Agenda No 14 AGENDA MANAGEMENT SHEET Name of Committee Cabinet Date of Committee 19 June 2008 Report Title Office of Fair Trading (OFT) Competitions Act Investigation into the Construction Sector Summary On the 17th April 2008 the Office of Fair Trading issued Statement of Objections against 112 construction companies alleging price fixing activities and in particular the practice of cover pricing. Of the 112 companies, 18 of these have completed projects for Warwickshire County Council. This paper provides Members with an overview of the investigation and the Councils exposure to risk from the investigation. The paper suggests a number of action areas for officers in response to the investigation. For further information Steve Smith please contact: Head of Property Tel: 01926 412352 [email protected] Would the recommended No. decision be contrary to the Budget and Policy Framework? Background papers None CONSULTATION ALREADY UNDERTAKEN:- Details to be specified Other Committees .................................................. Local Member(s) X Not Applicable Other Elected Members Councillor D Booth, Councillor G Atkinson, Councillor J Haynes, Councillor K Browne, Councillor Mrs E Goode, Councillor J Appleton Cabinet Member X Councillor A Cockburn, Councillor M Heatley Chief Executive .................................................. Legal X Barry Juckes, Property Projects & Contractors Team Leader Cabinet 220508 OFT v6.doc 1 of 12 Paul White, County Procurement Manager Tony Maione, Employment Company & Commercial Team, Leader Finance X David Clarke, Reporting Officer Other Chief Officers X Paul Galland, Strategic Director, Environment & Economy Directorate District Councils .................................................. Health Authority .................................................. Police .................................................. Other Bodies/Individuals .................................................. FINAL DECISION NO SUGGESTED NEXT STEPS: Details to be specified Further consideration by .................................................. this Committee To Council .................................................. To Cabinet .................................................. To an O & S Committee .................................................. To an Area Committee .................................................. Further Consultation .................................................. Cabinet 220508 OFT v6.doc 2 of 12 Agenda No 14 Cabinet – 19 June 2008 Office of Fair Trading (OFT) Competitions Act Investigation Joint Report of the Strategic Director of Resources and Environment and Economy Recommendations That Cabinet: 1. Supports the proposal not to exclude any named organisations from Warwickshire County Council tender lists. 2. Supports the proposal for officers to take additional vigilance in the preparation of tender reports 3. Supports the review of the Council’s Construction Property Procurement Strategy during 2008/09. 4. Supports the establishment of a sustainable supply chain that meets the needs of the Council going forward, delivering economic benefits to all parties and both the people of Warwickshire and their communities linked to the developing Sustainable Procurement Policy. 5. Awaits the outcome of the investigation by OFT prior to any further action. 6. That a further report is prepared when outcome of OFT Investigation is known 1. Background 1.1 On 17th April 2008 the Office of Fair Trading (OFT) issued Statement of Objections (SO) against 112 Construction Companies in England. A full listing can be found in Appendix A. 1.2 In the press notice 52/08 the OFT state: “The OFT formally alleges that the construction companies named in the SO have engaged in bid rigging activities, and in particular cover pricing. Cover pricing describes a situation where one or more bidders collude with a competitor during a tender process to obtain a price or prices which are intended to be too high to win the contract. The tendering authority, for example a local council or other customer, is not made aware of the contacts between bidders, leaving it with a false impression of the level of competition and this may result in it paying inflated prices. Cabinet 220508 OFT v6.doc 3 of 12 Cover pricing arrangements have previously been found by the OFT and the Competition Appeal Tribunal to be illegal and in breach of the Competition Act 1998 due to the restrictions on competition that arise. In addition, the SO formally alleges that a minority of the construction companies have variously entered into one or more arrangements whereby it was agreed that the successful tenderer would pay an agreed sum of money to the unsuccessful tenderer (known as a 'compensation payment'). These more serious forms of bid rigging are usually facilitated by false invoices. The construction companies under investigation carry out general building work including construction of housing, as well as commercial and industrial construction both in the public and private sector. The SO allegations cover a diverse range of projects, including tenders for schools, universities and hospitals. The OFT's investigation originated from a specific complaint in the East Midlands in 2004, but it quickly became clear from the evidence that the practice of cover pricing was widespread. The SO's formal allegations therefore cover neighboring areas including Yorkshire and Humberside and also elsewhere in England. The OFT has also received evidence of cover pricing implicating many more companies on thousands of tender processes, but has focused its investigation on approximately 240 alleged infringements which are being pursued in the SO.” 1.3 The objective of this report is to advise Members of implications, if any, for Warwickshire County Council and to identify any mitigating actions advised by officers 2. OFT Investigation 2.1 The OFT investigation started in 2004 where they were called in to investigate alleged contract irregularities relating to refurbishment works on projects at the Queen Elizabeth Medical Centre in Nottingham. The issuing of statements of objection is the next stage of the investigation that will not be concluded until early 2009 and some industry observers suggest that the formal legal arguments may well continue into 2012. The OFT contend that tender prices may have been inflated by as much as 10%, which when considering the public sector construction spend was worth over £14 billion for the years covered by the investigation is not an insignificant sum. Though in the same period total construction expenditure across the whole of the UK was in the region of £500 billion. 3. Explanation 3.1 Whilst the actual findings of the investigation are not known as the Statement of Objection is not in the public domain, most of the allegation refers to the practice of cover pricing with a smaller number of organisations (9) being accused of making compensation payments to losing bidders. Cover pricing is the practice of a company contacting a competing tenderer and asking what price they are submitting and then submitting a higher tender so that they do Cabinet 220508 OFT v6.doc 4 of 12 not make a nil return which might be viewed by the client as negative and not include the tenderer on future lists. 3.2 In the past some construction clients have viewed the non submission of a tender as a expression that the tenderer did not wish to work for them. When in reality the tenderer was fully committed and did not wish to alienate themselves from a client and not submit, so submitted a cover bid. In a recent procurement process for Planned Maintenance undertaken under EU Procurement rules 19 organisations expressed interest, pre qualification questionnaires were issued and received from all 19. All 19 met the Council’s criteria and were invited to tender, and prior to the closing date 4 organisations had advised the Council that they would not be submitting a tender, 2 of these are on the list of organisations covered by the statement of objections. 4. Impact on Warwickshire County Council 4.1 Table 1 below provides members with summary data on the organisations that have and are currently undertaking construction projects for the Council named in the Statement of Objection TABLE 1 Building Works Potential Value of Value of Named Contractors working Contracts future Current Activity for the Council over last 3 contracts years (3 years) 1 E. Manton Limited £487,000 £1,500,000 Tendering 2 GAJ Construction £5,480,000 £3,000,000 Tendering Limited 3 Greswolde £2,000,000 £0 Possibility for future Construction Limited contracts 4 Interclass plc £800,000 £0 Possibility for future contracts 5 Interserve Project £285,450 £1,000,000 Major Framework Services Limited Contractor 6 Morgan Ashurst plc £1,770,900 £3,000,000 Major Framework Contractor 7 Sol Construction £2,775,000 £6,000,000 Planned & Reactive Limited Maintenance Framework Contractor 8 Chase Norton £0 £0 Possibility for future Construction Limited contracts 9 Linford Group Limited £0 £0 Possibility for future contracts 10 Pearce Construction £0 £0 Possibility for future (Midlands) Limited contracts 11 Piper Construction £0 £0 Possibility for future Midlands Limited contracts 12 Thomas Vale £0 £0 Possibility for future Cabinet 220508 OFT v6.doc 5 of 12 Potential Value of Value of Named Contractors working Contracts future Current Activity for the Council over last 3 contracts years (3 years) Construction Plc contracts 13 Willmott Dixon £0 £2,500,000 Scape Framework