Summary

1. COMPETITION & THE CHALLENGE OF CULTURE CHANGECan innovative tools increase effectiveness and awareness of competition policy ?The Netherlands’ experience in tackling construction cartels Monique van OersDirector Legal Department Netherlands Competition Authority (NMa)Washington, October 2010

2. Summary Cartel + NCA = enforcement (fines) Cartels may be part of a culture => culture change Culture change > enforcement Culture change requires engagement public & private sector: NCA: enforcement actions against cartels Public sector: coherent policy embedding competition Private sector: common understanding of competition principles and damage caused by cartels The Netherlands: long lasting cartels in construction - did the Dutch accomplish a culture change & what are the lessons learned?

3. Outline of the Presentation • The NMa: facts & figures • The Netherlands & competition - history • Dutch construction sector - history • Dutch construction sector under fire (‘cartel contamination’) • How did the Dutch deal with it: (i). settle the past (‘fast-track procedure’) (ii). address the future • Did it work? • Lessons learned • Blessings

4. NMa: facts & figures • In 1998: Dutch competition Act - establishment of Netherlands Competition Authority (NMa) to enforce rules on competition • NMa is an autonomous authority with ~ 400 staff members • Also regulator in energy and transportation sector (~ 130 staff) • An administrative enforcement system: NMa may impose fines up to 10% of annual turnover of company involved • Cartels: 6 – 10 cases per year (a main activity but not only one) • NMa: budget Eur. 45 million (2009); fines Eur. 9 million (2008); outcome estimated ~ Eur. 325 million (2009)

5. The Netherlands & competition history • Before 1998: no competition rules applicable - ‘cartels paradise’ • 1998: new competition act mirrors the competition rules of the EU-Treaty • First years: lot of advocacy, guidance and education, first enforcement activities by end 1999 (fines) • Broad orientation (mild focus on financial services and telecom – no special attention to construction) – misjudgement?

6. Dutch construction industry – history (i) Reconstruction after World War II – tradition of cooperation (private/private – private/public) Construction sector highly organized - Association for Price Regulation Organizations (SPO), 1963, object: “to promote and administer orderly competition, to prevent improper conduct in price tendering and to promote the formation of economically-justified prices” > systems of information exchange and pre-bid meetings > increase tender price to cover calculation costs > system to protect the ‘entitled’ company System was publicly known, ‘approved’ by the government, alleged positive affects considered to outweigh possible negative impact on price level, innovation, and entry of (foreign) companies

7. Dutch construction industry- history (ii) February 1992: fine imposed on SPO by European Commission for violating EC-competition rules (fine > Eur. 50 million) Heavy protest in construction sector but SPO-system formally abolished 1998: establishment NMa – no special attention to construction sector as existing studies did not show probability of non-functioning of its markets November 2001: total shock!

8. Dutch construction sector under fire (i) November 2001: National TV program reports on practice of “shadow accounts” in road construction (over 3000 projects) > for many years, public money has been spent on artificially inflated prices. All companies involved deny and put blame (partly) on government itself. Beginning 2002: NMa initiates research: industry consists of many sub-sector markets which are generally highly specialized with little or no supply side substitution Bid rigging practices may (still) be widely spread: can we prove it - can we stop it?

9. Construction industry under fire (ii) Following in 2002: NMa starts investigating some large construction bidding projects and indeed discovers that bids were rigged Parliament very discontent and initiates parliamentary inquiry: Bid rigging practices widely spread in national construction industry The sector needs culture change and comply with competition rules Relationship between public sector and construction industry should become more professional (links are too close)

10. Construction industry under fire (iii) Some characteristics of discovered bid rig practices: Goal market-sharing and/or price-fixing Price increases: estimated 8,8% in public bidding – often substantially higher in private sector bidding process Creation of different mechanisms to apportion & distribute the ill-gotten gains (bid rotation / side-payments) Side-payments in money and in kind (subcontracting) December 2003: NMa issued first decisions on fines 22 companies in road construction: total fine Eur. 100 million NMa applied regular sanction procedures (> 1.5 year) Companies all appealed (appeal procedure can take up 3 to 5 years)

11. Construction industry under fire (iv) Internal discussion: How many cases are needed to evoke a real change? Are some ‘good cases with stiff fines’ enough? Probably not. How much can the sector pay in fines? Bankruptcies? How much of our resources should (and could) be spent on investigating the construction sector? Time is running – limitation period applies – how can we deal with large number of cases (sector wide) in limited time?

12. Construction industry under fire (v) Conclusion: Enforcement of a couple of cases is not enough. New approach: 1. settle the past: development of fast-track procedure as an alternative to regular sanction procedure. Aim: sector wide enforcement 2. address the future: a. Construction industry: commit to compliance (rules of governance / respect rules on competition) b. NMa: rigorous enforcement of new infringements c. Public sector: dialogue and joint action to ensure coherent approach of the sector

13. Settle the past: enforcement actions (i) NMa’s actions enabling sector wide enforcement: • Developed the so-called (alternative) ‘fast-track’ procedure • Established special Construction Industry Task Force • Developed special Fining Guidelines (transparency) – limit fine to maximum 12% of turnover in bid rig activities in one year • Dutch government & NMa called upon the construction sector to ‘clean up’ and apply for leniency by 1 may 2004 (> 400 leniency applications filed) • Announced generous application of Leniency rules • Centralized pressure on leading companies (went from denial to cooperation) to participate in fast-track procedure

14. Settle the past: 1400 companies fined(ii)

15. Settle the past: the ‘fast-track’ procedure (iii) Characteristics fast-track procedure: • Participating in fast track procedure gives right to 15% deduction of the fine • Participants must agree not to contest the allegations • All participants are represented by one authorised representative who appears for all the companies in the oral hearing before the NMa • No individual hearing or individual access to the file for the participating companies • Clear fining and leniency rules allow companies to calculate their (maximum) fine

16. Settle the past: outcome proceedings (iv) 85% companies participated in the ‘fast track’ procedure – 15% opted for regular cartel proceedings Nearly all cases in fast-track procedure were dealt with in 6 months Less than 12 % of companies involved filed for an appeal Legal track record (appeals): 90% success rate => ‘Fast-track’ procedure: - saved time and resources - enabled NMa to follow sector wide enforcement approach - encouraged parties not to appeal (‘pay fine & get it over with’) - enabled sector to claim publicly that they had collectively ‘cleaned up’ and were ready for a new start

17. Address the future(i) a. The industry: first sector wide inquiry shows enforcement result: • Widespread use of compliance programs • Wide support for competition principles • Change in working methods (cost reductions) • Change in (type of) management (‘new generation’) • Innovation • General complaint: too many rules (public procurement) • certainly a change for the better but not yet a clean bill of health for the whole industry b. NMa: construction sector still on NMa priority list – new investigations are being carried out – fine levels will increase (even higher fines in case of recidivism)

18. Address the future (ii) c. Public sector: crucial additional government action: NMa/government: the message of (benefits of) competition rules and damage done to consumers in case of infringement is sent more clearly and frequently National and local government: integrity rules have been re-viewed and are applied strictly (culture change!) Public prosecutor: cases of bribery, fraud, tax evasion linked with bid rigging practices are given more priority Tax authority: tax deduction of fines imposed by NMa is not allowed

19. Parliament: development of legislation allowing for exclusion from tender procedure in case of previous violations of cartel Parliament: simplifying of public procurement rules Public and private buyers: paying more attention to (design of) bidding procedure and bid requirements so as to limit cartel risks Public and private buyers: filing of damage claims against companies involved in bid rig activity Construction sector definitely shows a change but public authorities need to remain vigilant! Address the future (iii)

20. Lessons learned (i) • Anti-competitive behavior can be part of a (deep rooted) culture: sector-wide enforcement actions required. Alternative strategies may need to be developed in order to manage the full case load and reach successful enforcement • Policy approach limited to enforcement is not likely to evoke a lasting culture change – coherent wider governmental approach required (law and policy makers, tax authorities, public prosecutor) • Public communication is a strong tool (to reach the general public, the companies, and the local governments)

21. Lessons learned (ii) Government should be alert and not get involved in cartel activities - any (previous) governmental involvement in cartel activity (also if only limited) will make it harder (but not less necessary!) to change existing cartel practices Public buyers play a crucial role in bidding process (can send the wrong message but can also prevent & detect illegal practice) Red tape may be replaced by private arrangement with equal restrictive effects – competition policy required to address this issue

22. Blessings NMa was able to position itself as a serious and innovative enforcement agency Helped to convince the public that cartel activities are carried out in the Netherlands and that they (taxpayer & consumer) pay the bill Showed importance of sector knowledge and economic research (theoretical & empirical) Showed how important communication tool is and how NMa can use it NMa started mutual beneficial cooperation relationship with other governmental agencies (tax authority, public prosecutor)

23. ENDQuestions ?M.T.P.J.vanoers@nmanet.nlMany thanks for your attention!