Tackling Bid Rigging in Public Procurement - Another Means of Cutting Public Expenditure during the Recession

• Date: 01 January 2010

Tackling Bid Rigging in Public Procurement –

Another Means of Cutting Public

Expenditure During the Recession

RI CHAR D KE LLY*

Introduction

In difficult economic times a functioning and efficient public procurement

mechanism is crucial, especially given the massive public spending intended

to stimulate the global economy.1It is conservatively estimated that unlaw -

ful collusion by private actors bidding for public contracts adds 20–30% to

the cost of public contracting.2Using data from an investigation into bid

rigging of frozen seafood contracts for the US Department of Defense,

Froeb, Koyak and Werden found that collusion raised prices by at least

23.1%.3Similarly the Office of Fair Trading (“OFT”) in the UK noted a

drop in prices in the order of 30% after OFT action against hard core

cartels.4In Ireland the public procurement market accounts for €16 billion

per annum, or 10% of GNP.5Accordingly an increase in the cost of public

contracts by 20–30% equates to €3.2–4.8 billion per annum lost by the tax

payer to unscrupulous private actors. To put this in context, 2009’s harsh

emergency budget aimed to make savings of just €2.7 billion6while the

* BCL (Law with French Law), University College Dublin. Certificat Supérieur de Droit

Français, Unive rsité Panthéon-Assas (Paris II). LLM, Trinity College, Universi ty of

Dublin. Trainee Solicitor, Matheson Ormsby Prentice.

1Staunton, “Obama plays down differences over fiscal stimulus” The Irish Times (2 June

2009), http://www.irishtimes.com /newspaper/finance/2009/0402 /1224243862651.

html, accessed on 28 M ay, 2009; Commissio n (EC), “A European Economic

Recovery Plan” (Communication) COM (2008) 800 final, 26 November 2008.

2Anderson and Kovac ic, “Competition policy and internati onal trade liberalisation:

essential complements to ensure good performance in public procurement markets”

(2009) 2 Public Procurement LR 67, p 71.

3Froeb, Koyak and Werden, “What is the effect of bid rigging on prices?” (1993) 42(4)

Economics Letters 419.

4OECD, Hard Core Cartels: Third Report on the implementation of the 1998 Council

Recommendation (Report) (2005), p 25.

5IBEC, Ensuring Value Throug h Public Procurement (Report) (Novem ber 2008), 3,

htt p: //w ww.i be c.i e/ IBE C/ DFB .n sf/ vP age s/ Pub li c_s ector ~Reso urc es ~pu bl ic-

procurement---ensuring -value-28–11–2008/$file /Ensuring_Value_Th rough_Publi c

%20Procurement.pdf, accessed on 15 June, 2009.

6Department of Fin ance, “Summary of Supplementary B udget Measures – P olicy

Changes” http://budget.g ov.ie/2009SupApr il09/SummaryofSupplementaryB udget

MeasuresPolicyChanges.html#TaxationMeasures, accessed on 18 June, 2009.

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“Bord Snip Nua” report aimed for savings of some €5 billion through cuts

in funding, reducing public sector staffing levels by 17,300 and securing a

5% reduction in welfare payments.7This article employs Anderson and

Kovacic’s estimate, resulting in an approximate overspend of €3.2–4.8

billion per annum. Using this estimate the article will demonstrate how

greater efforts to tackle bid rigging of public contracts could substantially

address the Government’s current revenue problems, while creating a

culture of compliance which ultimately benefits the consumer.

Public procurement is the process whereby public contracting authorities

purchase goods or services from private actors. In 2004, the amount spent

on public procurement within the EU was estimated as being 16% of the

EU’s GDP or €1500 billion.8Given the large amount of money involved,

public sector purchasing can have a huge effect on the conditions of

competition in the market. Consequently the EU has endeavoured to open

the public procurement market to competition. To date, the EU rules have

led to a decrease of some 30% in the price paid by contracting authorities

for goods and services.9

However, there is an often overlooked conjunction between the EC’s

competition rules and the process of public procurement. Munro notes that

“[c]ompetition and procurement law and policy both derive from the

fundamental principle that, in the long term, competitive markets produce

benefits to the economy and to society as a whole.”10 When the principles of

free competition are applied to the public procurement market the benefits of

efficiency are even more tangible. Ultimately, this benefits the tax payer both

in terms of monetary savings and improved quality of public services.

One of the difficulties with the regimented manner in which public

procurement must take place is that it can facilitate collusion between

bidders.11 According to the OECD, “the formal rules governing public

procurement can make communication among rival companies easier,

promoting collusion among bidders. While collusion can emerge in both

procurement and ordinary markets, procurement regulations may facilitate

7“

Report of t he Special Group on Pu blic Service Numbe rs and Ex penditure

Programmes” http://www.finance.gov.ie/Viewprnt.asp?DocID=5861&StartDate=1+

January+2009, accessed on 2 August, 2009.

8Commission (EC), “Public Procure ment: EU rules deliver big savings for taxpayers;

scope for more gains” (Press Release) IP/04/149, 3 February 2004.

9Ibid.

10 Munro, “Competition l aw and public procurement: two sides of the same coin?”

(2006) 6 Public Procurement LR 352.

11 Contracts above a certain threshold must comply with the procedural tendering

formalities laid down in the Utilities Directive (Council Directive (EC) 2004/17) and

the Works Directive (Council Directive (EC) 2004/18). Fo r contracts below the

threshold there is no obligation to comply with the Directives but they are still subject

to the general principles of EU Law, see Case C–324/98 Telaustria v Telekom Austria

[2000] ECR I–10745.

2RIC HAR D KEL LY

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