The massive publicity surrounding the bid rigging cartel in the construction industry has done much to highlight the important work being done on a day to day basis by the competition authorities in South Africa. The public outrage confirms that society at large buys into the need for competitive markets. With any luck, further impetus will be given to cartel deterrence by the successful pursuit of civil damages suits, ideally with damages ultimately benefitting those who were truly harmed: the poor and marginalised, including learners whose schools did not get adequate funding to upgrade ablutions and families who continue to live in informal dwellings.

It is relatively easy to understand the damage done when schools don’t have toilets and families don’t have homes. Cases which impact directly on these kinds of products, which are consumed by the man on the street and are well known, typically attract a large amount of public attention. This was also seen with the bread cartel. However, when the product concerned is an obscure intermediate input higher up the value chain, less outrage seems to be forthcoming from the public, and there is no indication that customers are planning to sue for damages. Good examples of this can be found in the construction sector itself.

The construction sector uses many inputs that feed into the end construction project. In these input markets there have been known cartels in cement, bitumen, long steel, reinforcing wire mesh, scrap steel, and precast concrete products. Taken together these cartels are likely to have resulted in a far greater harm to customers of construction projects than the construction cartel itself.

Quantifying the size of the damages involved is highly revealing as regards the scale of the problem. Together with two former colleagues at the Competition Commission (Reena das Nair and Pamela Mondliwa), we have calculated the expected overcharge on reinforcing bar (rebar), one of several long steel products which was cartelised. Rebar is a product widely used in construction to reinforce built structures. It is, however, not visible to the end customer and is ordinarily acquired by the construction firm who passes the cost on to the final customer. As such there is a disjoint between the cartel and the end consumer of the product.

It was possible to estimate the cost of the cartel from 2000 through to its demise in 2008 (although it should be noted that the cartel was in operation from well before that). Our analysis of the competitive dynamics in this market leads us to the conclusion that there would have been aggressive price competition in this market, absent the cartel. To be technical, price competition is likely to have been Bertrand competition. Alternatively, the price may have been higher if the industry was able to identify and effectively follow a price leader. Using these two scenarios, the numbers suggest that the cartel was able to mark-up by between 43.2% and 35.7% over the hypothetical non-cartel price from 2000 to mid-2006. These translate into total overcharges of R3.24Bn or R2.85Bn for the Bertrand and price leader models respectively over this period (real 2012 prices).

Similar work was performed by Khumalo, Mashiane and Roberts [2012] in the concrete pipes market. This study estimated the cartel mark-up in concrete pipes, one of the products in the precast concrete products cartel, to be between 51% and 57% in KwaZulu Natal and above 16.5% in Gauteng. Repeated across the many construction input markets known to have been affected by cartel behaviour, these numbers add up to considerable damage to end consumers.

Care may need to be taken as regards which entity can lawfully sue for damages when it comes to cartels higher up the value chain, as well as with issues of pass-through of mark-ups to end consumers. It would certainly have been an unpleasant irony if the construction cartel firms had all sued these upstream cartels for damages, and then not have been required to pass the awards on to end consumers. At the level of cartel deterrence though, it doesn’t matter who the beneficiaries of damages cases are, as long as those that are penalised are the cartelists. And the firms buying obscure inputs like rebar are much more likely to understand the stakes involved, and thus to effectively pursue damages.

The ability to pursue damages claims for cartel behaviour is potentially a powerful new weapon in the cartel deterrence arsenal. If the jurisprudence develops to make damages cases readily winnable, then the profit seeking motives of harmed firms could become a good substitute for public outrage in cases where the product market is simply too obscure to produce the catchy headlines necessary to prompt such outrage.

Written by Andrew Sylvester, DNA Economics