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Corruption is a plague to the developing economies in the world. Public procurement is prone to corruption and global construction market alone accounts for an estimated US$340 billion per year. This paper is an attempt to explains what bid rigging is, the concept of ‘Cartels’, forms of bid rigging and various irregularities in public procurement in India. Cartel conspirators pre-determine the on fixing prices, market shares, rigging bids, setting common sale agencies, sharing territories, or a combination of these measures to gain supernormal profits.
There is a growing need for procurement systems to be able to fight corruption and improve the effectiveness, efficiency, fairness, and transparency of public procurement. The scope of the research paper is limited to bid rigging in public procurement of goods in India. The objective of the researcher is to do a literature review for the possible future research.
2. CORRUPTION IN CONSTRUCTION
Corruption is one of the major challenges faced by developing economies. According to Sohail and Cavill (2008) corruption in the global construction market accounts for an estimated US$340 billion. India’s annual government procurement is estimated to be around US$125 billion (The Financial Express, 2008).
Corruption in construction industry often results from the combination of: deregulating the infrastructure sector; substantial flow of public money; the highly competitive nature of the tendering process; lack of transparent selection criteria for projects; political interference and caution in investment decisions; the cost of sector assets; the monopolistic nature of service delivery; tight margins; close relationships between contractors, subcontractors and project owners and the complexity of institutional roles and functions; the asymmetry of information between user and provider, or cronyism in the industry. In order to address corruption, understanding and analyzing the irregularities in public procurement is the key. (Sohail and Cavill, 2008).
3. COMPETITION POLICY AND REGULATORY FRAMEWORK IN INDIA
Competition law and policy throughout the world is to maintain the equity among producers and to control profit maximization behavior. In 1995 there were 35 countries who had competition law and now today that number rises to around 100. (source: www.competition-commission India.nic.in ). India has clear policies and regulations which encourages fair competition and controls the unscrupulous cartels and behavior through two acts, the Consumer Protection Act and the Competition Act. Parties who found guilty of such practices faces severe punitive actions.
4. BID RIGGING
All the developed countries have proper and strict competitive laws to control anti-competitive practices. Bid Rigging is a major problem for developing economies like India. Public procurement can get easily infected by the virus of bid rigging. The formation of various cartels, abuse of dominant position and various unethical and illegal mergers can cause harm to the economy of the country. The explanation of sub-section 3 of section 3 of the act defines bid rigging” as “any agreement, between enterprises or persons referred to in sub-section (3) engaged in identical or similar production or trading of goods or provision of services, which has the effect of eliminating or reducing competition for bids or adversely affecting or manipulating the process for bidding”
Bid rigging happens when bidders collude for the personal gain and keep the bid amount at a predetermined level. A collusion is a form of a cartel which is defined as practices or arrangements where conspirators or competitors fix prices, make defected bids on purpose, shares regions or markets on various parameters.
There are minor differences between cartel and collusion. Cartels are productive structures involving multiple producers acting in unison that allow producers to exercise monopoly power (Khemani and Shapiro, 1993).
When there is direct or indirect illegal behavior of co-ordination of competitors to reduce or manipulate the market then it refers to the forming of a cartel. These agreements are frequently verbal and hence it is difficult to trace the formation of cartels. (Xin,2004). Cartels sometimes can force the new firms to join the cartel or sometimes they punish existing firms for non-compliance through price wars. To gain supernormal profits, cartel members agree on bid-rigging, price fixing, setting common sale agencies, allocating territories or a combination of these. Typology of cartels (Fear, 2006) is shown in the table 1.
4.2 FORMS OF BID RIGGING
There are mainly five forms of bid rigging. they are as follows:
4.2.1 Bid Suppression
This is one of the popular types of bid rigging. This type of bid rigging can be seen in developing countries such as India.
Bid Suppression can be explained as when bidders or conspirators, either withdraw from a bid or refuse to bid on a particular project so that designated bidders win that tender.
4.2.2 Complementary Bidding
Complementary bidding is also called as ‘cover’ or ‘courtesy’ or ‘phony’ bidding. In complementary bidding, all the other bidders agree to bid, either at very high prices or they request some extravagant, irrelevant conditions, so that their bid in total gets rejected by the authority and designated bidder gets the tender. These bidders are just bidding for the sake of participation. In these kinds of situation, competitive bidding is just to show on paper but in reality, they have no interest in getting that tender. Complementary bidding is the most common type of bid rigging.
4.2.3 Bid Rotation
When all conspirators submit bids but take turns being the lowest bidder in order to win a particular tender then it is called as bid rotation scheme. The term rotation may vary from project to project. The rotation can be with respect to the size of the contract/project, type of the contract/project and so on.
Customer cartels allocate customers or suppliers to certain producers
Specialization cartels divided the market differentially. In
Specialization cartels, members of the cartel assign lines of
commerce/product or production techniques among
themselves. This is basically a non-price oriented strategy
involving division of labor.
Territorial cartels divide market share by allocating the area geographically
Quota Cartels limit the production output of participating
members and thus artificially creating supply constraint. This
leads to price fluctuations and also excess capacity is left with
the firm. However in these cartels, there is greater probability of
defection as monitoring is difficult.
In Price Cartels, price is agreed upon among the members and
usually an independent agency is created to monitor the
compliance of members and hold them accountable.
Syndicates usually pose a more united front against firms
entering the market and also punish wayward firms.
Table 1– Categories of Cartels
Source: Adapted from Fear (2006)
As the name suggests, subcontracting bidding refers to the scenario when one of the conspirators will not submit a bid or submit a defective in order to get their bid rejected and in return they will get a lucrative subcontractor supply contract from winner conspirator. In this type of bid rigging, the low bidder agrees to withdraw from a bid in order to favor the next low bidder in exchange for the lucrative subcontract. This subcontract is illegally obtained which divides higher price between them.
4.2.5 Market Division
Sometimes there are agreements between the competitors where they share markets based on various parameters. These parameters can be geographical locations, type of tender, the price of tender and so on. For example, one
competitor will bid on projects only in the northeastern region while the other one will bid only on the northwestern region. These two competitors have agreed to not get into each other’s way and will quote high prices if the offers come from other regions. This type of collusion can hurt the competitive bidding’s ethics.
According to the Indian Competitive law, both bid rigging and collusive bidding are illegal. A common thread through all the mentioned bid rigging types involves some kind of formal or informal arrangement which impedes the competition in the market.
5. ANALYSIS AND EVALUATION OF IRREGULARITIES IN PUBLIC PROCUREMENT IN INDIA
According to the Central Vigilance Commission of India (www.cvc.nic.in), public procurement comprises all the outsourcing activities of the government, i.e. execution of works, a range of purchases and hiring of various services, etc.
The United Nations’ view of public procurement can be stated as ‘overall process of acquiring goods, civil works and services which includes all functions from the identification of needs, selection and solicitation of sources, preparation and award of contract and all phases of contract administration through the end of services contract or the useful life of an asset’ (Thai, 2008, p.3). Public procurement is most prone to corruption (Søreide, 2002).
Tabish and Jha in 2010 formed a Comprehensive list of irregularities in public procurement which was derived from irregularities observed during technical vigilance inspections by experts and reported cases. The research analysis was done with the Delphi method and an empirical investigation of the dynamics of irregular practices in public procurement. For this research, they followed the following steps
• Identification of irregularities
• Preparation of questionnaires
• Selection of respondents and collection of response
• Analysis of data
• Ranking and categorization of irregularities
• Validation of results
• Analyses and findings
• Ranking of 61 irregularities
• Frequently occurring irregularities
• Categorization of identified irregularities
• Ranking of the irregularities
1)Transparency; 2) Professional Standards; 3)Contract monitoring; 4)regulations; 4)Fairness and 5) Procedural accountability are the prominent irregularities in public procurement in India which need attention and better management.
India has a regulatory mechanism to ensure integrity and transparency in public procurement of goods and services. The competition law in India has evolved and come a long way to focus on the anti-competitive nature of bid rigging in public procurement, but there is still a long way to go. Preventing irregularities in public procurement is of utmost importance because of its widespread impact on development. In order to check these irregularities, previous studies laid emphasis on corrective measures in isolation, for example, transparency, accountability, and so on. (1) transparency; (2) professional standards; (3) fairness; (4) contract monitoring and regulation; and (5) procedural accountability are the five irregularities where more attention and better management is needed. The categorization of irregularities would help determine the kind of strategy to be adopted by policy-makers and planners. Further studies are needed to comprehend and formulate strategies to curb irregularities in public procurement.
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