Supply Side
The Economist on Public Sector Bid-Rigging – Are There Any Answers?

It is not often that EU procurement hits the pages of the Economist magazine, one of the most influential journals in the world. Unfortunately the recent article here was not a great endorsement of public sector procurement, and the title – Rigging the bids – immediately gives the flavour of the content.

The article starts with coverage of “Spain’s biggest corruption case in decades. Last month 37 businessmen and former politicians, including members of the ruling Popular Party (PP), went on trial on charges of fixing the government procurement system to steer construction contracts to their buddies”.

It then explains that according to the TED (Tenders Electronic Daily) database, over the past ten years the number of tenders that received only one bid has risen from 17% to 30%. The median number of offers per tender fell from five to three. We were not aware of that trend, and it does seem very worrying. During that time, many governments have put effort into opening up advertising of contracts or encouraging smaller firms to bid. Yet despite those moves, competition seems to have reduced.

As the Economist points out, there may be innocent reasons for this, such as governments spending more in sectors that have a very concentrated supply markets such as big IT projects or pharma. But some of the potential drivers for this change are self-inflicted – as the article says “the European Commission has encouraged governments to have departments team up when buying similar goods. Italy is trying to slash the number of purchasing authorities from at least 8,000 to 35. But it takes a big company to fulfil a big contract”.

We’ve been warning about the effects of aggregation in this sense for some time. Whilst collaboration and aggregation can be positive, we need to be aware of the possible downsides too – and this potential for reduced competition in supply markets  is certainly one of them. In addition, recent changes to EU directives have generally been in the direction of allowing shorter timescales for responding to contract advertisements. That might appear to help contracting authorities, but an unforeseen consequence might be less competition.

But of course it may also be that bid-rigging is becoming more common. As the Economist says: “Antonio Capobianco, a competition expert at the OECD … thinks that with fewer legitimate opportunities for increasing revenues since the euro crisis, companies may be resorting to dodgy deals”

It may also be that authorities are manipulating tenders to award contracts to favoured, probably local firms – so called “soft corruption”. The growth of nationalist or even protectionist thinking in countries from the UK to Poland legitimises this attitude that we want to support “our” businesses. The Economist quotes what is an old story, but one we hadn’t heard before (and it is quite amusing): In one egregious case in 2007, Slovakia’s construction ministry issued a €120m tender to provide legal and advertising services, co-financed by EU funds. To ensure that a favoured company won, the ministry posted it only on a bulletin board in a corridor inside one of its own buildings”.

We cannot know exactly what a reduction in competition – or indeed outright corruption – costs the taxpayer, it seems likely to be a substantial figure. “One study by PwC, a consultancy, found that it increased costs by 2% to 15% depending on the sector. A study by Rand, another consultancy, calculated that the annual increase in contract costs due to corruption in the EU was $5 billion”, says the Economist.

But whilst the article is well worth reading, if it has a weakness, it is that it offers little in the way of solutions. Better data must help, as will rigour in enforcing proper use of procurement processes. But perhaps the Commission and others in this field need to place more emphasis on openness, transparency and competition. Perhaps we need to explain more actively that the “buying local” idea has negatives as well as positives!  (Politicians are rarely challenged when they make statements around this issue for instance).

As we said earlier, there have also been changes to the rules designed to give buyers more flexibility, and allow authorities to move more quickly. That’s fine, but if that becomes a “cover” for non-competitive supplier behaviour or even corruption, the overall effect will be negative. An understanding of the balance here is essential.

First Voice

  1. Les Mosco says:

    Bid rigging, are there any answers? Well, there are things that can help to prevent bid rigging, by trying to establish healthy competition. First one needs to apply intelligent thinking, to shape the requirement into one which is more amenable to competition. Here, aggregation can work against competition, because the contract becomes too big for many companies to supply. For example a national cleaning contract limits competition because small local cleaners cannot compete outside their natural geography. Instead bids can only come from the small number of large national firms…who will probably subcontract some of the work to the small firms you’ve prevented from bidding, adding a markup to their price! Better to consider a number of smaller regional contracts. So think whether the requirement helps or hinders competition, and adjust accordingly. Next, one needs to think about the possible bidders, and satisfy oneself that there will be a reasonable number of likely contenders. Will there be enough for a real competition? The answer to this is not ‘3’, which appears to be a nonsense number adopted by many organisations as meaning enough bids; why should 3 be correct? And if you’ve no idea who the possible bidders are and if there is or isn’t a reasonable field, then you have not yet done enough research to issue an ITT!