Procurement can be a target for cartels
International experience has shown that procurers, particularly government bodies, can be targets for cartels.
While there are good reasons for the principles and rules governing public procurement, they can unintentionally facilitate collusion. The requirements for transparency of process and disclosure of information can give potential colluders the information required to establish, maintain and enforce a cartel, such as a bid-rigging cartel. Any cartel activity in public procurement could cost government significant sums of money, and ultimately it is ratepayers and taxpayers who bear that cost through increased rates/taxes, or reductions in services (or their quality) delivered by government agencies.
Types of cartel conduct
There are four main types of cartel conduct prohibited by the Commerce Act 1986:
- bid rigging
- market allocation
- price fixing
- restricting output.
Cartelists will often employ a combination of these strategies in relation to any one procurement although bid rigging is the biggest risk in tenders.
Practical steps to minimise the risk of anti-competitive conduct
In relation to the procurement process, there are a number of practical steps that you can take to minimise the risk of anti-competitive conduct. Please click on the step below for further information
Include clauses that deter collusion in your tender documents
Include anti-collusion clauses in your tender documents which require bidders where possible to sign a warranty that their bid has been independently developed and that there has been no communication with competitors about, and no contract, arrangement or understanding has been entered into with competitors about price, bid submission or terms of the bid, including quality and quantity of goods or services. If such a warranty cannot be signed, seek disclosure of contacts with competitors with regard to the bid.
The following is an example of a warranty you may want to include in your tender documents:
The bidder warrants that their tender has not been prepared with any consultation, communication, contract, arrangement or understanding with any competitor, other than:
- where certain joint venture arrangements exist between the bidder and a competitor;
- where the bidder and a competitor have an agreement that has been authorised by the Commerce Commission; and
- where the bidder has communicated with a competitor for the purpose of subcontracting a portion of the tender, and where the communication with that competitor is limited to the information required to facilitate that particular subcontract.
In such a situation, the bidder agrees to fully disclose to the tendering body the full nature and extent of any agreements with competitors.
In the event that no such disclosure is made, the bidder warrants that their bid has not been prepared with any consultation, communication, contract, arrangement or understanding with any competitor regarding:
- methods, factors or formulas used to calculate prices;
- the intention or decision to submit, or not submit, a bid;
- the submission of a bid that is non-conforming;
- the quality, quantity, specifications or delivery particulars of the products or services to which this call for bids relates; and/or
- the terms of the bid.
The bidder acknowledges that if the [department/agency etc] accepts the bidder’s offer and completes any contract, the [department/agency etc] will do so in reliance on this warranty.
Other clauses you may want to consider in your tender documents are, clauses which:
- warn bidders that you will report all suspicions of collusion to the Commerce Commission
- require disclosure of all subcontracting arrangements that involve communications between competitors
- require bidders to disclose any proceedings involving anti-competitive conduct in New Zealand or overseas involving the bidder, including related companies and senior management
- reserve the right not to award the contract if there are suspicions of collusion.
Ensure you receive the optimum number of potential bidders
The probability of bid rigging increases if you have a small number of potential bidders.
- if a public sector procurer, use the Government Electronic Tenders Service (GETS) to advertise tender opportunities
- keep tender requirements clear and easy to follow, thereby encouraging more companies to bid
- think carefully about unnecessary restrictions on bidders that may eliminate companies that are in fact qualified for the job
- keep the costs of bidding down – allow adequate time for bid preparation, use an electronic bidding system if possible, do not require information that is of little use, and keep amendments to the forms/ processes to a minimum
- avoid discriminatory or preferential treatment of certain classes of suppliers, or companies that have contracts up for renewal, which can discourage other suppliers from bidding. Anonymity of bidders may help to avoid this
- consider allowing bids on a portion only of a large contract, thereby allowing small and medium-sized companies to participate
- be open to bids from foreign companies on a non-discriminatory basis (as is required of public entities under government procurement policy).
Make it harder for bidders to communicate and collude
- avoid unnecessarily presenting the bidders with opportunities to communicate with each other, for example, at pre-bid face-to-face meetings or at site inspections
- if pre-bid meetings are necessary. mitigate the risk of collusion by, for example, reminding attendees of their obligations under the Commerce Act
- where possible and practical keep the identity of bidders undisclosed to make it more difficult for cartel members to contact all bidders
- try to avoid predictable procurement patterns which facilitate bid-rigging schemes, for example vary the scope of successive contracts by aggregating or dis-aggregating contracts
- manage the risks that may be associated with the use of industry consultants to conduct the tender process who may have established working relationships with bidders. Ensure any external consultants used have signed confidentiality agreements and are subject to a reporting requirement about inappropriate competitor behaviour
- if bids or prices do not make sense, discuss with individual bidders an not with bidders collectively.
Don't design tenders in a way that specifies particular producers
- design tender specifications in terms of what you want the product to do rather than based on specific products
- this can make bid-rigging agreements more difficult to implement by allowing for alternative or innovative sources of supply.
Be clear there is no obligation to bid as a condition of staying on a standing list of pre-qualified suppliers
- ensure you communicate this to suppliers, particularly when informing them of a new tender
- however, consider seeking reasons for any failure to bid by a company from whom you would expect a bid.
Public sector procurers working together may achieve more effective competition
- public sector procurers could consider aggregating purchase with another public sector organisation to increase incentives for suppliers to compete and to disrupt bid rotation schemes.