Public procurement markets are under the constant spotlight of competition authorities in the EU. As there are large amounts of public money and consumer interests at stake, competition authorities educate purchasing organizations about competition law and enforce competition law in public procurement markets.
Enforcement occurring mainly at the national level and predictability of infringement ‘scenarios’ are among the reasons of the low attention of competition specialists to this field. However, analysis of recent cases across the EU shows kind-of ‘success story’ of competition authorities in cartel investigations.
The article discusses that that is, firstly, due to close institutional cooperation between purchasing institutions and competition authorities allowing to detect anticompetitive practices, secondly, digitalization of tenders facilitates evidence collecting and, also, low awareness of intersection between competition and public procurement rules by bidders as they make straightforward infringements of Article 101 TFEU such as price-fixing and territory sharing.
Institutional cooperation makes no place to hide?
Public procurement markets are an important part of the economy. In the EU public authorities purchase goods, works and services for around €2 trillion per year what is 14% of GDP. Thus, OECD recognizes that competition in public procurement is necessary to achieve ‘value for money’ and to ensure efficient use of public money as well as better goods, works, and services for consumers. Therefore, the attention of competition authorities to public procurement markets is not surprising.
One shall regard that competition authorities differ in their intensity of competition law enforcement in public procurement markets. For example, the Lithuanian Competition Council adopted 2 decisions fining undertakings for bid-rigging in public procurement in 2018-2019; while the Bulgarian Commission for Protection of Competition – only 3 decisions in total in the period from 2012 to 2018.
Nevertheless, not only enforcement shows the active role of competition authorities in public procurement markets. National competition authorities also educate purchasing institutions about competition law. Training and guidance are prepared on how to recognize potential competition law infringements in tender procedures. Among them are, for example, Swedish, Finish, Croatian, Dutch, and UK’s competition authorities. Those soft law documents show typical situations and teach procurers how to identify bid-rigging in public procurement procedures.
In general, procurers are advised that too high or inconsistent prices in tender proposals signal cartel agreement (bid-rigging), whereas, ‘cover bidding’ when the winner is decided in advance and competitors bid ‘in favor’ of that winner, may be detected in behavioral patterns related to price coordination and information exchange.
Furthermore, this sort of investment in the capabilities of purchasing organizations to identify potential bid rigging behavior pays off to competition authorities. Firstly, purchasing organizations, as well as central purchasing agencies, stand as the first line of competition defense and may act themselves to eliminate allegedly anticompetitive behavior under public procurement rules. Secondly, they communicate their concerns to competition authorities. Practice shows that most investigations of competition law infringements start by ‘tip-offs’ (e.g. here and here). Consequently, competition authorities have a reliable source of information for detecting potential cartels.
Therefore, suppliers should be aware that institutions cooperate and share information. They must fully understand that institutions are well prepared to analyze their tender proposals and behavior. So, compliance with both public procurement and competition law rules are crucial.
Digitalization of tender systems: a new era of evidence collection
It is commonly known that the most complicated part of any cartel investigation is finding and collecting evidence. However, this task is easier for competition authorities when investigating bid-rigging in public procurement markets due to the digitalization of tendering systems and the standard burden of proof.
Digitalization (and centralization) of tender systems facilitate investigations. It allows detecting suspicious practices of bidders more efficiently and assessing them in the context of competition law. Also, such systems enable evidence collection. Competition authorities may get access to all submitted tender documents and even extract their metrics. That is extremely important in cartel investigation and specifically useful in the primary stages when decisions made whether to start an official investigation.
Furthermore, tools based on data analysis to identify cartels are already a reality. An initiative of the UK’s Competition and Markets Authority to develop a bid-rigging screening tool is a good example. The tool tests bidders and their behavior in public procurement procedures. Programmed indicators evaluate the number and patterns of bidders, pricing patterns and origin of documents. Such a standardized tool is available publicly and free of charge.
Of course, the tool has its risks, but, presumably, such measures are the future. Standardized tools for data analysis allow facilitating analyses of patterns of bidders, proposal price and document origin and is a good starting point of assessment of the existence of anticompetitive practices in tender procedures. That is a question of time when similar initiatives will be available across countries.
The burden of proof and fines: emerging questions of proportionality?
Two more aspects are attractive to competition authorities in investigations relevant to public procurement markets.
Firstly, Article 101 TFEU infringements in public procurement markets are an infringement by object. That implies that no real economic harm has to be proven and a mere fact that suppliers engaged in anti-competitive practices prohibited under Article 101 TFEU is enough to get a fine. In the recent judgments in private procurement, the General Court confirmed that information exchange among competitors is a restriction of competition ‘by object’ when such exchange may remove uncertainties about the market and conduct of competitors in it (Judgments of 12 July 2019 in Sony, Sony Optiarc, Quanta Storage, Hitachi-LG Data Storage and Toshiba Samsung Storage Technology) One shall notice that most likely that is always a case in procedures of public tenders.
Secondly, as in most cartel infringements, fines are significant. It is calculated from all relevant income and may include income from private procurement. Also, fine is not limited to income from a territory where a supplier intended to win a contract to supply goods, works or services.
Thus, undertakings have no defense of no real harm or insignificant harm due to, for example, low contract value. Even if a cartel were found in a tender procedure for a small contract in only one municipality and economic harm if calculated, where insignificant, the undertaking still would be paying a fine according to the rules of fine calculation under competition law and suffer all consequences of infringement under competition and procurement rules.
Consequently, competition law enforcement may have a huge impact on undertaking if an infringement found in public procurement markets. Particularities of the burden of proof also raise questions of proportionality which are hardly discussed in this context but require more attention and research.
Recent national investigations across the EU and predictable nature of infringements
Investigations of competition law infringements in public procurement markets take place at a national level. There is no comprehensive reporting from the Member States (unless effect on trade found) on such cases, and both awareness of investigations is low, and access to decisions is relevantly complicated.
Nevertheless, analysis of recently (in 2018-2019) conducted investigations from several national competition authorities allows concluding that infringements are straightforward Article 101 TFEU infringements. In general, bidders agree on the elimination of competition in the tender processes, which implies higher prices, lower quality of goods or services supplied. Among common infringements are, for example, pricing strategies set by professional associations, price fixing by competitors and territory sharing (‘bid-rigging’), as well as agreeing in advance on the winner of the tender and submitting a less favorable bid or bidding to only assist the winner (‘cover bidding’).
Surprisingly (or not) professional associations are still ‘full of smoke’. That is clear from investigations conducted by French, Spanish Portuguese and Bulgarian competition authorities.
In October 2019 the French competition authority discovered price strategy agreements between competitors and professional associations and imposed EUR 1,5 million fine. The association of architects agreed on pricing strategy in public work tenders. The strategy aimed at ‘combating dumping’, namely low fees in tender proposals. Additionally, the monitoring scheme was set to identify non-compliance with agreed fee rates and to enable the referral of non-complying architects to disciplinary boards.
Similarly, two trade associations and 26 school transportation companies entered into a price-fixing agreement in Spain. The goal of the agreement was to increase the prices of school transportation contracts. Spanish Competition and Markets Authority found that the associations facilitated the scheme and that it lasted for ten years. EUR 2 million fine was imposed for the bid-rigging. Another example is from Portugal, where Portuguese advertising associations restricted the functioning of the market setting rules to prevent the participation of its associates in tenders.
Also, after three years of investigation, the Bulgarian Commission for Protection of Competition found a cartel in public procurement markets relevant to the National Program for Energy Efficiency of Multifamily Residential Buildings (Bulgarian Commission for Protection of Competition Order No.1412/13.12.2018 and Order No.1443/20.12.2018). Twenty-four undertakings and associations coordinated their bids, fixed minimum prices and shared territory. The authority collected evidence that undertakings agreed to allocate sites and adhere to the agreed minimum prices.
All these cases are textbook examples of cartels and restriction of competition by object. Professional associations facilitated price-fixing or coordinated prices aiming at increasing the prices in tenders and the value of contracts. Factual situations hardly leave room for defense.
The next category of infringements is the so-called ‘cover bidding’. Cover bidding relies on the exchange of information and behavior coordination between competitors for the benefit of the selected undertaking. In general, competitors agree in advance which one of them will win the contract, and then the other(s) either submit less favorable tender proposals or bid only to assist the winner.
To illustrate this anti-competitive practice investigations of Lithuanian, Latvian, Greek and French competition authorities come at stake.
The Latvian competition authority named the features of coordination activities in cover bidding. It found that providers of office equipment maintenance and delivery services in public procurement procedures coordinated their activities by repeated, deliberate and systematic agreements to exchange information on prices and decide in advance on the winner.
Lately, French Directorate-General for Competition, Consumer Affairs and Fraud Control had several successful investigations in cover bidding in masonry works sector and installers of safety equipment in tobacco shops. It is worth noting that the analysis of pricing patterns of two bidders allowed to detect the infringement in the first case. Most likely the Directorate used the advice of competition authorities to look at pricing patterns of bidders as the first signal of potentially anticompetitive conduct. s recommended by the competition authorities
The latter case exemplifies another issue in public tenders when a purchasing organization is by law required to include at least three (or two) quotations from competing companies for the tender to be valid. When a procurer wants a particular company to participate or when regions are too small to attract competitors, such legal requirement potentially opens mentality to encourage cover bidding, i.e. companies agreeing to coverage quotes for the benefit of the other company or coordinating prices to facilitate the winner bid agreed in advance.
One shall notice that cover bidding often leads to geographic and (or) product market sharing. That was the case in investigations of the Hellenic competition authority in public procurement procedures relevant to the construction sector. It found that bidders entered into market allocation agreements in infrastructure projects. Similarly, last summer 3 Lithuanian street and road repair and land melioration undertakings fined for a set of anticompetitive behavior which besides of non-compete agreements in certain municipalities also fixed prices and agreed on the winner in advance. Lithuanian competition authority found that companies colluded in 25 public procurement procedures.
All in all, any competition law specialist would say that there is nothing new in competition law application to public procurement markets. However, such a predictable nature of infringements suggests that suppliers have a lack of awareness of general competition law and (or) limited understanding of how public procurement rules and competition law intersects.
Analysis of recent competition law enforcement cases by national competition authorities shows that institutions cooperate. Purchasing organizations’ tip-offs are a common ground for competition authorities to start investigations. Also, access to digital tender systems assists in efficient evidence collection. It both allows detecting potential cartel behavior by analyzing the behavior of bidders and to collect primary written evidence of anticompetitive practices. Moreover, infringements of Art 101 TFEU in public procurement markets are relevantly easier to investigate as no real economic harm has to be proven. Therefore, investigations of cartels in public procurement markets are relevantly easier.
The worrying part is that undertakings participating in public tenders make straightforward infringements of competition law, such as exchange of information, price-fixing, allocation of markets or cover bidding. Professional associations are still facilitating cartel behavior in many cases. That raises questions of the ability of suppliers to relate public procurement and competition law regimes.