Recommended Procedures For Tendering Parties To Identify And
Prevent "Bid-Rigging" (March 14, 2003)
It is common for parties seeking
tenders to include in their tender documents a prohibition against
bidders communicating with competitors in relation to bids;
recognising the concern of parties seeking tenders that this form
of conduct undermines the economic benefits which competitive
bidding brings. The OECD characterises collusive conduct of this
kind, as "hard core cartels" and "the most egregious violations of
competition law that injures consumers in many countries"
[1].
Bid rigging is therefore a serious
matter. Bid rigging is one of the examples of business practices
that the Hong Kong government has noted in its Statement on
Competition Policy[2] as
a matter that 'may warrant further attention' in terms of deciding
whether the practice is not in the overall interest of Hong Kong.
Moreover, the Prevention of Bribery Ordinance[3] makes it an offence for a person to
offer an advantage to any other person as an inducement to withdraw
a tender from a public body or refrain from making a tender, or
procure the withdrawal from an auction to a public body. It could
be expected that parties seeking tenders would therefore utilise
whatever means are available to identify whether the practice is
taking place, and find the means to prevent such practices from
occurring.
The intention of this document is to
outline a process which parties seeking tenders can follow to
identify the practice, and thereby attempt to limit its occurrence.
The document, and suggested procedures have been drawn largely from
similar procedures and information disseminated by competition
authorities in other countries that have general competition law
that prohibits bid rigging [4].
1. ARE THERE
INDUSTRY CHARACTERISTICS CONDUCIVE TO BID-RIGGING?
Certain industries appear more prone
to bid-rigging than others. For example:
* those where the product or the
service is fairly straight forward and not subject to significant
technological change;
* those where price is the major
determinant of the successful bidder rather than particular
capabilities or methodologies;
* those dominated by a small
number of large firms and where few, if any, new firms enter the
market;
* those with active trade
associations. Experience of competition authorities in
jurisdictions with competition laws, indicates that trade
associations have played a role in promoting this type of
behaviour.
While these factors do not, in and of
themselves, prove bid-rigging, they are indicators that fertile
ground exists for such agreements or arrangements.
2. WHAT IS
BID-RIGGING?
There are a number of identified
forms or patterns that bid-rigging may take.
*
Cover bidding
occurs when the bid price of the firm chosen to win is exceeded by
the bid prices submitted by the other firms that are party to the
agreement, or when the other bids are made to contain special terms
which make them unacceptable;
*
Bid suppression is
essentially the opposite of cover bidding. It involves one or more
of the parties agreeing not to bid or to withdraw their bid thereby
creating the false appearance of competition;
*
Bid rotation is a
systematic or random method by which the conspirators allocate
tenders among themselves;
*
Market allocation
is an agreement among the bidders not to compete for certain
customers or in certain geographic regions.
3. THE COSTS OF
BID-RIGGING
There is little doubt that
bid-rigging causes purchasers to pay far more than fair market
value for goods and services.
Landmark court cases in the US and
Canada against cartels in the supply of citric acid and vitamins
have exposed substantially increased prices to the public, that
have resulted in the prospect of those guilty having to pay civil
damages to the customers they have cheated [5]. Past Australian cases in ready mixed
concrete, freight forwarding services, and fire safety equipment
installation maintenance services have indicated substantial costs
to parties seeking tenders and have resulted in substantial damages
actions [6].
4. HOW TO
IDENTIFY BID RIGGING?
The party seeking tenders is in the
best position to detect bid-rigging through observing a number of
"warning signs". Any of the following tender results should cause a
second look, as they may indicate bid-rigging:
* Bids come in higher than were
forecast, with no apparent reason for the difference. For example,
where bids exceed published price lists, engineering cost
estimates, previous prices or some other base price;
* Firms who were expected to bid
do not;
* Two or more bids are received
which are highly similar or even identical;
* Certain companies always seem to
submit the winning bids for certain contracts;
* A new or infrequent supplier
bids and the results show a significant drop in the historic
pricing structure from previous tendering exercises;
* The party seeking tenders
becomes aware of tender related communications amongst what should
be competing suppliers [7];
* Tenders by firms usually
associated with subcontracting. Tenders that require
sub-contracting arrangements can create an opportunity for firms to
cover bids. For example, small suppliers unable to bid on the whole
of the tender themselves, may agree to submit a high bid, or one
with unacceptable conditions, as part of an arrangement with a
selected winner. The selected winner then rewards the cover bidder
or bidders with subcontracts.
5. THE
IMPORTANCE OF RECORD KEEPING
While some of the above factors that
have been identified as suspicious might appear consistent with
competing markets, they may, when combined with other information,
or when viewed together, be sufficient reason to initiate
inquiries.
Where a legislative prohibition
against bid-rigging applies, this could prompt 'whistle blowing' on
the existence of the scheme [8]. However, this sort of exposure cannot
be relied upon and it is more important to assist in identifying
bid rigging through analysing patterns of bids, and establishing a
pricing history for comparisons. Parties seeking tenders should
therefore establish administrative procedures along the following
lines, to assist in the process of identifying possible occurrences
of bid-rigging.
*
Maintaining historical data of prices
Maintain a record of unit prices for
all bidders. This is important in conducting post-tender reviews
and analyses, and creating a history of pricing for future
comparison work.
*
Maintain
records of tendering patterns
Document in detail whether any of the
'suspect occurrences' that are noted in section 4, above, have
arisen. This could be done in the form of a checklist, against each
of the suspect occurrences, for each tendering exercise.
*
Periodic
Review
Periodic reviews of tenders should be
conducted, because bid-rigging may not be evident from the results
of a single tender or request for bids. Quite often a pattern of
illegal behaviour is only revealed when one examines the tender
results from a number of calls over an extended period of time.
6. REQUIRING
PARTIES TO CERTIFY AN INDEPENDENT BID
A party seeking tenders should
develop a generic certificate that bidding parties are be required
to sign indicating that the bid had been prepared independently of
other competitors. The certificate could deter bid-rigging by
requiring bidders to disclose to the party seeking tender all
material facts about any communications and arrangements they have
entered into with competitors regarding the tender call. The
certificate should have a clause invalidating the bid and either
precluding the bidding party from making further bids or applying a
penalty, if it is found that the bid was made in contravention of
the certificate.
7.
PREVENTION
It is difficult to generalize on
preventive measures in relation to bid rigging, given the different
circumstances that exist for diverse economic sectors. Moreover,
different circumstances apply depending on whether the party
seeking tenders is a public body, or is in the private sector. In
some cases, preventive measures that are workable for one category
of parties seeking tenders, might actually work against the
interests of another category. Each preventive measure therefore
has to be considered on its different merits.
Some examples of measures that
parties seeking tenders can consider in an attempt to limit the
extent to which they are exposed to bid rigging, and some
qualifications to those measures are as follows:
*
Numbers of
bidders
It could be expected that the greater
the number of bidders, the greater the instability of any agreement
or arrangement and the more likely that competitive bids will be
submitted.
Unless there are sound reasons to
limit the number of bidders, parties seeking tenders should qualify
as many bidders as possible.
*
Bidder
lists
In some sectors it will be necessary
to have lists of authorised bidders and to limit the making of
offers to parties on the list. For example, to limit the making of
offers from parties which have achieved certain standards.
However, for some sectors the use of
bidder lists may create a climate that promotes agreements or
arrangements between small numbers of market participants, or acts
as a deterrent to new entry.
*
Compulsory
participation in bidding lists
It is sometimes the practice for
parties that maintain lists of authorised bidders to require those
on the lists to submit bids in order to maintain their status, and
achieve a high number of bids for any given project.
While there may be sound reasons for
doing so, the party maintaining the list should be aware of the
fact that in these circumstances some bids might not reflect
authentic market conditions, and could therefore distort the
pattern analysis described in section 5 of this document.
*
Disclosure
of bidder lists
In some circumstances the disclosure
of bidding lists might increase market intelligence on who may or
may not be bidding, and therefore enhance the opportunity for or
increase the longevity of a conspiracy. For example, by warning
parties to an agreement when non-participants are being invited to
bid.
On the other hand, for some parties
that have over riding transparency obligations, such as public
bodies, it would be more important for full disclosure of the
bidder list.
*
Subcontractors
As noted in section 4 of this
document, tenders that require sub-contracting arrangements can
create an environment for firms to make cover bids. One measure
that might be considered is building in a requirement that bidders
must identify all potential subcontractors and provide their
pricing. Such data would be useful when running pattern analyses
aimed at identifying allocation schemes, e.g. by geographic area,
client or market.
However, in some circumstances
tendering parties might be either unaware of who they will
eventually choose for sub contracting work, or are unwilling to
identify potential subcontractors because of the need to protect
their commercial interests in future negotiations with
subcontractors.
1. Organization for Economic
Cooperation and Development 'Recommendation of the Council -
Concerning Effective Action Against Hard Core Cartels'.
See
2. Hong Kong Government 'Statement
on Competition Policy' clause 6(b).
3. Sections 6 & 7, Prevention of
Bribery Ordinance CAP 201.
4. For example, the Canadian
Competition Bureau and the Australian Competition and Consumer
Commission
5. Speech by Assistant Attorney
General Joel I Klein 'International Anti-Cartel Enforcement
Conference' September 1999
6. See for example, Trade Practices
Commission v TNT Australia Pty Ltd (1995) ATPR 41-375, and Trade
Practices Commission v Pioneer Concrete (Vic) Pty Ltd (1996) ATPR
41-457.
7. For example, parties to a bid
rigging agreement might make a mistake in sending out information.
In one Canadian case information on a tender bid that was
originally supposed to go to a competitor informing it of the bid,
was inadvertently sent to the party seeking tender along with the
tender price. This immediately raised a suspicion as to why a firm
would want to inform its competitor of the tender bid.
8. For example, leniency programs
initiated by the Antitrust Division of the US Dept of Justice, have
been noted as an important reason behind the Division's success in
identifying price fixing by firms, who "reveal their own wrong
doing and that of their co-conspirators". See Op Cit speech by Joel
I Klein.
Issued by
Consumer Council
March 14, 2003
