competition Commission of South Africa (CCSA) investigated 69 firms involved in collusive tendering in the furniture removal industry.4 The cartel was found to have operated from 2007 to 2014. The Commission referred the case to the Competition Tribunal in June 2015 as a violation of sections 4(1)b(i), (ii) and (iii) of the Competition Act. The investigation found that each of these firms (including, for example, Stanley’s Removals CC, Langs Removals, J & H Furniture, JH Retief and Cape Express) was involved in multiple instances of collusive tendering. The companies were found to have colluded on furniture removal tenders issued by various government departments and private sector clients through exchanging cover prices. Cover pricing is essentially when a bidder submits a price with the aim of not winning the contract they are bidding for. This price is a price that would have been agreed upon between two or more bidders such that a particular bidder wins the contract. A cover pricing arrangement includes at least one of the following: * A competitor agrees that they will submit a bid that is higher than the bid of the designated winner; * A competitor agrees to submit a bid that is known to be too high to be accepted; or * A competitor submits a bid that contains special terms and conditions that are known to be unacceptable to the customer.5

Stanley’s Removals and Cape Express were involved in ten separate instances of collusive tendering.6 For example, during November 2008, Stanley’s Removals and Cape Express concluded an agreement on cover prices in respect of a tender issued by the University of Zululand for the removal of furniture which was awarded to Stanley’s Removals. Similarly, the two firms exchanged cover prices in respect of a tender issued by the Department of Health to transport furniture to Middleburg Provincial Hospital, which was also awarded to Stanley’s Removals. The bids rigged also involved tenders issued by Eskom, South African National Defense Force, Transnet and Alastair.

The Commission has taken a decision to invite companies involved in the cartel to engage in settlement of these contraventions prior to the referral to the Competition Tribunal for adjudication. The invitation gives the furniture removal firms an opportunity to settle and pay a lenient penalty which was set at 4% of their annual turnover for the financial year ended December 2013.10

The conduct took place throughout South Africa, involving numerous firms in each geographic area. The success of the arrangement is surprising given the high number of firms involved. Cartel arrangements are found to be most successful where there are fewer firms involved. This is because firms involved in a cartel have to develop internal mechanisms to ensure that collusive arrangements are stable. Such mechanisms mainly relate to selecting and coordinating the behaviour of all cartel participants on mutually consistent collusive strategies, monitoring the behavior of cartel participants to detect and prevent defections, and preventing entry by non-cartel firms. It is easier to coordinate in a highly concentrated market because cartelists are able to simplify the coordinating issues and increase the firms’ gains from collusion.7

Similar cases involving a high number of firms include the Commission’s investigation in 2013 of firms in the construction industry. A total of 21 construction firms responded to the fast track settlement process which uncovered bid rigging in over 300 instances.8 In 2009, the Commission reached settlements with 28 cycling retailers and wholesalers for conduct which was found to be in violation of section 4(1)(b)(i) of the Act, in that they agreed directly or indirectly to fix prices.9 Arrangements of this nature, which are widespread and involve a large number of firms raise some interesting questions in terms of the cartel literature. It is significant in the cases referred to above that the arrangements involved elements of bid rigging. This means that although multiple firms are involved in different agreements at different stages, only a subset of the firms appear to be involved in rigging the bids for each tender or contract. Coordination featuring a large number of firms would be less sustainable in a market where there was a single product (contract) across several geographic areas throughout the country, unless it were possible to coordinate around a single market price guideline or trading condition through a common body such as an industry association. In bid rigging cases, each tender or contract is effectively a market on its own although firms may coordinate over time and around multiple different projects in the same sector.

The collusion on furniture removals tenders related to various government department and private sector clients. Cartels harm consumers and have a negative effect on economic efficiency. A successful cartel raises prices above competitive levels and reduces output. Collusive tendering destroys the basis of competitive bidding and is harmful to the public as it usually distorts markets for procurement.11 Governments devote a large share of expenditure to public procurement and in the presence of these arrangements cannot be sure that they are getting good value for money, which has become a significant area of concern for competition enforcement as in the cases above.

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Notes

  1. Khumalo, J., Mashiane, J. and Roberts, S.  ‘Harm and overcharge in the South African precast concrete products cartel’. Journal of Competition Law and Economics, (2014), Vol. 10 (3), p. 621-646.
  2. Levenstein, M. and Valerie, Y. (2006).  ‘What Determines Cartel Success?’. Journal of Economic Literature, Vol. XLIV, p. 43-95.
  3. Marshal, C., Leslie, M. and Samkharadze, L. (2011). ‘Dominant-Firm Conduct by Cartels’.
  4. Competition Commission of South Africa media release. ‘Competition Commission refers four cases to the Tribunal for prosecution’ (01 June 2015). 
  5. OECD. (2009). ‘Guidelines for Fighting Bid Rigging in Public Procurement’. 
  6. Competition Tribunal of South Africa Affidavit. ‘The Competition Commission and Stanley’s Removals CC and Cape Express Removals (PTY) LTD, case no. CR030Jun15/2010Nov5447. 
  7. See note 2.
  8. Zengeni, Z. ’Constructing Competition’. CCRED Quarterly Competition Review (June 2014).
  9. See note 2.
  10. See note 6.
  11. OECD. (2008). ‘Fighting Cartels in Public Procurement’.