Bid rigging

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Bid rigging is a fraudulent scheme in a procurement action which enables companies to submit non-competitive bids. It can be performed by corrupt officials, by firms in an orchestrated act of collusion, or by officials and firms acting together. This form of collusion is illegal in most countries. It is a form of price fixing and market allocation, often practiced where contracts are determined by a call for bids, for example in the case of government construction contracts. The typical objective of bid rigging is to enable the "winning" party to obtain contracts at uncompetitive prices (i.e., at higher prices if they are sellers, or lower prices if they are buyers). The other parties are compensated in various ways, for example, by cash payments, or by being designated to be the "winning" bidder on other contracts, or by an arrangement where some parts of the successful bidder's contract will be subcontracted to them. In this way, they "share the spoils" among themselves. Bid rigging almost always results in economic harm to the agency which is seeking the bids, and to the public, who ultimately bear the costs as taxpayers or consumers.

Contents

Forms

As acts of corruption

Within a cartel

As a seller, auctioneer or official

Those forms of bid rigging can occur together, and two or more of the practices could occur at the same time. For example, if one member of the bidding ring is designated to win a particular contract, that bidder's conspirators could avoid winning by not bidding ("bid suppression") or by submitting a high bid ("cover bidding").

Economic costs

Many of the issues presented by bid rigging are the result of cartel involvement. Inefficient firms are not pushed out, as they would have been in a competitive market, and firms experience more profit, despite an inefficient allocation of resources. Cartels behave more like monopolies and so their behaviors, such as bid rigging, create market inefficiencies as contracts are fulfilled at elevated values. [10] Furthermore, bid prices increase with more repeated collusion. [11] Ultimately, the cost is typically borne by the taxpayer as government-sponsored contracts are artificially above market value. Additionally, it can be thought of as raising prices for the taxpayer (or consumer) as firms rent seek. One study found that bid rigging significantly raised prices over market value in the seafood industry in Philadelphia in a bidding scheme involving Defense Personnel Support Center, a purchaser for the Department of Defense. [12] The high price of entry and fewer entrants in many industries results in lessened incentives for firms to behave competitively. [13]

Detection

In the UK, the Competition and Markets Authority published an open letter in 2016 aiming to promote good practice among procurement and supply staff, and detailing indications they should watch out for. [14] [15]

Remediation

Bid rigging is an illegal practice under the criminal or competition laws of most developed countries. Depending on the jurisdiction, it is punishable by fines, imprisonment or both.

At a very basic level, there would likely be more competitive bidding if there were more firms present in a market, outside of a cartel, as evidence shows that bids lessen in value as the number of firms rises. Furthermore, collusion becomes less frequent with better market competitiveness, a result of reduced ability to compromise. [11]

The Organisation for Economic Co-operation and Development (OECD), in its work on bid-rigging and cartels in public procurement, makes the following suggestions for better tenders:

Suggestions for ameliorating procurement auctions have also been put forth. Lengstein and Wolfstetter suggest that when a particular bidder is preferred, disregarding cost, possible reforms include a sealed Vickrey auction, or if there is reason to believe that officials and bidders are in contact, an open auction is preferred to sidestep potential bribery. When officials are engaged in more competitive procurement processes with regard to price but are suspected of kickbacks, a potential solution is the open auction to prevent clandestine arrangements such as change order abuse. If a closed or sealed auction process is preferred, the use of electronic bidding and investment in tamper-resistant systems is suggested. [17]

Notable examples by region

South America

Brazil

Brazil's Operation Car Wash is an ongoing investigation into the Brazilian semi-public multinational Petrobras. Petrobras is suspected of having overcharged bids as much as 3% of the total cost on contracts with an alleged $2.1 billion being misappropriated in kickbacks. Operation Car Wash is part of a larger investigation into Brazil's government as well and has contributed to the conviction and imprisonment of former president Luiz Inácio Lula da Silva. [18] In early January 2018, Petrobras settled a United States class action case for $2.95 billion, though JP Morgan and BTG Pactual had expected a settlement between $5 and $10 billion. [19]

The Petrobras scandal extends beyond bid rigging in the oil sector as the investigation has also implicated Brazilian construction firms as bid rigging was discovered to be rampant in the preparations for the 2016 Summer Olympics. This would not be the first instance of bid rigging by construction firms in recent Brazilian history as Andrade Gutierrez Engenharia SA, the nation's second largest construction firm, admitted to bid rigging during contract procurement for stadiums to host the 2014 FIFA World Cup. This revelation implicates an additional five domestic construction firms and was revealed by the Conselho Administrativo de Defesa Econômica(CADE). [20]

Colombia

From 2002 until 2013, the Colombian government opened 121 investigations into bid rigging, which lead to sixty-nine entities paying fines amounting to nearly $23.5 million, with an additional nine entities receiving sanctions. Colombia was found to generally comply with the OECD's recommendations regarding competitive procurement. [21]

North America

United States

In the United States, bid rigging is a federal felony criminal offense under Section 1 of the Sherman Act. Even so, bid rigging is still rampant in the construction industry, auto sale auctions, and foreclosed home auctions.

Canada

In Canada, bid rigging is an indictable criminal offence under Section 47 of the Competition Act.

Europe

Bid rigging is illegal in the European Union (EU) under Article 101 of the Treaty on the Functioning of the European Union (TFEU). The annual cost to the EU in economic waste as a direct result of bid rigging among cartels was estimated to be between €13 billion and €37 billion in 2008. [22] Bid rigging seems to be on the rise across Europe, raising concerns particularly over excessive expenditures and single-bid tenders. These single-bid tenders represented 17% of tenders in 2006, but 30% nine years later. RAND estimated that the overall annual cost posed to the EU by bid cost increases was $5 billion. [23]

Slovakia

Bid rigging is illegal in Slovakia under the Act on the Protection of Competition and by EU membership, also Article 101 of TFEU. The first charges to be brought to court in Slovakia in 2006 by the Antimonopoly Office involved six construction companies who submitted bids with suspiciously consistent unit quotes. The fines from this bid rigging scheme amounted to €45 million following an initial court decision, an over-ruling, and a reinstatement of the initial verdict. [24] In 2007, a Slovakian government ministry participated in bidder exclusion by posting a request for proposals regarding consulting on a bulletin board in an official building, though not open to the public. This resulted in a consulting firm winning a €120 million contract. [23] [25] The word for receiving kickbacks after participating in bid rigging is known as "tunelovanie" in Slovak. [25]

Switzerland

Bid rigging occurs frequently in the construction industry in Switzerland. In 2007, seventeen different firms were involved in a bid rigging scheme but there was no prosecution as the ring had disbanded before colluding. [26] In 2009, a ring of seven electricity firms from Bern were charged with bid rigging and fined two million Swiss francs. In Aargau, in 2011, a bid rigging scheme was discovered wherein seventeen firms were fined eight million Swiss francs though the appeals are ongoing. Multiple other cases are still ongoing.

United Kingdom

In the United Kingdom, individuals can be prosecuted criminally under the Enterprise Act 2002.

Asia

Japan

Although both a violation of Japanese criminal law and the Japan Anti-Monopoly Law, bid rigging is still a habitual practice of the Japanese construction industry. It has been shown by a number of academic studies both in Japan and in the US to be a system which considerably inflates the cost of construction projects, and in the Japanese public sector, considerably wasteful of annual tax money amounting to billions of Japanese yen.

Dango refers to collusion in Japanese, or more precisely, "conference", and is an extremely prevalent system in Japan. Dango can be understood as a mutually beneficial system of bureaucracy and government and the private construction industry wherein bid rigging is incredibly common, benefiting colluding firms and officials alike in the form of kickbacks. The system of dango is often supported though as allowing small firms to continue to compete, though detractors are quick to point to the economic inefficiencies presented by a non-competitive market. [10] The US Government, specifically the United States Trade Representative Office and Department of Commerce, made fierce efforts [27] [28] in the late 1980s and early 1990s to urge the Japanese government to reform dango as a de facto non-tariff barrier to foreign firms in the Japanese construction market. Despite years of negotiations, including promises by the Japanese government in the Structural Impediment Initiative (SII) trade talks, [29] the practice was never fully stamped out and continued to flourish.

In 2006, Tadahiro Ando, the then governor of Miyazaki Prefecture, resigned over a series of bid rigging allegations and was subsequently sentenced to over three years in jail. [30]

As of 2008, thirteen lawsuits were still pending over 1990s' bid rigging for local government contracts to supply incinerator plants. [31]

Korea

In a three and half year period from 1995 to 1998 there was an estimated $4.13 billion surcharge attributed to bid rigging in Korea's construction industry, representing 15.5% of the total spent. It was also found that firms already present in an area enjoyed a significant degree of incumbency, meaning that they were more likely to continue to win additional contracts in areas they were already developing. This was discovered to be a result of complementary bidding. Some legal action has been undertaken against these bid rigging schemes with nine contracting companies and several officials being charged and fined $5 billion in 1999. [32]

See also

Further reading

Related Research Articles

An oligopoly is a market in which control over an industry lies in the hands of a few large sellers who own a dominant share of the market. Oligopolistic markets have homogenous products, few market participants, and inelastic demand for the products in those industries. As a result of their significant market power, firms in oligopolistic markets can influence prices through manipulating the supply function. Firms in an oligopoly are also mutually interdependent, as any action by one firm is expected to affect other firms in the market and evoke a reaction or consequential action. As a result, firms in oligopolistic markets often resort to collusion as means of maximising profits.

<span class="mw-page-title-main">Cartel</span> Mutually beneficial collusion among competing corporations

A cartel is a group of independent market participants who collude with each other in order to improve their profits and dominate the market. A cartel is an organization formed by producers to limit competition and increase prices by creating artificial shortages through low production quotas, stockpiling, and marketing quotas. Cartels can be vertical or horizontal but are inherently unstable due to the temptation to defect and falling prices for all members. Additionally, advancements in technology or the emergence of substitutes may undermine cartel pricing power, leading to the breakdown of the cooperation needed to sustain the cartel. Cartels are usually associations in the same sphere of business, and thus an alliance of rivals. Most jurisdictions consider it anti-competitive behavior and have outlawed such practices. Cartel behavior includes price fixing, bid rigging, and reductions in output. The doctrine in economics that analyzes cartels is cartel theory. Cartels are distinguished from other forms of collusion or anti-competitive organization such as corporate mergers.

<span class="mw-page-title-main">Auction</span> Process of offering goods or services up for bids

An auction is usually a process of buying and selling goods or services by offering them up for bids, taking bids, and then selling the item to the highest bidder or buying the item from the lowest bidder. Some exceptions to this definition exist and are described in the section about different types. The branch of economic theory dealing with auction types and participants' behavior in auctions is called auction theory.

<span class="mw-page-title-main">Price fixing</span> Agreement over prices between participants on the same side in a market

Price fixing is an anticompetitive agreement between participants on the same side in a market to buy or sell a product, service, or commodity only at a fixed price, or maintain the market conditions such that the price is maintained at a given level by controlling supply and demand.

Collusion is a deceitful agreement or secret cooperation between two or more parties to limit open competition by deceiving, misleading or defrauding others of their legal right. Collusion is not always considered illegal. It can be used to attain objectives forbidden by law; for example, by defrauding or gaining an unfair market advantage. It is an agreement among firms or individuals to divide a market, set prices, limit production or limit opportunities. It can involve "unions, wage fixing, kickbacks, or misrepresenting the independence of the relationship between the colluding parties". In legal terms, all acts effected by collusion are considered void.

Anti-competitive practices are business or government practices that prevent or reduce competition in a market. Antitrust laws ensure businesses do not engage in competitive practices that harm other, usually smaller, businesses or consumers. These laws are formed to promote healthy competition within a free market by limiting the abuse of monopoly power. Competition allows companies to compete in order for products and services to improve; promote innovation; and provide more choices for consumers. In order to obtain greater profits, some large enterprises take advantage of market power to hinder survival of new entrants. Anti-competitive behavior can undermine the efficiency and fairness of the market, leaving consumers with little choice to obtain a reasonable quality of service.

<span class="mw-page-title-main">Dutch auction</span> Type of auction which begins with a high asking price, and lowers it.

A Dutch auction is one of several similar types of auctions for buying or selling goods. Most commonly, it means an auction in which the auctioneer begins with a high asking price in the case of selling, and lowers it until some participant accepts the price, or it reaches a predetermined reserve price. This type of price auction is most commonly used for goods that are required to be sold quickly such as flowers, fresh produce, or tobacco. A Dutch auction has also been called a clock auction or open-outcry descending-price auction. This type of auction shows the advantage of speed since a sale never requires more than one bid. It is strategically similar to a first-price sealed-bid auction.

Procurement is the process of locating and agreeing to terms and purchasing goods, services, or other works from an external source, often with the use of a tendering or competitive bidding process. The term may also refer to a contractual obligation to "procure", i.e. to "ensure" that something is done. When a government agency buys goods or services through this practice, it is referred to as government procurement or public procurement.

<span class="mw-page-title-main">Spectrum auction</span> Government auction of radio spectrum

A spectrum auction is a process whereby a government uses an auction system to sell the rights to transmit signals over specific bands of the electromagnetic spectrum and to assign scarce spectrum resources. Depending on the specific auction format used, a spectrum auction can last from a single day to several months from the opening bid to the final winning bid. With a well-designed auction, resources are allocated efficiently to the parties that value them the most, the government securing revenue in the process. Spectrum auctions are a step toward market-based spectrum management and privatization of public airwaves, and are a way for governments to allocate scarce resources.

<span class="mw-page-title-main">Tacit collusion</span> Collusion between competitors

Tacit collusion is a collusion between competitors who do not explicitly exchange information but achieve an agreement about coordination of conduct. There are two types of tacit collusion: concerted action and conscious parallelism. In a concerted action also known as concerted activity, competitors exchange some information without reaching any explicit agreement, while conscious parallelism implies no communication. In both types of tacit collusion, competitors agree to play a certain strategy without explicitly saying so. It is also referred to as oligopolistic price coordination or tacit parallelism.

<span class="mw-page-title-main">Bidding</span> Method of competitive price determination used in auctions, stock exchanges, etc.

Bidding is an offer to set a price tag by an individual or business for a product or service or a demand that something be done. Bidding is used to determine the cost or value of something.

A request for quotation (RfQ) is a business process in which a company or public entity requests a quote from a supplier for the purchase of specific products or services. RfQ generally means the same thing as Call for bids (CfB) and Invitation for bid (IfB).

The Telecoms crash, also known as the Telecommunications Bubble was a stock market crash that occurred in 2001, after the bursting of the dot-com bubble.

Yield burning is a form of financial fraud involving the United States municipal bond market.

<span class="mw-page-title-main">Reverse auction</span> Auction with one buyer and many potential sellers

A reverse auction is a type of auction in which the traditional roles of buyer and seller are reversed. Thus, there is one buyer and many potential sellers. In an ordinary auction also known as a forward auction, buyers compete to obtain goods or services by offering increasingly higher prices. In contrast, in a reverse auction, the sellers compete to obtain business from the buyer and prices will typically decrease as the sellers underbid each other.

<span class="mw-page-title-main">Suicide bidding</span>

Suicide bidding is a response to a tendering exercise in which a potential supplier, anxious to win business, submits a proposal to carry out the work for less than it will cost. These procurement processes are typically modelled as reverse sealed-bid auctions with the lowest bid winning.

<span class="mw-page-title-main">Comisión Nacional de los Mercados y la Competencia</span> Spanish independent competition regulator

The Comisión Nacional de los Mercados y la Competencia, abbreviated as CNMC, is a Spanish independent competition regulator responsible for enforcing competition law. It was established by virtue of the Spanish Competition Act. It was preceded by the Tribunal de Defensa de la Competencia until 1 September 2007.

<span class="mw-page-title-main">Ebidding</span>

An ‘‘‘electronic bidding system ‘‘‘ is an electronic bidding event according to defined negotiation rules (eAgreement). A buyer and two or more suppliers take part in this online event.

The 2005 Japanese bridge scandal was centered around the use of bid-rigging between 47 colluding Japanese firms and Japan Highway Public Corporation (JH) in the granting of contracts to build steel bridges in violation of Japanese competition law. It was the biggest such scandal in the history of the nation up to that point, with an estimated 23.5 billion Japanese yen of unfair gains over fiscal years 2003 and 2004.

<span class="mw-page-title-main">Competition Commission (Hong Kong)</span> Hong Kong statutory organisation

The Competition Commission is the independent statutory body charged with regulating competition in Hong Kong. It was established under the Competition Ordinance, enacted in June 2012, which aims to prohibit conduct that prevents, restricts or distorts competition, and to prohibit mergers that substantially lessen competition in Hong Kong.

References

  1. ↑ "Potential Scheme: Change Order Abuse". guide.iacrc.org. Retrieved 2018-09-11.
  2. ↑ "Potential Scheme: Excluding Qualified Bidders". guide.iacrc.org. Retrieved 2018-09-11.
  3. ↑ "Potential Scheme: Split Purchases". guide.iacrc.org. Retrieved 2018-09-11.
  4. ↑ "Potential Scheme: Leaking of Bid Information". guide.iacrc.org. Retrieved 2018-09-11.
  5. ↑ "Potential Scheme: Manipulation of Bids". guide.iacrc.org. Retrieved 2018-09-11.
  6. ↑ "Potential Scheme: Rigged Specifications". guide.iacrc.org. Retrieved 2018-09-11.
  7. ↑ "Potential Scheme: Unbalanced Bidding". guide.iacrc.org. Retrieved 2018-09-11.
  8. ↑ "Potential Scheme: Unjustified Sole Source Awards". guide.iacrc.org. Retrieved 2018-09-11.
  9. ↑ Decarolis, Francesco; Goldmanis, Maris; Penta, Antonio (2017). "Marketing agencies and collusive bidding in online ad auctions". National Bureau of Economic Research, No. W23962. Working Paper Series. doi: 10.3386/w23962 . S2CID   44056837.
  10. 1 2 Black, William K. (October 2004). "The Dango Tango: Why Corruption Blocks Real Reform in Japan". Business Ethics Quarterly. 14 (4): 603–623. doi:10.5840/beq200414442. ISSN   1052-150X. S2CID   146369439.
  11. 1 2 Gupta, Srabana (2001). "The Effect of Bid Rigging on Prices: A Study of the Highway Construction Industry". Review of Industrial Organization. 19 (4): 451–465. doi:10.1023/a:1012568509136. ISSN   0889-938X. S2CID   153988096.
  12. ↑ Froeb, Luke M.; Koyak, Robert A.; Werden, Gregory J. (January 1993). "What is the effect of bid-rigging on prices?". Economics Letters. 42 (4): 419–423. doi:10.1016/0165-1765(93)90095-t. ISSN   0165-1765.
  13. ↑ https://www.oecd.org/governance/procurement/toolbox/search/checklist-design-tender-methods-reduce-bid-rigging.pdf [ bare URL PDF ]
  14. ↑ Cave, B., CMA publishes guidance to help detect bid-rigging, Lexology, accessed 18 January 2024
  15. ↑ Competition and Markets Authority, Detecting and deterring bid-rigging, published 20 June 2016, archived by The National Archives on 24 June 2016, accessed 18 January 2024
  16. ↑ "Guidelines for Fighting Bid Rigging in Public Procurement - OECD". www.oecd.org. Retrieved 2018-09-11.
  17. ↑ Lengwiler, Yvan; Wolfstetter, Elmar G. (2006). "Corruption in Procurement Auctions". SSRN Working Paper Series. doi:10.2139/ssrn.874705. ISSN   1556-5068. S2CID   167452901.
  18. ↑ "Petrobras scandal | Summary, Explanation, & Operation Car Wash". Encyclopedia Britannica. Retrieved 2018-09-11.
  19. ↑ Pierson, Brendan. "Petrobras to pay $2.95 billion to settle U.S. corruption lawsuit". U.S. Retrieved 2018-09-11.
  20. ↑ Mano, Ana. "Brazil builder admits to World Cup stadium cartel in deal with..." U.S. Retrieved 2018-09-11.
  21. ↑ "Fighting Bid Rigging in Public Procurement in Colombia - 2014 - OECD". www.oecd.org. Retrieved 2018-09-11.
  22. ↑ Maci, Marsela (April 2012). "Private Enforcement in Bid-Rigging Cases in the European Union". European Competition Journal. 8 (1): 211–227. doi:10.5235/174410512800369973. ISSN   1744-1056. S2CID   154382209.
  23. 1 2 "Rigging the bids". The Economist. Retrieved 2018-09-11.
  24. ↑ Blaao, Ondrej; Sramelova, Silvia (2015). "The First Bid Rigging Case in Slovakia after Years of Judicial Disputes" (PDF). SSRN Working Paper Series. doi:10.2139/ssrn.2741673. ISSN   1556-5068. S2CID   159767037. Archived from the original (PDF) on 2020-01-01.
  25. 1 2 Castle, Stephen (9 November 2010). "E.U. Cash Tunnel Ends in Slovakia". The New York Times. Retrieved 2018-09-11.
  26. ↑ Huschelrath, K. (2012-12-17). "Economic Approaches to Fight Bid Rigging". Journal of European Competition Law & Practice. 4 (2): 185–191. doi:10.1093/jeclap/lps071. ISSN   2041-7764.
  27. ↑ "US Department of Justice report". Usdoj.gov. 1994-09-16. Retrieved 2011-12-17.
  28. ↑ "New York Times report from 1995". The New York Times. 1995-03-09. Retrieved 2011-12-17.
  29. ↑ "Britanica Article". Britannica.com. Retrieved 2011-12-17.
  30. ↑ "Japan Times report". Search.japantimes.co.jp. 2009-03-28. Retrieved 2011-12-17.
  31. ↑ "Builders settle damages suit over bid-rigging | The Japan Times Online". Search.japantimes.co.jp. 2009-04-04. Retrieved 2011-12-17.
  32. ↑ Lee, In Kwon; Hahn, Kyungdong (2002). "Bid-Rigging in Auctions for Korean Public-Works Contracts and Potential Damage". Review of Industrial Organization. 21 (1): 73–88. doi:10.1023/a:1016018505021. ISSN   0889-938X. S2CID   153429133.
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