What is collusive tendering?
In essence, collusive tendering is an abuse of the tender process (although it can be extended to auctions and other similar types of transactions). Collusive tendering may occur in a number of ways. For example, it occurs when firms agree beforehand on the prices to be submitted for the tender. Alternatively, collusive tendering occurs where firms agree not to participate in a tender. Consequently, the above measures ensure a particular firm wins the tender.
Collusive tendering is becoming increasingly relevant, particularly in the construction sector. Stellenbosch university even fell victim to such conduct a few months ago.
Why would a competitor participate in collusive tendering?
In most cases, an agreement exists in which the winning firm will subcontract work to the colluding firms. Furthermore, the firm is able to achieve a higher price for the tender. The benefits of this higher price will then be passed on down the distribution chain to the subcontractors.
How is a firm able to achieve a higher price?
Firms are likely to achieve the benefit of higher prices in relation to state tenders. This is because the state can usually be described as having an inelastic demand curve. In other words, the state needs to acquire the goods or services. Therefore, the state is prepared to acquire the goods or services at higher prices. Accordingly, there is a strong argument to be made that the state is more susceptible to acquiring goods and services priced above the market price.
Consequences of collusive tendering
Collusive tendering is a prohibited horizontal practice and constitutes per se prohibited conduct in terms of section 4 of the Competition Act. This means that it is widely accepted that collusive tendering leads to anticompetitive consequences. In other words, collusive tendering substantially lessens or prevents competition. Once collusive tendering has been established (by means of a characterisation process), no economic evidence may be lead to justify the cartel.
A complaint may be initiated by the Competition Commission (“Commission”) or a complaint may be submitted by an outside party. Once a complaints procedure has commenced, the Commission may investigate and refer the complaint to the Competition Tribunal. The Tribunal has the power to impose administrative fines on the contravening firms. Such a fine may be up to 10% of a firm’s annual turnover. More importantly, management is now exposed to criminal prosecution as a result of the recent Competition Amendment Act. Lastly, firms are exposed to civil claims for damages by parties who have suffered harm as a result of the collusive tendering.