NATURE AND EFFECTS OF BID-RIGGING IN CONSTRUCTION INDUSTRY

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1 WHITEPAPER June NATURE AND EFFECTS OF BID-RIGGING IN CONSTRUCTION INDUSTRY Instances of bid-rigging in the construction industry have considerably increased in the recent past. Bid-rigging has taken a toll in the industry both in public and private sector construction. The effects and intensity of bidrigging are almost similar in all the nations. The effects, issues, reasons, steps to detect, steps to avoid and steps to be taken once bid-rigging is detected is discussed in this whitepaper. Action points for procurement officials are elaborated to reduce bid-rigging to the extent possible.

2 Bid-rigging is a conspiracy forbidden in all countries. It is a form of price fixing and market allocation, practiced where contracts are firm by a call for bids. Government construction contracts would be a good example for bid - rigging. Bid rigging almost always results in economic harm to the agency which is looking for the bids, and to the public, who eventually bear the costs as taxpayers or clients. Clients can assume the benefits of free and open competition resulting in the finest goods and services at the lowest prices. Public and private procurement professionals often depend on a competitive bidding process to achieve value for money. The competitive process properly functions, only when competitors set prices honestly and independently. When competitors conspire, prices are overstated and the customer is cheated. Why does Bid-Rigging happen? A common objective of a bid-rigging scheme is to increase the amount of the winning bid and the amount that the winning bidders will gain. Bid-rigging schemes often include mechanisms to allocate and distribute the additional profits obtained as a result of the higher final contracted price among the conspirators. However, long-standing bid-rigging arrangements may employ much more elaborate methods of assigning contract winners, monitoring and allocating bid-rigging gains over a period time. Bid rigging may also include fiscal payments by the designated winning bidder to one or more of the conspirators. This called compensation payment and it is at times also associated with firms submitting cover bids. There are several common strategies to device bid-rigging, though individual firms agree to device it inversely they end up following the common strategy. These common techniques are not mutually Competitors who agree not to bid or to submit a losing bid may receive subcontracts or supply contracts from the designated winning bidder in order to divide the proceeds from the illegally obtained higher priced bid among them

3 exclusive. In most of the cases the different types of bid-rigging can be used as a combination which results in a pattern that procurement official can detect and which can then help uncover bid-rigging schemes. Issue and Practices in the Industry In the past few months alone, action has been taken against bid-rigging in Australia, Canada, the Czech Republic, Italy, South Africa and the United Kingdom Recent cases and actions against Bid Rigging in Construction Industry Bid-rigging also known as collusive tendering is regarded as among the most serious violations of competition and unlawful by competition authorities and courts worldwide. In the past few months, action has been taken against bid-rigging in South Africa, Italy, Australia, Canada and the United Kingdom. South Africa: The competition commission in South Africa began investigating 140 cases of bid rigging and price fixing in the industry, since In July 2013, 15 construction companies were collectively fined for ZAR 1.46 billion as a penalty for collusion and anti-competitive practices. The competition commission has been investigating projects amounting to ZAE 30 billion in value since List of companies fined with penalty charges Aveng (ZAR ) Basil Read (ZAR ) Esorfranki (ZAR ) G Liviero (ZAR ) Giuricich (ZAR ) Haw & Inglis (ZAR ) Hochtief (ZAR ) Murray & Roberts (ZAR ) Norvo (ZAR ) Raubex (ZAR ) Rumdel (ZAR Stefanutti (ZAR Tubular (ZAR ) Vlaming (ZAR ) WBHO (ZAR311

4 Italy: 465) 664) ) Tender: Sewage disposal sector Location: Northern Italy Case: Investigation against 6 companies. Charges is that the companies engaged in bid-rigging by agreeing not to compete for various tender procedures in sewage disposal, allocating between themselves tenders in the Lombardy and Piedmont regions of northern Italy. The Bid Rigging conditions were Australia: Agreeing to abstain from taking part in specific tenders Submitting identical economic bids in tenders Competitors submitting joint tenders Tender: Bradken Case (Private Tender) Case: The Australian Federal Court in April, 2013 awarded damages of Australian $22.4 million for the victims. Bid-rigging also known as collusive tendering is regarded as among the most serious violations of competition and antitrust law by competition authorities and courts worldwide. Canada: Tender: Toyota for quotations for the supply of wheel hub unit bearings for cars Case: Japanese bearings manufacturer JTEKT, pleaded guilty under Canada s Competition Act. The proof revealed that JTEKT secretly united with another Japanese bearings manufacturer to submit bids in response to requests by the car manufacturer Toyota. JTEKT was fined Canadian $5 million. United Kingdom: Tender: Alarm systems for retirement homes Case: The claim is that one of the companies entered into bid-rigging arrangements with each of the others, apparently sharing

5 confidential pricing information with the aim that they would submit higher bid. Czech Republic: Collusive Tendering can occur in any type of economic sector, sectors with limited technological change, fewer substitutes and simple products or services tend to support the efforts of firms to rig bids Tender: Czech defense ministry (Public project) Case: Five companies had coordinated their conduct in public tenders for contracts to be awarded by the Czech defense ministry, by agreeing on the bidding price that they each offered. The total fines amounted to 4.9 million Czech. Characteristics that Help Collusion A successful bid rigging agreement should undergo the following steps: The firms must agree on a mutual course of action for implementation Observe whether other firms are abiding by the agreement Find a way to correct firms that go against the agreement For these steps to be followed the number of firms eligible for bidding should be limited and need for favorable market conditions and industry associations is vital. Collusive Tendering can occur in any type of economic sector, sectors with limited technological change, fewer substitutes and simple products or services tend to support the efforts of firms to rig bids. During those situations the procurement agents are expected to be attentive.

6 Few collusive tendering favorable characteristics are listed below Bid rigging increases costs and lowers quality Identical or simple products or services for public purchasers and ultimately for taxpayers. Competition authorities are committed to stamping it out by taking How to detect Bid-Rigging? robust and targeted enforcement actions 1. Check whether your market is vulnerable for bid rigging 2. Keep a track on all the opportunities that bidders have to communicate with each other 3. Look for indications whether bidders have communicated among them 4. Note the kind of relationship the bidders have after the successful bid is announced 5. Look for suspicious bidding patterns 6. Look for unusual behavior 7. Relate and identify the similarities among the documents submitted by different bidders What to do if Bid-Rigging is detected? If the procurement team happens to sense any signs of bid-rigging in the market, they must contact the government body responsible for competition execution. The government officials should be asked to investigate on the signs detected. Signs noticed may or may not prove the occurrence of bid-rigging. The bidding process and the bids must be carefully looked upon by the procurement people as there might be any added signs of collusive tendering. The evidence find against bid-rigging should be kept away from destruction. None of the bidders should be aware of

7 the traces followed as in might lead to damage of the evidence found. All the proofs identified must be carefully documented and preserved. Do not disclose or unnecessarily limit the number of bidders in the bidding process Procurement Ways to Reduce Risks of Bid- Rigging There are enough ways to reduce the risk of bid rigging and increase effective competition in public procurement. Procurement agencies should consider adopting the following measures: 1. Up-to-date market knowledge before designing the tender process: In-house expertise should be established at the earliest. Procurement agents should be knowledgeable about the potential suppliers of the product/service under bid. Information about the past similar tenders should be maintained and used effectively. If external consultants are used to estimate prices or costs confidentiality agreements should be signed. 2. Tender process should be designed to maximize potential participation: All the measures to increase the number of credible bidders should be considered Reduce the cost of bidding All the participation requirements should be reasonable that it should not limit competition Location of firms from other region or countries should not be a hurdle for participation Smaller firms should be encouraged to participate even if they cannot bid for the entire contract 3. Avoid predictability to the extent possible: Tenders must be clearly drafted allowing no space for certainty. Focus should be on functional performance like what is to be achieved rather than how it is to be done. Clear requirements will encourage innovative solutions. More predictable procurement schedules and unchanging quantities sold or bought can enable collusion.

8 4. Tender design should effectively reduce communication among bidders: There is no rule about the design of an auction or procurement tender. The following steps are expected to be followed to keep the bidders away from each other Procurement officials should be aware of factors that aid in collusion Transparency is the prime feature which helps in fight against corruption Information disclosed to the bidders must be considered at the time of public bid opening Since there is no rule as such, tenders must be designed according to the situation When designing the tender offer, think of the impact that your choice of criteria will have on future competition 5. The intensity and effectiveness of the selection criteria must be chosen with care: Avoid preferences for any certain type or class of suppliers Try not to split contracts between suppliers with identical bids Inquiries can be made on prices or bids, but don t discuss the issues with the bidders mutually Right of not awarding the contract in case of mistrust must be held till the very end 6. Every staff should be informed about the risks of bid rigging; Professional training is significant to strengthen procurement official s awareness of competition issues in public procurement. Effects of Bid-Rigging in Construction Industry Bid rigging has harmful effects on the construction. The practice almost always leads to higher prices. The multiplier effect is evident in the industry 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 then. This, in hand, affects the consumers, as the higher prices are certainly passed to them.

9 To determine the degree of market competition is an important criterion in any industry. Economists have concluded that a dynamic price competition or some repeated interactions among the firms facilitate noncompetitive behavior. Markets that are more prone to collusion, these markets need to be earmarked and scrutinized before bids are floated Markets being divided and projects ending in illicit bidders ultimately lowers the industry standards and the consumers of the industry end up suffering by paying more taxes for an unlawful service/product. Conclusion: This paper has shown how deep rooted and unavoidable bid-rigging has become in construction projects. Bid-rigging is found in all the stages of construction and in all types of projects not only public infrastructure projects. Traces are found in developed as well as developing nations. It is necessary to look for clues such as unusual bidding or pricing patterns, and the reoccurance of the same set of bidders in a given region, very marginal difference in bid prices. The procurement team should be on guard throughout the entire procurement process, as well as during the preliminary market research. Collusive practices in the industry are detrimental to the clients in a number of ways. Firstly, the price of the contract can be fixed among the construction companies which in most cases transpires to prices being fixed at non lucrative levels for clients. The client will lose price visibility, and incur unfair costs. The vigilance of the procurement team is instrumental in detecting bid rigs. There are some markets that are more prone to collusion, these markets need to be earmarked and scrutinized before bids are floated. Background checks into the company s history and credibility of bids submitted should be subjected to detailed sweep through. Before breaking ground in areas with no or dismissible prior experience, clients should educate themselves on the nature of contracting in these regions. Some regions, have loopholes that can be unscrupulously exploited, such as when sub contracting is employed by the prime contractor. The additional costs can be passed on to the clients, but such costs will be evaded by the contractor during the course of the bid price

10 submission. Cases of price ceiling breaches due to excessive cost of sub contracting has been markets such as Brazil and South Africa. Additionally, clients need to pay sharp attention while framing the scope criteria for bidding. Excessive limiting of participants, elimination without consideration, very broad design scopes without proper cost indications, allow for tampering by the contractors. Hence facilitating embezzlement by the bidding companies. In each state, the competition commission generally maintains tabs on companies involved in or that hold a previous record for collusive tendencies. Clients at the commencement of the bid can obtain these names, and be watchful of the bids submitted by these players. As a last resort, an uncharacteristic approach that has proved useful in the past is to maintain strong political ties in regions that lean towards collusion, political intervention has in many instances curbed bid rigging.