The MacNeil/Lehrer Report; Highway Robbery

ROBERT MacNEIL: Good evening. Over the next few weeks trials are due to start in Virginia and Maryland in what has become the largest antitrust investigation ever carried out by the Justice Department. The cases involve allegations that leading construction firms rig bids on government paving contracts and bilk taxpayers of millions of dollars. Justice Department investigators allege similar illegal bid-rigging in as many as one-third of the United States. Officials say such practices have been so pervasive that some highway departments are unable to continue projects at present because so many contractors have been temporarily barred from bidding. Although there have been scores of convictions with fines and prison sentences, new indictments are expected, and active investigations are continuing in a number of states. Tonight, why is bid-rigging such common practice, and how can it be stopped? Jim?

JIM LEHRER: Robin, Justice Department officials working on the investigation call it "Roadrunner." It began four years ago with a chance remark by a witness before a federal grand jury in Chicago investigating the paving contract for O'Hare Airport. "If you think it's bad here," said the witness, "you ought to see the way they do business in Tennessee." Well, the Justice Department went to Tennessee for a look, and the largest paving contractors in that state ended up convicted; two of them being the brother and uncle of former Tennessee Governor Ray Blanton. From Tennessee they went to Virginia. Bid-rigging was discovered in the paving contract for Richmond's Byrd International Airport. Those two original Roadrunner cases have now become 165 nationwide in 17 different states from Florida to Nebraska. One hundred and six corporations and 120 of their executives have pleaded guilty to bid-rigging crimes. Fines of more than $32 million have been levied; prison sentences of up to three years have been handed down; and it's not over yet. We get a status report on the investigation now from the number two man at the Justice Department, Deputy Attorney General Edward Schmults. Mr. Attorney General, is your investigation still spreading, or are 160 or so cases in 17 states about as far as it's going to go?

EDWARD SCHMULTS: No, I think it's fair to say that the investigation is still spreading. As you pointed out, we've brought over 160 cases in 11 states. We have grand juries now investigating in those 11 states and in six additional states. So this is an ongoing investigation. If I could just put it in context for just a minute, I think it would be helpful. This fits in with the Reagan administration's antitrust enforcement program. We intend to seek out and prosecute those people who engage in hardcore antitrust violations like price-fixing and bid-rigging. And we take this very seriously. We're not talking about inadvertent conduct in an area where the law isn't clear. We're talking about widespread, collusive, criminal conduct that is literally stealing millions of hard-earned taxpayer dollars. And so this investigation is continuing and we take it very seriously indeed.

LEHRER: Is it possible, Mr. Schmults, that this kind of thing has been going on in all 50 states?

Mr. SCHUMLTS: I won't speculate on that, but by the way this investigation has grown, when one investigation and one case leads to another, it certainly is widespread. But I don't want to speculate that it occurs in all 50 states. Indeed, we have gone into one state and did not bring any cases. So that I won't speculate about that.

LEHRER: One came up clean, in other words?

Mr. SCHMULTS: Yes, so far.

LEHRER: I see. One out of 50.

Mr. SCHMULTS: Well, we have not been in 50 states.

LEHRER: You have not been in all 50 yet. Look, just to make sure that we all understand what the process of bid-rigging is, give me a hypothetical that just explains what exactly happens.

Mr. SCHMULTS: Well, when a state decides to build a highway or a road it will start a competitive bidding process. It will seek to obtain bids from a number of contractors in a secret bidding process, and it will take the lowest bid. Now, the reason for this whole process is to produce competition and to get the road built at the lowest possible cost. What happens in bid-rigging is that the contractors get together ahead of time and decide who will win the bid. They decide, for example, that you'll win the bid and that I will bid at a higher price, and that the other people who are participating in the conspiracy will bid at a higher price. Now, it may be that we will agree to alternate -- you will win one bid; I will win the next one. It may be that you will pay me a sum so that I will not compete with you. So this is a perversion of the competitive bidding process, and is really willful criminal conduct.

LEHRER: You lawyers are always saying that conspiracy -- you use the word "conspiracy" -- that conspiracy cases are always the hardest to prove. Do you have to get somebody who is inside this conspiracy in order to make such a case?

Mr. SCHMULTS: Well, we don't have to do that. It can sometimes be done by analyzing the pattern of the bids, by comparing the bids with the engineering estimates and things like that, look at the pattern -- are the contractors really alternating? But you're absolutely right. By far the most useful investigative technique, and it's been the one used in these cases, and it's the reason why we've been able to do them so efficiently, is, in effect, we have been able to persuade people to testify in return for immunity or more lenient sentences and build the cases that way.

LEHRER: Finally, Mr. Schmults, let me ask you this. Is this practice that you just described still going on as we speak tonight, or has your investigation had a chilling effect on potential bid-riggers out there?

Mr. SCHMULTS: Well, we certainly hope that it's had a chilling effect, and by a chilling effect we mean that we hope that contractors are conforming to the requirements of the antitrust laws. However, we believe at the Justice Department that it is still going on. We are still making cases that come up right to the current date, so there's still bid-rigging going on out there, and we're going to pursue it vigorously, and we intend to bring criminal cases against bid-riggers wherever we find them.

LEHRER: Thank you. Robin?

MacNEIL: For the paving industry's view of this scandal we have John Gray, president of the National Asphalt Pavement Association. This trade group represents highway contractors throughout the country. Mr. Gray, how do you explain what appears to be such widespread corruption in your industry?

JOHN GRAY: Well, Robin, it would appear that the concept of widespread corruption is presumption at this point in time. We have seen it in a number of states, but to presume that all contractors are dishonest I think is completely wrong, and I also feel that from what we have seen, there have been a number of states in which there have been investigations which there have not been many pursuits, have been a number of contractors that have been investigated, and there has been no result. I also feel that to presume also that all contracts are subject to bid-rigging is entirely wrong at this time.

MacNEIL: All right. You're in this business -- you've come out of this business. How does it happen, how does it come about that -- you've just heard the Justice Department's explanation. How do you explain how this kind of thing can happen?

Mr. GRAY: Well, I think to review some of the companies -- it's an interesting position with regard to -- in the United States. Many of the corporations that are engaged in roadbuilding works are small, family-held corporations. They are involved in the construction business -- have evolved, actually, in the construction business as this industry has developed in the last 20 or 30 years. It would appear that there have been patterns in some places where the -- it would be almost like a requirement to be able to get involved with some people because there have been leaders of a group to start with. But it would appear also, and my estimation --

MacNEIL: The price of entry in the business was to go along, you mean?

Mr. GRAY: Yeah, I would think that that was possibly the case in a number of areas, but I feel that there are a lot of honest contractors out there and that, from the standpoint of our organization, we certainly have never condoned the activities, and we have worked very hard, in fact, to bring an educational process in the last two years to the industry. We've conducted a number of seminars across the United States to try to explain to these people, particularly to the smaller contractors, what this entails.

MacNEIL: Do you believe that perhaps some contractors, if this kind of practice has been going along so long, don't think it's illegal, that it's just a way of sharing the business and making sure that everybody gets some?

Mr. GRAY: No, I think there are conditions that have prevailed over the years, the need for multiple bids -- and it costs money to bid in the contracting business, any competitive bid -- and the presumption that some contractors would have by geography, by the location of plants and other activities by geography that they would have distinct advantages that their competitors would not have, would create some conditions where it would be obvious that they may win a bid and yet the state requires that additional bids be called for. I think this is one of the conditions, and I would agree that groups like ASTO, as well as ourselves and our organization, are looking for answers, because I do believe also that some of the contractors were really unaware of some of the conditions that were required.

MacNEIL: What do you say to what we've just heard from Mr. Schmults, that he's not talking about inadvertent conduct, but willful criminal conduct?

Mr. GRAY: Well, unfortunately, I believe there has been some of that, and I would have to say that it is regrettable for the industry and, however, it's also regrettable that there is a presumption that other members of the industry are equally as guilty.

MacNEIL: I see. What is the investigation -- what effect is this widespread investigation having on your industry?

Mr. GRAY: I think it's going to have a significant down effect inasmuch as we have hard economic times right now, and as the contractors are pursued in a particular way, whether they're innocent or guilty, that the expense, particularly for small companies to get involved, and then of course the actions that are taken: they have potential jail sentences; they have fines. And then debarment at the state level. And debarment by far is the greatest threat to the industry because I would have to say to you that there will be a significant exit, and we have already seen quite an exit from the industry. And to presume that the Department of Justice does, in my estimation at least, have some sort of desire to look for a fair and open marketplace -- and that is their real desire, not only to punish the contractors -- would appear to be almost in a contrary position to be knocking down the number of actual competitors in the marketplace.

MacNEIL: You mean by getting some of them out of the business or debarring them from working that they're reducing competition?

Mr. GRAY: Yes, I would submit that that is a potential and a very real potential.

MacNEIL: Well, thank you. Jim?

LEHRER: Figuring out what this bid-rigging has cost the taxpayers is not easy. David Kamerschen, professor of economics at the University of Georgia, has studied the question. He's been a consultant on bid-rigging cases for state officials in Alabama, Kansas and Florida, as well as his home state of Georgia. In terms of money, how big a scandal is this?

DAVID KAMERSCHEN: Oh, I think we're talking, when the final line is in, we're talking of hundreds of millions.

LEHRER: I read today that this has been going on for, some people estimate, 30 to 40 years. Is that what you mean, that that's what it's cost over that long period of time?

Mr. KAMERSCHEN: Yes, in fact, the first antitrust litigation, I believe, in this area was in Georgia in 1942 -- Evans case.

LEHRER: Can you give me a specific that explains why on any given case this raises the cost to the taxpayer?

Mr. KAMERSCHEN: Sure. Suppose that a good estimate, an estimate of what free and open competition would bring for a job, would be $10 million. Fix a bridge. And let's say the bids -- they get together and decide Jones is going to get this one. Jones comes in with a bid at $11 million. That's costing the taxpayers $1 million more than it would have if you had free and open competition.

LEHRER: Does the evidence in these cases thus far indicate that the bid-rigging really did result in a higher price rather than just a division of the territory?

Mr. KAMERSCHEN: Yes. In general, economists' studies have shown that you tend to get a 10- to 30-percent increase in the price as a result of price-fixing. In particular, now, in the asphalt litigation that I've seen, we're getting estimates of about roughly 10%. That is, the overcharge is about 10% over what it would have been in free and open competition.

LEHRER: I see. But you've looked at a lot of these cases now in several states. What's your explanation as to why it took so long for this thing to be uncovered and to bring the Justice Department into what it's doing, and to make it a national thing as it is now?

Mr. KAMERSCHEN: Well, I mean, Justice and state attorney generals offices have lots of things to do. I mean, they have lots of cases, and it just took awhile to get going on this one.

LEHRER: Forty years, Mr. Kamerschen?

Mr. KAMERSCHEN: Well, yeah, but when I talk about the case 40 years ago, that was an isolated example. I don't mean it's been as ubiquitous as it is now 40 years ago. But I just think, for instance, one reason this has been in the last 10 years, we've got stronger attorney generals offices in the states that'll look at antitrust matters. They didn't have time. They didn't have separate antitrust divisions 10 years ago, most states.

LEHRER: In other words, the practice isn't any more prevalent now than it has been; it's just that it's come to public attention and law enforcement.

Mr. KAMERSCHEN: That, and I think the computer has helped greatly in it, to detect bid-rigging. The computer's been a great aid in lots of price-fixing cases.

LEHRER: To pick up these alternating, it's-your-turn-now-it's-my-turn-and-now-it's-the-other-guy's-turn kind of thing?

Mr. KAMERSCHEN: Right. Particularly when a pattern is fairly sophisticated, like in electrical equipment when they had phase of the moon and things like that. It took some very sophisticated analysis to detect the collusions going on.

LEHRER: Had you looked back in any state -- well, take Georgia where there have been cases brought -- in terms of what effect it has had on the costs of comparable paving projects since? In other words, has it brought the cost down?

Mr. KAMERSCHEN: You mean since the --

LEHRER: Since all this happened. Since all this blew up.

Mr. KAMERSCHEN: Oh, sure. I mean I can't give you detail yet; it's too soon still in Georgia, but I can just tell you the simple economics of it is that, you know, you undertake an activity when you feel the benefits is greater than the cost, okay? And all this has done -- all this activity, this antitrust litigation, has brought the cost up of conducting that kind of activity. So you'd expect on simple economic grounds for that to have a chilling effect on conspirators, and would-be conspirators.

LEHRER: And you have no question but that that's happening?

Mr. KAMERSCHEN: Yes, I think that is happening. I think it is chilling.

LEHRER: Thank you. Robin?

MacNEIL: One state which has taken a particularly hard line on bid-rigging is North Carolina. Its legislature has passed a series of measures including stiff criminal penalities for price-fixing. So far, some 25 highway contractors have been convicted in the state. The prosecutor who has led that effort is Al Cole, North Carolina's special deputy attorney general. Mr. Cole, how bad was the problem in North Carolina when you faced it?

AL COLE: Well, Robin, the first contractor who came in and talked to us made the statement that all or virtually all are guilty. I was -- one of the newspapers picked that statement up and attributed it to me, and I don't think that one contractor called my hand on that. To date I see no reason to suspect that that statement is untrue.

MacNEIL: Well, how do you explain that it became -- from your experience, how did it become so pervasive that otherwise law-abiding people were doing this as a matter of course? Did they not think it was a criminal act?

Mr. COLE: Well, if you believe some statements about how long it's been going on, there are some who said it had been going on since the memory of man runneth not to the contrary.There are those who say 40 to 50 years, which I think is the usual figure that's bandied about now. That we had some second-generation family members into some of these companies, and they say that it was a way of doing business. They felt like that, in fat times, of course, there's enough work for all, and so let's spread it around and let's let everybody make some money. So I think those two things were, well, maybe notthe predominant reasons, but they were certainly two of them.

MacNEIL: How much do you believe it's cost the state of North Carolina?

Mr. COLE: Really hard to say. The economist over here is bandying about $100 million or so. We to date have recovered from about 25 companies $12 million. To put a figure on how much the state has in fact been harmed is again a little premature. We would like to think that we took the profit out of bid-rigging when we got the monies from these companies that we have already dealt with.

MacNEIL: Would you describe the measures you and the state legislature have taken to try and stop this in your state?

Mr. COLE: Well, I guess first and foremost our attorney general, Rufus Edmisten, along with the department of transportation, lobbied long and hard and got put through our legislature a very, very tough bid-rigging bill. Prior to the effective date of this bill, which was September of 1981, bid-rigging in our state was a misdemeanor. It is now a felony. It's punishable by up to five years in prison, $100,000 fine on individuals, a million dollars on corporations. But the money aside, I think some of the -- it would take awhile to go through all of the provisions, but I think some of the tougher things in there are the court's right and the department of transportation's right to suspend these companies from bidding. The courts can even take the contractor's licensing, which means he not only cannot bid with the state, he can't even make a living. There are those who say that our bill is somewhat of an overkill measure. I disagree with that. I think it's tough, and we wanted it to be tough in order to prevent or to give these contractors second thoughts before they did it again. I think if you look in Chicago, they're on about their third round of bid-rigging. It recurs about every four or five years in Illinois. So we are mindful of the fact that right now we hope that it's not going on, but we're looking down the road some four to five years hence. We want to make sure it does not happen again.

MacNEIL: How much do you think this is inevitable or at least sort of inherent in the system because of the close connection between big contracting for governments and the political system?

Mr. COLE: Well, I'd be less than honest if I said that over the years there isn't a real close relationship, and I don't mean just in North Carolina. I think it's true in most states, that I think in most states they'll tell you that if a prominent political figure who was in office needed several hundred thousand dollars on short notice, that the first group they thought of were highway contractors, and that money usually came in and came in very quickly. I think that's just a known fact.

MacNEIL: Does that mean that state governments have been winking at this or looking the other way for a long time?

Mr. COLE: Well, I would hate to say that. There are those who do, or those who say we should have known about it. And, looking at it with hindsight, which is always very easy, I can see where my office and maybe others should have spotted some patterns that should have raised some suspicions but didn't.

NacNEIL: Well, thank you.Jim?

LEHRER: Is it a known fact at the Justice Department, Mr. Schmults, of the connection between politics and the highway contracting?

Mr. SCHMULTS: No, that wouldn't be true in our view, at least our cases have not involved state or local officials. We have been pursuing and prosecuting the contractors, and so I would not state that that was a factor. I wouldn't even speculate as to that.

LEHRER: Would you, Mr. Gray?

Mr. GRAY: No, I would not presume that at all.

Mr. COLE: Well, let me butt back in --

LEHRER: Be my guest.

Mr. COLE: The way you have framed the question it sounds like my answer was that politicians and bid-rigging went hand in hand. That is not true. We have not prosecuted any politicians. I'm just saying that it fostered an atmosphere that allowed the contractors to feel like they could do what they wanted.

LEHRER: Yeah, now does that -- you still stick with your answer?

Mr. SCHMULTS: Well, I would stick with my answer, yes. We're charged with enforcing the antitrust laws, and we have not sued or prosecuted any state or local officials in these cases.

LEHRER: I assume you'll stick with yours, Mr. Gray?

Mr. GRAY: Absolutely.

LEHRER: See, they didn't misunderstand after all, Mr. Cole.

Mr. COLE: Well, I want to stick with mine, too. [laughter]

Mr. KAMERSCHEN: Maybe we can redress the balance here since it's sort of three to one. Let me say something from the industry's point of view, some difficulties that they would have even if this wasn't -- there wasn't any conspiracy. And that is that the practice of sealed bidding does lend itself to this kind of behavior. That is, most states use a sealed bidding procedure, and it's well-known by economists that that's a procedure that does not foster competition. The reason being is, they get the sealed bids, and what they do is then publicly announce the winner and the price he paid. That means then that this bidding procedure helps monitor who is doing what, and that means that if we had a conspiracy, let's say, and I decide --

LEHRER: I'm not sure I understand that.

Mr. KAMERSCHEN: Okay. Let me try again. I want to chisel on a price. We got a conspiracy and I want to chisel on a price, okay, and I get the contract and I try and say to you, "I didn't chisel on the price; I don't know why they gave it to me." The government reads what price I bid, so they know I chiseled on the price. See, the difficulty in holding a collusion together is always that it's very tempting for one of the firms to chisel on the price a little bit and they'll get a lot of business. But what the state does then, is it reads to you who got the contract and what price it paid for it. So they're helping monitor the collusion, if you like, for the colluders. So this procedure is a very bad one, and one of my recommendations would be, you know, certainly non-disclosure of what the winning price is, or, even more generally, instead of having a "we're going to give it to the lowest bidder," let's say we're going to give it to the best bidder, where you're going to have some elements besides price in there to introduce some uncertainty.

LEHRER: Does that make sense to you, Mr. Gray?

Mr. GRAY: This kind of concept, there is a lot of conversation about this, and I would have to say it should be the responsible bidder, the best bid relative to the responsible bidder.

LEHRER: Mr. Schmults, on the things they've done in North Carolina, is it your view that what they're doing in North Carolina is overkill?

Mr. SCHMULTS: No, that wouldn't be my view. We welcome what they've done in North Carolina. I think the most important thing they've done in North Carolina -- we would like to see this happen in other states -- is they've made bid-rigging a felony. They did what Congress did in 1974, and this is a very significant deterrent; it will have the chilling effect you've talked about, and we certainly would hope the other states would do the same thing.

LEHRER: Mr. Gray, what about the thing Mr. Cole said that he felt was the most important of all the things they've done in North Carolina, which is to debar or suspend firms from bidding on future projects?

Mr. GRAY: Well, I think that this is probably the most difficult area to deal with because you are -- it is a person presumably in a corporation who makes a decision whether they're going to rig bids or not. The corporation, however, when it comes down to it, is subject to fines, it's subject to the position with regard to the judge wherever he wants to go with regard to this, whether somebody will be incarcerated or not. And you actually have a fine against the corporation; you have personal fines. But then to presume that the entire company from thereon in is guilty, I believe there are some down sides to this, particularly with regard to the fact that they'd debar the company. Then there's possibly 200 or 300 honest employees who are being left out of work. The other thing that is different from a debarment from the standpoint of our type of work is that 80% of this work comes from public funding, and this is probably why the industry was a target to begin with. And so if you're debarred from public work, unlike other groups that have faced the Justice Department in the past, you don't have any other place to go. If you're debarred from all public work, let's say --

LEHRER: Nobody else is building highways, in other words?

Mr. GRAY: That's right. That's it. So where do these contractors go? They eventually go out of business. So there is a destruction of competition. There was another point, also, that --

LEHRER: Well, let me just get Professor Kamerschen's view on that in terms of debarment. Do you think that's the way these folks ought to be treated?

Mr. KAMERSCHEN: Well, there has to be a substantial cost in order to bring it more in line with the benefits of colluding, and if it takes this, I'd be in favor of it. I think there's easier things that we could do.

LEHRER: All right, let me ask Mr. Schmults one thing about it. Are you in favor of debarment? Does the Justice Department support that idea?

Mr. SCHMULTS: I think debarment from our standpoint, of course, is a matter for the state and local authorities.It's not part of the antitrust sanctions. We do have some concern. It is a fair point -- to the extent you debar nearly all of the contractors in a particular state, you do affect the competitive situation. So I think this is a fact that the state and local authorities should take into account when they decide whom they should disbar.

LEHRER: Mr. Cole, what's been the experience in North Carolina since you all started debarring contractors? Have you reduced competition?

Mr. COLE: We would like to think we have not. If fines are all that the defendants or the bid-riggers have to pay, they'll just put that into the cost of doing business. They'll say, "Hey, you know, 30 days in jail, 60 days in jail, $200,000." So we think we need to send a message out there. The state of North Carolina, when we talk about debarment, now, we're not talking about any permanent debarment. We do have a four-month minimum that you will be debarred, but after you come in and make your peace, and make what we feel is proper restitution to the department of transportation, we will then review your case and put you back on the bid list. We have been doing this since June of 1980, and dare say that most of those 25 firms are --

LEHRER: Mr. Kamerschen, you said there's an easier way to deter and stop this. What is it?

Mr. KAMERSCHEN: Well, to answer something, too, I didn't say before. You asked me why didn't they find this out earlier? I think one of the reasons was that the states didn't have any benchmark. That is, a lot of states didn't do estimates of what that job should cost in the first place, or at least didn't do good estimates. Remember I said to you before it cost $10 million to do that bridge; they didn't know it cost $10 million. They didn't do it. So a bid came in at $11 million, they had no benchmark. They didn't know that was way out of line. They didn't know that was 10% too high. So one thing we could do is have states make better estimates of what they think the job should cost to begin with, and I see some trend in that direction. The second thing you want to do is don't disclose those estimates, because once you disclose them what often happens, then, is the colluding firms just add a lug on -- their 10% or whatever -- to what the state estimate is, and they get the job.

LEHRER: Let me ask you finally -- we just have a few seconds left, Mr. Gray -- as a spokesman for the industry, is this practice going to stop?

Mr. GRAY: I think the practice is on the way to stopping right now, and I believe that, as was said by Al, that we're in a situation where we have seen a change from a misdemeanor to a felony, and there has been an understanding come to the industry in recent years.

LEHRER: In other words, they've felt the chill in the paving industry?

Mr. GRAY: Oh, there's no question about it. We're seeing it everywhere.

LEHRER: Thank you, gentlemen. Robin?

MacNEIL: Mr. Gray, Mr. Kamerschen, Mr. Cole and Mr. Schmults, thank you for joining us. Good night, Jim.

LEHRER: Good night, Robin.

MacNEIL: That's all for tonight. We will be back tomorrow night. I'm Robert MacNeil. Good night.