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Bid-rigging is a practice in which one or more participants in a bidding process coordinate their actions, and conspire to: reduce competition, increase prices, reduce the quality of the good or service offered, or divide up contracts (OECD, 2012).
Bid-rigging can occur in both public and private procurement processes. However, since public entities tend to use such competitive procedures more frequently to select contractors, it is a particularly concerning anticompetitive behavior in this sector.
Most jurisdictions consider bid-rigging in public procurement as one of the most serious forms of collusion, since public tenders often represent a high percentage of a country’s Gross Domestic Product (OECD, 2012).
Agreements among participants in tenders can take various forms. In their most basic structure, the members decide among themselves which participant will be awarded the contract and the price to be offered. However, there are other variations of bid-rigging, which can be used together.
First, participants may manipulate a tender by agreeing to submit common or very similar bids to eliminate price competition. This type of agreement is usually accompanied by the exchange of information among bidders.
Second, companies may agree in advance that one of the participants will submit the lowest or most favorable bid so that it wins the contract. This type of bid-rigging, known as bid rotation, usually occurs in tenders that are repeated over time, allowing participants to take turns in submitting the most attractive offer, so that each company wins a certain number or value of contracts (Irarrázabal & Araya, 2011).
Third, one or more participants may agree to submit intentionally rejected bids (cover bids), so that the officials responsible for the process select another offer that was previously agreed upon by the cartel members, or else choose not to participate in a given process at all (Irarrázabal & Araya, 2011).
Lastly, the members of the cartel may agree in advance to divide up the benefits of the awarded contract among themselves through resale or subcontracting mechanisms, even though the awardee could provide the service or product on its own (Anderson, Jones & Kovacic, 2019).
According to Anderson, Jones, and Kovacic (2019), there are seven main conditions that facilitate this type of anticompetitive agreement.
One of the conditions that enables companies to collude in public tenders is constant and predictable demand, as it allows bidders to divide contracts among themselves and ensures that the benefits of manipulating the tenders outweigh the gains they would obtain if acting independently. In contrast, when tenders are less frequent, it becomes more difficult to sustain such agreements.
This type of conduct is more likely to occur in bidding processes with few participants and significant entry barriers, which discourage other actors from participating (FNE, 2011).
When there are fewer participants in the tender process, it becomes easier for bidders to reach agreements, communicate without detection, and identify defectors (Anderson, Jones & Kovacic, 2019).
When the goods or services offered by participants in a bidding process are uniform or very difficult to differentiate, it becomes easier to form an anticompetitive agreement. This is especially common in tenders, as the buyer typically standardizes the product or service specifications (Anderson, Jones & Kovacic, 2019).
Officials or authorities responsible for public procurement are often in the best position to detect bid-rigging, since they usually have the most knowledge about the specific industry from which goods or services are being acquired and can observe patterns in procurement processes that suggest such anticompetitive conduct (OECD, 2005).
For this reason, one of the OECD’s recommended measures to combat collusion in public procurement is to encourage officials to learn the signs and patterns typically associated with bid-rigging, so that they can detect when bidders may be coordinating their proposals to manipulate the outcome (OECD, 2012).
However, there are usually not enough incentives for procurement officials to identify and report suspicious behavior. Their main goal is often to acquire the necessary goods or services quickly and efficiently—a goal that may be delayed if they detect potential bid-rigging conduct (Heimler, 2012).
Some incentives that can be introduced to avoid this problem include offering an attractive and competitive merit-based career path (OECD, 2015) or establishing monetary rewards for whistleblowers (Heimler, 2012).
Unlike the private sector, public procurement is subject to transparency rules designed to prevent favoritism and corruption. However, in some cases, these rules can actually facilitate collusive agreements or help make them more effective (Irarrázabal & Araya, 2011).
For example, transparency rules can make it easier for participants to access information about their rivals’ bids or allow members of a bid-rigging scheme to monitor other bidders to detect potential defectors (Anderson, Jones & Kovacic, 2019).
Tender specifications in public procurement processes can create new markets, replace or eliminate existing markets, and affect competition depending on the participation requirements they set and the specific context (Ruling No. 118/2012, TDLC).
Thus, the design of the tender terms could encourage collusive agreements when unjustified conditions are included—conditions that may allow one bidder to abuse a dominant position after the tender or, more generally, unjustifiably restrict competition (Ruling No. 61/2020, TDLC). This might include, for example, reserving tenders for local suppliers (Anderson, Jones & Kovacic, 2019).
In the United States, the Federal Trade Commission (FTC) and the Department of Justice (DOJ) recognize bid-rigging as an agreement between competitors that is per se illegal (FTC & DOJ, 2000). This means that it is deemed unlawful simply by proving its existence, with no need to demonstrate anticompetitive effects or allow for efficiency defenses or pro-competitive justifications.
Since bidding processes may involve legitimate partnerships between companies—even between competitors—for the purpose of offering a particular service, it is important not to confuse bid-rigging with lawful joint bidding arrangements (such as consortia, joint bidding, or joint tendering). On this matter, the U.S. guidelines clarify that if participants collaborate in a way that enhances the efficiency of an economic activity, and if those pro-competitive benefits can only be achieved through such cooperation, then the agreement may be considered lawful (FTC & DOJ, 2000).
In Europe, bid-rigging is prohibited as a restriction “by object” under Article 101 of the Treaty on the Functioning of the European Union (TFEU). Furthermore, because these types of agreements often occur at the domestic level, their enforcement is also entrusted to each country’s competition laws and authorities (Heimler, 2012).
The European system has seen some emblematic cases of bid-rigging or collusion in public procurement. For example: In the Elevators and Escalators case (2007), the European Commission fined elevator and escalator companies for bid-rigging in the provision of these goods in Germany, Belgium, and Luxembourg. In Car Glass (2008), the Commission sanctioned car glass suppliers for maintaining their market shares by, among other mechanisms, coordinating when to bid in manufacturer tenders or deliberately submitting higher prices.
As for joint bidding under European law, EU public procurement guidelines explicitly recognize subcontracting and consortia as valid mechanisms for bidders.
According to Cyril Ritter of the European Commission’s DG COMP, joint tendering is a legitimate form of cooperation between firms and is considered pro-competitive under EU competition law when it does not reduce the number of participants who could have realistically taken part in the tender (Ritter, 2017). Thus, based on competition law, relevant case law from national authorities, and official guidance, the key question is whether the firms are actual or potential competitors in the tendering process.
Article 101 TFEU protects not only actual competition but also potential competition—that is the competition created by companies with a real and concrete possibility of entering the market. The Horizontal Merger Guidelines of the European Commission state that consortia are agreements that enable the participating firms to undertake projects that they could not carry out individually. Therefore, the parties would not be potential competitors, and thus cannot be considered to be restricting competition.
The important point, then, is that joint bidding must not reduce the number of independent bids that could have been realistically submitted. The ability to bid in a tender means having the capacity to meet the required specifications, including sufficient spare capacity, equipment, personnel, regulatory licenses, quality certifications, etc.
European case law has gradually developed the criteria to assess joint bidding. Among other decisions, the Commission determined in the Konsortium ECR 900 case that the consortium members were not competitors, since the project in question could not have been undertaken individually.
Following the amendment to DL 211 in 2016, agreements between competitors that seek to affect the outcome of bidding processes became classified among the most serious offenses in the Chilean competition system, and a criminal sanction was added as well.
Article 3(a) of DL 211 establishes that agreements or practices involving competitors that affect the outcome of bidding processes shall be considered acts, contracts, or agreements that prevent, restrict, or hinder free competition—or that tend to produce such effects. With this amendment, bid-rigging practices are now part of the category of “hard-core cartels” that are absolutely prohibited; in other words, they are considered inherently anticompetitive conduct under current Chilean law (Grunberg, 2020).
From the criminal perspective, anyone who enters into, orders, executes, or organizes agreements intended to affect the outcome of tenders carried out by public companies, private companies providing public services, or public entities, may face a prison sentence of up to 10 years.
Among the bid-rigging cases recently sanctioned by Chilean competition authorities is The Ampoules Case (2018), in which the TDLC fined Fresenius Kabi Chile and its subsidiary Sanderson for affecting the results of public tenders held by the Central Supply Office of the National Health Services System (CENABAST) for the procurement of injectable medicines. Additionally, there is the The Saline Solutions Case (2020), in which the TDLC sanctioned two pharmaceutical laboratories that had colluded in two tenders for the acquisition of saline solution—even though they failed to achieve their goal. Both cases were confirmed by the Supreme Court.
Chile’s National Economic Prosecutor’s Office (FNE) has issued guidelines to help prevent and detect the main characteristics of bid-rigging in public procurement processes in its Public Procurement and Competition Guide (2011).
Albano, G., Spagnolo, G., Zanza, M. (2009). Regulating joint bidding in public procurement. Journal of Competition Law & Economics, 5(2), 335-360.
Anderson, R., Jones, A., Kovacic, W. (2019). Preventing corruption, supplier collusion, and the corrosión of civic trust: a procompetitive program to improve the effectiveness and legitimacy of public procurement. George Mason Law Review, 26(4), 1233-1298.
Ritter, Cyril, Joint Tendering Under EU Competition Law (2017). Disponible en: https://ssrn.com/abstract=2909572 o http://dx.doi.org/10.2139/ssrn.2909572
FNE, Guía de Compras Públicas y Libre Competencia (2011).
Grunberg, J. (2020). Regla per se para carteles duros y acuerdos de colaboración entre competidores: un problema regulatorio aparente. Investigaciones CeCo.
Heimler, A. (2012). Cartels in Public Procurement. Journal of Competition Law & Economics, 8(4), 849-862.
Irarrábazal, F., Araya, F. (2011). Notas sobre la colusión entre oferentes en licitaciones, con énfasis en la experiencia internacional. La libre competencia en el Chile del Bicentenario, 163-219.
Ritter, C. (2017). Joint Tendering Under EU Competition Law.
