India: Tender Bid Rigging

Last Updated: 29 October 2015
Article by Anupam Sanghi

Cartels in procurement loot railways of Rs 10,000 crore a year: E. Sreedharan

In the final report, the Metro man says the board was set up originally to "make policies, plans, to lay broader principles of railway management, to frame rules, to inspect and guide the railways". "And today the board is not performing these roles" he says.

On 'delegating tendering and commercial powers to general managers and other operating levels' of railways, Sreedharan has pointed out that by centralizing procurement powers, the railway board has accumulated enormous sum of money in the hands of few, and hugely enhanced rent-seeking power that encourages corruption.

The committee heard views of senior officials. "Procurement is through cartel only, list of approved sources and cartels are synonymous ... there is no item in which there is no cartel .. Committee feels that vendors thus continue to fleece at will" Sreedharan says.

Adam Smith, the world's first free-market capitalist (The Wealth of Nations) said :

"....Consumption is the sole end and purpose of all production and the interest of the producer ought to be attended to, only so far as it may be necessary for promoting that of the consumer...."

Although Cartel activity in procurement tenders is not new or unknown to our jurisdiction, it has not been dealt with strictly and often left un-established. The predecessor competition law ( MRTP Act, 1960) which broadly curtailed 'restrictive and unfair trade' practices did not even define cartels or provide for it separately to help unveil cartel conduct.

CCI fined Stone, Faively Transport, Escorts Rs. 62.31 Cr in February 05, 2014

Cartel of 3 companies supplying spares to Diesel Loco Modernization Works, Indian Railways, Patiala, Punjab.

What is the principal virtue of economic activity?

If it is a healthy competitive culture that creates rivalry between companies for markets and customers to have better choices then – Cartel conduct strikes at the very heart of such economic environment as it turns the competitive rivalry into friendly rivalry to collude at the cost of the beneficiaries i.e the competitors not part of the cartel and ultimately the consumers.

No wonder, although we have about 100 systems of Competition Law all over the world with their differences in various respects of how to prosecute and punish, they all condemn "hard- core" cartel behavior. Some of these laws date back more than a century: for example the US enacted the Sherman Act in 1890. The competition rules of the European Union were adopted by the Treaty of Rome of 1957, the same year as the German Act against Unfair Restraints of Competition. Competition law in the United Kingdom began with the Monopolies and Restrictive Practices (Inquiry and Control) Act of 1948.

"Bid-rigging" – also known as collusive tendering – is regarded as among the most serious infringements of competition and antitrust law by competition authorities and courts worldwide. In the European Union Mario Monti, the former Commissioner for Competition, once described cartels as 'cancers on the open market economy' and the Supreme Court in the US has referred to cartels as 'the supreme evil of antitrust'. In US, it is often described as 'nothing other than theft' and attracts criminal liability.

So why is bid-rigging so bad?

The answer lies in understanding the fundamental essence of competition law and its primary concerns.

Tender Bids (rigging) arise where the procurer of goods or services, proposes to award the contract on the basis of inviting a competitive tender. The idea of Competitive tender (required by law or simply to obtain the best value for money) invited by typically large organizations / governmental departments – is to ensure that tax payers enjoy the best value for money.

Bid-rigging arises when some or all of the bidders in a competitive tender attempt to frustrate the purpose of the competitive tender by colluding or actually deciding to limit the degree of competition – for example, agree between themselves not to submit tenders below a certain price; or fix the prices / engage in "market sharing" by agreeing which of them will submit "winning" (i.e. competitively-priced) tenders for particular contracts, so that the range of contracts over a period is rotated amongst them.

So what's the concern about bid-rigging?

The European Commission recently fined five companies in the "marine hoses" sector for bid rigging imposing a total of €131 million in fines (about £110 million or US $175 million), stating that:

"By engaging in that conduct, the undertakings aimed at eliminating the risks involved in uncoordinated bidding for marine hoses tenders, notably the risk of not being awarded a tender due to high prices or less attractive sales conditions...".

The heart of the matter is the secret manner in which this competitive process is rigged. For instance, parties forming a consortium or a joint venture openly joining hands would still involve "eliminating the risks involved in uncoordinated bidding" but it would not have been regarded as a cartel for forming a JV per se.

It's worse because it's secret

The Delhi high court finds the penalties imposed by the Competition Commission of India (CCI) on rubber boot manufacturers found guilty of bid rigging "shockingly disproportionate".

Thus, the fines imposed by CCI are not baseless and depends on the kind of infringement found. Parties tend to procrastinate and delay filing information and/or undertakings which would effectively amount to non-compliance of substantive orders, violation of its processes. Thus, to effectuate the substantive orders parties are also fined for non-compliance of any process.

Considering the fining practice world-over, the penalties imposed by CCI so far are comparatively relaxed.

Some of the instances of the fines imposed by the EC on cartels are stated below –

  • In the case of British Sugar (sugar cartel ), the fines totaled 50.2 million;
  • In the case of Pre-insulated Pipe cartel, fine of ECU 70 million imposed;
  • In the case of Amino Acids (Lysine Cartel) , Archer Daniels fined Euros 47.3 million.

Fines imposed by CCI in the past

  • Cartel of 3 companies supplying spares to Diesel Loco Modernization Works, Indian Railways, Patiala, Punjab: CCI fined Stone, Faively Transport, Escorts Rs. 62.31 Cr in February 05, 2014
  • Polyester blended duck ankle boot rubber sole cartel: CCI fined Rs. 625.43 lakhs in August 2013
  • Supply of explosives for coal mining operations cartel: CCI fined Rs. 58.8 Cr in April 2012
  • Supply of medical equipment's cartel: CCI fined MDD, MPS & PES of Rs. 300 lakhs in April 2012
  • LPG cylinder manufacturers cartel: CCI fined Rs.165 Cr in Feb 2012.

Conspiracy- Price Fixing And Bid Rigging cases

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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