You can find this paper here. There is also a shorter version of the paper available here.

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Governments around the world spend an estimated US$9.5 trillion on goods and services each year. This accounts for roughly one third of government expenditures (29.1% on average in OECD countries) and 10% to 20% of total gross domestic product (“GDP”) in many nations. Furthermore, public procurement is an essential input to the delivery of broader public services and functions of government that are vital for growth, development and social welfare.

The special procedures that characterise public procurement are necessary in light of the principal-agent problem and moral hazards that public procurement entails. Conventional responses to the problems of corruption and supplier collusion in public procurement comprise two broad sets of tools. The first, focusing on corruption issues, involves measures to increase the transparency of public procurement and to strengthen the accountability of responsible public officials for malfeasance. The second, aimed at preventing supplier collusion, focuses on the effective enforcement of national competition (antitrust) laws. However, measures to increase the transparency of public procurement and to strengthen the accountability of public officials cannot eliminate altogether the vulnerability of public procurement systems to corruption, and may render public procurement systems more susceptible to supplier collusion than private sector purchasing.

This paper seeks to develop a more comprehensive and holistic approach to public procurement, and to propose a set of measures that can deter and increase the resistance of these systems to supplier collusion without necessarily increasing their vulnerability to corruption. It is structured as follows:

Section I provides an overview of bid rigging and corruption in public procurement processes.

Competition agencies across the world continue to expose bid rigging on a regular basis. In such cases, corruption often coexists with, and supports or reinforces supplier collusion. Indeed, evidence indicates that corruption may often occur throughout the three stages of the procurement lifecycle—tender design, bidding, and contract performance. The authors provide a number of examples including the construction industry in Brazil and South America in the Car Wash investigation, the Canadian construction industry in Quebec, RORO shipping companies in China, elevators in Europe, water purification products in India, steel bridges in Japan, electrical works in Singapore, construction contracts in Spain, and a number of US cases.

Studies draw attention to a (negative) correlation between the level of corruption and competitiveness, economic development and growth. It has been estimated that the volume of bribes changing hands for public sector procurement was approximately $200 billion per year in 2004; that 3.5% of world procurement spending is paid in bribes in developing and developed economies each year; and that the cost of bribery in procurement auctions amount to 12% of their value. More recently, it has been estimated that between 10% and 30% of the investment in publicly funded construction projects may be lost through mismanagement and corruption. An OECD report (with which I have no connection) estimated that individuals and companies pay bribes in the vicinity of US$2-2.6 trillion (five% of global GDP) each year.

In addition to the harm caused by corruption, successful cartels result in higher prices, deadweight loss, productive inefficiency and dynamic harm from reduced incentives to innovate. Recent evidence indicates that median cartel overcharge hovers around 25%. A paper focussing on bid rigging in Japan suggests that procurers paid 16% to 33% percent more than they would have paid in a competitive bid process. A report published by the World Bank in 2011, investigating misconduct in World Bank funded road projects, provides evidence that bid rigging in procurement markets leads to sharply inflated prices and/or reductions in quality or safety of products and services provided.

An extensive body of scholarship identifies the conditions in which cartels and bid rigging can flourish. Unfortunately, the design of public procurement systems often makes them particularly susceptible to bid rigging. Conditions conducive to procurement collusion include: (i) constant and predictable demand; (ii) procurement rules that lead to few competitors, create barriers to entry and (often) exclude foreign competitors; (iii) tender design that reduces the scope for differentiation through standard requirements or restrictive product specifications; (iv) absence of incentives for procurement officers t to seek to identify cartels; (v) overly sweeping transparency requirements, which increase the risk of collusion; (vi) faulty tender design; and (vii) industry structure or recourse to common procurement advisors.

Section II outlines the main tools employed to address both bid rigging and corruption in public procurement processes.

A first pillar to address bid rigging and corruption in public procurements comprises legal prohibitions directed at it.  As regards bid rigging, this prohibition typically takes the form of competition laws prohibiting supplier collusion. Corruption in public procurement markets is generally targeted by national criminal justice rules, legislation on ethics in public office, and/or by public procurement regulations. Increasingly, corruption is also the subject of international instruments and guidelines, such as the United Nations Convention against Corruption (“UNCAC”) and the United Nations Convention Against Corruption (“UNCAC”).

These prohibitions must be effectively enforced, which requires that there is a high risk of the illegal conduct being uncovered. Many competition and criminal enforcement agencies obtain information or evidence of infringements from complainants (such as employees, purchasers, procurement officers, or the general public), leniency or amnesty applicants, and even through broader whistleblowing or bounty-hunting mechanisms that involve paying informers for information.

Furthermore, screens (both structural and behavioural) can provide important prima facie evidence that bid rigging occurred. A burgeoning literature explores how screens can be applied to flag possible unlawful cartel behaviour, and demonstrates that screens are becoming increasingly important in the detection of conspiracies and manipulations. Public contract tenders are particularly suitable for the application of screening tools as the identification of a public tender market facilitates structural assessment, and the data generated by the process facilitates subsequent behavioural assessment.

Also important to the successful creation of a procompetitive procurement system is to conduct Outreach to the business and wider community. Indeed, more could be done to encourage businesses to introduce competition and anti-corruption compliance programs backed by audits, monitoring, reviews and risk assessments. Public education may also facilitate the building of public support for policies to counter bid rigging and bribery, and help create a wider group of stakeholders vigilant for illegal conduct.

Lastly, Multilateral Development Bank (MDB) loans are frequently used to fund public procurement projects. To prevent corruption undermining the realization of their development goals, MDBs have developed legal structures and processes that allow them to fulfil their fiduciary duties and to ensure that loans are used only for the purposes for which they are granted. Many institutions now have integrity units, such as the World Bank’s Integrity Vice Presidency or the European Bank for Reconstruction and Development (“EBRD”) Legal Transition Program, that provide advice to borrower countries on procurement reform and corruption prevention, investigate misconduct, and/or operate sanctions systems. This allows MDBs to debar entities found to have engaged in misconduct from bidding on future MDB-financed contracts.

A last pillar consists of imposing effective sanctions. Many jurisdictions regularly impose significant fines on firms found to have engaged in cartel activity in violation of antitrust laws. However, there is a growing consensus that corporate fines may not suffice to deter anticompetitive conduct. Additional controls may be desirable or required, including monetary and non-monetary sanctions for individuals that play a role in instigating infringements; penalties for individuals that fail to prevent bid rigging; and non-monetary sanctions for corporations, such as debarment or even, in certain circumstances, structural remedies. Furthermore, asset recovery and damages actions not only increase deterrence, but also ensure that wrongdoers do not profit from their wrongs and/or that victims are compensated for their loss.

Section III develops a comprehensive approach to address the twin scourges of supplier collusion and corruption in public procurement markets.

In spite of the enforcement of competition and anti-corruption laws, it appears that only a fraction of illegal collusion and corruption in procurement markets is detected and effectively sanctioned. This suggests the need not only to intensify current enforcement efforts, but also to look for additional means beyond those currently employed.

An essential starting point to achieving procompetitive procurement is the existence of a robust public procurement system with clearly articulated objectives which reflect the cultural, administrative, economic, legal, and social traditions of the state in which it is adopted. Based on the best available international standards, the authors propose a number of steps to design a public procurement system that reduces barriers to entry and is less susceptible to both collusion and corruption. This would include:

  • Adopting procompetitive approaches to tender design. This could include: (a) selecting appropriate procurement models (e.g. sealed bid tender models may diminish the ability and incentive to collude as compared with other bid models); (b) adopting electronic tender systems which increase transparency, reduce direct interaction between procurement officials and companies, increase outreach and competition, and allow for easier detection of irregularities and corruption; (c) offering contracts less frequently and regularly; (d) purchasing centrally, which can create buyer power and reduce the occasion for (local) corruption; (e) including anti-bid rigging and anti-corruption clauses in tender arrangements; (f) adopting clearly defined, simple and streamlined requirements for bidders that only impose necessary conditions, in order to maximise participation and open markets to international trade.
  • Engaging in careful market research as a core element of strengthening and fine-tuning public procurement processes. Market research can also underpin competition advocacy efforts to promoting compliance, and lead to the identification of entry barriers to procurement markets for new entrepreneurs.
  • Professionalising the procurement workforce, including training the responsible officials to detect signs of bid rigging and corrupt practices. Experience suggests that appropriate investments in the procurement workforce may partially alleviate the need for costly ex post control systems and deliver better overall value for taxpayers. Public officials are well situated to detect bid rigging arrangement given their knowledge of the market and capacity to observe patterns in bidding process, interact with bidders, observe behaviour and intercept documents. Public officials should therefore receive competition law training which enables them to understand when markets are prone to collusion and how the procurement process might facilitate or encourage it. In addition, because bid riggers may offer procurement officials bribes and other kickbacks specifically designed to prevent them from reporting their wrong-doing, procurers should be informed of their duties to conduct procurement procedures in a fair, ethical and impartial way and of the measures put in place to prevent such misconduct.
  • Fine-tuning the interaction between anticorruption and anti-competition measures. It is difficult to fight bid rigging effectively in public procurement markets without tackling corruption, and vice versa. It is crucial, therefore, that, beyond advocacy and training, procurement, competition and anti-corruption agencies work closely together. Cooperation can be internalised by entrusting the same agency with procurement, competition and/or corruption remits. Where agencies are distinct, mutual assistance can be achieved not only through advocacy, training, and outreach, but also through placement and exchange of staff, cooperation and knowledge sharing systems.
  • Promoting non-discrimination on grounds of nationality in government procurement markets as a tool to strengthen competition and deter corruption. Opening access to procurement markets to foreign bidders not only enhances competition in the home market, but also allows the tendering body to access specialisation and technology unavailable in the home market. While the liberalisation of trade in relation to government procurement markets can theoretically be undertaken unilaterally, in practice it almost always occurs through participation in the WTO plurilateral Agreement on Government Procurement (GPA), or via bilateral agreements embodying rules and commitments similar to those of the GPA.
  • Adopting a suitable rate of reform. The reform of public financial management processes, especially public procurement, is a perilous process, fraught with risks. It is not surprising, therefore, to find evidence indicating that it is difficult to make reforms “take root” and achieve real change, even when they are based on international best practices. To be successful, reforms must be accompanied by a sustained effort to engage stakeholders in addressing the problems that are most critical to them. At the same time, some research suggests that in some contexts – e.g. of endemic corruption – progress is likely to be possible only with sweeping, systematic reforms that fundamentally alter incentives and expectations. The requisite solutions are likely to differ substantially from country to country and to require careful diagnosis of the roots of the problems in procurement.

Comment:

This paper provides a very comprehensive analysis of bid rigging and the problems it creates from a competition and corruption perspective. It is recommended reading to anyone interested in the topic, and it provides a wonderful source of analysis, literature and practical examples (even if part of this literature seems to be contradicted or complemented by the paper below).

The basic argument of the paper seems to boil down to: ‘to combat big-rigging, we should go beyond sanctioning corruption and anticompetitive practices. We also need to design tenders in a pro-competitive way’. The authors provide thorough academic support for this approach. I would go further and say that such a view is widely shared, including by the OECD. In effect, implementing pro-competitive public procurement systems  is one of the two goals of the OECD Guidelines for Fighting Bid Rigging in Public Procurement (the other is to adopt mechanisms and screens to identify bid-rigging), which the authors cite with the acknowledgment that they have been widely implemented.

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