Cartel damages claims are beginning to bite the construction industry, warns EU and competition law specialist Rebecca Owen-Howes of Dentons. The cement market has been particularly scrutinised across Europe but other markets are now coming under the spotlight.

Key points

  • The Competition Commission is investigating the markets for aggregates, cement and ready-mix concrete and has highlighted concerns in the cement market in particular
  • The Competition Commission has allowed Anglo American and Lafarge to create a joint venture subject to large-scale divestment
  • The European Commission must reconsider the UK aggregates levy under the EU state aid rules following annulment of its earlier decision by the European General Court
  • Price-fixing and market-sharing appear to be endemic to the industry as significant penalties continue to be imposed on cartels across Europe
  • Cartel damages claims in the construction industry are starting to become a reality

2012 has seen a number of competition law developments in the construction industry. The UK authorities − both the Office of Fair Trading (OFT) and the Competition Commission (CC) − have focused on the aggregates, cement and concrete markets, in particular, using the powers contained in the Enterprise Act 2002 to carry out both merger and market investigations in this area. The European Commission has also taken a keen interest and applied state aid rules to the UK aggregates levy, as well as continued its investigation into the behaviour of cement manufacturers. The national competition authorities in other EU member states have also been considering these and related markets, including asphalt.

Following its market study into the supply of aggregates, cement and ready-mix concrete (RMX), in January 2012 the OFT referred the GB markets for these construction materials to the CC for detailed investigation (the OFT did not refer the markets in Northern Ireland). The referral was based on evidence from third parties which revealed concerns about how well competition was working in the markets, in particular in relation to industry structure.

The CC has until January 2014 to determine whether any feature of the markets prevents, restricts or distorts competition and thereby gives rise to an adverse effect on competition (AEC). It published a statement of issues in March 2012 setting out its early thinking on how market characteristics may give rise to a possible AEC, which could lead to customers, for example, having to pay higher prices and/or accepting reduced service levels or choice. Customers may suffer harm due to: high barriers to entry − this makes it difficult for new entrants to supply aggregates and/or cement; high concentration − five major players dominate the markets for aggregates, cement and RMX; vertical integration − the main players are active across each of the three markets; and transparent markets − multiple contracts, information exchanges and collaboration across the markets mean that each of the major players has advance notice of commercially sensitive data. In addition, the CC is considering the way in which industry regulation may restrict competition, such as the EU Emissions Trading System, the aggregates levy and the planning regime. In November, the CC published a working paper on market definition as part of its developing thinking, defining each of the markets for aggregates, cement and RMX relatively widely to include the various types of product. At the end of November, the CC published an updated statement of issues (as well as further working papers) which sets out its views on market definition, confirms the theories of harm identified in the original statement (see above), and analyses the potential issues based on the evidence received to date. Whilst the CC has identified possible coordination in some local aggregates markets, the evidence suggests that it is competition in the cement market which may not be working properly. It would appear that this market is structurally susceptible to coordination due to concentration, barriers to entry and higher costs of imports over GB-produced cement, and the behaviour of companies including price announcement letters, crosssales and targeted retaliation.

The CC will conduct further information gathering and meet with the main parties before making public its provisional findings, as well as possible remedies required to address any identified AEC, in March/April 2013.

UK merger inquiry: Anglo American/Lafarge

Anglo American (Tarmac) and Lafarge intend to create a 50:50 joint venture to bring together their overlapping activities in the UK production and supply of aggregates, asphalt, cement and RMX. Some 12 months after the parties asked the European Commission to refer their proposed joint venture to the UK authorities for merger review, the CC published its final report concluding that the proposed joint venture would give rise to a substantial lessening of competition in relation to the supply of bulk cement, as it would make coordination in that market more likely, as well as increasing the effectiveness and sustainability of any pre-existing coordination. The CC also found that the joint venture could lead to a substantial lessening of competition in the national markets for the supply of rail ballast and high purity limestone; and in 19 local markets for the supply of primary aggregates for construction applications, two local markets for the supply of asphalt, and seven local markets for the supply of RMX. The CC considered that the outright prohibition of the joint venture would be disproportionate and instead decided to clear the transaction subject to a divestment package being put in place.

To address the coordinated effects found in relation to cement, the parties have agreed to sell a Lafarge cement plant, associated quarry, rail depots and a portfolio of RMX plants. To remedy the unilateral effects in primary aggregates, asphalt and RMX, the parties agreed to sell Tarmac’s interest in the Midland Quarry Products joint venture with Hanson; eight other primary aggregates quarries and one aggregates depot; two asphalt plants; and six RMX plants. In November, it was reported

that the proposed joint venture will complete in 2013 following agreement reached by the parties with Mittal Investments to acquire most of the assets required to be divested. The acquisition has been notified to the Commission for merger clearance and is awaiting approval.

EU state aid: aggregates levy

Since its introduction in 2002, the levy on aggregates extracted in the UK or imported into the UK has been the subject of challenge under the EU state aid rules by the British Aggregates Association (BAA), following state aid approval by the European Commission in April 2002. The state aid rules prohibit member states from granting aid which distorts competition by favouring certain businesses or goods, unless such aid has first been approved by the Commission. Under the rules, an exemption from a requirement to pay tax can constitute state aid if it is shown to provide a selective advantage to certain businesses.

Following a number of European court applications and appeals, in March 2012 the General Court annulled the Commission’s 2002 decision approving the levy under the state aid rules (although the court found that the levy exemption for exports did not in itself give rise to state aid). It is expected that the Commission will now carry out a detailed investigation into the levy before making a new decision on whether the levy constitutes aid. In the meantime, the Treasury continues to demand payment of the levy (although a planned increase in the rate of the levy has been delayed until April 2013). The levy continues to be the subject of judicial review by the BAA in the UK Court of Appeal, with a hearing scheduled for April 2013.

Cartel activity across Europe

In 2012, the European Commission continued its investigation into restrictive practices in the markets for cement and related products. The Commission opened formal proceedings in 2010 against a number of manufacturers of cement, aggregates and RMX. The Commission is investigating in particular possible import/export restrictions, market-sharing and price-coordination.

In a statement published by the CC in May 2012 on the UK market investigation into aggregates (see above), the CC reported that the nature and purpose of the UK and EU investigations are different and that a line of communication had been established between the two competition authorities. This is not the first time the Commission has investigated the cement industry: it imposed substantial fines on a large number of players in 1994 for cartel behaviour. The practices currently under investigation are similar to those previously investigated and involve a number of the same parties. Various parties have brought actions challenging information requests they have received as part of the Commission’s investigation, the latest being brought by Lafarge in 2012.

Action against cartels in the construction industry has been taken by a number of national competition authorities and claimants in individual member states, with significant fines being imposed on companies. It is clear from these cases that small regional markets cannot avoid the scrutiny of the competition authorities. Notable highlights include:

(1) Spain − in August 2012, the National Competition Commission imposed fines of 11.6 million Euros on six companies found to be involved in a bid-rigging cartel for pre-stressed concrete structures, which had operated for at least 14 years. Fines of a similar scale were imposed in January on five parties involved in a price-fixing cartel for cement, aggregates and mortar, which was found to have operated in the region of Navarre between 2008 and 2009.

(2) Germany − in March 2012, the Federal Cartel Office (FCO) took action against regional cartels operating between 2006 and 2010 in the markets for concrete sewerage pipes and for concrete paving slabs. In respect of the former, it has fined the parties involved some 13 million Euros. The investigation in the paving stone sector is ongoing, with companies fined to date almost 2 million Eureos for price-fixing. Three companies were fined for participating in both cartels. In October the FCO published the findings of its twoyear inquiry into the rolled asphalt industry. It concluded that the majority of joint ventures operating asphalt mixing plants may infringe the competition rules where two or more shareholders are active in the same market with their own mixing plants. Asphalt companies run the risk of proceedings being brought against them unless they take steps to make any necessary changes to their joint venture arrangements. Companies operating similar arrangements in other construction material markets are also likely to be affected.

(3) Finland – in September 2012, the Helsinki District Court began hearing damages claims brought by the Finnish Government and 40 municipalities against the participants in an asphalt cartel, which were fined a total of 82.5 million Euros in 2009. The Helsinki District Court is expected to give judgment in Autumn 2013.

Key developments expected in 2013

The table below is a summary of the main steps we can expect the UK and EU competition authorities to take in the cases reported above.

Click here to see table.