The potential traps of joint procurements - don't get caught!
Before proceeding with any joint procurement, multiple government entities must carefully consider their proposed method and approach to procuring the goods or services.
Governments at all levels are requiring departments, statutory authorities and agencies, government owned corporations or local governments to curb their budgets by reducing expenditure and by making significant cost savings. This can raise key commercial challenges for government entities, particularly when they are engaging in significant procurement exercises.
There may be opportunities for different government entities (being separate legal entities) to make significant savings by jointly procuring goods or services. However, caution must be exercised and the entities need to be alive to the potential competition law implications of pursuing this course. It is clear that the competition provisions of the Competition and Consumer Act (2010) (Cth) (CCA) will apply to all government entities insofar as they are "carrying on a business".
Competition risks for government entities
Generally speaking, when two or more persons who are competitors (or potential competitors) come together for the purposes of supplying or acquiring goods or services, there is a risk that any "contract, arrangement or understanding" between those persons and between those persons and third parties can give rise to a risk of a contravention of the competition provisions of the CCA.
Whilst government entities are usually not considered to be each other's competitors because, more often than not, they supply different goods or services to the public or, in the case of local governments, supply similar goods or services but in different geographic regions, where they each seek to acquire the same goods or services they may, so far as the competition laws are concerned, be considered to be competitors.
The key risks in any joint procurement is that the acquiring parties might enter into a contact, arrangement or understanding that:
- contains an "exclusionary provision";
- contains a "cartel provision"; or
- otherwise has the purpose or effect of substantially lessening competition,
in contravention of section 45 and/or the cartel provisions of the CCA.
For example, an agreement by two or more legally separate government entities to pay the same price in acquiring goods or services from a supplier would prima facie raise the risk of constituting a price-fixing cartel provision in contravention of the CCA. Further, any agreement by the same parties not to acquire goods or services from a particular supplier could prima facie be at risk of constituting an anticompetitive exclusionary provision.
So, before proceeding with any joint procurement, multiple government entities must carefully consider the method and approach that they propose to adopt in procuring the relevant goods or services.
How government entities can avoid contravening the CCA
It may be the case that any potential competition law risks can be avoided by a careful structuring of the proposed joint procurement.
With respect to price fixing, section 44ZZRV(1) of the CCA provides a potential exemption in the case of "collective procurements". Whilst no cases have yet tested the breadth of this exemption, it is considered that it would be likely to cover the following three circumstances:
- where the parties jointly acquire goods or services from a supplier (ie. under the one supply contract);
- where the parties use their combined bargaining power to negotiate a common purchase price but, separately acquire their requirements for the goods or services; or
- where one of the parties is appointed to acquire the parties' total requirements or where the parties form a jointly-owned buying agent.
Importantly, the collective acquisition exemption only covers conduct which would otherwise constitute price fixing. It will not give any protection in terms of the other forms of cartel or anticompetitive behaviour.
Other potential options that acquiring parties may be able to pursue include:
- establishing a joint venture;
- submitting a collective bargaining notification to the ACCC; or
- applying to the ACCC for an authorisation.
The appropriateness of a particular option will ultimately depend on the circumstances of the relevant case.
In the case of the authorisation option, it provides complete immunity from potentially contravening the aforementioned provisions of the CCA. The ACCC will only grant an authorisation if it is satisfied that the proposed arrangements between the parties for the joint acquisition of goods or services would, in all likelihood, result in public benefits that would outweigh any public detriment arising from the proposed arrangements.
It is not uncommon for government entities to apply to the ACCC for an authorisation. In the past few years, there has been a number of examples of local governments having successfully obtained authorisation for the joint procurement by several neighbouring councils for the acquisition by them of recycling and refuse collection services.
The current budgetary constraints in which governments at all levels find themselves presents opportunities for the joint procurement of goods and services. However, care must be taken to ensure that well-intentioned bargaining does not place the government entities at risk of contravening any of the competition provisions of the CCA.
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Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this bulletin. Persons listed may not be admitted in all states and territories.