Competition and Cooperation in Public Procurement: Friends or Foes?

Antonio Capobianco - OECD Competition Division

Cooperation between competitors in a public tenders can take several forms. Joint biding refers to a situation where two or more independent bidders submit a single bid for a tender without formalising their relation into a long-lasting partnership. The pro-competitive purpose of a joint bid is to allow new or small suppliers into a tender that would usually require a complex combination of skills or large volumes of goods and services, and who would otherwise be unable to participate on their owns. In these circumstances allowing suppliers to participate jointly attracts more bidders and expands competition in the tender. In other circumstances, however, joint bids eliminate a potential bidder and therefore restraint competition.

This is why cooperation, joint bids and consortia in public procurement stand on the thin line between anticompetitive behaviour and procompetitive behaviour. How can we make sure that bidders’ legitimate cooperation does not contribute to consumers harm? How should competition agencies and public procurement officers handle these situations to ensure that competition deliver its well-known benefits?

The answer to these questions depends on the wide framework of rules and practices that help fighting bid rigging in public procurement. Bid rigging, or collusive tendering, occurs when businesses, that would otherwise be expected to compete, secretly agree to raise prices or lower the quality of goods or services for purchasers who wish to acquire products or services through a bidding process. Bid rigging is an illegal practice in all OECD member countries (and in many non-OECD countries) and can be investigated and sanctioned under the laws and rules on competition . In a number of countries, bid rigging is also a criminal offence.

Cooperation between competitors in the form of joint bids and JVs or consortia can be pro-competitive: if bidding is costly, if the bid requires experience, skills, a minimum size, or financial requirements that reduce the number of potential competitors, submitting a joint bid or forming a consortium will increase the number of participants by allowing small companies to participate in larger tenders.

Beyond representing an implicit price fixing between actual or potential competitors, joint bids and consortia in public procurement might raise other competition problems. They also offer a platform for the companies to meet and exchange information that can harm competition in the framework of the specific tender, and can also leak sensitive information transfer regarding other sectors the parties are competing in.

What do competition authorities think of joint bidding?

In a few recent cases competition agencies have initiated investigations and issued fines on joint bids that were deemed to restrict competition. Exemplary is the Ski Taxi case[1] in Norway. The competition authority investigated a joint bid for transport services. At the end of the investigation the agency imposed fines on the parties and concluded that the parties would have been able to submit separate tenders in the tender procedure, therefor they were to be regarded as de facto and potential competitors. According to the agency the submission of joint bids constituted an anticompetitive of cooperation between the parties that had as its object the restriction on competition.

The case was challenged before the Supreme Court of Norway. Regarding the question if the joint bid considers restriction by object, the court held the following: “since the submission of joint bids involves price-fixing […] consideration of the economic and legal context may be limited to what is strictly necessary in order to establish the existence of a restriction of competition by object. However, such an assessment needs to take into account, albeit in an abridged manner, whether the parties to an agreement are actual or potential competitors and whether the joint setting of the price offered to the contracting authority constitutes an ancillary restraint”.

How to recognise pro-competitive effect of joint bidding?

Some pro-competitive effects if:

• The co-operators provide a single integrated service that none of them could supply independently.
• Two or more providers active in different areas submit a single bid for the whole of contract area.
• Two or more providers combine their capacity to fulfil a contract which is too large for each of them individually.

Some anti-competitive effects if:

Each member in the consortium has the economic, financial and technical capabilities to fulfil the contract on its own

• The joint bidders are the strongest competitors in the relevant market
• The joint bid does not produce any efficiency
• The consortium allows its members to transfer any kind of information between them.

From theory to practice - What should procurement officials do?

An in depth reading of the competition agencies’ decisions regarding joint bids teaches that the first and most important question that needs to be asked in these cases is: can the parties to the joint bids or consortia submit an individual bid? If the joint bid does not carry any pro-competitive effects, it might hurt the competition and should be forbidden.

Contracting authorities should introduce stricter internal rules to ensure that joint bids do not translate into a reduction in the number competitors. For example, the special regime should make it clear that joint bids will only be accepted when there are pro-competitive justifications such as:

• two or more suppliers combining their resources to fulfil a contract which is too large for any of them individually;

•  two or more suppliers active in different products markets providing a single integrated service which none of them could supply independently; or two or more suppliers active in different geographic areas submitting a single bid for all of Mexico or for multiple states that include areas that no single supplier can accommodate on its own

Because joint bids can be a way to split profits among bid riggers, contracting authorities should be particularly vigilant about joint bids by firms that have been convicted or fined by the competition authorities for collusion. They should be cautious even if collusion occurred in other markets and even if the firms involved do not have the capacity to present separate bids.

To conclude

OECD countries spend approximately 12% of their GDP in public procurement. The elimination of bid rigging could help reduce procurement prices by 20% or more. This is one of the reasons why the OECD developed best practices to fight against collusion in public procurement through recommendations, guidelines and worldwide in-depth expertise and workshops.

There is an importance to identify the obvious “red flags” during a public tender, but sometimes the potential harm for competition can be hidden in a legitimate business activity like joint bids and consortia. Search for the benefits for competition, and don’t hesitate to question their existence in the first place.

For more info on fighting bid rigging in public procurement and the OECD guidelines follow our website: http://www.oecd.org/competition/cartels/fightingbidrigginginpublicprocurement.htm

[1] Case E-3/16, Ski Taxi SA, Follo Taxi SA and Ski Follo Taxidrift AS and The Norwegian Government, 22 December 2016 - http://www.eftacourt.int/uploads/tx_nvcases/3_16_Judgment_EN.pdf

Antonio Capobianco is a Senior Competition Expert with the OECD Competition Division. In this position he is responsible for the proceedings of the OECD Competition Committee.

At the Competition Division, Mr Capobianco has coordinated a series of OECD projects and work streams, including the development of the 2009 Guidelines for Fighting Bid Rigging in Public Procurement and the related OECD Council Recommendation of 2012, the work on transparency and procedural fairness, on SOEs and competitive neutrality, and most recently he has been leading the work on international enforcement co-operation. He has authored numerous Background Notes of the Secretariat on a variety of competition law enforcement and policy topics.

Prior to joining the OECD in 2007, Mr Capobianco was a Counsel in the Competition Department of WilmerHale LLP, based in Brussels. He also spent three years with the Italian Competition Authority. Mr Capobianco authored several articles on antitrust issues published on major international law journals specialized in competition law and he co-authored textbooks on Italian and European competition law and economics. He regularly speaks at international conferences on antitrust and regulation issues. Mr. Capobianco graduated in law at the L.U.I.S.S. - Guido Carli in Rome and holds LL.M. degrees from the Law School of the New York University and from the Institute of European Studies of the Université Libre de Bruxelles.

Antonio Capobianco will be speaking on competition and public procurement at the Competition Law Nordic conference next February 2018. See the event website.