Bid Rigging in Public Procurement: COMPETITION Risks, Costs and MITIGATION

1. Bid Rigging in Public Procurement:COMPETITION Risks, Costs and MITIGATION This presentation is primarily based on OECD work and owes a particular debt to Antonio Capobianco of the Competition Division Dr. Sean F. Ennis Competition Commission of Mauritius sean.ennis@ccm.mu Mauritius – 28 September 2011

2. Structure of the Presentation 2 • Introductory remarks on bid rigging and public procurement • Example of enforcement cases against bid rigging • The OECD Guidelines for Fighting Bid Rigging • Co-operation between procurement body and competition authority

3. Main Points 3 • Bid rigging can occur in any country and in any market • Bid rigging significantly increases prices of goods and services • Fighting cartels and bid rigging is a top priority of most competition authorities • Effective tools, such as OECD Guidelines, can help fight bid rigging • Co-operation between public procurement agencies and competition authorities helps to fight bid rigging

4. Public Procurement and Competition • One major goal of public procurement: Get a good value for the government • The best way to ensure a good value: vigorous competition • Making competitive forces work is at the heart of procurement • If vigorous competition is not possible, e.g., because of a small number of suppliers, special approaches are needed • Even when the number of competitors is more than two, vigorous competition is NOT guaranteed • Vigorous competition is in the financial interest of government but not necessarily of companies • At times, companies try to prevent vigorous competition in public procurement, notably via corruption or bid rigging

5. Why Worry about Bid Rigging in Public Procurement? 5 Public procurement accounts for approx 15-20% of GDP in OECD countries • Bid rigging can raise prices significantly (up to 20% or more) POTENTIAL DAMAGES FOR TAX PAYERS CAN BE SIGNIFICANT !!

6. Public Procurement as % of GDP 6 Source: OECD (2006)

7. Public Procurement in Mexico 7 • In 2008, public procurement accounted for 18.4 % of GDP distributed as follows: • Public entities: 8.7 % • State and municipal governments: 5.5 % • Federal government: 2.9 % • Social Security: 1.5 % • In 2008, 70,230 federal public procurement contracts were registered adding up to USD 59 billion: • 65.2 % for acquisition of goods and services • 34.8 % for public works

8. Importance of Competitive Procurement 8 • A competitive procurement system will: • Drive prices to marginal costs • Minimize costs for firms and the government • Drive innovation, as firms learn from one another and thereby to continuously improve products. • Competitive public procurement systems will accrue benefits to the whole economy as public procurement often involves key infrastructure (highways, railways, electricity, etc.) for other industries.

9. International Examples 9 The improvement of procurement procedures led to significant savings in a number of countries (OECD 2003): • 47% saving in the procurement of certain military goods in Columbia • 43% saving in the cost of purchasing medicines in Guatemala • USD 3.1 ml savings for the Karachi Water and Sewerage Board (Pakistan) In the EU, the implementation of the EC Directive on Public Procurement in the period between 1993 and 2002 generated cost savings of between a little less than EUR 5 billion and almost EUR 25 billion.

10. Surveys of Cartel Overcharges Source: Connor and Bolotova (2006)

11. Bid Rigging – The Costs Japan: Prices across 18 tenders declined by approximately 20%after competitive bidding as restored to the procurement process U.S.: Bid rigging had raised the price paid by the US Department of Defense by 23.1% S. Africa: Prices of health care products declined by approximately 27%after antitrust intervention Clarke and Evenett have shown, the resource saving that can be generated by only a marginal reduction in bid rigging on government contracts (e.g. of the order of 1 per cent) is greater than the average annual operating budget of the competition agency in most countries, often by a factor of several times over.

12. Bid Rigging – The Causes Firms’ conduct - Agreements between competitors: • Agreement on who will win the bid • Agreement on prices • Agreement to raise, lower, or maintain prices • Agreement not to negotiate on price • Agreement to limit discounts / rebates • Agreement on price formulas or guidelines • Agreement on who will bid for certain customers (government agencies) or in certain geographic areas Regulatory framework which might: • Increase transparency • Increase participation costs • Limit international competition • Favor joint bidding and sub-contracting

13. Bid Rigging - Common Forms 13 Cover bidding A competitor agrees to submit a bid that is higher than the bid of the designated winner or agrees to submit a bid that contains terms that are known to be unacceptable to the buyer. It is the most common form of bid rigging as it gives the appearance of genuine competition. Bid suppression One or more companies agree to refrain from bidding or to withdraw a previously submitted bid. Bid rotationConspiring firms continue to bid, but they agree to take turns being the winning (i.e., lowest qualifying) bidder. Market allocationCompetitors carve up the market and agree not to compete for certain customers or in certain geographic areas.

14. How to Fight Bid Rigging Effectively 14 • Effective cartel laws and regulations • Effective leniency program • Effective enforcement procedures and institutions • Effective sanctions Other ways: Raise awareness of procurement officials and bidders concerning the risks of bid rigging (Checklists and Guidelines)

15. Bid Rigging Cases from Around the World ((partial list) 15

16. UK - Construction Bid Rigging 16 • 103 construction companies  were fined a total of 143 million Euros for colluding on building contracts. • Illegal conduct impacted 199 tenders for 6 years. • More than 220 million Euros in projects affected, including schools and hospitals as well as numerous private projects. • The OFT also received evidence of cover bidding implicating many more companies on thousands of tender processes, but focused its investigation on the alleged infringements. • Cover bidding strategies were used and compensation paid to losing bidders ranging from 3.000 – 70.000 Euros.

17. Korea – Insurance 17 • Insurance is highly regulated in Korea but in 2003 a portion of the law was changed to allow for more competitive bidding in a certain segment of the industry – work related accident insurance. • Prior to the change only 1 firm won every bid to 17 government agencies • After the law was changed a cartel was formed to forestall competition. • 2006 expenditures by government were approximately 80 million USD. • Joint bidding was used • Markets allocated • Compensation was paid for false bids by other insurance providers, markets allocated • USD 15 million in fines levied by competition authority • Examination of documents from previously successful cartel investigation led to the case being opened

18. Other international examples 18 Brazil: Security guard services China: School construction Indonesia: Supply of pipe and pipe-processing services Peru: Supply of construction services Chinese Taipei: Truck-mounted mobile cranes Netherlands: Construction bid rigging (more than 600 firms, 486 leniency applications) Mexico: Surgical sutures X-ray materials and developers for X-ray Generic pharmaceuticals

19. OECD Guidelines for Fighting Bid Rigging 19 Source Better tender design Tougher law enforcement Help procurement officials design public tenders to reduce bid rigging (Design Checklist) Best practices in OECD countries Help procurement officials detect bid rigging when it occurs (Detection Checklist)

20. Checklist for Designing Tenders 20 • Learn about the market and about your suppliers • Maximize participation of potential bidders • Define requirements clearly and avoid predictability • Reduce communication among bidders • Raise awareness of the risks of bid rigging, provide training

21. Checklist for Detecting Bid Rigging 21 Procurement officials should be alert for: • Opportunities that bidders have to communicate with each other • Relationships among bidders (joint bidding and sub-contracting) • Suspicious bidding patterns (e.g. ABC, ABC) and pricing patterns • Unusual behavior • Clues in documents submitted by different bidders

22. Where to find the OECD Guidelines? Web link: www.oecd.org/competition/bidrigging Translations available in 22 languages!

23. Co-operation between procurement bodies and competition authority • How to ensure bid rigging is prosecuted? • Use procurement legislation • Form intergovernmental committees with regular meetings (Chile) • Co-operate with competition authority • Sign Memorandum of Understanding that provides comfort to officials who would share suspicions and data. • Example: Mauritius

24. MOU in Mauritius • In certain aspects of public procurement, the Competition Commission of Mauritius (CCM) and the Procurement Policy Office (PPO) have overlapping powers. This is because collusion among bidders or between a bidder and a public official, which is prohibited under sections 52 (3) and 53 (1) of the Public Procurement Act 2006 (‘the Procurement Act’), may also infringe the Competition Act 2007 (‘the Competition Act’).

25. Process • Where the PPO is in receipt of a complaint or identify any matter which it considers might infringe the Procurement Act or the Competition Act, it may request the CCM to launch a formal investigation. The CCM shall, within three weeks, inform the PPO whether there are reasonable grounds to institute an investigation under the Competition Act. The CCM shall share its expertise with the PPO on competition analysis, during the public procurement investigation.

26. The responsibilities of PPO under the MoU • The PPO will: • inform the CCM of formal complaints it received from any person regarding collusion under the Procurement Act or the Competition Act; • inform the CCM of any course of action decided upon for breach of section 52(3) of the Procurement Act; • share information with the CCM when notified of an investigation under the Competition Act that directly involves a bidder in public procurement.

27. The responsibilities of the CCM under the MoU • In relation to public procurement, the CCM will : • inform the PPO when the CCM decides to begin an investigation under the relevant sections of the Competition Act or before launching a market study; • consider any views of the PPO when an investigation or study under the Competition Act involves public procurement. The CCM will also further inform the PPO if minded to disagree with certain aspects of the views; • inform the PPO of cases in other markets which it believes may have consequences for public procurement • inform the PPO of any decision taken by the Commission in respect of an infringement of section 42 of the Competition Act.

28. Disclosure of confidential information • Each party will respect the confidentiality and/or secrecy of information exchanged which has been obtained as a result of the other party’s statutory powers or other legal obligations and relates to the affairs of any individual, business or undertaking. Each party will comply with any non-disclosure obligations that are binding on the other, in particular those set out in sections 70 of the Competition Act or section 54 of the Procurement Act. • It is agreed that the CCM shall publish its decisions with reasons and as such may have to disclose information exchanged between the two parties. However, in no event shall any party disclose any information which is protected as confidential under the Competition Act or the Procurement Act.

29. Thank you for your attention!