How bid rigging affects business, economy

COUNTRIES around the world have recently been pre-occupied with reducing the negative impact of coordinated activities to restrain trade and tap as much public funds allocated for public procurements as possible.

Fair Competition Commission (FCC) Senior Advocacy Officer, Mr Alex Mmbaga spoke to the ‘Daily News’ recently, saying most competition legislations have embodied in their structures sections that address this phenomenon, which is termed as “bid-rigging” or “collusive tendering”.

“Bid rigging” or “collusive tendering” occurs when businesses, that would otherwise be expected to compete, secretly conspire to raise prices or lower quality of goods and services for the purchasers who wish to acquire products or services through a bidding process.

He said the practices involve groups of firms agreeing to raise prices or lower the quality of the goods or services offered to the public through public procurement.

Thus, Mr Mmbaga observed that bid rigging is a problem that plagues government procurement around the world and costs taxpayers billions of money.

Giving an example, he said whereas in the country the lowest cost of constructing a kilometre of tarmac road can be 1bn/-in a standard market with collusive tendering bidders may bid with the costs of up to 1,5bn/- or 2.5bn/-per kilometre.

“This usually happens when there are few bidders and possibility of rotating winners within themselves,” he said. He said FCC have a number of measures to address ‘bid rigging’ (collusive tendering) practice which contravenes Section 9(1)(d) of the Tanzania’s Fair Competition Act (FCA), No. 8, 2003.

According to Mr Mmbaga, FCC as well has set up heavy penalties to firms engaging in the practices as the Fair Competition Act imposes a penalty ranging from five to 10 per cent of the firm’s annual turnover.

“Business are required to comply with the Fair Competition Act by ensuring that their activities do not restrict competition,” Mr Mmbaga said at one of the FCC awareness campaign events to educate the public and firms on the dangers and penalty imposed to those found guilty of the offence.

He said the public as well has the role to play by informing the responsible authorities of such acts given the truth that taxpayers’ money that would have otherwise financed provision social services end up being misspent.

He explains that though efforts to discourage bid rigging are taken at local level by imposing a number of measures, efforts are also taken at international level to fight the problem.

Mr Mmbaga cited the Organisation for Economic Development (OECD) as an international tool that offers guidelines for fighting bid rigging in public procurement developed by the OECD Competition Committee in 2009.

The Guidelines help governments improve public procurement as they are designed to reduce the risks of bid rigging through careful design of the procurement process and to detect bid rigging conspiracies during the procurement process.

The Guidelines include two checklists: a checklist for detecting bid rigging in public procurement and a checklist for designing the public procurement Process to reduce the risks of bid rigging.

In bid rigging, malpractices can be manifest themselves in the forms of Cover Bidding, Bid Suppression, Bid Rotation and Market Allocation.

Bid suppression occurs when conspirators agree not to submit a bid so another can win the contract while Cover Bidding occurs when competitors agree to submit a bid that is higher than the bid of the designated winner or a competitor submits a bid that contains special terms that are known to be unacceptable to the purchaser.

Bid rotation refers to the practice of competing bidding firms “taking turns” at winning the job Experts in public procurement believe bid rigging schemes materialize in the form of bid rotation.

Under Market Allocation, competitors carve up the market and agree not to compete for certain customers or in certain geographic areas. Studies have also shown that, on average, overcharge by cartels in OECD countries has been recorded to be about 38 per cent of the government expenditure (OECD, 2003).

Demonstrably, world economic trends have clearly indicated that bid rigging has detrimental repercussions on the economies of nations. The practice always leads to higher prices of the projects above the competitive level. It may, as well, lead to reduction in quality and standards of the project thereby reducing value for money.

The firms which are not in the collusive scheme may end up frustrated due to regular loss in bidding. Consequently, such independent firms may ultimately be relegated from the market due to market foreclosure.

In addition, bid-rigging limits greater efficiency associated with inter-firm rivalry. On the other extreme, members of the collusive club may end up incurring huge losses due to heavy penalties imposed by Competition Authorities upon detection of their conduct.

Colluding firms may be permanently or temporarily barred from competing for tenders issued by particular buyers or deregistered. Also, these firms may lose public reputation in case found involved in the collusive behavior.


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