Two recent announcements highlight the need for competition law compliance in sectors where tenders are common practice. Tender processes seek best value outcomes through a structured competitive process. For this reason competitive behaviour (or the lack of it) around tender processes is always of particular interest to competition regulators and lawmakers.

Attempts by bidders or potential bidders to thwart competition in relation to any tender process are regarded by regulators and governments as some of the more harmful forms of anti-competitive cartel conduct. The recent announcements indicate that New Zealand is no exception in this regard, with the Government announcing that it will shortly be releasing a draft exposure bill on the criminalisation of cartels and the Commerce Commission releasing its research findings on tender practices across the non-residential construction sector.

In this FYI we review these announcements and highlight steps that can be taken by those operating in sectors where tender processes are common to avoid breaching New Zealand competition law with what could, if the proposed legislation is passed, be potentially criminal consequence.

Update on criminalisation proposals

Criminalisation of anti-competitive cartel behaviour has been a subject for discussion as part of the Government's policy agenda for some time. Earlier this year the Ministry of Economic Development issued a discussion paper and sought submissions on whether cartel conduct should be criminalised, as well as holding a number of workshops.

Responses to the discussion paper were mixed but the Government is not ready to let the issue go and has announced that it will issue a draft exposure bill on criminalisation of cartels early next year, as the next step in the consultation process prior to making a final decision on the issue.

Commerce Minister Simon Power has noted that many of the issues raised by stakeholders related to how the legislation might be drafted, including how cartel behaviour is defined. The Government wants business to have an opportunity to comment on how the law could look before any final decision is made.

From the Government's perspective, the introduction of criminal penalties, including imprisonment, will send a strong message to business that cartel behaviour such as price fixing and bid rigging (also sometimes referred to as collusive tendering) is simply not an acceptable way for business to be conducted as it ultimately results in consumers paying inflated prices.

Tenderers on notice

Behaviour around tender processes in the non-residential construction sector has been the focus of recent research undertaken by the New Zealand Commerce Commission. While not the only driver, the Commission was no doubt interested to see if international experience that this sector is prone to anti-competitive behaviour is similarly the case here in New Zealand. A crack down by the UK competition regulator last year resulted in more than 100 construction companies being fined a total of £129.5 million for anti-competitive behaviour in relation to construction tender processes.

The research findings indicated a low level of awareness across the non-residential construction sector of the type of behaviour required by competition law and correspondingly low levels of understanding that certain types of behaviour are unlawful because they are anti-competitive. Cover pricing was identified as a common practice among many of the research respondents.

In contrast to the approach taken by the UK competition regulator which had enforcement as the key focus, the Commission's investigations and research were undertaken on a confidential basis across a small sample to help it develop a targeted education campaign as part of a wider, more proactive, education focus on competition law compliance.

This does not mean that the construction sector or those participating in tenders in other sectors have any reason to be complacent. On the contrary, the Commission has clearly signalled that if any specific complaint is laid and subsequent investigation of that complaint reveals illegal behaviour, it will take enforcement action.

At the same time as releasing its research findings, the Commission issued a number of fact sheets and guidelines on avoiding illegal agreements, the different types of cartel conduct that might arise in relation to tender processes, how to recognise these types of behaviour and particularly behaviour around different types of bid rigging.

Bid rigging is where some or all potential bidders to a tender get together and agree which of them should get the bid, with corresponding bidding behaviour by each of them. There are a number of different ways that bid rigging might occur - sometimes this might be over time, by reference to different geographic areas, by reference to different particular types or size of contract, or by reference to different types of product within the market.

Behaviours to give effect to bid rigging can vary. Specific types of bid rigging behaviour described by the Commission in its fact sheets include cover pricing, bid suppression and bid rotation.

Cover pricing, which was identified by the Commission's research into the construction sector, occurs when a number of bidders submit bids with all but the designated successful bidder submitting bids designed to be unattractive to the issuer of the tender, either because of higher pricing or onerous terms. The appearance of competition is maintained. With bid suppression, competitors agree that one or more of them will not participate in a particular bid, while bid rotation agreements seek to allocate contracts among competitors on an agreed basis.

For more information on anti-competitive behaviour in relation to tender process, refer to our FYI Tenders under Scrutiny of 8 October 2009.

All tenderers, whatever sector they operate in, are now clearly on notice as to what is and is not legal behaviour around how they respond to tender processes.

A culture of compliance

With the potential for criminalisation of such behaviour and strong signals from Government that it is seriously considering the introduction of criminal penalties, understanding the boundaries of legal behaviour and a strong culture of competition law compliance will be more important than ever.

Steps that can and should be taken by companies to avoid unintentional illegal conduct, and where Simpson Grierson's competition experts can help you, include:

  • A proactive compliance culture led by senior management
  • Ensuring that all staff are familiar with the requirements of the Commerce Act
  • Understanding how the Commerce Act affects the day-to-day dealings of your organisation
  • Developing proactive strategies to help staff recognise and positively manage any compliance risks.
  • Reviewing internal procedures to understand and mitigate any compliance risks.