WBHO chairman says collusion in construction ended 5 years ago – will never happen again

My first day back after a five year absence on CNBC Power Lunch featured an exclusive interview with the chairman of South Africa’s largest construction company, WBHO. The 62 year old Mike Wylie agreed to come onto the show to put across his perspective on the media storm which erupted after the Competition Commission levied enormous fines following a three year investigation. During our interview, Wylie provided much needed context – explaining that the Leniency system gave construction companies an incentive to sift through every contract of the previous 10 years, and report any abuses discovered. By eliminating the double counting, he reckons only 55 of almost 30 000 bids broke the law. Not a great reflection, but hardly a reflection of the endemic corruption the popular press has painted. It was a fascinating discussion.    

ALEC HOGG: During South Africa’s Apartheid era its Siege Economy put procurement above cost. Sanction busters were encouraged to break the law and blind eyes were turned when businesses colluded. Stuff was needed, so the Apartheid government turned a blind eye to let things keep going. They didn’t mind how things came to them. The readjustment to normality took time. It was spearheaded by tough new Competition laws introduced in the year 2000. Since then one industry after another has been investigated. Where the residues existed of past misbehaviours, hefty fines were imposed generating successive media uproars. Now it’s the turn of the construction sector to feel the public’s outrage. And as each headline writer tries to outdo the next, a picture is being created of a construction Mafiosa meeting in smoky rooms deciding how much to screw the country. But narrative alone is rarely accurate. The rational approach is to interrogate the facts. That’s what we’re going to do today. So I asked the Chairman of the country’s Blue Chip construction firm to join us. His group has been hit with the biggest fine of the R1.5bn that was levied by the Competition authorities. It’s a warm welcome to Mike Wylie who is the Chairman of Wilson Bayly Ovcon WBHO, a group that you joined in 1975. So you’re a lifer at the business, Mike. I’m sure you’ve been busy with looking into what the Competition authorities have been accusing for quite some time.

MIKE WYLIE: Yes. We have the invitation which really enabled us and we were invited to go through everything we could find and leave

Chairman of WBHO
Chairman of WBHO

no stone unturned to find whatever incidents that we could. We submitted that. It took about 2½ years and it was finally submitted and we now have the result of that, which is in the public domain.

ALEC HOGG: It’s interesting. As I was trying to portray in my introduction, South Africa was a country that has a crazy past but we’re going into the future, and industry after industry has been addressed. Construction industry, it’s your turn if you like, now. And I guess the important thing that we’ve got to put into perspective here is: How bad is it? How bad are things? And when we have a look at the number of issues, or if we call it the problem projects, they don’t seem to be that high. In your firm’s case there were 11 projects. Over what period was this and what percentage of total projects that you have?

MIKE WYLIE: Alec, if I can maybe just go back a little bit just to put the whole thing in perspective to when the Commission started investigating the construction industry. It became our turn in 2009 and I think they saw the enormity of this task. So they devised this invitation to us and we had to comply by April, if we wanted to. It was a free choice of ours. And they said, “Look, put everything on the table. You go and find everything you can. Put it on the table and we will give you reduced penalties” which we did. So the period we’re talking about in unearthing all these things starts – it goes back three years from when the investigation started – so that’s 2009 back to 2006 – and then it’s any contract that could have finished in 2006. So contracts are often two or three years long so that took you back to 2004, maybe even 2003. So the period that we looked at in absolute detail is almost ten years.

ALEC HOGG: Very smart of the Competition authorities to invite you guys to actually ‘cluck’ on each other; to say who the people were who actually had colluded.

MIKE WYLIE: We don’t just sell a product that has a price and you change every six months. Every time we bid or tender on our product it’s a different product. Every one is different. So there’s an enormous amount of bidding that goes on.

ALEC HOGG: How many bids would you do in a month, typically?

MIKE WYLIE: In a month – WBHO would do 40 bids in a month.

ALEC HOGG: So that would be say, 500 per year.

MIKE WYLIE: Ja. So we had to, in this period if I’m going to be honest we actually had to work it out. We’ve got a register of every single tender that goes in. So it was easy to go through these things because we’ve got records. But there were – we went through about 5 000 bids. The amount of bids that fell into this period that I was talking about – this 8/9/10 year period – was 3 500 bids.

ALEC HOGG: Alright. So let’s just stop you there. 3 500 bids of which 11 you’ve been fined for. It kind of puts it in perspective for me. And is this the tip of the iceberg? How do we know there aren’t more things that will come out?

MIKE WYLIE: I think this was the beauty of this whole system. Because there were a lot of projects that we didn’t even know about that we unearthed in this. We have seven or eight independent tendering units around the country in the different aspects of construction. So between those guys that are putting in between 40 and 50 tenders per month – and if you add that all up it was about 3 500 (over the period) – I think the industry must be putting out over 100/150 bids per month. There’s an enormous amounts of tendering going on; thousands of bids. So we – it wasn’t 11. There were 21. We got leniency on ten and then 11we’re getting fined on.

ALEC HOGG: How do you get leniency?

MIKE WYLIE: If you’re the first in. So as you’re uncovering these things, as soon as you find something you send it in to the Commission. If you’re the first one in you get leniency.

ALEC HOGG: So you tell on the other guys.

MIKE WYLIE: You tell on the other guys.

ALEC HOGG: So that you get off the hook.

 

MIKE WYLIE: And that’s why the system is so powerful. Because nobody’s going to leave (anything) out because if you don’t put it in, somebody else is going to put it in. It’s an amazing system. So it really does (expose everything).

I read in the papers they talk about the tip of the iceberg, but it’s actually not. It’s the whole thing. We uncovered it ourselves. I think a lot of these projects would never have been uncovered (otherwise). And the benefit the Commission got: they got everything given to them on a plate. The benefit we get is a slightly lower fine. But also the benefit…the thing against us, was that everything is based on our 2010 turnover whereas a lot of these things occurred in 2004 for instance, where our turnover was substantially less. So that’s another big uplift for the Commission.

ALEC HOGG: You said a slightly lower fine. Your fine was R311M.

MIKE WYLIE: Ja.

ALEC HOGG: It was the highest of all the construction firms. In fact four of you were just over R300M – four of the listed ones. But it’s interesting to me to see that as a percentage of the market capitalisation it’s fairly low. We’ll get into that in just a moment though. But it was 3.9% of your turnover.

MIKE WYLIE: Yes.

ALEC HOGG: The Commission could have fined you 10% of your turnover. What was the difference? Did they ever tell you this?

MIKE WYLIE: No. Look, that was based on the rules they set out and we thought that the fine… You know, we hear talk that the fines are not enough. But when we look at the thing in perspective with the margins that we work at and the profits that we make, we think this is very severe especially with the transgressions that took place, especially on the building side. If I can maybe just enumerate on that. We (WBHO) are the biggest builder in South Africa I think now for the last few years. We do about R5bn worth of building work per year. The main work is about R1bn in Cape Town and say about R2.5bn/R3bn in Gauteng area. And in those two areas over this full period we didn’t find one transgression. So it actually hurts.

ALEC HOGG: And neither did anybody else. I guess that’s the important part.

MIKE WYLIE: I don’t think so. I don’t think so. But it really does hurt to get…

ALEC HOGG: Mike, let’s talk about profits and profitability. Because if you guys were colluding a logical conclusion is that prices of properties or construction in South Africa would be sky-high. You’d be making piles of money. We did have a report (published on Friday) – timeously for you given everything that’s going on. It came from Statistics South Africa which had a look at nine different sectors and it said of those nine sectors you (construction) have the lowest profit margins.

MIKE WYLIE: Yes.

ALEC HOGG: Why is that?

MIKE WYLIE: I think if you went back it’s been like that forever. The construction sector has always been a very low margin and that’s a very high-risk sector as well and that’s why there are often poor performances, especially in the construction side. If you look at the construction sector or the construction segment of the results you’ve seen in the last couple of years – construction companies actually losing money at the end of the year. That’s happened for the last two or three years. If you go back to – I think it was about 2004 – Aveng actually lost money in their construction sector. So it’s very competitive. And you can also see it’s competitive, not only for those margins of between two and four percent, but there are no international contractors here.

We are one of the few countries in the world where there are no international contractors. We’ve seen the French come and go. We’ve seen the Chinese come and go. We’ve seen the English come and go and the Italians come and go.

There’s nobody that can stay here and say ‘this is worthwhile. We could make money’ because it’s just too competitive.

ALEC HOGG: You’ve got a big business in Australia.

MIKE WYLIE: Ja.

ALEC HOGG: How do the profit margins, or how do the costs compare between what you build here and what you build there?

MIKE WYLIE: Ja – no. We are extremely low cost-wise (in SA). I think in building, in our costs per square metre are less than half of what we’re doing in Australia – sometimes three times.

ALEC HOGG: Why?

MIKE WYLIE: It’s because, I think labour is cheaper. I think we’re more efficient. I think the materials are cheaper. The whole industry is very, very cost-effective and you can see it with what’s happening around the world if you look at the stadiums for instance and the costs of our stadiums versus the overseas stadiums.

ALEC HOGG: Well, give us an example of that.

MIKE WYLIE: For instance, Wembley will cost £750M/ £760M-odd.

ALEC HOGG: So call it R10bn.

MIKE WYLIE: R10bn. So if you add up Greenpoint, Soccer City and Durban Stadiums they come to about R10bn.

ALEC HOGG: Sorry, let’s stop there.

If you’re telling us then that the stadiums that you build in South Africa; you could build three of them – those three that you’ve described or noted – for the same cost as it cost the Brits to build Wembley Stadium in London?

MIKE WYLIE: Yes – yes. And they are – all three of those stadiums I mentioned – they’re all iconic so they’re all modern architectural stadiums.

ALEC HOGG: You did a bad job of colluding (chuckles).

MIKE WYLIE: We’re not very good at it (laughs), but the Wembley Arch is lower. It’s not as big as the Durban Arch. This industry did a fantastic job and I hope when all the dust settles one can actually look at the facts better. We certainly are not happy at all about what’s happened in the past. We’re embarrassed about it and it’s certainly not going on (now). It hasn’t been going on for the last five years. We had to go back 2000 bids and five years before we found our first transgression which we then gave to the Commission. So this is historic. It was a hangover from those 80’s and 90’s you spoke about. But I think the industry did a great job in cleaning itself up and learning from the Competition Commission when we understood all the Competition Law.

ALEC HOGG: What do you do now if someone joins Wilson Bayly? A graduate engineer comes to join the company: how would they be informed about the way the Competition Act applies to them?

MIKE WYLIE: As soon as you’re in sort of a more middle/senior management position where you were involved in procurement you automatically go onto Competition Law training schemes. They’re very thorough and we have refresher courses.

ALEC HOGG: When did you introduce these?

MIKE WYLIE: In the last two or three years.

ALEC HOGG: Alright. So the Competition Commission has achieved its objective and I guess it’s so important for the country because we’ve got R4 trillion infrastructure programme. If I was sitting in government and I had some smell coming out of the construction industry I would also have said ‘let’s keep this on hold’. Do you think now you can rehabilitate your reputation with government so that we can go ahead with what we desperately need (infrastructure investment)?

MIKE WYLIE: Well, we really do hope we can. I think the results of the Commission and all these settlements will now put the facts on the table. There’s a lot of misreporting going on at the moment which creates a much worse position than it actually is. You know, just for instance; if you look at the settlement agreements you can count up the projects. They’re all there. And when I count them up I get to 55, but they talk about 140. And I think 140 – that number applied about when this thing was just happening and it was years ago and they haven’t really updated that number.

ALEC HOGG: Mike, 55 out of how many?

MIKE WYLIE: Out of thousands and tens of thousands of bids going in. Tens of thousands of projects.

ALEC HOGG: Again, putting it in perspective; tens of thousands of bids – 55 projects that amongst yourselves you’ve sifted through and found there were problems. Clearly you must have done something about the people who were involved in those bids.

MIKE WYLIE: Yes. Well you know there were so few and I think to achieve what we achieved and to go through all those bids and actually work with the guy and say “did you do anything? Did you do anything? Come on. You must remember now. We want to give everything out”. We had to say to the guys “don’t worry. You’re not going to be prosecuted or you’re not going to be fired. We just need the information” so we did this. And it’s the same as the Leniency case that exists. I mean we really just adopted the Leniency clause that the Competition Commission has that if you give the information and you’re first in, you don’t get prosecuted. So it’s the same sort of thing as that. I think the guys did a fantastic job. Really, if you’re put in all those bids and you found 21 and they really are historic I think you really want to move on now.

ALEC HOGG: Sure. Just to close off, as far as tender processes are concerned – when you put in a bid the person on the other side of it who receives it: what process do they go through to make sure you aren’t ripping them off?

MIKE WYLIE: Alec, the tender process is really…it needs to be understood because it just shows what a great industry we have. We don’t give a price – X. Boom. That’s it. Take it or leave it, as most people are confronted if you’re buying a bag of fertiliser or you’re looking at your bank charges on your account. We spend two weeks, sometimes two months on a particular bid. We have to supply; with a bid comes a total schedule of quantities and rates detailing every single element of work that we do.

ALEC HOGG: Does it say what your profit margin is?

MIKE WYLIE: No. It doesn’t say what the profit margin is but the rates are all broken down so it’s very easy to see how it compares.

ALEC HOGG: But who checks it on the other side?

MIKE WYLIE: Each client has his own cost controller or quantity surveyor and he checks it. Let me just finish the whole tender thing. It’s quite simple. So we’ve got all that schedule of rates – that’s the work we do. Then there’s a group of what we call selected sub-contractors.

ALEC HOGG: Mike, we get it. We get it. We get the fact that there’s a big detailed process that you go through. I wanted to know: is there any defence on the other side? You say a quantity surveyor will check it. So in other words, if I’m the City of Cape Town I’ve got my own professionals who check that your bid is not ripping me off.

MIKE WYLIE: Ja.

ALEC HOGG: It’s an important point. Just to close off with though, as far as investors are concerned, if I’m investing or if I own particular construction shares – I’ve seen them go nowhere in the last little while: is everything, the fines, the engagement with the Competition authorities in the price of the shares?

MIKE WYLIE: I think if you ask the analysts…we don’t know how they come up with the price for our share but I think if you spoke to them and certainly what we’ve read – it’s in the share price. We’ve seen SGB; they had a table where they’ve shown what they thought the fine would be and what the actual fine is, so it looks like they’re pretty up to speed with… And in fact the fine was a bit lower than what they had expected. But ja, I would think the analyst had put that in the price otherwise the price wouldn’t be what it is.

ALEC HOGG: From where I’m sitting this is a priority in the country to invest heavily in infrastructure. Surely if we’re going to be spending the R4 trillion that (SA’s) President Zuma talks about then it has to go somewhere. If you guys can rehabilitate yourselves with government clearly you’ll be in a position to bid for many of those projects. That’s really where I look at it from a long-term investment perspective.

MIKE WYLIE: Absolutely. You know, our percentage of our (building) turnover which is work for government in South Africa has been dwindling over the last five years and I think in South Africa we’re down to 20%. Of our overall turnover we’re down to 10%. We would like that figure to be up around 40% because that’s what we’re here for. We qualified as engineers in this country. We want to be part of the process and we’re a vital part of the process to provide the infrastructure necessary to improve quality of life and alleviate poverty. That’s our game and we must be able to do it. And I think that we’ve shown the Competition Commission – which is the government – we’ve shown them everything we’ve done. We all regret it. It will never happen again and Alec, I can say that with absolute confidence. It hasn’t happened for the last five years and it will never happen again.

ALEC HOGG: You guys are very embarrassed. I’m sure when you meet with various people and family members they must be looking at you differently given the newspaper headlines. How do you deflect that?

MIKE WYLIE: I think we just try and put the thing in perspective. We’re not proud of what we did. We don’t feel we’ve ripped people off. As you know we were talking about the margins. So we feel we provide a really good (service)…

I think it comes out in the airport we built at King Shaka when you compare that to Terminal 5 (in London’s Heathrow) that had all the bags piling up at the end of the day. I think King Shaka cost £500m and that (Terminal 5) cost £4bn. If you look at what’s going on in…

ALEC HOGG: Sorry. Just say that as a nice way to end. South African construction sector isn’t too expensive. £500m for King Shaka versus £4bn for Terminal 5.

MIKE WYLIE: Ja. That’s on the Internet, you can go and have a look. Have a look at the Brazil Soccer World Cup. Where is that going? Have a look at Poland, you know. What happened there with the Euro? We’ve provided fantastic value for money in this country. Sure, we’ve done wrong things. It’s part of our past and we really want to move forward with government and build this country.

 

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