Construction industry gearing up for competition law

Construction industry gearing up for competition law

Danny Chung

The construction industry, which is sometimes known locally and overseas for its questionable business dealings, is gearing up to comply with a new competition law in Hong Kong.

The Legislative Council last June enacted the Competition Ordinance to “prohibit conduct that prevents, restricts or distorts competition in Hong Kong” and ban mergers likely to stifle competition.

A Competition Commission and a Competition Tribunal will be set up to administer the law, which will go into effect at a date to be set by the government, expected sometime next year.

Last Friday, the government announced the members of the commission with Executive Council non-official member, Anna Wu Hung-yuk, being appointed chairman for three years starting on 1 May.

A Development Bureau spokesperson said: “The Competition Ordinance provides a legal framework to curb anti-competitive conduct. The public works procurement system is developed to maintain a level playing field with clear, open, fair, competitive and transparent procedures.”

The measures in the procurement system include admission requirements for the list of government approved contractors, open calls for tender, compliance with procurement requirements of the World Trade Organisation, a transparent and fair tender assessment method, anti-collusion requirements and regulations for cases of misconduct.

The Construction Industry Council will hold a half day forum on Friday on the law to help businesses understand the new requirements.

“We aim to help inform construction industry [small and medium enterprises], in particular, who usually do not have an in-house lawyer to explain the law to them. The response from the industry so far has been encouraging,” a CIC statement said.

The council’s committee on procurement formed a task force on competition law and it submitted its opinions to Legco on the proposed law in March last year.

The new commission should consider “block exemption” in favour of vertical agreements in the industry “as one of its first priorities”, the council said.

Vertical agreements are those between, say a main contractor and a lower level entity, such as a materials supplier or a subcontractor.

Chairman of the Competition Commission Anna Wu Hung-yuk. She is also the chairman of the Mandatory Provident Fund Schemes Authority. (photo from HKFSA website)

Chairman of the Competition Commission Anna Wu Hung-yuk. She is also the chairman of the Mandatory Provident Fund Schemes Authority. (photo from HKFSA website)

The CIC said it has already issued its first fact sheet on the new law and plans to prepare more fact sheets, “possibly on tendering practices such as bid rigging”.

One quantity surveyor at a listed contractor said the new law could affect the forming of joint ventures and pre-bid agreement with subcontractors or suppliers, especially at tendering stage.

Pre-bid agreements with subcontractors and suppliers were done to mitigate risk of cost fluctuation and shorten the time for subletting.

If the tender was successful, the subcontractor was sublet the work at prices previously agreed.

“It is very common in the industry and all these agreements are verbal. That’s why nearly all main contractors have their own [preferred] subcontractors,” the QS said.

Another industry consultant knew one company that was thwarted from setting up in Hong Kong by obstacles put up by the authorities “and other, outside, influences”.

“I came across bid rigging when working for one of my previous employers in the UK. They would openly talk to their ‘competitors’ about who was going to ‘win’ which projects awarded by a multi-national petroleum supplier and retailer,” the consultant said.

He said most clients and contractors would have “favoured” companies to the exclusion of all others.

Developers such as Sun Hung Kai Properties(0016) have their own construction companies while Cheung Kong (0001) has awarded many building projects to Paul Y Engineering (0577), now called Louis XIII Holdings.

One major Hong Kong contractor has had a project team working on airport matters “pretty much since the airport opening in 1998 whereas no other contractor has done that” according to the consultant.

One company boss at a listed contractor contacted by Construction Post complained of a cartel in the supply of a key material used in the construction industry.

Some companies are not adverse to complaining to the government if a new competitor sets up.

In 2006, the Court of First Instance dismissed an appeal by a group of four asphalt producers for a judicial review of decision by the Director of Lands Department to allow temporary use for asphalt production by a competitor on agricultural land in Tuen Mun.

It seems the new law cannot come soon enough, judging from experience overseas.

The Development Bureau says it has procedures in place in its procurement system to ensure a fair and competitive tendering process for public works contracts  (Danny Chung)

The Development Bureau says it has procedures in place in its procurement system to ensure a fair and competitive tendering process for public works contracts (Danny Chung)

Malcolm Chin, partner at law firm Minter Ellison, noted a whole list of bad behaviour by companies in other countries.

In August 2009, the Office of Fair Trading in the UK imposed fines totalling  £129.2 million on 103 construction firms for collusive tendering in relation to building contracts.

In one example in Australia, heavy fines were imposed on construction companies, tendering for government contracts, for a bid rigging arrangement which involved the successful bidder paying an “unsuccessful tendering fee” to failed bidders.

Three Australian pre-mixed concrete suppliers were also fined AUD 20 million for engaging in a price fixing and market sharing cartel relating to government construction projects.

In Europe, the European Commission imposed heavy fines of millions of euros on the construction and related sectors including fining 17 producers of pre-stressed steel a total of 269 million euros for operating a cartel lasting 18 years.

Chin said examples of anti-competitive behaviour included price fixing (including cover pricing), market sharing and bid rigging.

“The introduction of the Competition Ordinance brings Hong Kong into line with many other jurisdictions which have competition laws in place. Such laws in other jurisdictions (including Australia and the EU) are well established and vigourously enforced by regulators,” Chin said.

Since the Ordinance was new, Chin said the construction industry would need time to adjust to the new law but ultimately it would help prevent anti-competitive conduct and protect industry participants.

As it stands, Chin said there was some room for improvement in the competition law.

“The conduct rules in the CO prohibiting anti-competitive behaviour are broadly worded, and there are relatively limited exemptions. As they potentially capture a wide range of commercial conduct, it will be necessary to look to the block exemptions and guidelines to be issued by the Commission to understand in sufficient detail how the Commission will interpret and apply the new law, for example, in relation to vertical agreements and distribution arrangements,” Chin said.

 

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