Illegal agreements and collusive conduct Workshop: Protect your procurement

1. Commerce Act 1986 Illegal agreements and collusive conductWorkshop: Protect your procurement Presentation to Southern Response 2 November 2012

2. Key points for today Why is competition law in place and why is anti-competitive behaviour harmful What are illegal agreements under sections 27 & 30 of the Commerce Act - including collusive (or “cartel”) conduct? The four main types of collusive conduct and how to detect them. What can you do to protect your company and its procurement?

3. A bit about the Commerce Act 1986 Commerce Commission enforces the Commerce Act Competition law is in all major economies Purpose = promote competition in markets for long-term benefit of New Zealanders Competitive markets important for • domestic economy • international trade

4. Why is Collusive Conduct Illegal? Collusive and other anti-competitive conduct affects consumers and businesses, also damages the economy and even society: • increases prices • limits output and choice • inhibits innovation • lowers quality • skews investment incentives • lowers competitiveness of exports

5. Risks to Competition Competition generally ensures that purchasers get the best price, best quality and best choice of supplier Christchurch works are on an unprecedented scale, demand outstripping supply: • Increased risk that competitors will agree prices on works/bids • Increased risk that competitors will agree bids/outputs/market sharing • For example where specialist services undertaken by few players

6. Illegal Agreements – sections 27 and 30 of Commerce Act Communication between at least two parties that shows an agreement • (communication includes nods & winks) Contracts, arrangements, & understandings Can be verbal and informal May involve agreeing not to do something “Entering into” = making an agreement; and “Giving effect to” = putting the agreement into action

7. Anti-competitive agreements – section 27 Commerce Act Can be between any parties, not just competitors; • egmanufacturer and wholesaler To be illegal the agreement must the have the purpose, effect, or likely effect of substantially lessening competition in a market Often restrictive in nature, • eg refusing to supply(Resource – fact sheet on Agreements that Substantially Lessen Competition)

8. Price fixing provisions – section 30 Commerce Act Agreement must involve competitors Per se illegal conduct “fix, control, or otherwise maintain the price of a good or a service” Includes components of price (such as margin), a price level, or a formula to calculate price Even agreeing a price for one party is illegal (Resource – fact sheet on Price Fixing and Cartels)

9. Four types of collusive agreements Price fixing agreements Bid rigging agreements Market sharing agreements Output restriction agreements This serious behaviour is often referred to as “cartel” conduct Captured by sections 30 and 27 of Commerce Act

10. Sections 30 & 27 Commerce Act – compared in summary

11. Price fixing More than just exact price matches Fix, control or maintain Any component of price Margins, rebates, discounts, formulas Floors & ceilings Only has to involve one price

12. Price fixing behaviour – what to look for Timing and magnitude of price increases Very sudden end to a period of discounting by multiple suppliers Blanket refusal to negotiate price by multiple suppliers Timing and magnitude of any changes to rebates etc

13. Price Following is not Illegal Price Following is not Illegal

14. Bid Rigging Agreement between competitors as to which one will win bid Can be verbal or written Common types: • Cover bidding (vs. “cover pricing”) • Bid suppression • Bid rotation • Bid withdrawal

15. Bid rigging – what to look for Suspicious bidding patterns • (may be sophisticated) Suspicious behaviour or prices Clues in documents Clues in things said by bidders Relationships amongst bidders • egsub-contracting

16. Design tenders that minimise the risk Ensure appropriate number of bidders able to bid Avoid predictability Reduce opportunities for communication • egpre-tender group meetings Include anti-collusion clauses in tender documents Raise awareness of bid-rigging – use Commission Guidelines

17. Market sharing Competitors agree on market, regions, customers or types of contract/customer Competition in the shared area is curtailed or removed Difficult to spot, may look like stable supply May occur in conjunction with other behaviour • egbid rigging to ensure customer stays with the incumbent supplier

18. Market sharing – what to look for Supplier’s lack of interest in certain customers/areas/ contracts etc • eg non-incumbents prices are much higher, not willing to negotiate Steady market share by type of customer, in certain regions, in certain contract types etc Lack of entry with no good reason • eg already doing same kind of work in one part of Christchurch but refuse to enter another part

19. Output restriction Capping or lowering output Aim is to increase price and/or reduce other benefits to the customer What to look for • coordinated reductions in output by multiple suppliers with little or no justification

20. Competing buyers Also need to be careful as purchasing can be done “in competition” Any coordination interferes with the competitive process Same rules apply for purchasers as to bidders • eg meat buyers cartel

21. Sometimes competing businesses lawfully collaborate – care required • EXEMPTIONS • s31 Joint Ventures (exempt from s30 only), s33 Joint Buying (s30 only) • S32 Certain price recommendations, 50 or more parties (s30 only) • AUTHORISATIONS • Only if public benefits outweigh detriments • (Resource – fact sheet on Exemptions under the Commerce Act)

22. Trade associations Provide many important benefits for those involved. However, care needed as: • Members usually also competitors • Any illegal agreement entered into by association captures all members too! • If member disagrees with conduct, to avoid liability, must object in writing or prove could not have reasonably known • Price recommendations possible if more than 50 members - but risks involved (Resource – Guidelines for Trade Associations)

23. Possible penalties • If civil proceedings result, significant fines available for companies and individuals, both per breach • Also $ damages for victims under private actions • Individuals banned from being managers or directors • Those in authority and third parties also need to be careful (section 80) • Attempt to make an agreement is enough to break the law • 2012– Cartel Criminalisation Bill under consideration - significant changes to the Commerce Act may result

24. Monitor your procurement process, you are the experts Keep good records, eg all tender documents and data Look for indicators of price fixing, market sharing, bid rigging and output restriction outlined earlier Include anti-collusion clauses in tender documents (see example in your pack) If you are suspicious, be careful with any evidence and inform Commission of any suspicions about suppliers Please read our resources and any Commerce Act related material provided by your organisation What can you do to protect your company ?

25. Work-through hypothetical scenarios These are designed to help illustrate practical examples. So you can put the knowledge gained today into practical application

26. In summary – our key messages When you are procuring, look out for the indicators of bid-rigging, price fixing and other unlawful conduct Knowing the key rules & having good processes will help you protect your company from being subjected to unlawful conduct.

27. Quick survey You are all important stakeholders for our work Please take a few minutes to fill out our quick survey as it assists to target and improve our advocacy

28. Questions? Further enquiries welcome: Nicky Beechey Chief Adviser Competition Branch Commerce Commission nicky.beechey@comcom.govt.nz 04 924 3623   Barrie Sutton Chief Adviser Competition Branch Commerce Commission Barrie.Sutton@comcom.govt.nz 04 924 3631 *All images sourced from Google Images