Dear readers,
As previously announced, I am incredibly happy and honored to publish guest articles written by the world’s most renowned antitrust scholars every month of the year 2020. The one for November is authored by Alison Jones, Professor of Competition Law at King’s College London. In it, Alison highlights the importance of not abandoning the (crucial) issue of bid-rigging in public procurement (and, more generally, the detection, punishment, and deterrence of cartel activity). Not everything is or should be about abuses of dominant positions in the digital sector. I am confident that you will enjoy reading it as much as I did. Alison, thank you very much!
All the best, Thibault Schrepel
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Spotlight On Cartels: Bid Rigging Affecting Public Procurement
Introduction
Competition agencies across the world are facing pressure to deal with an ever-expanding set of concerns. For example, many are being urged to do something about increasing consolidation and concentration in markets, to do something about the conduct of leading firms, especially those operating in the digital economy such as Google, Amazon, Facebook, and Apple (GAFA), to tackle ‘excessive’ prices charged in the healthcare and technology sectors and ‘collusion’ facilitated by algorithms, to ensure that their policies and enforcement priorities protect consumers and address sustainability issues and inequalities in society (including those arising from race and gender), and to consider how competition law should react to, and analyse, market adjustments that are occurring as a result of the Covid-19 pandemic.
These matters, many of which have been discussed in previous Concurrentialiste guest articles, are requiring competition authorities, legislators, policy-makers, antitrust practitioners, and academics to think deeply about a growing number of broad questions, including whether current competition laws are capable of reaching, or can be adapted to reach, all of the competition issues arising (especially in the digital economy), whether adjustments or amendments to antitrust laws are required, how antitrust policies should interface with other public policy objectives or whether competition laws need to be expanded to encompass a more egalitarian set of goals, and/or whether additional mechanisms including regulation or new market investigation tools are required to deal with the myriad of complex issues arising. Indeed, across the world, these discussions have sparked a proliferation of papers, investigations, inquiries, reports, and consultation processes debating whether, and if so how, competition law and policy should adapt. The complex issues and the mixed effects of much of the conduct under scrutiny, are understandably challenging policymakers and competition agencies and inevitably consuming much of the latter’s time, energy, and resources.
This short paper, however, seeks to serve as a reminder that competition agencies should not allow this plethora of important and taxing matters to distract them unduly from one of their other core missions – the detection, punishment, and deterrence of cartel activity (anticompetitive arrangements between competitors to fix prices, restrict output, to share or divide markets, or to rig bids), described in 2004 by the US Supreme Court as the ‘supreme evil’ of antitrust (see Trinko). Indeed, my recent research (with Robert Anderson, Professor William Kovacic, and Professor Caio Mario da Silva Pereira Neto) suggests that if competition agencies ensure that some of these resources are preserved for, and dedicated to, the fight against cartel activity, bid-rigging or collusive tendering, impacting on public procurement processes (the public purchasing of essential goods, services, and works), they can combat conduct which not only harms consumer welfare but which, in many cases, also produces much broader harm to a nation and its citizens, especially the more vulnerable and those most reliant on the public services procured.
Spotlight on bid-rigging
There are at least two important reasons why competition agencies should be vigilant for bid-rigging affecting public procurement and developing strategies for countering it.
First, collusive tendering represents a major threat to the effective and efficient operation of public procurement, with significant scope for adversely affecting the provision of crucial public goods and services that a country, and its citizens, rely on.
Public procurement is the process through which a government routinely purchases and delivers many public goods, infrastructure, and services that are central to its economy, economic development and the health and social welfare of its residents, for example: the construction and maintenance of schools, hospitals, military equipment, public sanitation systems, energy, communications and transport infrastructure (including roads); the delivery of back-office functions, such as information technology, and front-line services, such as probation and social care; and the efficient delivery of medicines, hospital equipment and beds, desks, computers, and other goods that allow governments to function. It is also crucial in providing emergency relief and remedial programmes in the face of disasters or crises. In 2020 the vital importance of public procurement has been in plain sight as governments have scrambled to purchase medicine, medical products, personal protection equipment, and testing services and to build or equip health facilities in their struggle against the Covid-19 pandemic.
When performed well, public procurement helps governments to save public money, provide more and better public services, and build belief that it is committed to improving citizens’ lives. A core purpose of many public procurement regimes is to ensure that government contractors are able to secure the best value for taxpayer money that the market can deliver through extracting the most competitive, cost-effective bid for the products or services required from the tender process. These benefits and objectives will be thwarted, however, if the integrity of the public procurement process is compromised whether internally (for example, by corruption (by public officials steering government contracts to preferred bidders in return for financial or other benefits)) or externally by collusive tendering or bid rigging by suppliers when tendering for public contracts (through eg bid suppression, cover bidding, market or customer allocation, or bid rotation). Indeed, in the case of supplier collusion, bidders, instead of competing to submit the lowest possible tender at the tightest possible margin, frustrate the essence of the tendering process by limiting price competition or sharing markets between themselves. The conduct is, consequently, liable to inflate contract prices and so to drain scarce public funds, to reduce the quantity and quality of goods and services procured, to create public safety risks, to diminish public confidence in the competitive process and, given the nature of the purchasing, to have wider knock-on effects on the well-being of a state and its population. The serious consequences that may flow from these negative effects are especially evident today, given the significance of public purchasing in the response to Covid-19 and the demands that the virus has placed on the public purse more generally.
Secondly, a number of factors, including the value, volume, and frequency of public purchasing activity, make public procurement processes especially attractive targets of, and highly susceptible to distortion by, collusion. For example, coordination of tenders may be facilitated, and the internal and external stability of a cartel arrangement bolstered, by the constant nature of government demand, tender processes and requirements that limit the pools of bidders, processes designed to enhance transparency, and the disincentives that exist for procurement officials to disrupt procurement by reporting suspicions of bid-rigging. In some cases, collusion may even be reinforced by the actual participation of a government insider in the scheme in return for financial or other benefits (a corrupt public official).
Combatting bid rigging
In one sense it seems straightforward for competition agencies to combat bid-rigging schemes. In most competition systems fighting cartels (famously described in 2000 by then EU Competition Commissioner Mario Monti as ‘cancers on the open market economy’) has been a core priority over the last 30 years. Collusive tendering generally constitutes a clear, and automatic, violation of competition law attracting draconian sanctions (criminal or civil) when uncovered. The likely anticompetitive effects with flow from the conduct are evident, and the elaborate measures that bidders normally have to engage in to mask their cooperation make it difficult conduct to justify.
Nonetheless, and in spite of increasing efforts to prevent, deter, and punish cartel activity, serious offences like supplier collusion are difficult ones for enforcement agencies to expose. Bid rigging is generally committed in secret and designed to simulate and create illusions of a genuine competitive bidding process. Further, as outlined above procurement officers who are best placed to identify it ordinarily have weak incentives, or even disincentives, to be vigilant for it (and in some cases, they have even been found to be involved in collusive arrangements). In order to facilitate the detection of hidden cartels, many jurisdictions are heavily reliant on a carrot and stick approach to the problem – with significant and increasing sanctions for those found to have been engaged in cartel activity and immunity, leniency or penalty reductions for those exposing, or providing evidence of, wrong-doing, or otherwise cooperating in investigations. A difficulty with this method, however, is that self-reporting is unlikely to be attractive where, as is frequently the case in relation to bid-rigging, the collusion is stable and profitable, and where no good track record of effective enforcement and sanction exists following the use of other detection techniques. In such circumstances, bid-rigging may be able to operate under the waterline, undetected and unchecked.
In order to augment the fight against bid-rigging, a broader strategy thus appears to be required, both to raise the stakes for those involved in it (by ensuring that the cost of so acting exceeds its benefits) and to increase the resilience of public procurement processes to supplier collusion in the first place.
Increasing the resilience of public procurement processes to bid-rigging
Although procurement processes are frequently designed with the objective of preserving the internal integrity of the process through minimising opportunities for corruption, in many countries competition law training is not conducted systematically within procuring bodies. If this were done more routinely, procurers would have a better understanding of the benefits to be reaped from procompetitive procurement practices, the benefits of more open-ended approaches to procurement design, and how tender processes can be constructed to maximise the pool of bidders and minimise the risk of it being undermined by collusion (eg through careful market research at the start of the tender process, careful tender design and careful crafting of transparency provisions). Training also alerts procurers of the importance of reporting collusion suspicions to competition agencies. As such steps are likely to interfere with the procurement the officials are employed to complete, rewards or other incentives for reporting may be required.
Increasing enforcement and improving mechanisms for detecting bid-rigging
In order to increase enforcement, competition law enforcers must of course be able to find out about infringements and to collect sufficient evidence to support a finding of infringement. Leniency applicants and other whistle-blowers (such as employees or former employees) have often proved to be important sources of direct evidence in cartel cases over the last 20 years. These reactive methods, however, have their limits. It has already been seen that leniency regimes are unlikely to be effective in the context of stable, lucrative collusion and in the absence of a healthy, independent enforcement record. Further, given the adverse consequences that may flow from whisteblowing, significant rewards and protectionary measures are likely to be required to entice whistleblowing by a wider group of cartel insiders.
Although most competition agencies also possess their own broad powers to gather evidence of a suspected infringement proactively through, for example, requesting documents, searching premises, interviewing witnesses or, even, surveillance, it may still be a challenge to gain first evidence of unlawful conduct sufficient to trigger their use. Procurers, if incentivised and willing, may provide one source. Data analysis tools might provide another. Indeed, although there is a mounting concern that communications between firms, operated or monitored by algorithms, may facilitate or strengthen collusion between them and lead to more effective cartels, algorithms can in certain situations also provide an important means of identifying ‘red flags’ or signs of collusion. Some competition agencies, automatically analyse online public procurement data to quantify the likelihood of bid-rigging and to identify procurements for further investigation, see in particular the Korean Fair Trade Commission’s (KFTC’s) Bid Rigging Indicator Analysis System. The Korean system, after some honing, has proved to be effective, and in 2017, for example, nearly 50 percent of cartels sanctioned by the KFTC were bid rigging relating to public procurements.
Enhancing Penalties: Individual Sanctions and Debarment
Many states rely principally on corporate fines to sanction cartel activity. As, however, corporate fines may have to be impossibly high to ensure deterrence, it is increasingly recognised that other sanctions may be required to ensure deterrence of cartel activity and punishment of those responsible. In particular, sanctions targeting individuals – whether criminal (such as imprisonment and fines) or civil (such as fines and disqualification orders) may help to focus the mind of cartelists. Successful criminalisation of economic crimes like cartels has, nonetheless, proved difficult to achieve in many countries, especially where there has been a failure to build a strong moral case for it. One way of building a moral case for, and generating support for, criminalisation, however, could be to target criminal prosecution on bid-rigging that adversely impacts on the purchasing of crucial public goods and services.
Debarment of contractors involved in bid-rigging from bidding for public sector contracts may also help to raise deterrents to violations, at the same time as helping to preserve the integrity of the procurement process by mitigating against the risk of it occurring in future procurements. Although many countries provide for debarment of bid riggers (whether mandatory or discretionary), concern is often expressed that this sanction is not used routinely in practice, for example, perhaps because no central register exists for recording details of debarred companies, or because procurers are fearful of exacerbating procurement difficulties that already exist in concentrated markets. An effective debarment system will thus be dependent on problems and complexities being addressed. In particular, a central register of debarred companies is likely to be required, along with guidance addressing challenging issues relating to implementation, self-cleaning, and how to proceed in concentrated markets.
Damages
If routinely, brought damages actions will allow a government to claw-back taxpayer money that is lost as a consequence of bid-rigging, at the same time as increasing the costs of infringing the rules. To be successful, however, a central entity may be required to bring these complex cases; procuring bodies themselves are unlikely to have incentives to do so and are unlikely to wish to risk souring relations with contractors they may need to do ongoing business with.
Increasing Policy Coordination
The discussion above has illustrated the importance of procurers and competition agencies adopting a coordinated approach, having a good understanding of each other’s remit, and cooperating closely together. As corruption constitutes another significant threat to procurement, and can sometimes be used to strengthen collusive tendering arrangements, policy coordination with anti-corruption authorities is also necessary in this area. Negative coordination can ensure that measures designed to ensure the internal integrity of the procurement system do not inadvertently increase its susceptibility to collusion (or vice versa). Further, greater positive cooperation between agencies can ensure that they achieve synergies and work more effectively together in pursuit of their interrelated remits – for example, through advocacy, training, placements, knowledge sharing, and coordination where suspicions of wrongdoing arise.
Conclusion
Many competition agencies are considering, and consulting on, how they, and the competition law systems they administer, can meet the challenges of the twenty-first century and the digital age – especially the rise of leading firms such as GAFA and the complexities that digital markets, platforms, and practices create for competition law and policy. The importance of these issues and debates has been reinforced by the pandemic which has increased our reliance on digital and online services and the profitability of firms operating in the digital economy.
Covid-19 has also given rise to new problems for competition authorities to solve as firms react to the unprecedented difficulties confronting them and brought to the forefront of public debate the importance of effectual public procurement processes to the health and welfare of people across the world. Efficient and effective public procurement will only be achieved, however, if a nation has a system in place which protects procurement processes from both internal and external threats, especially corruption and collusion. Active competition advocacy and competition law enforcement form a crucial, and integral, part of that overarching strategy. Together with procurers and anti-corruption agencies, competition enforcement agencies can help to reap significant rewards, through improving public procurement which impacts on the day-to-day life of citizens and the social and economic well-being of a nation.
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Citation: Alison Jones, Spotlight On Cartels: Bid Rigging Affecting Public Procurement, CONCURRENTIALISTE (Nov. 16, 2020)
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