Deterring, detecting and dealing with bid-rigging in government procurement

Government procurement represents significant expenditure in the Australian economy.

With all levels of government increasing their outsourcing of goods and services in the wake of the COVID-19 pandemic, these procurement activities can become easy targets for cartels.

Government procurement is at particular risk of bid-rigging, whereby businesses communicate before lodging their bids and agree among themselves who will win the tender and at what price.

With 81,174 contracts for the Federal Government published on AusTender in 2019-20 alone, government lawyers and those advising entities involved in government tendering should also be aware of the risks bid-rigging presents and how to detect, deter and deal with such conduct during the procurement process.

Cartel conduct

Australia’s economy relies on businesses competing for trade so that prices are truly determined by the market. While most businesses increase their customer base and profits honestly, businesses that are struggling to compete fairly and maintain profits may be tempted to deliberately set up or join a cartel with their competitors.

Cartel conduct is anti-competitive conduct and exists when there is a provision in a contract, arrangement or understanding between competitors that has the purpose or effect of fixing prices, restricting supply, allocating customers or geographic areas or rigging bids.

Known as the ‘cartel provisions’, this behaviour is strictly prohibited by the Competition and Consumer Act 2010 (CCA) (under sub-sections 45AA to 45AG) and is considered the most serious contravention of competition laws.

The CCA not only prohibits cartels under civil law, but makes it a criminal offence for individuals and corporations to participate in a cartel. Individuals could face up to 10 years in jail, fines of up to $444,000 for criminal cartel conduct offences and a pecuniary penalty of up to $500,000 per civil contravention.

While corporations will be penalised the greater of $10 million, three times the benefit reasonably attributable to the cartel, or 10% of the company’s annual turnover in the preceding 12 months.

These penalties are set to change, with the Federal Government recently releasing of a draft Bill that would see companies and individuals face significantly higher penalties for breaching the CCA and the Australian Consumer Law.

Bid-rigging

Bid-rigging refers to the conduct of competitors conspiring among themselves to determine how they ought to respond in a bidding process instead of competing fairly. According to the Australian Competition and Consumer Commission’s (ACCC) ‘Cartels deterrence and detection’ guide, bid-rigging may take a variety of forms, including:

• cover pricing, where competing businesses choose a winner while the others deliberately bid over an agreed amount, which ensures the selected bidder has the lowest tender and also helps establish the illusion that the lowest bid is indeed competitive
• bid suppression, where a business agrees not to tender thereby ensuring that the pre-agreed firm will win the contract
• bid withdrawal, where a firm withdraws their winning bid to ensure a competitor will be successful
• bid rotation, where competitors agree to take turns at winning business while monitoring their market shares to ensure they all have a predetermined slice of the pie, and
• non-conforming bids, where firms deliberately include terms and conditions they know will not be acceptable to the procurer.

This type of cartel conduct leads to uncompetitive tender processes and the supply chain paying higher prices or receiving lower quality goods or services. It is of particular consequence to government procurement processes, as Australian taxpayers will ultimately pay the inflated price of the tender.

ACCC action against bid-rigging

Despite recent setbacks in their competition enforcement program, the ACCC remains resolved to pursue enforcement action against businesses engaging in bid-rigging cartels arising out of government procurement activities.

ARM Architecture

The ACCC recently launched civil proceedings in the Federal Court against Ashton Raggatt McDougall Pty Ltd (ARM Architecture) and its former managing director, Anthony John Allen, alleging they engaged in cartel conduct by attempting to rig bids for the tender for a building project at Darwin’s Charles Darwin University.

After a tender process, in May 2019 Charles Darwin University awarded ARM Architecture the contract for principal design and consultant services for the first phase of a new $250 million Education and Community Precinct in the Darwin CBD.

The ACCC alleges that, following the issue of the tender for the second stage of the project, Mr Allen sent emails to eight other architectural firms requesting them not to submit a bid for the work.

The ACCC alleges that in doing so ARM Architecture, through the conduct of Mr Allen, attempted to rig or induce other competitors to agree to rig the tender for principal design consultant services. The ACCC also alleges that Mr Allen attempted to induce other competitors to agree to rig this tender.

After becoming aware of the alleged conduct, Charles Darwin University ultimately excluded ARM Architecture from consideration for the second phase of the building project, which was valued at about $2.6 million plus GST.

In bringing the proceedings, the ACCC is seeking declarations, pecuniary penalties and costs, as well as orders for compliance training.

National Gallery of Australia

On 13 May 2021, the ACCC advised it instituted civil proceedings in the Federal Court against Delta Building Automation Pty Ltd (Delta) which designs, installs and maintains building management systems that manage equipment in large buildings, and its sole director, Timothy Davis.

The ACCC alleged that Timothy Davis, in acting on behalf of Delta, attempted to rig a bid in connection to a tender conducted by the National Gallery of Australia in Canberra for the replacement and ongoing maintenance of a building management system that manages and monitors equipment such as air-conditioning, ventilation, lighting, and power.

Specifically, it was alleged that the attempt was made in late 2019 during a meeting with a competitor at a Canberra café to fix the price of bids to be submitted by Delta and its competitor in response to the National Gallery’s tender.

While the cartel arrangement was not executed because the competitor rejected Mr Davis’ and Delta’s attempt, the ACCC are seeking declarations, pecuniary penalties, injunctions and costs, as well as an order disqualifying Mr Davis from managing a company, and orders for compliance training.

These proceedings remain on foot.

Country Care

The prosecution of the Country Care Group Pty Ltd (Country Care) by the Commonwealth Director of Public Prosecutions (CDPP) was a compelling big-rigging case. Following referral by the ACCC to the CDPP, this was the first contested criminal prosecution under the criminal cartel provisions of the Act, and the first to proceed to trial by jury against both an individual and a corporation.

The CDPP first brought criminal cartel proceedings against Country Care, its CEO, Mr Robert Hogan, and a former employee, Mr Cameron Harrison, in the Federal Court of Australia in February 2018. Due to delays caused by a number of interlocutory proceedings, demonstrating the difficulties of bringing criminal proceedings on complex cartel provisions, and the COVID-19 pandemic, the trial commenced in March 2021.

The charges related to cartel conduct by Country Care and the named individuals involving assistive technology products used in rehabilitation and aged care, including beds and mattresses, wheelchairs and walking frames. It was alleged that between May 2014 and May 2016, Country Care had entered into:

• an understanding whereby a competitor of Country Care would not bid if HealthShare NSW requested bids for equipment
• an arrangement that Country Care and its competitor would both bid in a NSW Health tender, but on the basis that one of the bids would be more likely to be successful, and
• a cartel arrangement with 42 healthcare equipment companies across Australia to fix prices for the goods supplied by Country Care and their own businesses.

Following a 13-week hearing before a jury, Country Care, its CEO and a former employee were acquitted after unanimous acquittal verdicts were read out on 2 June 2021.

In response to these acquittals, former ACCC Chairman Rod Sims said: “Following a lengthy trial, the jury has now spoken and we respect the process and the verdicts which have been delivered … we were concerned this alleged conduct had the potential to increase prices paid by consumers for rehabilitative and assistive technology products which are essential for the health, wellbeing and dignity of people with disabilities or who are undergoing rehabilitation or are in aged care. It also had the potential to increase prices paid by governments for these essential products … cartel conduct cheats consumers and other businesses, and restricts healthy economic growth. The ACCC will continue to give high priority to deterring, detecting and dismantling cartels that have the potential to harm Australian consumers and take enforcement action in appropriate cases.”

Despite being ultimately unsuccessful in this case, the partnership between the ACCC and the CDPP remains strong, with the two recently teaming up on wider cartel conduct criminal cases against Bingo Industries, Vina Money and Alkaloids of Australia Pty Ltd with more success.

Deterring bid-rigging

In addition to significant penalties prescribed by the CCA for bid-rigging cartel conduct, government lawyers and those advising entities involved in government tendering might consider the following deterrents for businesses from engaging in bid-rigging when submitting tenders:

• Keep bids confidential and critically analyse each bid for any similarities or inconsistencies
• Obtain disclosure from your suppliers or bidders regarding subcontractors and their market pricing, and
• Be alert to the market prices of your suppliers or bidders and whether there have been any recent changes (including in other jurisdictions).

Detecting bid-rigging

In light of the above enforcement action and the significant consequences for competition arising from bid-rigging, it is important that government lawyers and those advising entities involved in government tendering are aware of signs that bid-rigging may be occurring during the procurement process. These include:

• Whether the goods or services you are procuring are susceptible to bid-rigging. For example, bid-rigging is likely to be more prevalent if the goods or services are standardised and suppliers or bidders can reach an agreement that is likely to last a long time
• No apparent reason for the absence of regular suppliers or bidders from competing in the tender
• Irregular or suspicious bidding patterns. Consider the previous bidding patterns, the geographic locations and any previous success or otherwise, repeat suppliers or bidders in conjunction with the type and size of your tender
• Fewer suppliers or bidders competing in the tender
• Suppliers or bidders who appear to be alternating at winning tenders, sharing contracts by value, subcontracting to competitors with higher bids, or deliberately including unacceptable terms in tenders
• Any potential communication between suppliers or bidders before the close of tender instead of the procuring entity. While this may be done via telephone or email, this form of communication does leave a paper trail. Competitors may be meeting in public repeatedly to discuss cartel arrangements, and
• A firm of professional advisers representing several suppliers or bidders in the same tender. Look out for bids that are produced together, or similarities in the documents produced by each supplier or bidder (including minor, cosmetic errors) as this may indicate collusion.

Dealing with bid-rigging

If you detect conduct that demonstrates bid-rigging may be occurring on your procurement, the recommended course of action is to report your concerns to the ACCC, which is best placed to investigate collusive conduct. Be reassured that this will not stop, interrupt or overturn any tendering exercise as cartel investigations can take many months before conclusion.

You should also consider whether there are other reporting requirements. In Queensland, for example, ‘collusive tendering’ is now considered a form of ‘corrupt conduct’ within the meaning of the Crime and Corruptions Act 2001 (Qld) (CC Act).

The Crime and Corruption Commission in Queensland provides the following example of “collusive tendering” in its guidance to the Queensland Government, which relies on the criminal nature of ‘bid-rigging’ under the Act to constitute ‘corrupt conduct’ within the meaning of the CC Act:

Conduct

Elements that make it corrupt

Six road construction companies have engaged in a collusive tendering scheme for six multi-million-dollar contracts awarded by a government department. Each company has applied for more than one contract, but has only been successful with one of its tenders. The companies have agreed to ‘take turns’ at winning the contracts, with all companies except the winner deliberately quoting above a certain dollar value to make the winner’s quote appear competitive. The price of each awarded contract is significantly higher than previous contracts for similar work.

1. impairs or could impair public confidence in public administration. 2. involves collusive tendering 3. is a criminal offence (i.e. one of the cartel conduct offences under the Act).

Cartel conduct and bid-rigging remains a critical component of the ACCC’s competition portfolio, and an enduring compliance and enforcement priority due to its potential detriment to consumer welfare and the competitive process.

With significant bid-rigging proceedings on foot, government lawyers and those advising entities involved in government tendering should be on the lookout for any offending conduct during the procurement process.

This article appears courtesy of the Queensland Law Society Competition and Consumer Law Committee. Joanne Jary is a Partner at Holding Redlich and member of the committee. Kayla Plunkett is a Graduate at Holding Redlich.