How public procurement processes facilitate bid rigging, cartels, and waste

This blog highlights why waste from ineffective and uncompetitive public procurement processes occurs and why procurement regulations should be designed to not unwittingly facilitate collusive arrangements such as bid rigging. Where public procurement processes are compromised, processes which should run openly and competitively do not and result in inflated prices and a potential reduction in the quality of goods and services received. Governments spend a significant amount of taxpayers’ money on the procurement of goods and services. However, if these processes are compromised, the public may lose confidence in them getting the best value for their money. From huge infrastructure projects and contracted services right down to bottled water, public procurement processes have a huge impact on the efficiency of public services. 

An effective procurement policy allows the acquisition of goods and services at the lowest price or at the least, the best value for money, and this can only be achieved if there is vigorous competition among suppliers. However, the way in which tender procedures are carried out and designed tend to hinder competition and help promote cartelistic tendencies. Cartels are detrimental to the economy as they waste tax payers’ money and cause governments to pay far more than a fair price.

Cartels within the procurement process occur when bidders agree among themselves to eliminate competition, thereby denying the public a fair price. For instance, cartel members can engage in collusive tendering or bid rigging - an illegal activity where bidders create the illusion of competition while secretly agreeing among themselves which of them will win the tender. Competition can be eliminated when a competitor submits a non-competitive bid that is too high to be accepted or withdraws their bid from being considered or when a competitor only submits bids in specific geographical areas. By choosing the best price, the purchaser, is forced to pay more than they would otherwise pay in conditions of fair competition.  The schemes used by different firms may however, have one common goal - the elimination of competition, resulting in raised prices - a cost to any government.

When cartels impact public procurement, they have the potential to cause great harm because public procurement is a large part of an economy. Experience has shown that cartelistic conspiracies can last for decades, while impacting affected markets negatively. While cartels can emerge in ordinary markets, it is crucial that procurement regulations do not unwittingly facilitate collusive arrangements such as bid rigging. Developing tender processes to minimize collusion significantly aids in the fight against anti-competitive behaviour. This is because a well-planned process reduces the ability of bidders to reach a collusive agreement. Whenever formal rules governing public procurement make it easy for competing bidders to communicate, the potential for collusion is increased and this should be avoided. Thus, procurement officers when developing tender processes are encouraged to design processes that hinder cartelistic behaviour by being proactive and identifying the following behaviours:

§  Look out for sectors that are prone to bid rigging – the presence of certain factors increases the need to take precautions in developing public procurement e.g. where there are concentrated markets with few bidders. Concentrated markets are more susceptible to cartels as bidders can easily reach an agreement that eliminates competition since the same few bidders are involved in repeat procurements.

§  Procurement officers need to learn and gather information about the market related to potential suppliers, prices and existing conditions in the market. When procurement officers are aware of prices submitted in recent tenders, it becomes easier to recognize what is acceptable and what is not.

§  The bidding process must encourage a wide participation of bidders which reduces chances of collusion. While the use of conditions eliminates firms that may not be qualified, the process must not equally discourage qualified bidders by keeping the associated costs of bidding low, e.g. avoid changing bid forms unnecessarily and allow for adequate time for bids to be prepared and where possible use electronic bidding systems. Further, allowing bidding on a portion of a large contract can allow for medium and small sized firms to participate as well.

§  The procurement process should restrict communication amongst bidders by making it difficult for potential bidders to identify their competitors. Avoid bringing potential bidders together in face-to-face pre-bid meetings and for instance use electronic, mail, telephone and keep the identity of the bidders undisclosed by using numbers rather than names.

§  Tender procedures should be very clear, conscientious and allow for unpredictability as this makes it easy for firms to understand what is expected of them. Notably, predictable purchasing patterns can facilitate bid rigging schemes thus, it is important that successive contracts vary in scope.

§  Provide appropriate training for procurement officers on bid rigging or market allocation to design procurement processes that are less susceptible to bid rigging. Keeping a database of past and present bid results helps in early detection of potential problems and resolution.

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Luyamba K. Mpamba - Kapembwa is currently the Director, Mergers and Monopolies at the Competition and Consumer Protection Commission (CCPC) in Zambia. She is a dedicated professional with over 17 years of experience in fostering fair competition and protecting consumer rights. As Director, she leads the analysis of mergers, acquisitions, and cases of abuse of dominance, ensuring a level playing field for businesses and safeguarding the interests of consumers. Luyamba holds Masters degrees in Business Administration and Management from the University of East Anglia, and in International Business, Business Administration & Management from Hanze Groningen. She holds an LLB from the University of Lusaka in Zambia.