The Basics of Bid rigging
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The facts suggest bid rigging occurred in both scenarios. In scenario 1, the private company likely engaged in complementary bidding by submitting an inflated bid to facilitate being awarded a subcontract. In scenario 2, the two major companies divided the market and fixed prices through their quarterly meetings, and later included the local company to maintain their collusive scheme. The CAK should investigate both scenarios further for violations of competition laws prohibiting bid rigging, market allocation, and price fixing agreements that harm consumers.
The Basics of Bid rigging
- 1. THE BASICS OF BID RIGGING Lyla Latif University of Nairobi, School of Law 3 Day Course on Law for Economic Regulation & Competition 12-14 September 2016
- 2. Introduction The basics of bid rigging Forms of bid rigging Harm to the economy Identifying bid rigging Considerations during tender process in public procurement Bid Rigging across Africa Conclusion Q&A session Hypothetical case studies
- 3. The basics of bid rigging 1/3 A bidding process is one by which a government or company seeks and receives quotes from various firms for a particular project (such as a construction job) that is to be contracted out. The award of contract is based on quality and price considerations. The bidding process can only work when competitors make their bids honestly and independently. However, the competitive system in bidding process can be tailormade for anti- competitive conduct, such as bid rigging. Bid rigging is a form of collusion, i.e. a cartelised anti-competitive practice which results in costs that are in excess of justifiable levels.
- 4. The basics of bid rigging 2/3 In Africa, bid rigging is the most prevalent anticompetitive practice in bidding. This essentially refers to a situation in which bidders for a particular contract or tender collude to pre-arrange the outcome of the bid or more specifically to pre-determine the winning bidder. The tacit consent is then that the losing bidders will be nominated by the winning cartel to win other contracts or will be rewarded in some other way. Competition is thereby entirely eliminated or at least severely circumscribed depending on the kind of bid rigging that has taken place. The result is that the contract price is usually higher than the true competitive price level.
- 5. The basics of bid rigging 3/3 Bid rigging in Africa permeates trade not only at the national level, but also at the regional and international level as well. Since the majority of contracts open to bidding involve governments, it is they who are most often the target of bid rigging. Bid rigging is a form of fraud and almost always results in economic harm to the agency that is seeking the bids, and to the public, who ultimately bears the costs as taxpayers or consumers.
- 6. Forms of bid rigging Sub-contract Bid Rigging: Where some of the bidders opt out of the process under the agreement that some parts of the bid will be sub-contracted to them. Complementary Bidding: Where some of the bidders submit bids which are either too high or contain unacceptable conditions, defrauding purchasers in the process by creating the appearance of genuine competitive bidding. Bid Rotation: Where the bidders take turns winning the bid.
- 7. Forms of bid rigging (continued) Bid Suppression: Where some of the bidders opt out of the bid so that the designated winning competitor’s bid will be accepted. Market Division: Where competing firms allocate specific customers or types of customers, products, or territories among themselves and the winning bid is decided in accordance with such allocation. Common Bidding: Where firms agree to submit common bids, thus eliminating price competition.
- 8. Harm to the African economy 1/4 Bid rigging has detrimental repercussions on the economy. The practice almost always leads to higher prices. The multiplier effect is perceivable in the economic impact of bid rigging. The callers of the bid are affected as they usually end up paying far more than they would have had to pay otherwise. This, in turn, increases the cost to the consumers, as the higher prices are inevitably passed to them. As the higher prices result from bid rigging, the purchaser will have fewer resources available to devote to other needs. Certain types of bid rigging entail the designated winning bidder having to pay off the losers, either in cash or kind (for instance by sub-contracting parts of the bid) and to recoup this loss. The winning bidder has been known in such cases to inflate prices, over bill for materials and labour and/or under deliver on quantity and quality in comparison to what the bid and the contract specify (World Bank, 2004).
- 9. Harm to the African economy 2/4 Collusion for bid rigging purposes is often aimed at eliminating domestic competitors within the purchasing country as well as potential international competitors and as such impedes overall economic development. Furthermore, bid rigging discourages qualified bidders to compete and stop them from bidding, which may lead to reduction in quality standards.
- 10. Harm to the African economy 3/4 At times governments may allocate a huge amount of money for public work projects keeping in view a particular set of socio-economic reforms. Bid rigging affects these public projects by pushing up prices that leads to inefficient allocation of resources. This affects the flow of funds to other such projects. Resources thus lost are an unacceptable drain on developmental effectiveness. Given the nature of the projects in question, the poor standard of work often associated with bid rigging directly impacts society at large. Moreover, it also affects the poor in particular since many projects are conceptualised for their exclusive benefit.
- 11. Harm to the African economy 4/4 Countries in sub saharan Africa are particularly vulnerable to the practice of bid rigging due to the high incidence of government procurement, lack of a strong legal and regulatory framework for antitrust enforcement and general absence of awareness. Another factor that renders countries in sub saharan Africa more susceptible to bid rigging at an international scale is that they often do not have the capacity to implement large projects on their own and have to invite tenders from foreign companies.
- 12. Identifying bid rigging 1/3 Small number of companies. Bid rigging is more likely to occur when a small number of companies supply the good or service. The fewer the number of sellers, the easier it is for them to reach an agreement on how to rig bids. Little or no entry. When few businesses have recently entered or are likely to enter a market because it is costly, hard or slow to enter, firms in that market are protected from the competitive pressure of potential new entrants. The protective barrier helps support bid rigging efforts. Market conditions. Significant changes in demand or supply conditions tend to destabilize ongoing bid-rigging agreements. A constant, predictable flow of demand from the public sector tends to increase the risk of collusion. At the same time, during periods of economic upheaval or uncertainty, incentives for competitors to rig bids increase as they seek to replace lost business with collusive gains.
- 13. Identifying bid rigging 2/3 Industry associations. Industry associations can be used as legitimate, pro- competitive mechanisms for members of a business or service sector to promote standards, innovation and competition. Conversely, when subverted to illegal, anticompetitive purposes, these associations have been used by company officials to meet and conceal their discussions about ways and means to reach and implement a bid rigging agreement. Repetitive bidding. Repetitive purchases increase the chances of collusion. The bidding frequency helps members of a bid-rigging agreement allocate contracts among themselves. In addition, the members of the cartel can punish a cheater by targeting the bids originally allocated to him. Thus, contracts for goods or services that are regular and recurring may require special tools and vigilance to discourage collusive tendering.
- 14. Identifying bid rigging 3/3 Few if any substitutes. When there are few, if any, good alternative products or services that can be substituted for the product or service that is being purchased, individuals or firms wishing to rig bids are more secure knowing that the purchaser has few, if any, good alternatives and thus their efforts to raise prices are more likely to be successful. Little or no technological change. Little or no innovation in the product or service helps firms reach an agreement and maintain that agreement over time. Identical or simple products or services. When the products or services that individuals or companies sell are identical or very similar, it is easier for firms to reach an agreement on a common price structure.
- 15. Warning Signs Checklist Look for markets that are more susceptible to bid rigging. Look for opportunities that the bidders have to communicate with each other. Look for indications that the bidders have communicated with each other. Look for any relationships among the bidders after the successful bid is announced. Look for suspicious bidding patterns. Look for unusual/suspicious behavior. Look for similarities in the documents submitted by different bidders. Look for warning signs and patterns related to pricing.
- 16. Considerations during tender process in public procurement Pre-qualifications Prequalification may be necessary for large or complex works or projects. This is a preliminary stage of the tendering process that is designed to produce a short list of companies that would be capable of meeting the technical standards of the works or project, without regard to price considerations at this stage. Prequalification should take into account: Experience and past performance on similar contracts; Capabilities with respect to construction and manufacturing facilities; and Financial position. Tendering is then confined to companies that have been prequalified.
- 17. Specifications Requirements for an item, works or service to be procured are specified in the tender document. Specifications are normally based upon Kenyan or international standards. Specifications form part of the tender documents and are the basis on which the technical evaluation is conducted. It is important that offers should adhere to all mandatory requirements; otherwise the offer may be rejected as non-conforming. Goods must be supplied or work done in accordance with the specifications. Items which do not meet the specified quality or standards may be rejected by the procuring entity who may withhold payment until items of the required quality are supplied. The time requirements for delivery of goods or performance of services must also be met.
- 18. Bid rigging across Africa The case of a Japanese Shipping liner, NYK in South Africa On 1 June 2015, the Japanese Shipping liner, NYK, concluded a settlement agreement with the Competition Commission (the “Commission”) in the amount of R104 million (approximately $8 600 000), for contravening sections 4(1)(b)(i),(ii) and (iii) of the Competition Act (“Competition Act”), 89 of 1998. The listed sections related to collusive conduct, including: directly or indirectly fixing a purchase price or other trading condition; dividing markets by allocating customers, suppliers or territorial or specific types of goods or services; and/or collusive tendering. The settlement follows an investigation by the Commission into the collusive behaviour of a number of shipping liners, namely Mitsui O.S.K Lines; Kawasaki Kisen Kaisha Ltd; Compania Sud Americana de Vapores; Hoegh Autoliners Holdings AS; Wallenius Wilhelmsen Logistics; Eukor Car Carriers; and NYK, in relation to allegedly fixed prices, divided markets and tendering collusively in respect of the provision of deep sea transportation services in South Africa.
- 19. Bid rigging across Africa Zambia Majority of bid rigging cases in Botswana involve the use of multiple directorships in companies to submit bids for the same products resulting in cover bidding (for example; the case of Omnia Fertiliser Zambia Limited and Nyiombo Invetsments Limited). Other cases involve market allocation and bid suppression. Bid rigging occurs mostly in government tenders for the supply of tools to district councils and in tenders for the supply of portable cabins and government food rations to government institutions.
- 20. Bid rigging across Africa Botswana Common form of bid rigging in Botswana is through a market allocation scheme and collusion.
- 22. Hypothetical Case Study Scenario 1 The National Treasury wants the Competition Authority of Kenya (CAK) to help it hold accountable individuals engaging in tender fraud. The Treasury has found that tender fraud discourages qualified bidders to compete and consequently stops them from bidding, which then leads to reduction in quality standards. Accordingly, the Treasury and CAK have agreed to jointly audit the Rural Electrification Authority with specific reference to the tender the Authority awarded a certain company for constructing its headquarters in the County of Mombasa. The following are the facts provided to your law firm that has been instructed to provide the Treasury and CAK with a legal opinion explaining whether any incidence of tender fraud can be identified therefrom.
- 23. Scenario 1: The Facts The Authority sent out a Request For Proposals (RFP) inviting bids for an award of a contract to construct a new 300 billion Kenya Shillings headquarters building for the Authority in the County of Mombasa. Only three firms submitted bids for the attractive project. Two of the bidders were large, well-known local companies; the third was a much smaller, privately held firm that appeared to be unqualified for the contract. The two public firms submitted realistic bids that closely tracked the estimated costs. The third, privately held company submitted an incomplete bid at a much higher price. The higher price was almost entirely due to a grossly inflated quote for two line items to provide fire safety equipment. The private company was given an opportunity to “clarify” its bid, which appeared to be an error, but declined to do so. The contract was awarded to the publicly-held low bidder. Almost immediately thereafter it subcontracted most to the work to the highest priced third bidder, the private company.
- 24. Hypothetical Case Study Scenario 2 At the suggestion of the Ministry of Health of Kenya, for several years two major international pharmaceutical companies, operating through local subsidiaries, had divided the market for medicines and medical supplies purchased by the Ministry under projects financed by international donors. The companies met quarterly in the capital city of Nairobi to agree on which company would provide which items and set highly inflated prices. A local pharmaceutical company saw the very high prices that the Ministry was paying and submitted a bid at a much lower price. The bid prompted concerted protests by the other two companies, who complained that the local company was not qualified to supply the drugs because of its limited finances and lack of access to foreign markets to source for the medicines and medical supplies. Eventually, under pressure from the lead donor, the low bid was accepted. Such unwanted interference was, of course, a cause for concern by the two companies, who responded by inviting the low bidder to their next quarterly meeting. There they invited the interloper to join them, which it did, and thereafter five companies divided the spoils and claimed the big profits. The Competition Authority of Kenya has invited you for a meeting to explain to them the legal implications of such arrangements. How would you advice the CAK?