Collusion among bidders

Collusion among bidders can corrupt the procurement process and leave the project owner with poor value for money.

Risk type: Practice

Risk driver: External

DESCRIPTION

The project owner can encounter the risk of collusion among bidders, which means that bidders conspire to rig bids or fix prices. Because of collusion among bidders, bid prices might be inflated without the involvement or even awareness of project officers. The technical complexity inherent to the water sector can make it difficult for project officers to negotiate contracts or identify technical deficiencies in bids. In order to increase their returns, bidders can abuse this lack of capacity to inflate requirements for work and material. This is often the case when there is no competitive tender.

The most common methods of collusion among bidders include complementary bidding, loser’s fee, bid rotation, bid suppression, and market division:¹

• Complementary bidding: Cooperating bidders agree to submit higher-priced or deliberately defective bids to ensure the selection of the designated winner at inflated prices.
• Loser’s fee: Competing bidders secretly agree that they will each include in their bid price an agreed additional sum of money representing the total estimated tender costs of all the competing contractors. Whichever bidder is awarded the contract will then divide this sum of money among all the unsuccessful bidders, who will thereby recover their tender costs.
• Bid rotation: Participants in a bid rigging scheme often rotate winning bids by geographic area, by type of job, or by time to give each member a chance to share in the spoils.
• Bid suppression: For bid rigging schemes to succeed, colluding bidders must prevent outside companies from bidding. This can be accomplished by paying off an interloper or by more forceful measures, such as threats or violence.
• Market division: The cooperating bidders may divide markets or product lines and agree not to compete in each other’s territory, or to only do so through collusive measures, such as submitting complementary bids.

RED FLAGS

• Qualified companies fail to bid.
• There are physical similarities in bids or proposals submitted by different bidders indicating that all of the bids might have been prepared by the same party. Examples of similarities are an identical stationery layout, common addresses, the same personnel, the same calculations, the same handwriting, etc.
• There are unusual bid patterns, e.g. identical or similar bids, bids with round numbers, a high price for a one-line item in one bid and a low price for the same line item in another bid by the same bidder, etc.
• The proposed design in the bid seems overly sophisticated.
• Bid prices are persistently high or increasing compared to cost estimates, price lists, or previous prices for similar jobs.
• Conventional market prices and discounts (e.g. volume discounts) are not applied in the bids.
• There is rotation of winning bidders by job, type of work, or geographical area.
• Losing bids do not comply with bid specifications, or only one bid is complete and other bids are poorly prepared or defective.

KEY GUIDING DOCUMENTS

IACRC, 2015, Collusive bidding schemes, Guide to Combating Corruption & Fraud in Development Projects, International Anti-corruption Resource Center (IACRC), http://guide.iacrc.org/potential-scheme-collusive-bidding/, accessed 15.10.2015

Davis, J., 2004, Corruption in Public Service Delivery: Experience from South Asia’s Water and Sanitation Sector. World Dev. 32, 53–71

Visscher, H.-F., 2011, AWIS Facilitator’s Guide, Water Integrity Network (WIN), Berlin, Germany

GENERAL EXAMPLES

Contractor meetings²

Location: South Asia

[In W&S service provision] field staff often pointed to the procedures by which professional engineering staff award and implement construction contracts with private firms. Two processes operate to subvert fair and honest contracting in W&S services: contractor cartels and political influence in contractor selection. […] One contractor described the process as follows: ‘A group of [contractors] meet on the weekend in the office. We have a list of contracts being offered. We draw names out of a bag to see who will be the winner for each contract. That person decides what he will bid for the contract, and everyone else bids something higher than that.’

Three companies, same family³

Location: n.a.

Tender procedures may be well organised, but we found an example in which everything seemed legitimate because three companies were bidding for a project. In fact this was not the case because the three companies, which had different names, belonged to members of the same family and were not independent.

Collusion among bidders⁴

Location: South Asia

In South Asia, a donor-funded poverty reduction project included the construction of septic tanks in locations selected by communities. Following a competitive tender, the municipality noted that the bids received were all 3 times the standard unit rate. To get around what was perceived as collusion amongst the tenderers, and high prices, the chief municipal engineer proposed to the community that they take on the construction of the project – it would also provide work for community members. This was agreed and two community leaders, the most educated, were given the task of managing the finances. Initially, there were some concerns that the accounts were not open to the rest of the community, but when one leader started smoking imported cigarettes rather than the local ones, the community lost faith and in a public meeting involving donor representatives, demanded that the accounts be made public. The costs of materials and payment for labour were posted at the entry to the slum at the end of each week for the remainder of the work.

FULL REFERENCES

1. IACRC, 2015, Collusive bidding schemes, Guide to Combating Corruption & Fraud in Development Projects, International Anti-corruption Resource Center (IACRC), http://guide.iacrc.org/potential-scheme-collusive-bidding/, accessed 15.10.2015
2. Davis, J., 2004, Corruption in Public Service Delivery: Experience from South Asia’s Water and Sanitation Sector. World Dev. 32, 53–71
3. Visscher, H.-F., 2011, AWIS Facilitator’s Guide, Water Integrity Network (WIN), Berlin, Germany
4. Plummer, J., 2007, Making Anti-Corruption Approaches Work for the Poor: Issues for Consideration in the Development of Pro-poor Anti-corruption Strategies in Water Services and Irrigation, Swedish Water House Report No. 22