Bid-rigging practices and their harmful impact
A bid exercise is the process whereby suppliers make an offer, bid or proposal, or express interest in response to an invitation or request for tender.
The suppliers’ tender outlines the offer and generally include pricing, schedules as well as their eligibility for the project information on qualification, competencies and experience. The submitted tenders are evaluated and the best competitive one that meets the requirements is normally awarded the contract.
Tendering or bid exercise is usually utilized by government departments, offices and agencies, private sector companies and business as well as NGOs. Whilst a bid exercise is meant to create competition between bidders, so that the bid caller gets the best value for money offers, some bidders pervert this exercise by rigging the bids to the detriment of the bid callers and ultimately tax payers.
With bid-rigging, competition is eliminated and the contract price is usually higher than the competitive price.
The main purpose behind a procurement exercise is to get the most competitive offer out of a cut-throat competition between suppliers to offer the best deal in terms of prices which is beneficial to the institution launching a tender exercise. The idea behind competitive tendering is that it forces suppliers to compete and consequently the purchaser and taxpayer will gain a better 'value for money', since the best and competitive price is derived for goods or services required. Furthermore, a bid exercise creates a transparent environment that is open and fair. It is also a way to encourage innovation in the way services are provided.
Nonetheless, bidders usually attempt to chill this process of competition in bidding exercises by conspiring amongst themselves to give a fake picture that competition is happening when it is not. This is termed as ‘bid-rigging.’ Therefore, bid-rigging is a form of collusion which relates to a situation in which bidders for a particular contract collude to pre-arrange the outcome of the bid or pre-determine the winning bidder. There are different forms of bid-rigging, namely: cover bidding, sub-contract bid rigging, bid suppression, bid rotation and market division.
An example of bid-rigging would include some bidders opting out of the bid process so that the designated winning competitor’s bid will be accepted. Another example would be some bidders taking turns to win bids. Suppliers rig bids because they want to maximize their own profit and welfare to the detriment of the procurer, tax payers and the economy as a whole. In the bid-rigging guidance document of the OECD, the Chairman of the Japanese Fair Trade Commission, Kazuhiko Takeshima, stated that ''Strict and proactive enforcement against bid-rigging has promoted fair and free competition in Japanese public procurement markets. This has saved significant public resources and reduced contract prices by nearly 20 per cent in some cases as a result of restoring competition.”
Under the Mauritian competition law, bid-rigging is prohibited because of its harmful economic impacts. With bid-rigging, competition is eliminated, and the contract price is usually higher than the competitive price. The caller of the bids ends up paying a much higher amount than he would otherwise have paid under normal competition. Tax payers, in turn, pay a higher cost because the higher prices are passed onto them. The impacts of bid-rigging impede the overall economic development of a country by reducing efficiency and welfare.
Since bid-rigging has damaging effects to an economy, competition law is one solution to correct the market failure of collusion and bid-rigging practices among competitors. In the context of Mauritius, the Competition Commission of Mauritius is the watchdog for such types of malpractices. Bid-riggers, when found in breach of the prohibition of bid-rigging, bear the risk of paying a financial penalty of 10 percent of the amount of their turnover over a maximum period of five years. The amount of the fine turns out to be very significant and this should act as a deterrent against bid-rigging. Bid-riggers should think twice before entering into such types of malpractices. Therefore, it is in the best interest of bidders to compete with each other so that the benefits of competition generate positive spillover effects to society at large and lead to progress and economic development.
This article forms part of a series of stories of Competition Commission.