Bid rigging in public procurement

Abstract

This policy paper has been prepared to suggest the ways and means to effectively fight cartels in public procurement. Due to formation of cartel , the colluding firms gain undue profit by artificially increasing the bidding rates and securing tenders at higher rates. The average increase in rates is about 20%. As 15 to 20% of government expenditure is spent on public procurement hence government loose substantial amount of revenue to these cartels. Private procurement has flexible strategy and does not require transparency hence they have effectively managed to fight cartels. But public procurement is markedly different from private procurement as the public authorities have to follow the set rules and regulations in order to promote fairness, equity and transparency and avoid the misuse of discretionary power. Hence taking the advantages of these factors bidders are able to effectively form cartel. However in order to further prosper and propel the cartel need conducive atmosphere in form of restrictive practice like higher barrier to entry, frequent procurement by public authority, getting required information of other bidders, trade associations, sub contracting by successful bidders etc. The existing regulatory setup to fight cartels is Competition commission of India which was setup by the competition Act 2002. The basic function of the commission is to monitor and prosecute the violators and form awareness among the procurement agencies. It has to basically depend on the procuring agency to get information aboutsuspect cartel then it further takes up for the prosecution of violators. Even the punishments for the violators are only in monetary terms and it is not considered as criminal offence as in many other countries. There is lack of awareness among the procuring agency about the rules and regulations framed to fight cartels due to no proper and formal training imparted. In most of the organization the procuring officials are not professionals but have been deputed for the time being to look after the procuring activity. Apart from that procuring authority has to do substantial amount of ground work in order to prove that there is a suspected cartel. Hence the general attitude of the procuring agency is to avoid reporting to the competition authorities. Even if it is reported much of the time is lost due to ground work required by procuring agency. Further it requires another 2-3 years for agency to give report. Even if firms are successfully prosecuted, it happens with undue delay and the amount of punishment is very miniscule hence it does not deter the firm in anyway. Due to above factors the cartels are functioning freely without fear of prosecution thus drainingthe valuable taxpayer s money. The traditional method of fighting cartels were change in bidding process, designing tenders by removing restrictive clauses etc. However these methods have not Page 5 of 37worked effectively and still the collusive practice is widely prevalent. Hence new ways and means are to be found out for fighting cartels.One of the most significant ways is to reduce the frequency of procurement. Repeated interaction between the bidders allows them to effectively monitor the activity of each other and punish the defaulting member. By reducing frequency of purchase and holding tenders fewer and larger tenders, a zero sum game can be created whereby winner takes all and looser gets nothing. Hence in such situations cartels are likely to break. However the main challenge in long term strategic procurement is risk management. This requires providing flexibility to procurement officials and change in existing rules for alter the terms and condition of contract at post contact stage. However with more and more such contact further learning and knowledge will develop for effective risk management.There are few very high value items procured which account for significant portion of revenue. Where collusive practices are prevalent and difficult to break, the production of these items can be taken up through public private partnership mode. SPV to be formed for the purpose and government should be minority partner. Only land and infrastructure will be provided by government and capital, manpower etc will be p rovided by private partner. This should be operated in Built own operate mode. However pricing of products will be huge issue. In order to overcome such problem, it is suggested that the SPV should also participate in competitive bidding and get the order at market rate. However in absence of assured demand it is to be seen whether this model works. However it will be very effective in fighting cartels as the SPV firm will bid as per costing. Development of new sources has always been the focus of procurement agency but development does not only depend upon exemption and incentive given but major factor is market mechanism. Hence there is limited scope in fighting cartels. Cartels can be effectively curbed with very strong and proactive competitive agency. However if we look in the role of Competition commission of India, it has mostly played passive role and acted only when they received complain. As against this many country has very active competition agencies which work with the procurement agencies right from the start of procurement process. Countries such as Denmark, Russia and South Korea have got fair degree of success in fighting and prosecuting cartels. Denmark has adopted a system where all the laws, rules and regulation regarding cartels are framed by competition agency and they educate the procuring agencies also. But they have to depend upon the procuring agency for reporting and only then takes up with the violators. However, if such system is adopted in India, then very heavy resources and manpower have to be deployed. Moreover there are more than 15000 procuring agency and bulk of them are not professional hence very limited degree of success is perceived if it is adopted in India. Page 6 of 37Russia has given the full control to competition authorities and they monitor the whole tendering process from start till end and frame the rules and regulation apart from providing training and assistance to procuring agencies in interpretation of rules. Hence the competition authorities have successfully countered the cartel menace. However if such system is adopted in India, it will require even more resources and manpower than in Denmark system because monitoring such huge amount of tenders from initial stage is uphill task. Moreover coordinating between the agency and procurement authority for framing of rules and regulation will be big issue as each sector such as railways; telecom, defense, highway etc. have their own challenges hence require tailor made rules. If this system is adopted then the feasibility of proper implementation is very low with even lower degree of success.South korea s competitive agency keeps a close coordination with the procuring agency and has developed a electronic system of monitoring through which it guides the procuring agencies from the tendering stage itself. It also educates and provides online help to raise awareness and guide them . It also prosecutes the violators which has been detected or reported upon by purchasing agency or any other source. If it is adopted in India, then resources of the agency has to be increased but to limited extent. However the benefits accrued due to abolition of cartel will outweigh the additional cost incurred. Moreover it will also help in educating the procuring agency also hence most suited for Indian condition as India has already adopted for electronic procurement system in big way. The existing mechanism and regulations have failed to successfully fight against the cartel hence new methods to be tried although in smaller scale at initial stage. After gaining experience and knowledge further it could be scaled up.Further competition authorities structure has to be revamped and they should be asked to play pro active role with collaboration with procurement agencies. They shouldbe equipped with adequate resources and manpower so they can increase their role and awareness and knowledge of procuring agency. Through amendment of act, they have to be integrated to purchasing agencies so that there is regular flow of information in both ways. While fighting cartel is not one size fit all hence a judicious mix of all approaches should be taken depending on the various parameters and circumstances of the case. If traditional means fails to effectively curb the collusive practice the n another set of approach should be adopted. Hence if various new options are available then these new options can be exercised. Obviously these new tools will have their own favors and drawbacks. This will be continuous process and the new tools will only give us new learning experience. Hence with these enhanced experience it is expected that we will able to curb the collusive behavior effectively and efficiently.