Subcontractors may have colluded to unduly influence the outcome of a tender put out by Paphos municipality, the auditor-general has pointed out.
Auditor-general Odysseas Michaelides has written to the Commission for the Protection of Competition (CPC) urging it to investigate the alleged collusion “as a matter of high priority.”
On market collusion, the CPC has the power to slap a fine equal to up to 10 per cent of a company’s turnover.
The auditor-general was alerted to the matter by Paphos Mayor Phedonas Phedonos, after the Mechanical and Electrical Contractors Association of Cyprus (SEMIEK) instructed members to boycott a tender launched by the municipality.
The tender related to works to revamp the Paphos Municipal Market.
Although 24 companies did originally obtain the tender documents, SEMIEK members – save one – complied with their association’s directive and did not submit bids.
The single company which did not go along and did bid for the project was Zemco Ltd. Its offer was about 11 per cent higher than the project cost estimate.
The project was estimated at €2 million; Zemco’s bid was €2.22 million.
In response, SEMIEK subsequently asked Zemco representatives to appear before it and explain why they failed to toe the line, apparently threatening the company with sanctions.
In the auditor-general’s opinion, this behaviour by the association may very well constitute collusion – not in that SEMIEK abstained from the Paphos tender, but rather that it sought to force members to abstain, thus unduly influencing free market competition.
SEMIEK later tried to walk back its position, denying that it had ever threatened members not to participate, but the auditor-general has secured correspondence suggesting otherwise.
SEMIEK had decided to shun the tender because it disagreed with its terms. They wanted Paphos municipality to use the method of nominated subcontracts. The municipality, however, opted for domestic subcontracts.
In a nominated subcontract, the project owner pays the main contractor a sum. The project owner – in this case Paphos municipality – then selects the sub-contractor, via another competition, to carry out the ancillary work, such as for mechanical and electrical installations. However, payment of the subcontractor remains the responsibility of the main contractor.
In a domestic subcontract, the choice of subcontractor is left to the main contractor.
SEMIEK insists on nominated subcontracts chiefly for financial reasons. In such a subcontract, subcontractors can appeal to the employer for protection against the main contractor, for example if the main contractor fails to pay them.
And in practice, construction contractors tend to squeeze electrical and mechanical subcontractors, who prefer landing a subcontract by going through a public tender which provides certain guarantees.
Zemco, the company which bid for the tender, defying the association, owns a subsidiary which carries out mechanical and electrical works. The fact that the company would therefore be able to keep the project in-house is likely the reason it decided to participate in the tender.