This article has been written by Pushkaraj Ghorpade, pursuing the Certificate Course in Competition Law, Practice And Enforcement from LawSikho.
Free and fair competition is one of the fundamental pillars of any efficiently functioning market. Competition law has developed throughout the world with the very objective of facilitation of this healthy competition and providing equal opportunity for all. In India, this development began in 1969 and continues to evolve today. It aims to eliminate anti-competition practices. Being a market leader, the European Union (EU) has also developed its own laws to curb such practices. One such anti-competitive practice is that of bid-rigging which will be discussed in detail herein. In this paper, we will focus on a comparative analysis of India and the EU with regard to bid-rigging and evaluate the legal aspects therein with a primary focus on the public procurement sector.
Public Procurement refers to the acquisition of goods and services by the public sector and accounts for 15% of global GDP and 30% of Indian GDP. Such procurement is undertaken by various ministries, departments, the central governments, and governments of all levels in the case of federal structure. The primary purpose of public procurement is to provide for efficiency in the selection of the supplier i.e., to choose the supplier with the most value at least price. Healthy and vigorous competition is at the heart of such a practice. Bid rigging curtails this fundamental aspect and leads to loss of taxpayer’s money.
Bid rigging, also known as collusive tendering, refers to collusion of bidders to keep the bid at a pre-determined stage. This pre-determination of the bid amount is intentional and manipulative and can include actual or potential bidders acting in collusion with each other. Such collusion is detrimental to healthy market practice and takes away a fair chance from the public to participate in the process. Bid rigging in public procurement aims at eliminating competition in the public procurement process. Some examples include an agreement to submit identical bids, agreement to hurdle new entrants, geo-specific or rotation-based agreements, agreement to not bid against each other, etc.
Such acts or agreements essentially rid the market of competition that is the very basis of keeping a market flourishing and can have adverse effects on the markets. A bidding agreement is a horizontal agreement. Such agreements can be between associations, persons, or enterprises engaged in identical or similar arenas. It results in non-competitive bids and is a form of market manipulation.
Bid rigging in India and EU
Bid rigging results in the loss of taxpayer’s money and excludes more efficient competitors from the process. Bid rigging can also lead to a reduction in incentives for the suppliers and therefore a reduction in quality and innovation that is birthed from robust competition. Bid rigging is defined in the Competition Act, 2002 as any agreement between enterprises or persons who are engaged in similar production or trading of goods or services. The agreement includes the effect of bid-rigging as manipulation or elimination of competition for bids or adverse effect or manipulation of the process itself. The Act aims at prevention of practices having an adverse effect on competition, promotion, and sustenance of competition in markets, protection of consumer interest, and ensuring freedom of trade for other participants in the market. The formation of cartels in the market leads to the curbing of a healthy market and they have been called ‘cancers on the open market economy.’ Such agreements curbing competition in the market are expressly barred by the Indian competition law. Public procurement is said to be most prone to bid-rigging.
The establishment of an independent commission to look into matters of violation is provided under Indian law. The Commission puts paramount focus on twin principles of enforcement and advocacy. The Competition Commission of India has the duty to eliminate such practices. It has the power to identify anti-competitive agreements and also impose a penalty of up to 10% of the average turnover for the last preceding three years of the enterprise. The Commission also has the power to impose a penalty on each member (producer, seller, distributor, and/or service provider) of any cartel. It can also proceed against directors/officials of any company in violation of the competition laws in India. Under the Act, the Commission can conduct an inquiry of any contravention of a provision under Section 3(3) of the Act. The Commission has the same powers as a Civil Court of the land in such matters. A fair and equal market is guaranteed under the Indian Constitution itself.
Bid rigging is also addressed in the EU and is specifically violative of the Treaty on the Functioning of the European Union (TFEU). The EU practice does not distinguish between bid-rigging in private and public procurement and is treated at par with other violations that affect competition in the market like market sharing. Some countries of the EU like Germany and the United Kingdom have specific sanctions of criminal nature in cases of bid-rigging. The European Commission has the power to impose penalties on defaulters (up to 10% of the group’s worldwide turnover in the preceding business year). This is specifically calculated as per various factors like the gravity of the infringement, the value of sales, duration of the infringement, etc. The policy is based on the principles of deterrence, both specific and general. The policy also provides for protection to the whistleblowers (in terms of fines) and reduction of fines in case of cooperation. There can also be exclusion of an infringing party in participation in public procurement. This exclusion can be mandatory or voluntary and is subject to national laws. This exclusion has to be proportional depending on the gravity of the misconduct. In case a period has not been outlined in the judgment, the exclusion period should not exceed three years from the date of relevant events.
Trends seen in India and EU markets
There are various forms of bid-rigging seen in any market. The following five are the most common forms:
One or more competitors, expected to bid or previously bid, refuses to bid or withdraws a bid and a predetermined bid is accepted.
This is the most common form of bid-rigging and the least apparent one as well. In complementary bidding, the competitors either place a very high bid or a bid on special terms that shall be rejected. This gives the procurer an illusion of competition and the competitor with a low bid is declared the winner.
In this instance, all the colluders take turns in submitting the lowest bid as per their accepted agreement.
The colluders bid a losing bid and when the bid is given to a co-colluder at an exorbitant price, the other colluder (s) can subcontract and make handsome profits from the difference in the amount.
The competitors divide the market amongst themselves on various parameters. These parameters can be geographical, type or size of tender, price, etc. A cartel is slightly different from mere collusion to the extent that cartels are productive structures that involve many producers. These producers act together and form a monopoly in the market. There are various kinds of cartels prevalent in both India and the EU like territorial cartels (division on the basis of geography), syndicates (a united group of competitors against entrants), customer cartels (a division of customers), etc.
In a developing nation like India, corruption is rampant and it acts as both a source and cause for unethical practices like bid-rigging. In order to address corruption, understanding and analyzing the irregularities in public procurement is key. The mere magnitude of the market share of public procurement in India has a competitive impact on the entire goods and services market. This is not to say bid-rigging does not exist in developed nations.
Legal perspective and case laws
In India, there is a lack of a single central body that is responsible for public procurement or laying down guidelines, rules, procedures for the same which leaves scope for bid-rigging. The Ministry of Finance has also issued certain guidelines for model procurement practices. The guidelines can be read here. The EU laws, however, fail in the face of domestic laws and their stringent nature acts as an impediment for market players. There have been various bid-rigging cases that have been dealt with by the competition commission of India and the European Commission
Kerala Insurance Scheme Case
The commission encountered manipulation of the bid-rigging process in insurance tenders, violative of the competition laws of the land. The Competition Commission of India took suo moto cognizance of the case and penalized the parties. The manipulation of the bidding process was assessed by analysing the bidding patterns, minutes of meetings, and exchange of emails. It was held that the evidence was enough to prove a violation of laws and that the opposite parties had entered into anti-competitive agreements.
Essel Shyam Communication Limited Case
The Commission received information of exchange of commercial and confidential price sensitive information between ESCL and Globecast (Lesser Penalty Party) which resulted in bid-rigging of tenders for procurement broadcasting services of various sports events (2011-2012). Upon perusal of investigation reports of DG, the submissions of parties, and arguments, both the parties provided their assent to involvement in bid-rigging and the existence of a cartel in this regard. The Commission put a penalty on all the parties involved in the cartel. A 100% reduction was provided to Globecast while a 30% reduction to ESCL. ESCL was liable for payment of Rs. 22.36 crore.
Rajasthan Cylinders Case
The Supreme Court of India has held in this instance that mere instances of price parallelism cannot be the sole basis for an adverse finding. The Apex Court has held that the key test in bid-rigging cases is the situation of the market. The Court referred to European judgments with regard to oligopsony and allowed the appeal, in this case, thus setting aside the decisions of the Commission and the Appellate Tribunal.
British Sugar Cartel Case
The European Commission fined a total of 33 million pounds on the parties involved in cartelisation that resulted in inflated sugar prices for consumers and retailers for four years. The two companies and the two merchants involved in the case-controlled a whopping 90% of Britain’s white granulated sugar market. British Sugar that was the primary concern behind the cartel was fined 38 million pounds. It has been categorically held that there can be a concerted practice even in the absence of any actual effect on the market.
Lysine is a feed additive, used by farmers globally. In this case, five major lysine producers around the world formed a cartel that influenced prices of the product around the world, down to a penny. The companies were fined a total of 105 million $ and Archer Daniels (One of the culprits) was fined 47.3 million Euros.
Precautions and suggestions
The precautions and suggestions for bid-rigging include detection of signs of bid-rigging, designing tenders to reduce bid-rigging, and a robust justice system. The warning signs for bid-rigging include geographic allocation, sudden withdrawal from the process, never winning any bids, always winning bids, very close bids, turns in the winning bid that defies chance, joint bids despite having the resources to bid alone, repeated sub contraction to losing bidders and holding meetings or communication between competitors before placing bids. In case of such patterns that seem to defy odds, there is a high possibility of bid-rigging.
It is important to keep in mind that punishment is proportionate to the impact. It is also important to avoid unnecessary restrictions and an unnecessarily complex system that fails to work, as in India. There should be a reduction of restrictions and transparency in size and content of procurement with no impediment on participation, like size, composition, nature of firms, etc. A reduction in foreign participation can also go a long way in fostering healthy competition. The qualification of bidders should not be pre-determined or expected so as to provide an environment of uncertainty which leads to less scope for collusion. A reduction in preparation of costs of the bid also goes a long way in encouraging new entrants. This can be achieved by a streamlining process across services, goods, or sectors. India’s lack of such streamlining is often blamed for bid-rigging. A distribution or allocation of lots in the project can also help smaller or mid-level firms participate in the process, provided it is done with due diligence. The factor of predictability should be eliminated wherever possible. The tender process should be designed in a way so as to render communication between competitors impossible or at least reduce it to a certain extent. Advocacy and generating awareness amongst staff is also key to dealing with bid-rigging.
Bid rigging is a pervasive market practice that leads to a hostile and monopolistic market that hinders growth in the economy. It has been categorically made illegal in law. In the case of public procurement, such practices lead to a loss of taxpayer’s money, disproportionate gains, undue influence on markets, and discouragement of vital competition. Both the EU and India suffer from bid-rigging in various forms. India, being a developing nation is plagued with corruption and despite the establishment of a competition commission in India, there is rampant bid-rigging. Although India has come a long way in the evolution of competition law, there is still a long way to go. The same is also true for the EU. The EU has stringent laws pertaining to collusive agreements but such cases still persevere. In the face of a massive global economy, there is a pertinent need to develop a vigilance authority in this regard along with the development of better laws, more awareness, and better strategizing.
- MRTP Act (1969)
- Competition Commission of India, Provisions relating to Bid Rigging (2009) https://www.cci.gov.in/sites/default/files/advocacy_booklet_document/Bid%20Rigging.pdf
- Moses Manuel, Bid Rigging in Public Procurement Sector, Zerite Network (2021) http://zeritenetwork.com/dealing-with-bid-rigging-in-public-sector-procurement/
- Competition Commission of India, Public Procurement and Competition Law 6, https://www.cci.gov.in/sites/default/files/presentation_document/p4.pdf?download=1
- Fining guidelines, European Commission (2006)
- Van Bael and Bellis, Bid-rigging and deterrence under EU law 3 (2017)
- Directive 2014/24/EU, European Parliament (2014)
- Connexxion Taxi Service BV v Staat der Nederlanden (Ministerie van Volksgezondheid, Welzijn en Sport) & Others, C-171 (2015)
- Khemani, R.S and D. M. Shapiro, Glossary of Industrial Organisation Economics and Competition Law, commissioned by the Directorate for Financial, Fiscal and Enterprise Affairs, OECD (1993).
- Jeffery Fear, Cartels and Competition: Neither Markets nor Hierarchies, Working Paper, Harvard Business School (2006).
- Manual on Policy and procedures on purchase of goods, OECD
- Cartelization by public sector insurance companies in rigging the bids submitted in response to the tenders floated by the Government of Kerala for selecting insurance service providers for Rashtriya Swasthya Bima Yojna. vs National Insurance Co. Ltd. and Others, Suo Moto Case No. 02, CCI (2014)
- Cartelisation by broadcasting service providers by rigging the bids submitted in response to the tenders floated by Sports Broadcasters. Vs. Essel Shyam Communication Limited & others, Suo – Motu Case No. 02, CCI (2013)
- Rajasthan Cylinders and Containers Limited Vs UOI & Anr., 1718 SCC OnLine, SC (2018)
- British Sugar plc, Tate & Lyle plc, Napier Brown & Company Ltd, James Budgett Sugars Ltd OJ  L 76/1
- Detecting Bid Rigging in Public procurement, OECD https://www.oecd.org/competition/cartels/42594486.pdf
- Guidelines for fighting bid rigging in procurement, OECD (2009) https://www.oecd.org/daf/competition/guidelinesforfightingbidrigginginpublicprocurement.html
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