Open tenders – so no corruption, collusion?

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It does not necessarily follow that if you have open tenders, everything is transparent and above board.  All kinds of funny things can happen including collusion among bidders, bid-rigging led by fixers, and the formation of cartels to submit bids that are not really serious. Project officials may also receive ‘commissions’ or whatever you may call it.

Ten indicators of collusive bidding

  1. Number of contract awards to a specific firm
  2. Project bid tabulations
  3. Firms that submitted a bid later became a subcontractor on that project
  4. Rotation of firms that are the low bidder
  5. A consistent percentage differential between the firms’ bids
  6. A specific percentage of the available work in a geographic area goes to one firm or to several firms over a period of time
  7. A consistent percentage differential between the low bid and the engineer’s estimate
  8. Location of the low bidder’s firm versus location of the second and third low bidders’ firms
  9. Variations in unit bid prices submitted by a bidder on different projects in the same setting
  10. Number of firms that requested bid packages versus the number actually submitting a bid.

Source: US government (2004)

Note especially point no. 3.

And this is my list of the C’s that can happen during an open tender process, if we are not vigilant:

  • Collusion (among bidders and officials)
  • Cronyism (in the selection process)
  • Corruption (of officials)
  • Commissions (to fixers and ‘introducers’)
  • Contributions (to political coffers)
  • Cartel rigging of bids
  • Complimentary stuff (‘hospitality’, gifts)

In a World Bank report ‘Curbing Fraud, Collusion and Corruption in the Road Sector’ in June 2011, the Bank’s Integrity Vice Presidency confirmed allegations in 25 projects resulting in 29 cases of misconduct under Bank rules. “The most common forms of wrongdoing in these 29 cases are collusion among firms bidding on a project and fraud and corruption in the execution of the resulting contract.”

One of the things we should be aware of is the World Bank’s definition of misconduct most often found in the projects it has funded.

In the 29 cases of misconduct detected, the three most common forms of misconduct were:

  • Collusion—bidders agreed among themselves who would win the bid…. (Aha!)
  • False documentation—typically, the submission of false documents to qualify to bid.
  • Fraud in the implementation of a contract—usually overbilling or undersupplying materials during con-
    tract execution, often with the connivance of project overseers.

 

According to the OECD (1990):

Collusion and Cartels

Collusion refers to any combination or agreement—no matter how informal—among sellers, to raise or fix prices or rig bids or to reduce output in order to increase profits.

Although the term cartel is often used when the collusive arrangement is a formal agreement, the economic effects of collusion and cartels are the same.

This was what happened in the Philippines when China Communications Construction Company was debarred by the World Bank. According to one press report:

The sanction was originally handed down to the China Road and Bridge Corporation on 12 January 2009, and concerns alleged collusion in the bidding for a World Bank-financed road project in the Philippines in 2002. Similar sanctions also applied to six other companies and an individual.

The World Bank’s allegations were strongly denied by the CCCC, which was formed in 2006 out of a merger between the CRBC and China Harbour Engineering Co.

The World Bank report goes on to list numerous instances of how bidders had colluded in or rigged tender processes.

The World Bank’s mandate requires that it give “due attention to considerations of economy and efficiency” when funding a project; its Procurement Guidelines therefore require that, in all but a few narrowly circumscribed instances, the contracts it finances be let competitively (World Bank 2010a, 7). In roads projects, competition most commonly takes the form of a one-stage sealed-bid auction. The agency responsible for theproject prepares a description of the work required andsolicits bids from eligible firms. Bids are kept confidential until a specified day, when they are opened in public and the bidder offering the lowest price is declared the winner. When bidders have equal access to information about the proposed work and compete with one another to win the tender, this method of awarding contracts produces economy and efficiency (Milgrom 2004; McAfee and McMillan 1987)..

Evidence gathered by INT, however, suggests that roadcontract awards are not always the result of competition. For example, Bank-funded roads contracts require a bidder to submit a bill of quantities, a document showing the materials, equipment, and labor it expects to use to build the road along with their costs. In a competitive market, a bidder calculates unit prices for each item on the basis of its cost structure,  estimates the amounts required, and arrives at its bid price. But in a series of contracts in an Asian country INT found anomalies and inconsistencies in unit costs and totals for line items that showed that bidders had worked backwards from a pre-determined price.

In an investigation in Bangladesh, evidence showed that companies paid project officials up to 15 percent of the contract value in exchange for contract awards. A Kenyan informant said that “collusion was rife” in the nation’s roads sector, an allegation later confirmed by the Kenyan Roads Authority and the Kenyan Anticorruption Commission (Government of Kenya 2007, 2004). After interviewing several firms and government officials in Cambodia, INT investigators concluded that there were strong indications that “a well-established cartel,” aided and abetted by government officials, controlled the award of roads contracts. In the Philippines, “Numerous witnesses independently informed INT investigators that a well-organized cartel, managed by contractors with support from government officials, improperly influenced [Department of Public Works and Highways] contract awards and set inflated prices on projects funded by the Bank and others.” (World Bank n.d., 3) One Indonesian respondent explained that “the Indonesian collusive system had been operating for 32 years, and many viewed the ‘free market’ system as counter to the cultural norm of consensus and cooperation,” a statement consistent with reports by Indonesia’s competition law authority (Soemardi 2010) and scholarly research (Van Klinken and Aspinal (2011).

Besides these examples, some INT cases labeled “false documentation” in the tables may be the result of collusion as well. In a project in Eastern Europe, a World Bank procurement specialist alerted INT to a pattern in the bids on a street rehabilitation contract that suggested bid rigging. The cost figures in the bids submitted by the only two firms competing were virtually identical—down to the same typos in both. The only difference in the two bids was the total price: one was 1 percent below the engineering cost estimate, and the other was 1 percent higher. While INT could not substantiate collusion in this case, it did find that the high bidder had provided a false bid security. When firms have agreed in advance which one will “win” the contract, the designated losers frequently submit higher “cover bids” to camouflage the agreement (Khumalo, Nqojela, and Njsane 2009). Further, because banks charge for issuing a bid security, cover bidders often falsify the security to save money. Collusion was also likely in a case in Latin America in which three firms that submitted low bids on a contract were disqualified for reasons that INT suspected were aimed at keeping new entrants out, a common strategy for preserving a bid-rigging scheme (Lambert-Mogiliansky forthcoming).

How common is collusion in roads projects? Neither the data in INT files nor information from any other source can provide a definitive answer. But the INT findings, considered with the results of other case studies of the roads sector in developing countries, the experience in developed countries, and cartel theory, suggest that collusion in roads projects in developed and developing countries is significant….

B. Cartel Theory

It is not surprising that cartels are common in the road construction industry in developing countries. Road construction and repair markets tend to be dominated by the same few firms; the “product,” a road, is standardized; prices are relatively insensitive to demand; entry is often difficult, and market conditions are predictable. In addition, would-be competitors often exchange information about both past and future opportunities and develop ties through subcontracting, joint ventures, and membership in trade associations.The presence of any one of these factors increases the likelihood of collusion. When all are present, the probability of collusive behavior is very high (Grout and Sonderegger 2005).
The awarding of contracts through public tenders aggravates the tendency toward cartelization in the sector. To ensure that contracts are fairly awarded and corruption risks minimized, both borrowing country governments and Bank procurement rules require that tenders be conducted transparently. Yet, as explained below, disclosure of some kinds of information facilitates collusion….
D. Effect of Collusion on Tender Prices
The effect of a cartel is to raise prices above what they would be in a competitive market. An analysis of bids from the American state of Florida showed that collusion on highway contracts increased prices by 8 percent (Gupta 2001) and a similar study found prices in South Korean highway construction markets to be 15 percent higher than they would have been without collusion (Lee and Hahn 2002). The Dutch parliament estimated that cartelization added as much as 20 percent to the price the government of the Netherlands paid on construction contracts (Van den Heuvel 2006), and collusion on construction contracts in Japan is thought to have raised prices anywhere from 30–50 percent (Woodall 1996: 48). Surveying economic studies and judicial decisions containing 1,040 estimates of cartel overcharges, Connor (2009) found the median cartel overcharge was 25 percent.
These estimates are almost all drawn from cartels operating in developed nations. What evidence there is from developing countries suggests the impact is even greater there. Using information from donor-funded roads projects in 29 countries, Estache and Iimi (2008) estimated that collusion can increase the per-kilometer cost for building a road by as much as 40 percent—from $0.5 million to $0.7 million. INT compared the winning bids on donor-financed roads projects in the Philippines against engineering costs estimates and found a 30 percent variance; earlier estimates range from 20–60 percent (Batalla 2000). Prices in Tanzania in the 1990s were found to be 15–60 percent above competitive prices (Government of Tanzania 1996); a 2003 investigation in Romania revealed that contractors conspired to markup the price of concrete used in road construction by 30 percent (Oxford Business Group 2004); and a Turkish government study showed that, thanks in part to cartelization, road construction costs in Turkey were 2.5 times higher than in the United States (Gönenç, Leibfritz, and Yilmaz 2005)….
For a cartel to “succeed,” its members must:
(a) agree on who will “win” the tender and at what price,
(b) curb “cheating” or undercutting the agreed price by individual members, and
(c) prevent nonmembers from disrupting the agreement by submitting a lower bid (Levenstein and Suslow 2006).
Cartels rarely find permanent fixes to these problems. Some members cheat to boost short-term profits or new entrants succeed in submitting a winning bid. Even when the cartel is able to dictate who can bid and how much, there are often periods of instability during which the price to some customers is at or near the market price. But when government officials participate in the cartel, its durability is virtually assured. They can dictate which member will “win” the bid and at what price, rejecting bids that undercut the agreed price and refusing to permit non-cartel members to bid. Gambetta and Reuter (1995) reported that organized crime families perform the same functions for cartels in Sicily and New York: where family members police compliance with the cartel agreement through intimidation and violence and take a share of the cartel’s profits in return. The effect is the same as when government officials enforce a cartel agreement: the long-term stability of the cartel.
So you see, a lot of funny things can happen – via a wink and a nod, a hand-shake and behind-the-scenes talks in hotel meeting rooms, away from the public eye – in ‘open tenders’ and ‘competitive bidding’, especially when it comes to major infrastructure projects. Unfortunately, in many cases, a lot also depends on who you know and what connections you have.
So don’t be taken for a ride and accept everthing at face value.
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owc

If Malaysia signs TPPA, we will be exposed to the negative consequences (with or without open tender) as outlined in this video:
https://www.youtube.com/watch?v=an-q2pPHTm0

Watch it and comment if the video is right.

glissantia

Except for no. 3, the other indicators are relatively minor. Bigger factors incude these: (a) needless or useless projects, e.g. repeated reconstruction of easy, urban infrastructure (b) blanket secrecy in plans, options, drawbacks, specifications, selection criteria, contracts, EIAs (c) leaking business opportunities and bid details, extending period for bidding (d) “negotiated contracts”, cheap loans, loan guarantees, tax holidays, subsidies, liberal variation-order clauses including delays, guaranteed price increases and profit (e) failure to monitor performance before payment, even in publicised failures (f) failure to maintain black-list, prosecute for losses; instead, cronies are given time to get away with wealth or privatised… Read more »

tunglang

Open tenders no corruption, no collusion. CAT’s the way.
Ever used clorox? Everything must ‘look’ clean on the outside. I repeat, clean on the outside.
BUT donations are very welcomed, do you see what I mean?
State gomen & political party hard up for Money! So open tenders are lu tau gua mau apa.
BUT do it openly. Like that massive discount for Merc S300Lansi. It’s public news for a politician cum accountant (CFO for state gomen).
Psst! Psst! Psst! Wanna swap? (I don’t mean your wife).

Don Anamalai

Will the AG financial report uncover any hanky panky?

tunglang

Get deep into Botak Hill saga & you may find a CAT in the bag.
But of course Mr Chow is on stand by mode @ the press of Niao Kong’s paw of Boh Hoot.

Hooray

Kopi o Kau kau save cost buy Penang brand Sailor Tabik one work out 31sen per bag, can stay alert to smell aroma of all the Cs Anil mentioned!

Hooray

Anti LGE demonstration at noon outside Komtar showing unhappiness over LGE led reclamation work. Not sure of Anil’s regulars were there to bring us more news?

tunglang

Kopi’O’ Hailam Salute Brand (Cap Tabik or in Hokkien Hai Kun phiau) in iconic red + green packaging has been my daily favourite beverage for the past 3 years. 2 sachets daily keeps my brain sharp, exalts my emotion to happy & keep some after-50 sickness at bay. All at a cost of Rm19.90 per month (2 packs x Rm9.95 per pack) which justifies my shrunken budget of a downshifted lifestyle – a simplicity living without the falsehood of living on credit or covetous bin-chui. Only drink Kopi-O kau kau @ old world charm kopitiam when can afford to but… Read more »

owc

1MDB – Wall Street Journal Infographic

tunglang

Collusion & Cartel in the property industry? I smell a rat for a CAT. One way is to encourage rising land prices which is one fast-track way to justify increasing property prices across the board. And a great way to excuse for not building affordable housing, not to mention any low-cost housing without a swap deal with you know who. Am I right, Niao Kong? I once met a developer in Butterworth for a brochure proposal who revealed the selling price for high rise units starting from about Rm200K in 2010. A year later, the selling price for that same… Read more »

rajraman666

Indonesian workers salary increase? Most Developer use illegals and most of the time outsource like UMNO.
If Deity say that he in the same league already. 60% of illegals workers employed by Developer lah Tunglang. Medan more nearer to Penang – illegal tourist and cheap labour for Deity Island.

rajraman. Now i am more famous than you Tunglang since my negative votes more than you.

tunglang

If you ever deal with a developer as a supplier or a house buyer, one characteristic behaviour of this profession sticks out – “Good Morning” mini china towel Squeezer.
Every drop of potential earning (for a supplier) or hard-earned money for a home is squeezed to the last drop thro’ any means devised in the tricky minds of (most) developers.
Don’t believe me? Try this one @ Batu Maung.

rajraman666

Developers haha – you had to finance them first all the time. When ask payment like we owe them a favor.I have many dealing with them in the past and at present time. One Developer pay you in Peugeot car as contra payment – they company dead as the owner. Another Developer pay in Cherokee Jeep – Now he claim he is philanthropist and a lot of people praise him. His brother now big time cronies of Deity i think.(Forgotten which Developer gave peugeot and Cherokee). rajraman. No longer finance a risky deals. Bring to court takes years by then… Read more »

tunglang

rajraman666.
There are 2 types of workers:
1) Work to fulfil others’ dreams
2) Work for self to fulfil own dreams, regardless
Many fall in the 1st group. And some fall never to walk up again after retrenchment.
Our education system should teach financial wisdom, entrepreneurship & risk taking (Dare To Fail).
Then only our work force will not be at the mercy of unscrupulous employers or businessmen.

I agree with what you said about some developers.
They love the ‘contra game’ of ‘you lose, I win’.
But then Karma has a way to deal with these unscrupulous.

rajraman666

tunglang, Why you always call me rajraman666 although i sign off as rajraman? No fun lah tuanglang, Benny don’t want to play game.He hits and run. I tell you what, we play a game. The next Post i praise the Deity you whack me, then you praise the Deity i whack you. We play good cop bad cop. How? Make the Deity supporter blurr. rajraman. Already dead BORED and giving up on Benny since the DEiTY posses him. I can’t cure him. I had to call Ghost Buster but then i think back i don’t even believed in GOD, how… Read more »

benny

Are you suggesting that this is happening in Penang with reference to the controversial land reclamation deal?

tunglang

Anil, you drink Kopi-O kau kau?
Wherever there are political traders, open tenders are wide opened doors for such collusions but cleverly packaged as legalised thro’ means in the name of accountability. Swap deals are highly suspected wheeling+dealing.
One such reference though not a tender is the Madam Pykett Rape & Scott Free Open Act of Repugnance. Donation to Heritage Fund (to seek ‘forgiveness’) is as bad as a donation to an infamous politician.

rajraman666

Why Benny?
Do you feel the heat on behalf of your master?
It’ s common every part of the world.Closed tender someone still going to open it and decide.
Open tender selected people can see.

rajraman. Cable strong RM1 company still get closed or open tender.

This posting for testing anil- do setting reply by email.
Tq.If works great i going to play a game again.

rajraman666

Benny,
Good Morning to you.
From today onwards i declaring a friendly war with you.
rajraman.Please take note my engeris not good and i won’t vote you down since if i vote you down it’s means i shooting you down.You can always vote me down.
Anil- today morning i received a email saying i am subscribe to your blog and further posting will be updated.
Deity follower can join to whack me.Don’t simply vote down and hide.FaceOff don’t face down.Stop telling me what 2.5 billions thief doing.Tell me what your deity doing.
Testing the weapon of follows up comment.

benny

Keep Calm And Keep Kaam Se Kaam!

rajraman666

Keep calm i know but Keep Kaam Se Kaam i don”t know Benny.
rajraman.I understand reading english but i don’t read such a word in my life Benny.Is it a German or Hindi words? What’s the meaning Benny? I only read this kind words from you.
Will much appriciate if you can explain.
Game plan started?
Tq.