Although it may take many forms, anti-competitive behaviour is as old as commerce itself. We may live in an age of regulatory and commercial sophistication, but that does not mean such behaviour is less likely; it simply makes it harder to spot.
The Competition and Markets Authority (the "CMA") has just published a "60 second summary" guidance note on how to "avoid, identify and address bid-rigging activities during the public sector procurement process". Bid-rigging is as much an issue for the seller as the buyer; no matter what side of the fence you're on it's important to know what it is, how to spot it and the penalties it carries.
In today’s tightly regulated environment, and with open access to information, customers are less accepting of false and misleading tenders and have subsequently adopted "a zero tolerance attitude" towards bid-rigging activities. In addition to the public humiliation and damage to reputation, the suppliers could also be faced with colossal financial penalties and personal risk of imprisonment.
Case Study: Evidence that the OFT is prepared to act and come down hard on offenders
In one of the UK's largest Office of Fair Trading (the "OFT") cartel investigations, over 100 construction companies were found guilty of conspiring to rig public sector contracts worth billions of pounds. The companies carried out an illegal activity known as "cover pricing". This involved the construction companies secretly agreeing their prices in advance, prior to submitting their individual bids. This activity, which was committed during a tendering process, gave false impressions to the tendering authority about the level of competition in the marketplace.
During the investigation some of the companies claimed that their participation in cover pricing was completely innocent as they were not aware that this was an illegal process. Whether or not this was true is debatable; however, what we know for sure is that the OFT considered all the companies to be held accountable. As a result of carrying out this illegal activity, the companies were collectively ordered to pay a staggering £129.5 million pounds in damages, serving as a deterrent to any similar such activity in future. This case not only clearly demonstrates the power of authority of the OFT, but also paints a strong message to the wider public that in no instance will bid-rigging activities ever be tolerated.
So what is a bid-rigging activity?
A bid-rigging activity is any form of collusive tendering undertaken by suppliers. The aim of a bid-rigging activity is to limit the competition within the procurement marketplace. Suppliers can engage in this illegal activity by secretly agreeing to collaborate with each other. Bid-rigging can arise in a variety of forms, such as:
(1) Bid rotation: suppliers agree (in turn) to submit the lowest bids
(2) Cover pricing: some of the suppliers in the collaboration will agree to submit an inflated high price bid, which thereby gives the customer a false impression of the competitive price
(3) Bid suppression: where one or more suppliers agree to remove their bids from the tendering process
(4) Sub-contracting (risk-sharing agreements): the winning bidder agrees to subcontract parts of the project to other suppliers; rewarding them for their failure in not winning the contract
Penalties associated with bid rigging activity
According to the Competition Act 1998 and Article 101 of Treaty of the Functioning of the European Union, companies can be fined up to 10% of their annual worldwide turnover for engaging in a bid-rigging activity. During the OFT investigation, the average fine imposed was 1.25 million, although this ranged from individual fines of £713 to fines in excess of £17 million pounds. In addition to the possibility of financial penalties, bid-rigging also carries a risk of imprisonment varying from two to six years. Conducting a bid-rigging activity can also lead to exclusion from public contracts, resulting in a detrimental impact on the financial viability of the suppliers involved in this prohibited activity.
Minimising the risk of bid rigging activity
The OFT's investigation into the construction industry, one of the largest UK cartel cases, has not only financially shamed and caused reputational damage to all of the companies involved in bid-rigging, but has also provided a clear direction for the need to deter any further suppliers engaging in similar illegal activities of this nature in the future. There are guidelines for contracting authorities to help identify suspicious bidding activity. Those activities that should cause suspicion include instances where:
(1) There are a small (or smaller than usual) number of bidders
(2) Bids are received from companies who are incompetent of performing the tendered contract
(3) Bids are received which appear to have significantly inflated prices compared to the historical price
(4) Winning bidders engaging in significant subcontracting to competitors
(5) An unusually wide margin between the winning price and other bids, or outlying bids with no evidence of reasonable justification (e.g. increased distance/travel expenses)
(6) Bids which include less detail compared to others and/or have acquired information of preceding bids
(7) The lowest bidder not accepting the contract and/or the favourable bidder not submitting a tender
Bid-rigging has been described as one of the worst "hard-core, cartel offences": the essential take home point is to manage the risk and implement suitable compliance procedures, so as to prevent suppliers having an opportunity to participate in bid-rigging. It's a simple choice; be alive to the dangers because the consequences can be significant.