BID RIGGING IN TENDER
Some time in September 2012, I was nominated by the BSM (HR Division) to represent the RMAF for attending a workshop titled “Workshop on Bid Rigging for Public Officials” organized by MYCC at IOI Resort Hotel, Putrajaya.
Upon receiving the called from the Staff Officer I was not so enlightened to attend. By reading the word 'bid-rigging', it was a strange terminology to me. Furthermore, the offer was made just a day before. How ever I managed to turn my mind to be more positive and went for the workshop.
So, herewith I like to share some information on what is 'bid-rigging' and why, when, where and how it happen. I tried to get as many as reference in defining bid-rigging.
Bid-rigging is a criminal offence defined by section 47 of the Competition Act and occurs when each of the following four elements are met:
- There was a call for tenders;
- There was an agreement between two or more bidders where:
- One or more agrees to not submit a bid, OR to withdraw a bid, OR
- Two or more submit bids that were arrived at by agreement or arrangement (This section does not apply to companies that are affiliates)
- Bids were submitted in response to the call for tenders;
- The person who called for the tenders was not made aware of any agreement or arrangement, at or before the bids were submitted.
Because bid-rigging is a criminal offence, each of these elements must be proven beyond a reasonable doubt.
Any party to the agreement or arrangement must explicitly notify the tendering authority of the agreement or arrangement to avoid liability under this offence. It is not enough that the tendering authority ought to have known there was an agreement because of past practice or because identical prices were submitted.
Bid-rigging schemes are harmful to private and public sector organizations because they incur the initial cost of establishing a tendering process, which is then undermined by a covert scheme to charge them higher prices, and deprives them of the other benefits of competition. These higher prices are often borne by consumers and taxpayers.
The Act therefore provides for severe punishments for those individuals and corporations found guilty of this offence. Individuals and corporations may be sentenced to a fine in the discretion of the court because there is no maximum fine level. In addition, individuals may also be further liable to imprisonment for a term up to fourteen years.
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A scheme in which businesses collude so that a competing business can secure a contract for goods or services at a pre-determined price. Bid-rigging stifles free-market competition, as the rigged price will be unfairly high. The Sherman Act of 1890 (USA) makes bid-rigging illegal under US antirust law. Bid-rigging is a felony punishable by fines, inprisonment or both.
There are four main types of bid rigging: bid suppression, complementary bidding, bid rotation and subcontracting. In the most common of these schemes, complementary bidding, some of the "competitors" submit offers that they know the buyer will reject because the price is too high or the terms are unacceptable in order to create the appearance of legitimate bidding while ensuring that a prearranged "competitor" will win the bid.
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Reference : www.investopedia.com/terms/bid-rigging.asp#zz28zk3Frd5/
Bid rigging is also known as a form of fraud in which a commercial contract is promised to one party even though for the sake of appearance several other parties also present a bid. 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.
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.
Types of Bid Rigging
There are some very common bid rigging practices:
- Subcontract bid rigging occurs where some of the conspirators agree not to submit bids, or to submit cover bids that are intended not to be successful, on the condition that some parts of the successful bidder's contract will be subcontracted to them. In this way, they "share the spoils" among themselves.
- Bid suppression occurs where some of the conspirators agree not to submit a bid so that another conspirator can win the contract.
- Complementary bidding, also known as cover bidding or courtesy bidding, occurs where some of the bidders bid an amount knowing that it is too high or contains conditions that they know to be unacceptable to the agency calling for the bids. Complementary bidding, however, is not always a corrupt practice. A contractor that is too busy to complete the work will often place a high bid simply to maintain a relationship with government agencies.
- Bid rotation occurs where the bidders take turns being the designated successful bidder, for example, each conspirator is designated to be the successful bidder on certain contracts, with conspirators designated to win other contracts. This is a form of market allocation, where the conspirators allocate or apportion markets, products, customers or geographic territories among themselves, so that each will get a "fair share" of the total business, without having to truly compete with the others for that business.
In the United States, bid rigging is a criminal offense under Section 1 of the Sherman Act, even so bid rigging is still rampant in the construction industry. In Canada, it is a criminal offense under Section 47 of the Competition Act.
In the United Kingdom, individuals can be prosecuted criminally under the Enteprise Act 2002.
In 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 USA 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. The US Government, specifically the United States Trade Representative Office and Department of Commerce, made fierce efforts. in the late 1980s and early 1990s to urge the Japanese government to scrap "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 S.I.I. (Structural Impediment Initiative) trade talks, 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.
As of 2008 thirteen lawsuits were still pending over 1990s' bid rigging for local government contracts to supply incinerator plants.
References
"US Department of Justice report". Usdoj.gov. 1994-09-16. Retrieved 2011-12-17.
"New York Times report from 1995". Nytimes.com. 1995-03-09. Retrieved 2011-12-17.
"Britanica Article". Britannica.com. Retrieved 2011-12-17.
"Japan Times report". Search.japantimes.co.jp. 2009-03-28. Retrieved 2011-12-17.
"Builders settle damages suit over bid-rigging | The Japan Times Online". Search.japantimes.co.jp. 2009-04-04. Retrieved 2011-12-17.
Bid rigging is also defined as a particular form of collusive price-fixing behaviour by which firms coordinate their bids on procurement or project contracts.
There are two common forms of bid rigging. In the first, firms agree to submit common bids, thus eliminating price competition. In the second, firms agree on which firm will be the lowest bidder and rotate in such a way that each firm wins an agreed upon number or value of contracts. Since most (but not all) contracts open to bidding involve governments, it is they who are most often the target of bid rigging. Bid rigging is one of the most widely prosecuted forms of collusion
Reference: Glossary of Industrial Organisation Economics and Competition Law, compiled by R. S. Khemani and D. M. Shapiro, commissioned by the Directorate for Financial, Fiscal and Enterprise Affairs, OECD, 1993.
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Recognizing and Stopping Bid Rigging
Your Career Could Be At Stake
How much damage has been done to the auction industry by bid rigging is impossible to gauge. Because bid rigging lowers the sale price, discourages those outside the ring to bid and is illegal, bid rigging negatively affects everyone who attends and conducts auctions.
The good news is that there are ways to reduce and stop it from happening. But doing so demands knowledge and constant awareness by the auctioneer and staff. It's a difficult job, but in a business where reputation is everything, your career as an auctioneer depends on it.
Trying to define bid rigging is difficult. Although bid rigging may be as simple as two friends who agree not to outbid each other, larger and more organized rings of dealers and wholesalers are the ones that drastically impede the fair market of the auction process.
While the forms bid rigging takes are constantly evolving, the primary goal remains the same; to illegally control prices to save money. And any method is considered fair game.
As part of their activity, rings may spread false information about the auction to discourage attendance by those not in the ring; pressure other buyers, especially those who refuse to participate; and even go as far as to damage purchases made by non-participating dealers before the buyer can get the items home.
Usually, rings show up at auctions where many like items are for sale. The group, comprising a loose knit but well-organized group, agrees ahead of time not to bid competitively against one another. Each member of the group decides to buy certain lots of items and to be the sole bidder on different portions of the inventory.
After the auction, the group meets with a list of what they bought. They then hold another auction among themselves, selling the newly acquired property. The difference between what the ring paid for each item at the first auction and what a member of the group bids for it at the secondary auction is divided proportionally.
The approach is usually subtle, making it hard to detect. However, there are certain behaviors to look for before, during and after the auction.
In The Official Government Auction Guide by George Chelekis, several obvious red flags that bid rigging may be occurring are noted.
Low turnout of auction attendees.
Winking, hand signals or other similar signs among dealers after the bidding is opened.
A uniformity to the bidding. For example, Dealer One bids on a particular lot and buys it with little or no activity, and then Dealer Two buys another lot, again with little or no competition.
Difficulty getting things going.
A lot of handshaking and other signs of recognition among several dealers before or after the auction takes place.
An air of silence throughout the auction as auctions are generally noisy - or conversely, a lot of conversation among bidders during the sale of lots they normally would be bidding on.
Low competition among known dealers who normally bid strongly against one another. Most auctioneers have had encounters with rings and are in tune to spotting deceptive ploys of all types, but remember: Ring members are subtle. While they are "performing" at an auction, their communications may be practically non-existent.
But ignoring these warning signs is done at the auctioneer's peril. Both buyers and sellers are quick to sense something's not quite right and, at the least, may decide to take their business elsewhere.
They may also register a complaint with the National Auctioneers Association or Auction Marketing Institute against the auctioneer, or even press charges against the auctioneer who lets bid rigging continue.
Fighting bid rigging is made difficult by the fact that many that participate in this crime often don't think of it as illegal. They have participated in rings, in some cases for years, and view it as the way business is done.
Which makes knowing your customers and their bidding styles an important step in preventing bid rigging from happening. A sudden change in bidding style, especially among dealers, could be a signal that things aren't right.
Strongly advertising each auction also helps prevent the possibility of bid rigging. If enough people are in attendance, especially non-dealers, a ring will almost certainly be broken. Ring members look for small auctions with little competition from private individuals, who often are willing to pay higher prices.
BID-RIGGING IN MALAYSIA
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Bid Rigging is the New Target
OPTIMISTICALLY CAUTIOUS
By Errol Oh
JUSTIFIED or otherwise, the usual complaint about tender exercises is that not enough is known about how these are decided. With such a perception, it's natural to make the small leap to allegations of corruption and of jobs being given to the undeserving.
But many of us in Malaysia have overlooked another form of foul play that can happen when contracts are up for grabs bid rigging. That may change... if the Malaysia Competition Commission (MyCC) does what it says it will do.
On Thursday, when speaking at the official opening of the commission's office in Kuala Lumpur, Chairman Tan Sri Siti Norma Yaakob said the MyCC would intensify its focus on bid rigging this year.
She pointed out that Japan, the European Union and the United States had identified bid rigging as a principal target when enforcing their competition laws.
“When procurement activities are tainted by bid rigging, it will definitely give an adverse impact to the country's economy, consequently burdening taxpayers, who indirectly have to pay more than the actual price of a product or service,” she added.
Siti Norma cited a US study that found that bid rigging in tender exercises in the country's construction sector inflated prices by more than 36%.
Bid rigging is not new to Malaysia, but it's rarely discussed publicly here. So a little education on the subject is warranted.
According to the Organisation for Economic Co-operation and Development (OECD), bid rigging occurs when “bidders agree among themselves to eliminate competition in the procurement process, thereby denying the public a fair price”.
The Competition Act 2010 (CA), the legislation that the MyCC enforces, mentions bid rigging only once it's among several examples of anti-competitive agreements listed in the Act but doesn't provide a definition.
But we can turn to other material released by the commission to better understand the topic.
For example, the MyCC's Guidelines on Anti-competitive Agreementssays: “Taking turns to win competitive tender contracts is an example of bid rigging. This could include parties agreeing to submit cover bids (high) that are intended not to be successful where the unsuccessful bidders may get kick-backs; bid suppression, where parties agree that only one of them will submit a bid for the contract; and bid rotation, where the parties to the agreement take turns to win contracts.
“More than one of these bid rigging practices can occur at the same time. For example, if one party to the agreement is designated to win a particular contract, the other parties could avoid winning either by not bidding (bid suppression'), or by submitting a high bid (cover bidding').”
Is that hard to grasp? Then try the commission's 14-page publication on the CA, which is labelled as a “handbook for the general public”. It does a decent job of explaining what the Act is all about.
On bid rigging, the handbook says: “Under the CA, it is illegal for enterprises to engage in bid rigging. The purpose of the tender process is to select from among a range of bidders, a competent enterprise that offers the best price on the most attractive terms. Bid rigging defeats this purpose.
“Enterprises take part in bid rigging by first agreeing as to which amongst them is to win the bid. The other enterprises will then submit bids at unacceptably high prices, withdraw their bids, or refrain from bidding to enable the pre-selected enterprise to win the bid.
“The winning bidder then rewards those who conspired with it by awarding them sub-contracts. Enterprises may also go on rotation to take turns to win bids. Bid rigging results in the most cost-efficient enterprise not winning the bid. It thereby drains the resources of the economy, consumers and enterprises that do not participate in bid rigging.”
What the MyCC hasn't said so far is that bid rigging is not always a case of friendly rivals joining forces to game the system. At times, there's in fact one owner behind the enterprises that work together to manipulate the outcome of a tender exercise, although his control of the enterprises may be masked well.
Whether acting alone or as part of a group, anybody who gains from bid rigging is essentially stealing from all of us. We should cheer on the MyCC as it takes on the task of curbing this anti-competitive conduct. We should also have some patience because investigating an alleged infringement and taking subsequent action will take time.
To win and maintain such support, the commission must always show that it's truly an independent, transparent and fearless body. Better yet, it would be great to see all our regulators competing among themselves to be the most independent, transparent and fearless.
Reference: www.thestar.com.my
I attended this Seminar......
MyCC Talks About Bid Rigging
KUALA LUMPUR, 25 September 2012 – “Businesses should be made aware that if they want to bid for tenders, they must do so fairly, or they will be found guilty under the Competition Act,” said Malaysia Competition Commission (MyCC) Chairman, Tan Sri Dato’ Seri Siti Norma Yaakob, at the two-day bid rigging seminar hosted by the Commission recently.
“Bid rigging, especially in Government contracts, will adversely impact the public as funds that should be invested to benefit the public are not being utilized in the proper manner,” she added.
According to a study carried out by the Organisation for Economic Co-operation and Development (OECD), in most countries, government procurement activities account for more than 15% of the country’s Gross Domestic Product (GDP). When procurement activities are tainted by bid rigging, it will definitely give a significantly adverse impact to the country’s economy, consequently burdening taxpayers who indirectly have to pay more than the actual price of a product or service.
In view of the harmful effects of bid rigging to the economy, most countries have identified bid rigging as one of the main focus for enforcement in their respective competition laws, she added further.
The two-day seminar, titled “Workshop on Bid Rigging for Public Officials”, was attended by 75 participants representing numerous Government bodies and agencies nationwide. The seminar covered topics on the harmful effects of bid rigging on the economy, procurement procedures, role of procurement officials in reducing bid rigging and methods of detecting bid rigging.
The invited speakers were:
- En. Muhamad Nawir Messi, Commissioner, from Indonesia’s Commission for the Supervision of Business Competition (KPPU),
- Mr. Sangmin Song, officer from the Competition and Consumer Policies Branch of the United Nations Cooperation on Trade and Development (UNCTAD) and Korean Fair Trade Commission (KFTC),
- Mr. Harikumar Sukumar Pillay, Deputy Director of the Competition Commission of Singapore (CCS),
- Mr. Shingo Kasahara, Chief Deputy Director from the Japan Fair Trade Commission (JFTC), and
- Dato’ Hashmuddin bin Mohammad, Deputy Under Secretary, from the Ministry of Finance (MOF), Malaysia.
Reference: www.mycc.com.my
It was an interesting seminar. It was also a new thing to me. The exposure killed all my perception that this seminar is got nothing to do with my job.
After listening all papers presented by the guest speakers, the seminar participants were divided into three groups and I led one of the groups facilitated by Mr Shingo Kasahara. And as a group leader I presented the group presentation.
IN MALAYSIA, the offence of bid rigging is defined by Section 4 of Competition Act 2010 (Act 712):
IN MALAYSIA, the offence of bid rigging is defined by Section 4 of Competition Act 2010 (Act 712):
PART II
ANTI-COMPETITIVE PRACTICES
Chapter 1
Anti-Competitive Agreement
Prohibited Horizontal and Vertical Agreement
4. (1) A horizontal or vertical agreement between enterprises is prohibited insofar as the agreement has the object or effect of significantly preventing, restricting or distorting competition in any market for goods or services.
(2) Without prejudice to the generality of subsection (1), a horizontal agreement between enterprises which has the object to;
(a) fix, directly or indirectly, a purchase or selling price or any other trading conditions:
(b) share market or sources of supply:
(c) limit or control:
(i) production:
(ii) market outlets or market access:
(iii) technical or technological development; or
(iv) investment; or
(d) perform an act of bid rigging, is deemed to have the object of significantly preventing, restricting, or distorting competition in any market for goods or services.
(3) Any enterprise which is a party to an agreement which is prohibited under this section shall be liable for infringement of the prohibition.
