Getting rid of bid rigging in public procurement

By: |
Published: September 21, 2015 12:15:22 AM

The jurisprudence of CCI with respect of cartel and bid rigging is still evolving

Some recent cases show a possible maturing of thinking on mere identical prices being considered sufficient to prove the allegationSome recent cases show a possible maturing of thinking on mere identical prices being considered sufficient to prove the allegation.

Public procurement in India constitutes about 30% of GDP, with total annual expenditure of around Rs 15-20 lakh crore, and that for the Union government alone in the range of Rs 2.5-3 lakh crore. This government activity is most vulnerable to corruption, not only between the suppliers and government staff but also within the suppliers themselves. The latter emerges in the form of cartels, i.e. bid rigging and collusive bidding—a form of cartelisation.

Whether an industry can become cartelised or not depends upon—apart from common factors such as market concentration or limited number of producers, high and inelastic demand, absence of substitute products—how great the incentives are for the firms in the industry to form a cartel and how sustainable the cartel is likely to be. The incentives to create a cartel depend on the difference between the profitability of the firms in the presence of a cartel and in the absence of a cartel. A sustainability of a cartel, in turn, depends on two factors. One, whether the incentives of the firms to cheat on the cartel agreement outweigh the likelihood of cheating being detected and punished by other cartel members. Two, the reputation of a strong enforcement authority ensuring fast detection of cartel and inevitability of meeting with very harsh punishment prescribed in the law and whether there are precedents of success in such investigations with the help of expert antitrust attorneys/legal advice.

At the same time, supply-side responses by non-cartel members can undermine the cartel, especially where the entry in a market is easy or it is easy for non-cartel members of the industry to expand their output in response to cartel members raising their prices, making the cartel no longer sustainable. This way, supply-side responses by non-cartel members can neutralise a cartel which can also be described as “the response of the market forces.”

In the last six years of enforcement, the Competition Commission of India (CCI) has built a reputation of a proactive regulator by taking up suo motu investigations, based on references from government departments. It has prosecuted cartel allegations in 33 cases of anticompetitive agreements, including 12 cases of bid rigging cartels from PSUs (two cases transferred from erstwhile MRTPC). The cartel cases related to a wide spectrum of the economy, covering diverse sectors such as pharma, energy (LPG domestic cylinders), media (film/cable distribution and exhibition), travel and tourism (travel agents), infrastructure (cement), food (food storage in FCI godowns), health, transport (shipping, civil aviation, trucks) and recently insurance. This list also includes an increasing number of cases of bid rigging in the defence sector, related to procurement by military units, such as bid rigging in DGS&D rates contracts for supply of jungle boots to armed forces and recently bid rigging in supply of CN containers (containers with disc required for 81mm bombs to three ordnance factories). In a welcome trend, CCI penalised four PSU insurance companies with R671 crore for bid rigging tenders for providing insurance cover for social welfare schemes of Kerala. Appeals have been filed or will be filed by parties in almost all these cases. In a fairly transparent legal structure, such challenges are signs of developing jurisprudence.

A perusal of CCI orders in bid rigging cases over the last six years shows a hardening stance, and the quotation of identical rates by bidders, despite different locations and different cost of production, has been considered sufficient for conviction, whether there exists any other corroboration or “plus factor” in the form of pre-bid meetings, active industry association, etc, or not. Recently, a contrast was noticeable in two orders of CCI, both involving allegations of bid rigging in supplies of products to the production units of Indian Railways by similar parties, which seems to indicate a rethinking by the regulator on its earlier stand.

For instance, the penalty imposed by CCI in February 2014 on three manufacturers of “feed-valves” (spare parts for diesel locomotives) quoting identical prices—matching up to two decimals—in response to one regular tender issued by Indian Railways was based on the following conclusion: That the quotation of identical prices by manufacturers despite having been located at different geographical locations and having different cost of production is sufficient to establish cartelisation, without any direct evidence of collusion. As said, this case showed a hardened stance towards bid rigging cartels by CCI.

In complete turnaround, in another case decided by CCI recently in September 2015, two (of the three in the above case) manufacturers of disk brake system—supplied to Rail Coach Factory, Kapurthala—who quoted identical prices (matching up to two decimals) in response to three emergency purchase tenders issued by Indian Railways were exonerated from the allegation of bid rigging in spite of the director general finding evidence of bid rigging by the two parties after a detailed investigation. Noticeably, the two manufacturers are the only two approved suppliers of disc brakes and a genuine competition between them would have brought prices down for the product. Clearly, CCI ignored its own yardstick of the evidence of similarity of prices despite different geographical locations and the strong degree of probability which such exact similarity of prices in three successive tenders throws open. As regards the other factor considered by CCI in previous cases, whether their costs of production were similar or not, CCI has accepted the defiance of the parties against non-disclosure of cost breakup in the post-tender scrutiny to the Railways. Due to a legal lacunae, no appeal can be filed against this order by the Railways.

Importantly, while closing the allegations of cartelisation, CCI noted that the procurement policies of the Railways have also contributed to the lack of competition between the suppliers in the current case (being only two suppliers) and has advised the ministry of railways to modify the said policies to incentivise suppliers. It has advised for a reassessment of the role of Research Design and Standards Organisation (RDSO) so as to sub serve the objectives of competition.

Similarly, in another case decided in July 2015, CCI exonerated all the five firms from allegations of bid rigging. The reference was filed by the North Western Railway against five firms approved by RDSO for supplying “fire retardant vinyl upholstery fabric leather confirming to RDSO specifications” to the Railways. The allegation was that the firms had rigged the bids as a strategy in terms of a cartel/understanding among themselves so that only the largest of them secured all the orders most of the time being the lowest bidder. It was alleged that the rates quoted by the said firm were higher than those quoted by it in other railway zones; these were not competitive in nature and were exorbitant.

However, the director general, after conducting a detailed investigation, noted that the prices quoted by the bidders were actually lower than the indicated price of upholstery determined by the Railway Board, thus dismissing the allegation of excessive prices being quoted by the bidders. Agreeing with the findings CCI found that the largest firm against whom the primary allegations were made was justified in quoting higher prices on account of devaluation of the rupee and hike in petroleum prices, which led to increase in manufacturing cost of upholstery. CCI took into account that the parties had established they were independent entities and even the IP addresses of computers from which bids were submitted were found to be distinct. No evidence of any collusion/cartel was found, which would have resulted in the violation of the Act. Thus, an objective justification provided by the main accused party was accepted by CCI, showing a change in trend.

The jurisprudence of CCI with respect of cartel and bid rigging is evolving. The above two decisions show a possible maturing of thinking on mere identical prices being considered sufficient to prove the allegation. It is hoped CCI will be consistent in its approach.

The author heads competition law practice at Vaish Associates Advocates, a corporate, tax & business advisory law firm. Views are personal

Get live Stock Prices from BSE and NSE and latest NAV, portfolio of Mutual Funds, calculate your tax by Income Tax Calculator, know market’s Top Gainers, Top Losers & Best Equity Funds. Like us on Facebook and follow us on Twitter.