Corrupt bidding process
Competitors might collude with project owners or each other in the bidding process, resulting in the dismissal of an SME’s bid.
Risk type: Practice
Risk driver: External
DESCRIPTION
The bidding process can be corrupted by collusion between a competing bidder and the project officer. The competing bidder bribes or colludes with the project officer in order to obtain the main contract award. The collusion can also be a result of clientelism – the preferential treatment of partners. The project officer then manipulates the tender process in order to contract the favoured bidder. The project officer can tailor bid specifications, claim to do ‘emergency procurement’ to avoid open bidding, leak confidential bid information, manipulate other bids, or start unnecessarily large projects in order to award its favoured bidder.
Collusion in subcontract procurement is a specific form of collusion among competing bidders. Competing bidders can agree—before submitting bids for the main contract—that the company with the winning bid will engage the other company as a subcontractor in exchange for bribes or out of clientelism. It can also be the case that the project officer colludes with a subcontractor to recommend the latter to the competing bidder.
RED FLAGS
Collusion between competing bidders and the project officer:
- Specifications are significantly narrower or broader than in previous similar tenders
- There is close similarity between the specifications and the winning bidder’s products or services
- The SME’s bids are disqualified without good reason
- There are illicit bidding procedures: e.g., acceptance of late bids, non-public bid openings, breaks during the bid opening (to provide the opportunity to share the content of certain bids and to amend others), etc.
- A competing bidder is awarded although it is not more qualified than the SME
Collusion in subcontract procurement:
- Firms that have participated in the tender for the main contract are subcontracted by the winning bidder
- Qualified competitors fail to bid and become subcontractors to the winning bidder, or one competitor withdraws from the tender and becomes a subcontractor to the winning bidder
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
Stansbury, C. and Stansbury, N., 2008, Anti-corruption Training Manual, Global Infrastructure Anti-Corruption Centre (GIACC) and Transparency International (TI)
TARGETED EXAMPLES
Collusion between bidders and project owner1
Target group: SMEs
Location: n.a.
A former employee of an international IT firm reported that the company had won a major contract because its agent had bribed project officials to modify the hardware and software specifications to match the company’s products. In fact, the former employee said, the project team allowed the firm to draft the specifications itself, which the firm had done with some care to avoid making the scheme too obvious. To compound the fraud, the employee disclosed, the IT firm colluded with its prime ‘competitor’ to divide the work on the contract and to submit collusive bids on successor projects. As a result of the various manipulations, the firm was able to secure a contract for almost 30% above the competitive price.
Collusion between bidders and project owner1
Target group: SMEs, NGOs
Location: n.a.
The head of corporate procurement for an international development agency became progressively more concerned as she witnessed the awarding of more than 20 sole-source contracts for IT services to a small startup company. These contracts totalled more than $4 million over three years, and were processed at the personal direction of a senior executive. Eventually she reported the matter to the donor’s internal investigations unit, which found the following. The first contract was for $49,000, just under the $50,000 competitive bidding threshold. This was followed quickly by two other sole-source contracts for a little more than $100,000 each, well above the threshold. These funds were for a report on the usefulness of the internet, whose contents, the investigation revealed, were clipped entirely and verbatim from existing websites, except for minor edits to remove the evidence of the actual source of the materials. It took the investigators a little more than one day to locate, download, and print the documents, which were contained in two one-inch ring binders. The IT firm, however, billed for three months of staff time for what it claimed was ‘original research’ on the topic. The IT company then forwarded the entire proceeds for the internet study to an account designated by the senior executive. Thereafter, the firm received numerous additional sole-source contracts for IT staffing services, most well above the source threshold.
Collusion in subcontract procurement2
Target group: SMEs
Location: n.a.
A procurement manager of a contractor is required to organise the hire of cranes for one of the contractor’s projects. Crane hire companies are at that time giving discounts of approximately 25% off their published hire prices for long-term hires. The procurement manager and two friends set up a company (‘Craneco’) which is registered in the names of the two friends. Half the shares in Craneco are secretly held as nominee for the procurement manager. Craneco obtains a quote including discount from a crane hire company. The procurement manager obtains the published rate sheets (excluding discounts) from two other crane companies. Craneco supplies a written quote to the contractor to supply the cranes at a rate slightly lower than the published rates of the two other crane companies, but at a higher rate than the rate quoted to Craneco. The procurement manager uses the two rate sheets and the quote from Craneco as three competitive quotes, and awards the contract for the supply of cranes to Craneco. These documents are placed on the procurement file, creating the false impression that there has been genuine competitive pricing, and that the hire contract has been awarded to the cheapest supplier. Craneco makes a profit. The procurement manager does not disclose to the contractor his interest in Craneco. The contractor pays more for the hire than it would have done if the contract had been awarded, including discount, to one of the other crane hire companies.
FULL REFERENCES
- 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
- Stansbury, C. and Stansbury, N., 2008, Anti-corruption Training Manual, Global Infrastructure Anti-Corruption Centre (GIACC) and Transparency International (TI)