Malaysia: Bid Rigging Series: Public Procurement In Malaysia – Navigating The Crossroads Of Bid Rigging And Bribery

Introduction

Do you participate in government tenders? Are you aware of the laws governing public procurement in Malaysia? If you do, the discussion below will apply to you.

How is Bid Rigging Different from Corruption in Public Procurement?

In the earlier instalments of this series, we have discussed some common forms of bid rigging under competition law and the approach taken by Malaysia's Competition Commission when it comes to bid rigging.

We know that in public procurement, bid rigging involves collusion among enterprises who are in a horizontal relationship with each other.¹ These enterprises conspire to remove the element of competition from the process by engaging in anti-competitive conduct such as price-fixing and market sharing.

How about corruption?

When it comes to public procurement exercises, the word "corruption" often crops up. While bid-rigging involves collusion between two competitors, corruption in public procurement typically involves a vertical relationship between the public official concerned and one or more bidders.² Corruption may involve bribery, kickbacks, favours, or offering of something of value to a procurement official or decision maker to influence the procurement decision making process or to gain an unfair advantage.

Corrupt officials may provide insider information, allow contractors to submit their own proposals, tailor specifications to the corrupt bidder, shorten tender periods or take a cut of the profits as bribes from the conspirator's bidders.³

While they are different concepts, both bid rigging and corruption undermine the principles of transparency, fairness, and competition that are essential to a well-functioning procurement system.

Circulars on Public Procurement in Malaysia

Under the Ministry of Finance's circular on Integrity in Public Procurement (PK 1.6) ("PK 1.6") which came into effect on 1 June 2022, companies interested in participating in government tenders must adhere to the Competition Act 2010, Malaysian Anti-Corruption Commission Act 2009, as well as other legislation cited in the circular.

PK 1.6 introduced the implementation of an integrity pact for public procurement to avoid conflict of interest, bribery, leakages in government expenditure and curb misuse of powers.⁴ Under the pact, government agencies and companies participating in public procurement are required to provide for a non-collusion clause in its tender documents which are to be adhered by bidders.⁵ They also have to declare that they will not engage in bribery to win contracts or to expedite procurement processes.⁶

Further, government agencies are required to pay attention to bid rigging cartels in government procurement.

Another relevant circular to take note of is the Ministry of Finance's circular on Disciplinary Action Against Companies in Public Procurement (PK 8)("PK 8").

Under PK 8, enterprises convicted of bribery or found to have engaged in bid rigging conduct in public procurement may be issued a warning, suspended from registration or their registration may be cancelled by the Ministry of Finance for a maximum period of five years. They will be prohibited from participating in other procurements by government agencies during the period. Directors of said enterprises will also be blacklisted. They will not be allowed to register any new companies with the Ministry of Finance for that duration.⁷

The relevant government agency is also required to report the wrongdoing of an enterprise to the Ministry of Finance.⁸

Are These Circulars Enough?

While the circulars issued by the Ministry of Finance are a welcome move to promote transparency, accountability and fairness in the public procurement process, one would expect them to merely be the beginning of a long and arduous journey to eradicate corruption and distortion of competition.

Investigation and enforcement can be time-consuming and authorities, whose hands are tied by limited time and resources, may have to prioritise certain battles over others in light of widespread corruption and collusion that plague our public procurement exercises.⁹

Mandatory Exclusion – Conviction of Corruption

In the EU, contracting authorities (which includes an EU Member State, regional or local authorities, bodies governed by public law or associations formed by them) are mandated to exclude a tenderer from a tender procedure if the latter has been convicted by final judgment of specific offences, including corruption.¹⁰

Discretionary Exclusion – Grave Professional Misconduct Rendering an Economic Operator's Integrity Questionable

Other than mandatory exclusion of a tenderer who is convicted of corruption, a contracting authority has the discretion to exclude an economic operator from a tender procedure if it can demonstrate by appropriate means that the economic operator is guilty of grave professional misconduct, which renders its integrity questionable,¹¹ including if the economic operator has violated its obligations before a final and binding decision on the presence of mandatory exclusion grounds has been rendered.¹²

It should be noted that the scope of "grave professional misconduct" is not confined to a breach of regulatory or professional standards and can be extended to all wrongful conduct which has an impact on the professional credibility of the operator at issue.¹³

For example, the Italian authorities decided to exclude an economic operator from a tender exercise for its failure to disclose its former director's criminal conviction of fraud and for failure to fully and effectively dissociate from that director. When brought upon the European Court of Justice ("ECJ") for a preliminary ruling, the ECJ held that, having regard to the nature of the offences of which the director was convicted, i.e. fraud, which was indicative of a lack of business ethics in his professional conduct, the failure of the economic operator to dissociate itself from that conduct might legitimately be covered by that ground of exclusion.¹⁴

Discretionary Exclusion - Sufficiently Plausible Indication of Collusion

A contracting authority also has a wide margin of appreciation to decide whether or not to exclude an economic operator from a tender procedure¹⁵ where a contracting authority has sufficiently plausible indications to conclude that an economic operator has entered into agreements with other economic operators aimed at distorting competition.¹⁶

This discretionary power by a contracting authority to exclude an economic operator applies where there are sufficiently plausible indications of collusion. This requires only 'indications' of participation in illegal agreements that distort competition in an award procedure and not formal evidence, such as a court judgment confirming such participation.¹⁷ There is no requirement for a finding of definitive evidence of wrongdoing or a conviction by a court of law.

For example, the contracting authority can take into account as a potential plausible indication the knowledge that a tenderer has already concluded a subcontracting contract with another tenderer in the same procedure or has pre-ordered the material needed to perform the specific contract in question well before the evaluation of the tenders is concluded. Other aspects for contracting authorities to assess include:

• The overall market behaviour of tenderers participating in the procedure (for instance, tenderers who never bid in the same award procedure or tenderers who bid only in certain regions or tenderers who appear to be taking turns in participating in award procedures).
• The text of the tenders (for instance, the same typos or phrases in different tenders or comments left by mistake in the text of the tender indicating collusion among tenderers).
• The prices offered in the award procedure (for instance, tenderers who offer a higher price than in previous similar procedures or offer excessively high or low prices).
• Administrative details (for instance, tenders submitted by the same business representative)¹⁸.

In comparison with the EU, PK 8 appears to arm our Ministry of Finance with a discretion, rather than a duty, to suspend and prohibit participation of tenderers found to have been convicted of bribery or found to have engaged in bid rigging. To curb wrongdoing, it may be circumspect to spell out mandatory suspension or exclusion from participation in the event of a finding of wrongdoing.

Further, unless a conviction of bribery, or finding of bid rigging is made, our authorities are not empowered with discretion under PK 8 to exclude participation of tenderers. To uphold higher standards of integrity, and to dissuade enterprises from even considering to toe any lines, we could consider taking a leaf out of the EU's books to incorporate discretionary exclusion measures in instances such as grounds of grave professional misconduct which may render an enterprise's integrity questionable, or if there are sufficiently plausible indications to conclude that an enterprise has entered into agreements with other enterprises aimed at distorting competition.

Concluding Remarks

A Government Procurement Act is expected to be introduced by the end of the year as the government seeks to tighten public procurement regulations to crack down on corruption.¹⁹

In the meantime, the adoption of PK 1.6 and PK 8 in Malaysia is a positive step to curb collusion, bid rigging and corruption in public procurement. If properly implemented, this can help create a level playing field for all potential bidders, encouraging competitive pricing and innovative solutions that ultimately benefit the rakyat (Malay for ordinary people).

To ramp up the effect of the government's integrity pact to a higher level, incorporating mandatory suspension or exclusion where there is a finding of wrongdoing, as well as imposition of discretionary exclusion measures may be a valuable tool to deter and disincentivise such behaviour, enhance the effectiveness and ensure the integrity of the public procurement process.

Footnotes

1. DAF/COMP/GF (2010)6 OECD's Roundtable on Collusion and Corruption in Public Procurement dated 15 October 2010

2. Ibid.

3. See Astro Awani article titled "Integrity challenges in the public procurement" by Akhbar Satar dated 9 September 2020, retrieved from https://www.astroawani.com/berita-malaysia/integrity-challenges-public-procurement-258645 on 23 August 2023

4. Enclosure A, PK 1.6 Ministry of Finance's circular on Integrity in Public Procurement (Effective from 1 June 2022)

5. Paragraph 2.5, Ibid.

6. Paragraph 3.3, PK 1.8 Ministry of Finance's circular on Disciplinary Action against Companies in Government Procurement

7. Paragraph 2, Ibid.

8. Paragraph 4, Ibid.

9. See The Straits Times article titled "Hundreds of companies under investigation for bid rigging in public procurement, minister says" by Arfa Yunus dated 23 June 2022, retrieved from https://www.nst.com.my/news/nation/2022/06/807499/hundreds-companies-under-investigation-bid-rigging-public-procurement on 23 August 2023

10. Directive 2014/24/EU of the European Parliament and of the Council of 26 February 2014 on public procurement

11. Article 57(4)(c) of Directive 2014/24/EU of the European Parliament and of the Council of 26 February 2014

12. Recital 101 of Directive 2014/24/EU of the European Parliament and of the Council of 26 February 2014

13. Case C-465/11 Forposta SA, ABC Direct Contact sp.Zo.o v Poczta Polska SA

14. Opinion of Advocate General Campos Sanchez-Bordona for Case C-178/16 Impresa di Costruzioni Ing. E. Mantovani SpA, Guerrato SpA v Provincia autonoma di Bolzano, Agenzia per i procedimenti e la vigilanza in materia di contratti pubblici di lavori servizi e furniture, Autorità nazionale anticorruzione

15. DAF/COMP/WD(2022)80: OECD's Note by the European Union – Director Disqualification and Bidder Exclusion

16. Article 57(4)(d) of Directive 2014/24/EU of the European Parliament and of the Council of 26 February 2014

17. (2021/C 91/01) European Commission's Notice on tools to fight collusion in public procurement and on guidance on how to apply the related exclusion ground

18. (2021/C 91/01) European Commission's Notice on tools to fight collusion in public procurement and on guidance on how to apply the related exclusion ground

19. The Star news article dated 13 June 2023, titled "Fiscal Responsibility Act, Procurement Act expected to be tabled by year-end, retrieved from https://www.thestar.com.my/news/nation/2023/06/13/fiscal-responsibility-act-procurement-act-expected-to-be-tabled-by-year-end on 31 August 2023

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.