Honesty pays. How to detect and prevent bid-rigging cartels INFORMATION FROM THE SWEDISH COMPETITION AUTHORITY

Transcription

1 Honesty pays How to detect and prevent bid-rigging cartels INFORMATION FROM THE SWEDISH COMPETITION AUTHORITY 1

2 Remember» Bid-rigging cartels lead to higher prices and a poorer range of products.» Bid-rigging cartels harm competition, consumers and the economy.» As a procurement officer you can help detect bid-rigging cartels.» Follow the checklist! 2

3 Bid-rigging cartels lead to reduced competition, higher prices and less development and innovation. Bid-rigging cartels harm the economy and undermine procurements, which has an adverse effect on our collective resources and costs taxpayers money. Bid-rigging cartels are hard to detect. Contracting authorities and public procurement officers are the key players in detecting and preventing bid-rigging cartels. The Swedish Competition Authority wants to help you as a procurement officer by providing concrete tips on how to reduce the risk of bid-rigging cartels and, in doing so, save time and money. In this brochure you can read about:» signs of a bid-rigging cartel» how to prevent bid-rigging cartels in your procurement» points to remember when preparing your contract documents» how to report a suspected bid-rigging cartel. 3

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5 What is a bidrigging cartel? A bid-rigging cartel is where competitors collude by deciding who will win a specific contract. This form of collusion limits competition in the market, is illegal according to the competition rules and can result in substantial fines. You have a lot to gain by detecting and preventing bid-rigging cartels. In addition to eliminating competition in your procurement, a bid-rigging cartel can lead to higher tender prices, incurring higher costs for taxpayers. As a procurement officer you have a key role in detecting and preventing bid-rigging cartels. 5

6 Learn the signs of a bid-rigging cartel Here is a list of examples which may be signs of a suspected bidrigging cartel, and which you should be particularly attentive to. High prices? If all or a majority of the tenders are significantly higher than the tenders in previous procurements, the companies published pricelists or the estimated cost of the goods or services, this could be a sign of what are known as courtesy bids. This is where companies submit tenders for the sake of appearances, having decided in advance that a certain company will win the contract. Price variation? If one company submits a much higher tender in certain procurements than others, without there being any obvious differences in cost to explain the price difference, this could mean that the companies have formed a bid-rigging cartel. They may have agreed which company will win the contract for a certain product or within a certain geographic area. Identical prices could be a sign of a bid-rigging cartel. 6

7 Large price differences? If there is an inexplicably large difference in price between the winning tender and the other tenders in the same procurement, this could be a sign that companies in the sector have formed a bid-rigging cartel to keep price levels up. The winning tender comes from a company that is not part of the cartel and which submits a much lower tender than the companies in the cartel. Similar prices? If several companies submit tenders containing identical prices, this could be a sign that they have agreed to share the contract. Similar tenders? If the tenders refer to agreements within the sector which can affect the price, this could mean that the companies have agreed to use:» industry-wide pricelists» delayed payment fees» other anti-competitive sales conditions. Such agreements can result in higher prices and are illegal according to the competition rules. 7

8 Coordinated boycott? If no company tenders for a contract it could mean there is a coordinated boycott in order to influence the conditions of the procurement. This means that the companies have agreed not to submit a tender. The purpose of a coordinated boycott could, for example, be to enable the companies in the bid-rigging cartel to share a certain market among themselves. When a boycott is a sign of a bid-rigging cartel A procurement of a product was prepared so that the authority could award the contract to only one supplier. Five companies contacted the authority during the tendering period to request a meeting to discuss the conditions of the procurement. The authority replied that a meeting could only be arranged once the tendering period had expired. No tenders were received. When the companies met the authority they explained that they were unable to submit a tender independently and requested that all five companies conclude contracts with identical prices. This is an example of a collective bidding boycott aimed at dividing up the market among the companies in the cartel and preventing price competition. 8

9 The purpose of a boycott could be to share the market. 9

10 Few tenders? If an inexplicably small number of companies submit tenders, this could be a sign of market-sharing. The object of a marketsharing cartel is to avoid competition in certain geographic areas, for instance. The companies refrain from tendering in a certain area to allow another company to win the contract there. 10 When suspiciously few tenders is a sign of a bid-rigging cartel In a contract procured by a county council, there were few tenderers despite a large number of companies that were able to deliver. It transpired that several of the companies were part of a bid-rigging cartel which had shared the market between them. Some of the companies submitted tenders in county council procurements and others only in private procurements. The procurements attracted fewer tenders than would have normally been the case.

11 Suspicious patterns of behaviour? If the same company wins a contract every time it is up for renewal, it is possible that the companies in the sector have divided up the market between them. You should be attentive to certain patterns of behaviour, e.g. if the same company always submits the lowest tender to a particular contracting authority or in a certain geographic area. Another way for companies to share the market is to take turns in submitting the lowest tender. When a suspicious pattern of behaviour is a sign of a bid-rigging cartel In the Asphalt Cartel, the largest bid-rigging cartel in Sweden to date, the companies had divided up the contracts between them. The companies that refrained from submitting competitive tenders were compensated in various ways by the winner, such as in the form of sub-contracts or financial compensation. 11

12 Collaboration with sub-contractors? If the company that wins a contract gives a sub-contract to companies that had submitted a higher tender in the same procurement, this could be a sign of a bid-rigging cartel. The companies may have agreed that the winning tenderer will compensate its competitors with sub-contracts during the execution of the contract. Suspicious collaboration with sub-contractors Two companies formed a bid-rigging cartel ahead of a procedure for the procurement of power line poles. They agreed that the company that won the contract would compensate the losing company by purchasing half the poles from that company. 12

13 Carelessly prepared tenders? If only the winning tender is prepared with thoroughness and attention to detail, while the other tenders have been put together more carelessly, this could be a sign of a bid-rigging cartel. Only the winning company has invested the resources into submitting a well-prepared tender, while the other companies who consciously lost the contract have spent little time or resources on their tenders. Identical wording? If there are irregularities in various tenders or in the questions that the companies have asked the contracting authority during the tendering period, this could be a sign that the companies have coordinated their tenders. Such irregularities might include identical wording or the same errors in calculations. They may even have used the same letter paper or forms. Alternating lowest tender? If the suppliers seem to be taking turns to tender the lowest price in a procurement, they may have agreed in advance which company will win the contract for certain years. Be on the lookout for tenders with identical wording. 13

14 How to prevent bid-rigging cartels Risks in preparing your contract documents Certain markets and sectors have characteristics that may increase the risk of bid-rigging cartels. By knowing what these risks are, you can prevent bid-rigging cartels when preparing the contract documents. Low number of potential tenderers There is an increased risk of potential tenderers forming a bid-rigging cartel when there is a low number of participants in the market. It is easier to agree on conditions and conceal the bid-rigging cartel from outsiders. One way to attract more tenders is to divide up the procurement into sub-contracts to open the door for smaller companies to submit tenders. New bidders have difficulty entering the market Certain markets are very difficult to enter. This could be because the product or service is:» very costly and requires investments at an early stage» technically complicated» particularly time-consuming. 14 When new companies have difficulty entering the market, the power of established companies grows. These potential suppliers can share the market between them, either geographically or by forcing prices down.

15 Simple products It is easier for a bid-rigging cartel to operate if the product or service being procured is simple in nature or has not changed significantly over time. Bid-rigging cartels can be sustained for long periods because their participants do not need to negotiate terms ahead of each procurement. 15

16 Advice for you as the procurement officer Increase competition in the procurement procedure By making it easier for more tenderers to take part, you reduce the risk of bid-rigging cartels. You can, for instance, review all the mandatory requirements. Ask yourself if:» the requirements in the procurement are proportionate and really necessary» you have introduced requirements that indirectly restrict international tenderers Vary the contract documents Bid-rigging cartels thrive in predictable situations. Contract documents that are seldom varied enable tenderers to sustain a bid-rigging cartel for years. By changing the area of the agreement or the evaluation model, you can change the contract documents without making it more difficult for potential tenderers to take part. Network with other procurement officers Attending networking meetings and collaborating with other procurement officers can actively prevent potential suppliers from forming a cartel. By contacting other procurement officers and exchanging experiences and planned procurements, you make bid-rigging cartels easier to detect. The knowledge that procurement officers are exchanging experiences could be sufficient to deter suppliers from forming bid-rigging cartels. 16

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19 There are certain measures you can take to lessen the risk of bid-rigging cartels. How effective and proportionate these measures are depends on the product or service being procured and other considerations that need to be factored into the procurement. Choice of procurement procedure Short time limits for submitting tenders There is a greater risk of cartel activity when suppliers have a lot of time to prepare their tenders. This applies particularly to contracts that are procured on a two-stage basis. This means that potential suppliers have more time to collude on their bidding strategy. The Swedish Public Procurement Act imposes certain minimum time limits for a tendering period. A time limit should always be proportionate to the type of service or product being procured. Don t reveal how many qualify for the second stage In a two-stage procedure, it is easier for a bid-rigging cartel to operate if the participants know in advance how many tenderers there are. Not revealing the exact number of tenderers in advance could help reduce the risk of a bid-rigging cartel in your procurement. Divide up the procurement into sub-contracts The more bidders that have a chance of winning the contract in a procurement, the less incentive there is to form certain types of bid-rigging cartels. When you divide a procurement into sub-contracts you should make it difficult for the participants to decide in advance which tenderers will tender for which part. 19

20 Selection criteria Change and refine your contract documents ahead of each recurring procurement By continuously changing, improving and refining your contract documents at regular intervals, you make it harder for bidrigging cartels to operate. In some bid-rigging cartels the participants take turns to decide who wins each new contract, but this is only possible when the procurement is conducted the same way each time. Sub-contractors A potential tenderer can engage a sub-contractor to fulfil the selection criteria of a procurement. Collaborating with an external company in this way could still be a bid-rigging cartel. If the sub-contractor has the possibility to participate in the procurement independently, there may be a bid-rigging cartel behind it. The tenderers may have agreed not to tender for a contract in exchange for being made a supplier. To avoid such a situation, the procurement officer can add an obligatory requirement in the contract documents. The tenderers must attest that they have not had any unlawful contact with competitors in conjunction with the submission of the tender. 20

21 In some bid-rigging cartels, the participants decide who will win each new procurement. 21

22 Award criteria Lowest-price procurement procedures make it easy for bid-rigging cartels to operate Contracts that are awarded on the basis of lowest price run a greater risk of attracting bid-rigging cartels than procurements that are awarded on the basis of the criterion economically most advantageous. Tenderers in a bid-rigging cartel can more easily collude if the only criterion they need to agree on is the price. The risk is also greater in the case of recurring procurements where the conditions in the contract documents remain the same. Avoid relative evaluation models Relative evaluation models can be open to manipulation by the colluding tenderers. The tenderers can prepare their tenders in a way that influences the allocation of points of their colluding partners in an advantageous manner. It is better to use absolute evaluation models, which are harder to manipulate. Avoid using award criteria that benefit the current supplier You should avoid using award criteria that benefit the current supplier if your goal is to:» create innovation» open the door for new tenderers» generally improve competition in the procurement. Making the current supplier less confident about winning subsequent contracts is another way to prevent bid-rigging cartels. Variation makes it harder for suppliers to maintain a bid-rigging cartel. 22

23 Use award criteria that promote development and innovation Bid-rigging cartels are formed more easily in sectors where there is limited innovation, development or alternatives. If instead you create award criteria that promote tenders characterised by new ideas, this often reduces anti-competitive effects and opens the door for new, innovative companies to compete for the contract. Exclude tenderers that have taken part in bid-rigging cartels Tenderers that have committed a serious breach of professional practice can be rejected at the evaluation stage. Participating in a bid-rigging cartel is a serious breach of professional practice. If you inform the tenderers in the contract documents that previous bid-rigging cartel participation is regarded as a serious breach of professional practice, you can dissuade tenderers from taking part. Variation makes it harder for bid-rigging cartels to operate. 23

24 CHECKLIST Twelve ways to detec High prices? Companies can submit tenders for the sake of appearances, aware that another company will win the contract. Price variation? If one company submits a significantly higher tender in certain procurements than others, without there being any obvious differences in cost, this could be a sign of a bid-rigging cartel. Large price differences? Inexplicable price differences between the winning tender and other tenders could be a sign that the others have a bid-rigging cartel. Similar prices? If several companies submit identical prices, this could mean that they have agreed to share the contract. Coordinated boycott? If none of companies submits a tender, this could mean there is a coordinated boycott in order to influence the conditions of the procurement. Few tenders? Companies can refrain from submitting a tender within a certain area to allow another company to win the contract there. 24

25 t a bid-rigging cartel Similar tenders? It is illegal to have sector-wide pricelists and thereby submit similar tenders. Suspicious patterns of behaviour? If the same company wins the contract each time it comes up for renewal, the companies may have divided up the market between themselves. Collaboration with sub-contractors? If the company that wins a contract engages the services of the companies that submitted higher tenders in the same procurement, this could be a sign of a bid-rigging cartel. Carelessly prepared tenders? If only the winning tender is prepared with thoroughness and attention to detail, while the others appear to be carelessly put together, this could be a sign of a bid-rigging cartel. Identical wording? Be on the lookout for identical wording, the same errors in calculations or the same letter paper and forms between the companies. Alternating lowest tender? If the suppliers appear to have taken turns in submitting the lowest price in a procurement, they may have agreed who will win the contract in certain years. 25

26 Tip us off if you suspect a bid-rigging cartel If you have any questions or are suspicious about irregularities in a procurement, you are welcome to contact us at Swedish Competition Authority. Remember to phone us first if you wish to remain anonymous. The Swedish Competition Authority investigates and decides whether it is a bid-rigging cartel. In order to perform such an investigation we need the documentation from the procurement. Therefore, please save all the documents including tenders, correspondence, envelopes and similar information. Do not discuss your suspicions with the bidders. It is also a good idea to write down the information about suspicious behaviour in detail dates, who was involved, what was said. All such information is valuable material for the Swedish Competition Authority s investigation. 26

27 Tip-off function tel: (our switchboard) konkurrensverket@kkv.se post: Konkurrensverket, SE Stockholm 27

28 Address SE Stockholm Tel Fax konkurrensverket@kkv.se 28 June 2015