The construction fraud exposed in 2001 consisted largely of prohibited tender agreements. The Netherlands Competition Authority (NMa) – the predecessor of the Netherlands Authority for Consumers and Markets (ACM) – imposed cartel fines of tens of millions of euros on the construction companies involved at the time on that ground.
Things remained relatively quiet in this area in the Netherlands for some time after that. In recent years, however, authorities in the Netherlands and neighbouring countries have imposed fines of many millions of euros for prohibited tender agreements. They often related to the building industry (see here and here, for instance), but tendering cartels have also been fined in other sectors, such as radiology services, power grid infrastructure, and the supply of electronic equipment.
It is therefore important for tenderers to be well aware of what is and is not permitted in a public or private tender procedure. In this blog, we address the main points of interest, and what forms of cooperation between companies are and are not allowed.
Bidding as a consortium permitted in many cases
It may sometimes be necessary to perform a contract together with one or more other companies. Companies may then opt to bid jointly for the tender. This is known as a consortium. In this blog, the term consortium refers to both (i) a pure consortium, whereby each party is jointly and severally liable towards the contracting authority for the performance of the contract; and (ii) subcontracting, whereby the tenderer subcontracts part of the performance of the contract to another company but is solely liable towards the contracting authority for that performance.
Bidding as a consortium is permitted in many cases. First of all, if the tendering companies are not actual or potential competitors, such collaboration is, in principle, permitted under competition law. There may furthermore be various justifications for working together as competitors, for instance if the companies concerned cannot perform the contract independently because none of those companies individually meets the tenderer’s suitability requirements.
An exemption may also apply under Article 6(3) of the Mededingingswet (Competition Act). First, this requires that the cooperation leads to an objectively measurable improvement in production or distribution, or results in technical or economic progress. The aim may be, for instance, to combine partly complementary specialisms, improve the quality of a contract, spread or reduce financial risks, or utilise residual capacity. Second, a reasonable part of the improvement or progress achieved must benefit consumers. Third, the cooperation may not reduce competition any more than is strictly necessary to achieve the benefits, and sufficient competition must remain.
Prohibited collaboration in tender procedures: collusion or bid rigging
If joint bidding distorts the competition in the tender procedure, the companies involved are in breach of the cartel prohibition under Article 101 TFEU and Article 6 of the Competition Act. Briefly stated, those articles provide that all agreements and concerted practices between companies that have as their object or effect the restriction or distortion of competition within the internal market are prohibited.
Examples are agreements that allocate a certain part of a market or group of customers, agreements between competitors that restrict production, and the exchange of sensitive competitive information. Such prohibited collusion in a tender is also known as bid rigging.
The most common forms of collusive tendering are (i) bid suppression, (ii) overbidding, (iii) bid rotation and (iv) cover pricing.
- In bid suppression (or withdrawal), firms agree that that they will not bid for a contract or that they will withdraw their bid, to ensure the success of another company.
- In overbidding (or sham bids), companies deliberately bid a higher price than the firm that is ‘allowed’ to win the contract. It may also involve making other terms of the bid so unacceptable that the other bidder will definitely not win.
- In bid rotation, the tenderers agree for each recurring tender whose turn it is to win the contract. That increases the likelihood of a particular bidder being awarded a contract, and the price can be driven up without the risk of losing the contract. This is sometimes accompanied by a mutual redistribution of the (artificially high) revenues between the cartel participants.
- In cover pricing, a company that is not actually interested in winning the contract agrees with its competitor to bid above its tender price. By bidding a higher price, that company does not qualify for the contract in question, but does remain in the contracting authority’s sights – for instance with a view to a later contract in which it is interested. This may seem innocuous, but companies thereby create the false appearance of a competitive bidding process and thus violate the cartel prohibition.
In all cases, the form of the prohibited collaboration makes no difference. It may range from a written agreement to an oral gentlemen’s agreement. It also includes the mere informal exchange of information. It suffices that there is a form of coordinated action between companies that replaces the risks of competition between them with collaboration. A preconceived plan is not required. Even a cursory enquiry about who is going to bid for which future tender is therefore likely to be problematic, because it can reduce uncertainty about future market behaviour and facilitate collusion.
Enforcement of procurement cartels in different sectors
Bid rigging and other procurement cartels cost contracting authorities a great deal of money and lead to loss of quality and expertise. They are therefore subject to strict enforcement. In the Netherlands, this is done by ACM and the European Commission. In recent years, various fines have been imposed by national authorities in the EU for prohibited collaborations in tenders in various sectors.
By decision of 27 October 2023, the Danish competition authority ruled, for instance, that a large number of power and electricity plants had infringed Article 101 TFEU and the corresponding national provision. The power plants had engaged in price coordination and bid rigging in the daily auctions for manual Frequency Restoration Reserve (mFRR).
On 19 July 2023, the Spanish competition authority fined four military equipment manufacturers a total of over €6 million for bid rigging in various calls for tenders issued by the Spanish Ministry of Defence. Two manufacturers, for instance, had entered into a coordination agreement in which they had agreed to coordinate their bids. They had furthermore agreed that if one of the two won the tender, both companies would share the execution and the fee.
On 7 February 2023, the Polish competition authority fined seven different companies a total of €1.6 million for bid rigging in the waste treatment market. The reason for this was that the companies always tendered as a consortium, even though they were also able to provide the services in a smaller context or even individually.
On 13 July 2022, the Portuguese competition authority imposed a fine of over €41 million on a bid rigging cartel active in tenders for the provision of guarding and security services. One of the agreements that the companies had made was to submit fictitious bids or withdraw their bids to ensure that the agreed company would win the tender.
In the Netherlands, the Trade and Industry Appeals Tribunal (CBb) recently upheld the fine imposed by ACM in 2017 on several roofing companies for bid rigging. Two roofing companies had coordinated their bids when tendering. The CBb ruled that ACM had sufficiently demonstrated that an agreement was in place between two roofing companies that had the restriction of competition as its object.
Risk of high fines for prohibited collaboration
Companies that are found guilty of collusion in tendering risk a high fine. The maximum fine that ACM may impose per violation is €900,000 or 10% of a company’s turnover, whichever is higher (increasing to 40% for multi-year cartel agreements). Contracting authorities furthermore have the option of excluding a company from the procurement procedures in question if there are sufficiently plausible indications of collusion. Once a company has been fined for bid rigging, that may be grounds to exclude it from future tenders. A violation of the cartel prohibition may therefore have a big impact.
Cartelisation in tenders has been on ACM’s agenda for some time already: see also this blog and this blog. Participants in a procurement cartel should also bear in mind that the party that first confesses the cartel to the authorities may get off without a fine.
Information on dawn raids by ACM and the European Commission can be found at invalacm.nl.
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