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
- Number of contract awards to a specific firm
- Project bid tabulations
- Firms that submitted a bid later became a subcontractor on that project
- Rotation of firms that are the low bidder
- A consistent percentage differential between the firms’ bids
- A specific percentage of the available work in a geographic area goes to one firm or to several firms over a period of time
- A consistent percentage differential between the low bid and the engineer’s estimate
- Location of the low bidder’s firm versus location of the second and third low bidders’ firms
- Variations in unit bid prices submitted by a bidder on different projects in the same setting
- 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.
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