Bid rigging (or collusive tendering) occurs when businesses, that would otherwise be expected to compete, secretly conspire to raise prices or lower the quality of goods or services for purchasers who wish to acquire products or services through a bidding process. Public and private organizations often rely upon a competitive bidding process to achieve better value for money. Low prices and/or better products are desirable because they result in resources either being saved or freed up for use on other goods and services. The competitive process can achieve lower prices or better quality and innovation only when companies genuinely compete. Bid rigging can be particularly harmful if it affects public procurement.
Such conspiracies take resources from purchasers and taxpayers, diminish public confidence in the competitive process, and undermine the benefits of a competitive marketplace. Bid rigging is an illegal practice in all member countries and can be investigated and sanctioned under the competition law and rules. In a number of countries, bid rigging is also a criminal offence. Bid-rigging conspiracies can take many forms, all of which impede the efforts of purchasers – frequently national and local governments – to obtain goods and services at the lowest possible price. Often, competitors agree in advance who will submit the winning bid on a contract to be awarded through a competitive bidding process.
A common objective of a bid-rigging conspiracy is to increase the amount of the winning bid and thus the amount that the winning bidders will gain. Bid-rigging schemes often include mechanisms to apportion and distribute the additional profits obtained as a result of the higher final contracted price among the conspirators. For example, 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.
However, long-standing bid-rigging arrangements may employ much more elaborate methods of assigning contract winners, monitoring and apportioning bid-rigging gains over a period of months or years. Bid rigging may also include monetary payments by the designated winning bidder to one or more of the conspirators. Individuals and firms may agree to implement bid-rigging schemes in a variety of ways, they typically implement one or more of several common strategies.
Bid-suppression schemes involve agreements among competitors in which one or more companies agree to refrain from bidding or to withdraw a previously submitted bid so that the designated winner’s bid will be accepted. In essence, bid suppression means that a company does not submit a bid for final consideration. Bid rotation. In bid-rotation schemes, conspiring firms continue to bid, but they agree to take turns being the winning bidder. The way in which bid-rotation agreements are implemented can vary
Although bid rigging can occur in any economic sector, there are some sectors in which it is more likely to occur due to particular features of the industry or of the product involved. Such characteristics tend to support the efforts of firms to rig bids. Indicators of bid rigging, which are discussed further below, may be more meaningful when certain supporting factors are also present. In such instances, procurement agents should be especially vigilant. Although various industry or product characteristics have been found to help collusion, they need not all be present in order for companies to successfully rig bids.
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.
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
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 innovation in the product or service helps firms reach an agreement and maintain that agreement over time. Industry or trade associations consist of individuals and firms with common commercial interests, joining together to further their commercial or professional goals.
CHECKLIST FOR DESIGNING THE PROCUREMENT PROCESS TO REDUCE RISKS OF BID RIGGING
There are many steps that procurement agencies can take to promote more effective competition in public procurement and reduce the risk of bid rigging. Procurement agencies should consider adopting the following measures:
BE INFORMED BEFORE DESIGNING THE TENDER PROCESS
Collecting information on the range of products and/or services available in the market that would suit the requirements of the purchaser as well as information on the potential suppliers of these products is the best way for procurement officials to design the procurement process to achieve the best “value for money”. Develop in-house expertise as early as possible. Be aware of the characteristics of the market from which you will purchase and recent industry activities or trends that may affect competition for the tender. Determine whether the market in which you will purchase has characteristics that make collusion more likely to Collect information on potential suppliers, their products, their prices and their costs. If possible, compare prices offered in B2B procurement.
DESIGN THE TENDER PROCESS TO MAXIMISE THE POTENTIAL PARTICIPATION OF GENUINELY COMPETING BIDDERS
Effective competition can be enhanced if a sufficient number of credible bidders are able to respond to the invitation to tender and have an incentive to compete for the contract. For example, participation in the tender can be facilitated if procurement officials reduce the costs of bidding, establish participation requirements that do not unreasonably limit competition
DEFINE YOUR REQUIREMENTS CLEARLY AND AVOID PREDICTABILITY
Drafting the specifications and the terms of reference is a stage of the public procurement cycle which is vulnerable to bias, fraud and corruption. Specifications should be designed in a way to avoid bias and should be clear and comprehensive but not discriminatory. They should, as a general rule, focus on functional performance, namely on what is to be achieved rather than how it is to be done. This will encourage innovative solutions and value for money. How tender requirements are written affects the number and type of suppliers that are attracted to the tender and, therefore, affects the success of the selection process. The clearer the requirements, the easier it will be for potential suppliers to understand them.
DESIGN THE TENDER PROCESS TO EFFECTIVELY REDUCE COMMUNICATION AMONG BIDDERS
When designing the tender process, procurement officials should be aware of the various factors that can facilitate collusion. The efficiency of the procurement process will depend upon the bidding model adopted but also on how the tender is designed and carried out. Transparency requirements are indispensable for a sound procurement procedure to aid in the fight against corruption.
They should be complied with in a balanced manner, in order not to facilitate collusion by disseminating information beyond legal requirements. Unfortunately, there is no single rule about the design of an auction or procurement tender. Tenders need to be designed to fit the situation.
CAREFULLY CHOOSE YOUR CRITERIA FOR EVALUATING AND AWARDING THE TENDER
All selection criteria affect the intensity and effectiveness of competition in the tender process. The decision on what selection criteria to use is not only important for the current project, but also in maintaining a pool of potential credible bidders with a continuing interest in bidding on future projects. It is therefore important to ensure that qualitative selection and awarding criteria are chosen in such a way that credible bidders, including small and medium enterprises, are not deterred unnecessarily.
When designing the tender offer, think of the impact that your choice of criteria will have on future competition. Whenever evaluating bidders on criteria other than price, such criteria need to be described and weighted adequately in advance in order to avoid post-award challenges. When properly used, such criteria can reward innovation and cost-cutting measures, along with promoting competitive pricing.
RAISE AWARENESS AMONG YOUR STAFF ABOUT THE RISKS OF BID RIGGING IN PROCUREMENT
Professional training is important to strengthen procurement officials‟ awareness of competition issues in public procurement. Efforts to fight bid rigging more effectively can be supported by collecting historical information on bidding behavior, by constantly monitoring bidding activities, and by performing analyses on bid data. This helps procurement agencies to identify problematic situations. It should be noted that bid rigging may not be evident from the results of a single tender.
CHECKLIST FOR DETECTING BID RIGGING IN PUBLIC PROCUREMENT
Bid-rigging agreements can be very difficult to detect as they are typically negotiated in secret. In industries where collusion is common, however, suppliers and purchasers may be aware of longstanding bid-rigging conspiracies. In most industries, it is necessary to look for clues such as unusual bidding or pricing patterns, or something that the vendor says or does. Be on guard throughout the entire procurement process, as well as during your preliminary market research.
LOOK FOR WARNING SIGNS AND PATTERNS WHEN BUSINESSES ARE SUBMITTING BIDS
Certain bidding patterns and practices seem at odds with a competitive market and suggest the possibility of bid rigging. Search for odd patterns in the ways that firms bid and the frequency with which they win or lose tender offers. Subcontracting and undisclosed joint venture practices can also raise suspicions. The same supplier is often the lowest bidder.
There is a geographic allocation of winning tenders. Some firms submit tenders that win in only certain geographic areas. Regular suppliers fail to bid on a tender they would normally be expected to bid for, but have continued to bid for other tenders. Some suppliers unexpectedly withdraw from bidding.
LOOK FOR WARNING SIGNS IN ALL DOCUMENTS SUBMITTED
Bid-rigging conspiracy can be found in the various documents that companies submit. Although companies that are part of the bid-rigging agreement will try to keep it secret, carelessness, or boastfulness or guilt on the part of the conspirators, may result in clues that ultimately lead to its discovery. Carefully compare all documents for evidence that suggests that the bids were prepared by the same person or were prepared jointly.
LOOK FOR WARNING SIGNS AND PATTERNS RELATED TO PRICING
Bid prices can be used to help uncover collusion. Look for patterns that suggest that companies may be coordinating their efforts such as price increases that cannot be explained by cost increases. When losing bids are much higher than the winner’s bid, conspirators may be using a cover bidding scheme.
LOOK FOR SUSPICIOUS STATEMENTS AT ALL TIMES
When working with vendors watch carefully for suspicious statements that suggest that companies may have reached an agreement or coordinated their prices or selling practices. Spoken or written references to an agreement among bidders.
LOOK FOR SUSPICIOUS BEHAVIOUR AT ALL TIMES
Look for references to meetings or events at which suppliers may have an opportunity to discuss prices, or behavior that suggests a company is taking certain actions that only benefit other firms. Forms of suspicious behavior could include the following: Suppliers meet privately before submitting bids, sometimes in the vicinity of the location where bids are to be submitted. Suppliers regularly socialize together or appear to hold regular meetings.
STEPS PROCUREMENT OFFICIALS SHOULD TAKE IF BID RIGGING IS SUSPECTED
If you suspect that bid rigging is occurring, there are a number of steps you should take in order to help uncover it and stop it. Have a working understanding of the law on bid rigging in your jurisdiction. Do not discuss your concerns with suspected participants. Keep all documents, including bid documents, correspondence, envelopes, etc.
Keep a detailed record of all suspicious behavior and statements including dates, who was involved, and who else was present and what precisely occurred or was said. Notes should be made during the event or while they are fresh in the official’s memory so as to provide an accurate description of what transpired. Contact the relevant competition authority in your jurisdiction. After consulting with your internal legal staff, consider whether it is appropriate to proceed with the tender offer.