Companies that collaborate in tendering procedures find themselves at the intersection of procurement law and competition law. If such collaboration distorts competition in the tendering procedure, the companies are in breach of the cartel prohibition. Such prohibited “collaboration” (which in fact constitutes cartelisation) is also known as collusion and is more common than generally assumed, according to the European Commission in a recent Notice.
Collusion not only costs the contracting authorities a great deal of money, but is also detrimental to quality and expertise. The construction, healthcare and ICT sectors have turned out to be particularly susceptible to tender fraud. The Commission therefore felt that it was high time to take action. In its Notice, the Commission provides tools to promote cooperation between contracting authorities and competition authorities. It also provides tips on the use of the facultative exclusion ground regarding distortion of competition that is set out in Public Procurement Directive 2014/24/EU and may be used by contracting authorities if they suspect collusion.
Incidentally, cartelisation in tendering procedures has been on ACM’s list for some time already (see this blog and this blog). Below, we will address the details of the Commission Notice and explain the field of tension between competition law and procurement law in tendering procedures.
Restrictive practices
So a tenderer casually works together with competitors in a tendering procedure; no price-fixing agreements are made, just a quick enquiry as to who will be tendering for what contract. Not a problem, right? On the contrary! Such conduct isstrictly prohibited and in breach of the cartel prohibition set out in Article 101 of the TFEU and Article 6 of the Dutch Competition Act. The cartel prohibition is often associated with firm price-fixing agreements between undertakings (a type of horizontal agreement) or with a supplier forcing its distributor to charge a certain price (a type of vertical agreement), but it comprises a great deal more than that.
In sum, Article 101 of the TFEU and Article 6 of the Competition Act provide that all agreements between undertakings and all concerted practices of undertakings that have as their object or effect the restriction of competition on the market, are prohibited. The exchange of sensitive competitive information may be prohibited, for instance, even if it does not directly contain price information or if it is shared via a third party. Under certain circumstances, cooperation in the field of research and development, which, in principle, is encouraged by the Commission, may also fall under the cartel prohibition, for instance if one of the parties cannot obtain any competitive advantages. A final example is any agreement that allocates part of a market or restricts certain groups of customers or products and sales markets. All such agreements are in breach of the cartel prohibition, so therefore even the simple act of calling a competitor to ask whether or not it is going to tender for a contract.
The cartel prohibition applies to undertakings. The term “undertaking” has a broad definition and application. Every entity that conducts an economic activity is an undertaking within the meaning of Article 101 of the TFEU and Article 6 of the Competition Act, regardless of its legal form. Legal personality is not even required. The term “agreement” also has a broad scope. If consensus is reached and the undertakings intend to take each other’s interests into account, that suffices to assume the existence of an agreement. The term “concerted practice” has an even broader scope than “agreement”. All it requires is some form of coordination between undertakings in which the competitive risks between them are replaced by cooperation. A specific prior plan is not a requirement. In sum: the cartel prohibition has a broad scope and may even pertain to “innocent” contract sharing by enquiring who is going to tender for what contact.
Collusion in tendering procedures
Collusion also quite regularly occurs in tendering procedures. It may come in various guises, but often involves prohibited agreements or concerted practices between undertakings with the aim of distorting competition in the award procedure. Agreements may be made, for instance, to coordinate the details of a tender or, conversely, to have one or more of the undertakings involved refrain from tendering. Undertakings may also allocate the market on the basis of geography, the contracting authority involved, or the subject of the tender. That way the chances of a contract being awarded to a particular tenderer are greatly increased and the price can be driven up.
Collusion in tendering procedures undermines a fair and transparent tendering procedure and restricts competition. The costs for the contracting authority may be enormous. In the Netherlands, for instance, studies have shown that contracts in the building industry cost up to 20% more than they would have done in normal circumstances. Collusion in tendering procedures is therefore an obvious breach of the cartel prohibition. For that reason, contracting authorities have the option to exclude an undertaking from the procurement procedure if they have plausible reasons to assume that collusion has taken place (Article 57(4)(d) of Public Procurement Directive 2014/24/EU). In the Netherlands, the facultative exclusion ground relating to a serious professional error on the part of a company could also be used to exclude that company from the procurement procedure (Article 2.87(c) of the Public Procurement Act). The Dutch Tax Authorities, for instance, excluded KPN from a procurement procedure because it had failed to report in its own statement a serious professional error that it had made. The Dutch Supreme Court has furthermore ruled that the Ministry of Public Health, Welfare and Sport should have excluded a number of public transport companies on the grounds of a serious professional error (because that exclusion ground had been declared applicable to the procurement procedure).
A tenderer should thus be well aware of what is and is not allowed in a tendering procedure. Cooperation is not always prohibited: if the tenderers are not competitors, cooperation is permitted, in principle. There are also possibilities when the cooperation agreement meets the requirements of the combination exemption. In that case, the agreement is exempt from Article 6 of the Competition Act. The idea behind this exemption is that forming combinations may also give rise to many advantages, such as risk spreading or easier market entry. ACM has published guidelines of the Ministry of Economic Affairs for combination agreements on its website. Under certain circumstances, some forms of cooperation may furthermore be exempt under the Guidelines on Horizontal Restraints. ACM does emphasise, however, that cooperation is subject to strict conditions. Companies must themselves ensure that they comply with the rules and must apply the exemptions correctly. Prohibited collusion may lead to high fines (of up to EUR 900,000 or, if higher, 10% of the company’s turnover) being imposed by ACM.
The European Commission on countering restrictive practices
The Commission drew attention to the seriousness of the collusion problem in the procurement sector in 2017 already. In its communication “Making public procurement work in and for Europe”, it announced several instruments that should be of help to Member States and contracting authorities in combating collusion. The new Communication elaborates on these instruments.
According to the Commission, collusion is a recurring phenomenon on the public procurement market. To combat collusion, the Commission wishes to improve the cooperation between contracting authorities and competition authorities. The knowledge and expertise of both parties should be pooled.. Certain schemes operated by contracting authorities, such as whistle-blowing and leniency programmes, could be promoted more effectively by competition authorities. A broad exchange of information between contracting authorities and competition authorities might also help competition authorities to better fulfil their tasks when dealing with collusion. Joint training sessions on both public procurement and competition could also be organised, to familiarise both sides with each other’s areas of activity.
Finally, the Commission has provided extensive guidelines aimed at clarifying the use of the procurement directives. Contracting authorities may use those guidelines when checking tenderers to detect collusion at the earliest possible stage. The guidelines explain, for instance, what is meant by “'sufficiently plausible indications” to exclude an economic operator (known as “red flags'”). According to the Commission, examples of red flags include:
- identical errors or spelling mistakes in different tender documents;
- different tenders written using similar handwriting or fonts;
- tenders using another tenderer’s letterhead or contact details;
- different tenders with identical miscalculations or identical methodologies for estimating the costs of certain items; and
- tenders submitted by one and the same person or by persons with the same contact details.
Additionally, a specific list of resources and tips is provided. Undertakings should be made aware, for instance, of collusion and its consequences, and contracting authorities should do the groundwork thoroughly. It is important to properly investigate the market and to start the award procedure in good time, so that a contracting authority has sufficient time to check tenders. Close attention should accordinglybe paid to the prices quoted and contracting authorities should check, for instance, whether those prices correspond with a bidding pattern based on earlier similar tendering procedures. They should furthermore check whether the tendering companies are connected in any way and whether they have been found guilty of collusion in the past.
ACM has also drawn up a list of viewpoints for procurement officers of contracting authorities to help them identify prohibited collusion. For instance, the number of tenders (much fewer than usual), the type of company that submits a tender (companies from which you did not expect to receive a tender) and tenders that resemble each other may be important indicators of prohibited collusion. Inexplicably increased prices, extremely low prices, or companies that change their prices should also set off the alarm bells. Finally, attention should be paid to suspicious comments, for instance that the trade association determines the prices or that a party sell products only in certain regions.
More information about the exclusion grounds that a contracting authority may use, can be found on the PIANOo website.
More information on dawn raids by ACM and the European Commission can be found at invalacm.nl.
