Cartel case fails despite concrete proof

Cartel case fails despite concrete proof
Published: 04 November 2005

Over the space of three years, a group of seven sub-contractors in Hong Kong banded together to rig tenders for Housing Authority contracts worth $115m. They met at least 80 times, obtained legal advice and submitted bids to supply steel gates for 16 developments. Before every contract came up for grabs, they would agree on a price and decide which one of them would get the deal. Excess profits were then returned to the cartel and split equally among the members.

In March this year, the seven individuals walked free from the Hong Kong District Court after a judge found that although they had indeed formed a cartel, their acts amounted to nothing more than shrewd, sharp business practice. There was insufficient evidence to show price-fixing. The case was, however, the most tangible proof to date that Hong Kong’s construction industry is prone to collusive behaviour. It also reflected a peculiar trait of the city’s regulators: that rigging a bid in the public housing sector could have you thrown in jail. If it is done in the private arena, there is no such worry.

Further up the chain, the picture is somewhat different. With large property developers using in-house or favoured contractors for key projects, the issue is not so much of competition but high building costs. On this level, any competition statute could impact on dominant market players who abuse their positions in raw materials supply.

The most important component in Hong Kong construction is ready-mixed concrete: supply is limited to about 16 companies, according to Professor Edwin Chan of Hong Kong Polytechnic University’s department of building and real estate. Around eight of these suppliers take up the lion’s share of the market.

Three major ones - expected to include at least one company in Li Ka-shing’s Cheung Kong group - take up 50 per cent of the market, while another three have about 30 per cent. According to Professor Chan, one of the main impediments to new entrants is availability and the cost of land to mix and house this concrete. Leases are granted only on a short-term basis, for three to five years. Likewise it is difficult getting a pier to load and unload the cement.

One feature of having so few players in the supply of concrete is that prices have tended to be prone to large increases when business is good. A Housing Authority study, for example, found in 1999 that prices had increased by 67 per cent between 1994 and 1997. By 1998, ready-mixed concrete in Hong Kong was reportedly the most expensive in Asia.