There are several forms of collusion and some also affect public procurement procedures. Regardless of the form, the result is always the same — we all pay more.
Let's start by explaining what public procurement is: it’s the process — regulated by the Public Contracts Code — through which the State and other public entities acquire goods and services necessary for their activities.
Bid-rigging takes place in public procurement when bidders in the tender secretly agree among them to coordinate their offers.
This behaviour — a clear infrigement of the Competition Law — leads to less favorable conditions for the public buyers than those that would result from effective competition, leading to higher prices, lower quality, or less innovation.
Bid-rigging compromises efficiency in allocating public resources, and it undermines the goal of “more and better for less” in public procurement, ending up harming both consumers and taxpayers.
The most common ways of bid-rigging in public procurement
Several forms of collusion can coexist in the same public procurement procedure. The same type of practice can also affect purchasing by private entities. Let’s see which are the most common.
Bid rotation
Competitors agree winning proposals' rotation schemes, taking turns among themselves to win the procedure.
This strategy is favoured by the repeated participation of the same bidders in public procurement procedures over time.
Cover bidding
In this big-rigging scheme, the companies agree on bids with a higher price than that of the company previously chosen to win the procedure.
These cover bids only serve the purpose of creating an illusion of competition in the procedure.
Bid suppression
The scheme by which some companies participating in the collusion agree not to submit a proposal to the procedure or withdraw a previously submitted proposal so that the contract is awarded to the company they choose to win the tender.
Market allocation
Companies agree to a bidding scheme with the aim of sharing market between them. Market allocation may focus on costumers, the type of product or service, or the geographic area.
Subcontracting
Firms agree to allow a competitor to win the contract, in return for the assurance that they will be subcontracted to supply certain goods or services for that contract.
Market characteristics that can facilitate collusion
The probability of bid-rigging increases if the number of companies is small and/or the more concentrated the market is. The larger the number of competitors, the more difficult it will be to establish and maintain collusion.
The existence of barriers to access or market expansion (legal or regulatory, economic, strategic) favors collusion by protecting companies from the competitive pressure of potential participants.
The stability of the offer and the predictability of public procurement enhance the risk of collusion. Significant changes in demand or offer conditions tend to destabilize collusion. On the other hand, periods of crisis and economic uncertainty can promote collusion to replace losses.
The repeated interaction between competing companies in different markets facilitates contact between competitors and, as a consequence, increase the likelihood of collusion.
The frequent realisation of contracting procedures for a given product or service increases the probability of bid-rigging. It facilitates the sharing and rotation of contracts between competitors and retaliation for deviations from the agreed terms.
Business or professional associations facilitate contact between competitors and contribute to a more favorable environment for collusion.
The existence of contractual or structural relationships between competing companies facilitates the coordination and monitoring of behaviour and increases the risk of collusion.
Standardized products or services, homogeneous or with no differentiation between competing offers, facilitate a common understanding of the price level and structure, increasing the possibility of collusion
Markets where innovation intensity is lower are more prone to collusive practices, given that the degree of offer differentiation is lower, and market conditions are more stable.
Transparency of information regarding, in particular, the identity and costs of competitors and their prices, can facilitate collusion.
The evidence of bid-rigging in public procurement
In a public procurement procedure, several signs should serve as a warning to contracting authorities and other interested parties that they might be facing a bid-rigging scheme.
Most of the time, there are evident signs in the way bids are presented in certain aspects of the commercial conditions offered, suspicious statements by bidders in the tender, patterns in the award of contracts, and in subcontracting of competitors.
In the checklist of signs of bid-rigging in public procurement [text in Portuguese], you can get information about the main warning signs in greater detail.
Reduce the risk of bid-rigging
In the Guide of Best Practices in Combatting Bid-Rigging in Public Procurement [text in Portuguese], prepared by the AdC, it is possible to consult various strategies that contracting authorities can — and should — adopt to reduce the risk of collusion and further promote competition in tenders.
Bid-rigging is a serious infringement of national and European Union Competition Law, punishable by a fine of up to 10% of turnover of firms and, to the respective administrators and directors up to 10% of their annual remuneration.
A firm participating in bid-rigging can - and should - report it to the AdC, using the Leniency Programme, to get immunity from the fine.
Any suspicion of collusion must also be communicated to the Competition Authority by contracting authorities, companies, or citizens, so that the AdC can analyse and open investigations.
