Bid rigging

Bid rigging is a fraudulent scheme in procurement auctions resulting in non-competitive bids and can be performed by corrupt officials, by firms in an orchestrated act of collusion, or between officials and firms. 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. The typical objective of bid rigging is to enable the "winning" party to obtain contracts at uncompetitive prices (i.e., at higher prices if they are sellers, or lower prices if they are buyers). The other parties are compensated in various ways, for example, by cash payments, or by being designated to be the "winning" bidder on other contracts, or by an arrangement where some parts of the successful bidder's contract will be subcontracted to them. In this way, they "share the spoils" among themselves. 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.
Forms of Bid Rigging.
Bid rigging as an auctioneer or official.
These forms of bid rigging are not mutually exclusive of one another, and two or more of these practices could occur at the same time. For example, if one member of the bidding ring is designated to win a particular contract, that bidder's conspirators could avoid winning either by not bidding ("bid suppression"), or by submitting a high bid ("cover bidding").
Economic Costs.
Many of the issues presented by bid rigging are the result of cartel involvement. Inefficient firms are not pushed out as they would in a competitive market, and firms experience more profit despite an inefficient allocation of resources. Cartels behave more like monopolies and as such their behaviors, such as bid rigging, create market inefficiencies as contracts are fulfilled at elevated values. Furthermore, bid prices increase with more repeated collusion. Ultimately this cost is typically borne by the taxpayer as government sponsored contracts are artificially above market value. Additionally, this can be thought of as raising prices for the taxpayer (or consumer) as firms rent seek. One study found that bid rigging significantly raised prices over market value in the seafood industry in Philadelphia in a bidding scheme involving Defense Personnel Support Center, a purchaser for the Department of Defense. The high price of entry and fewer entrants in many industries results in lessened incentives for firms to behave competitively.
Remediation.
Bid rigging is an illegal practice under the criminal or competition laws of most developed countries. Depending on the jurisdiction, it is punishable by fines, imprisonment or both.
At a very basic level there would likely be more competitive bidding if there were more firms present in a market, outside of a cartel, as evidence shows that bids lessen in value as the number of firms rises. Furthermore, collusion becomes less frequent with better market competitiveness, a result of reduced ability to compromise.
The OECD's suggestions for better tenders include:
Suggestions for ameliorating procurement auctions have also been put forth. Lengstein and Wolfstetter suggest that when a particular bidder is preferred, disregarding cost, possible reforms include a sealed Vickrey auction or if there is reason to believe that officials and bidders are in contact, an open auction is preferred to sidestep potential bribery. When officials are engaged in more competitive procurement processes with regard to price but are suspected of kickbacks, a potential solution would be the open auction preventing clandestine arrangements such as change order abuse. If a closed or sealed auction process is preferred, then the use of electronic bidding and investment in tamper-resistant systems is suggested.
Bid Rigging by Region.
South America.
Brazil.
Brazil's Operation Car Wash is an ongoing investigation into the Brazilian semi-public multinational Petrobras. Petrobras is suspected of having overcharged bids as much as 3% of the total cost on contracts with an alleged $2.1 billion being misappropriated in kickbacks. Operation Car Wash is part of a larger investigation into Brazil's government as well and has contributed to the conviction and imprisonment of former president Luiz Inácio Lula da Silva. In early January 2018, Petrobras settled a United States class action case for $2.95 billion, though JP Morgan and BTG Pactual had expected a settlement between $5 and $10 billion.
The Petrobras scandal extends beyond bid rigging in the oil sector as the investigation has also implicated Brazilian construction firms as bid rigging was discovered to be rampant in the preparations for the 2016 Summer Olympics. This would not be the first instance of bid rigging by construction firms in recent Brazilian history as Andrade Gutierrez Engenharia SA, the nation's second largest construction firm, admitted to bid rigging during contract procurement for stadiums to host the 2014 FIFA World Cup. This revelation implicates an additional five domestic construction firms and was revealed by the "Conselho Administrativo de Defesa Econômica(CADE)."
Colombia.
From 2002 until 2013, the Colombian government opened 121 investigations into bid rigging, which lead to sixty-nine entities paying fines amounting to nearly $23.5 million, with an additional nine entities receiving sanctions. Colombia was found to generally comply with the OECD's recommendations regarding competitive procurement.
North America.
United States.
In the United States, bid rigging is a federal felony criminal offense under Section 1 of the Sherman Act. Even so, bid rigging is still rampant in the construction industry, auto sale auctions, and foreclosed home auctions.
Canada.
In Canada, {bid rigging} it is an indictable criminal offence under Section 47 of the Competition Act.
Europe.
Bid rigging is illegal in the European Union (EU) under Article 101 of the Treaty on the Functioning of the European Union (TFEU). The annual cost to the EU in economic waste as a direct result of bid rigging among cartels was estimated to be between €13 billion and €37 billion in 2008. Bid rigging seems to be on the rise across Europe, raising concerns particularly over excessive expenditures and single-bid tenders. These single-bid tenders represented 17% of tenders in 2006, but 30% nine years later. RAND estimated that the overall annual cost posed to the EU by bid cost increases was $5 billion.
Slovakia.
Bid rigging is illegal in Slovakia under the Act on the Protection of Competition and by EU membership, also Article 101 of TFEU. The first charges to be brought to court in Slovakia in 2006 by the Antimonopoly Office involved six construction companies who submitted bids with suspiciously consistent unit quotes. The fines from this bid rigging scheme amounted to €45 million following an initial court decision, an over-ruling, and a reinstatement of the initial verdict. In 2007, a Slovakian government ministry participated in bidder exclusion by posting a request for proposals regarding consulting on a bulletin board in an official building, though not open to the public. This resulted in a consulting firm winning a €120 million contract. The word for receiving kickbacks after participating in bid rigging is known as "tunelovanie" in Slovak.
Switzerland.
Bid rigging occurs frequently in the construction industry in Switzerland. In 2007, seventeen different firms were involved in a bid rigging scheme but there was no prosecution as the ring had disbanded before colluding. In 2009, a ring of seven electricity firms from Bern were charged with bid rigging and fined two million Swiss francs. In Aargau, in 2011, a bid rigging scheme was discovered wherein seventeen firms were fined eight million Swiss francs though the appeals are ongoing. Multiple other cases are still ongoing.
United Kingdom.
In the United Kingdom, individuals can be prosecuted criminally under the Enterprise Act 2002.
Asia.
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 US 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.
"Dango" refers to collusion in Japanese, or more precisely, "conference", and is an extremely prevalent system in Japan. "Dango" can be understood as a mutually beneficial system of bureaucracy and government and the private construction industry wherein bid rigging is incredibly common, benefiting colluding firms and officials alike in the form of kickbacks. The system of "dango" is often supported though as allowing small firms to continue to compete, though detractors are quick to point to the economic inefficiencies presented by a non-competitive market. 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 reform "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 Structural Impediment Initiative (SII) 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.
Korea.
In a three and half year period from 1995 to 1998 there was an estimated $4.13 billion surcharge attributed to bid rigging in Korea's construction industry, representing 15.5% of the total spent. It was also found that firms already present in an area enjoyed a significant degree of incumbency, meaning that they were more likely to continue to win additional contracts in areas they were already developing. This was discovered to be a result of complementary bidding. Some legal action has been undertaken against these bid rigging schemes with nine contracting companies and several officials being charged and fined $5 billion in 1999.