OFT could pay for being over-keen

If any government department should be in the firing line for cuts, the Office of Fair Trading must be a strong candidate. After wasting five years and, no doubt, skiploads of tax payers’ money investigating supposed “bid-rigging” in the construction industry, the fines meted out to the first batch of companies contesting their penalties were slashed last week by 90%.

In April 2008, after what is understood to be its largest ever investigation, the OFT accused 112 construction firms of engaging in “cover pricing” from 2000 to 2006. The following September fines totalling £129m were imposed on 103 of them. Of these, 25 felt emboldened enough to appeal what they saw as the over-harsh level of punishment and late last Friday, the first tranche of six had their fines cut by the Competition Appeals Tribunal from a total of £41.8m to £4.4m.

The tribunal rebuffed the magnitude of the penalties, arguing they were “excessive given the nature of the infringement together with the harm it was likely to cause”. More embarrassing, it found that in some cases the OFT number crunches simply got their sums wrong.

To most people “bid rigging” conjures up images of company employees in corners of what used to be smoke filled pubs carving out who was going to win what contract and at what price. Seriously bad stuff.

So what is this heinous practice of cover pricing? For anybody that can remember those far distant days of boom, most contractors had simply so much work that they had not the resources to bid for more. Public authorities, however, often took the hump and told reluctant suppliers to not to bother coming back. So companies with full order books put in bids deliberately high, in order to stay on clients’ tender lists, while those that had some spare capacity would bid appropriately. Unlike “bad” bid rigging, participants were trying not to get work.

It’s a bit of an archaic and unsophisticated approach, admittedly, but with scant evidence of any of the winning or “losing” parties gaining any financial advantage. The OFT - using what looks like the most tenuous of calculations - trumpeted to the press that this had added hundreds of millions of pounds to authorities’ build costs. Frankly, at that point they were lucky to get anyone to bid at all.

The 25 companies appealing have not argued against their collective guilt, just the level of the fines. According to directives from, where else, Europe, these are levied on the basis of companies’ global turnover, not profit. So, in theory, luxury handbag makers on high double digit margins can expect the same level of punishment as local building contractors that struggle to get north of 2% in the best of times. Indeed, if there is a builder out there that has ever earned a 5% margin for mainstream contracting, it probably is doing something dodgy.

There seemed scant rationale in the ranking of fines. Kier - a company that most rivals in the industry would probably affirm is as white as this slightly off-white industry ever gets - received the heftiest fine of all, £17.9m. There was evidence provided by the OFT that a small spattering of some bigger and smaller groups than Kier did seek “compensation” from winning bidders - and chose not to appeal their much lighter fines.

One of the shortcomings highlighted by the tribunal was the turnover test was applied to the wrong year. In Kier’s case it happened to be against the year that saw the record high. There were also inconsistencies in terms of whether global or divisional turnover was the reference.

As chance would have it, I was sharing a Chablis with Kier’s then-chief executive John Dodds on the evening in 2009 the fines were first announced. His mood was, at least initially, as dark as that of Arsenal manager Arsene Wenger’s the red card shown to Robin van Persie against Barcelona in the Champions’ League last week. As gutted Gunners fans recall only too well, the Dutchman received a second yellow for time wasting, having kicked the ball wide of goal a mere second after the whistle had been blown for offside.

Like Kier, Wenger wouldn’t argue that the ref was following the letter of the law (and in his heart of hearts the Frenchman would have accepted Barca was the better team). His argument was van Persie didn’t hear the whistle amid 95,000 baying fans at the Nou Camp.

OFT investigators, at least in cases like this, may have acted a bit like referees who are over-keen to justify their employment. They’ve got whistles and cards and feel they have to use them. When the costs of what increasingly looks like a botched campaign by the watchdog emerge, cost cutting apparatchiks in Whitehall may start waving some red cards of their own.

The OFT has retorted, however, that it may appeal the appeals. To use a building analogy, when you’re in a hole, stop digging.