Predatory bidding is a pricing strategy of bidding up the price of inputs to prevent other competitors from acquiring enough supplies. Predatory bidding is very similar to predatory pricing.
Auditing consultant, Dave Loxton, has said that company employees have committed undetected economic crimes, such as procurement fraud, during economic downturns, because companies inadvertently weakened their internal controls.
Speaking in Johannesburg recently, he said white-collar crime, including fraud is estimated to cost the South African economy billions of rands annually.
According to a recent study carried out among KPMG’s top 100 clients in Africa , about 30% of businesses said employee fraud had the highest effect on their business.
According to recent South African Police Service crime statistics, 84,842 cases of commercial crime were reported from April 2009 to March last year, a 51.8% rise since 2003 .
US companies are also losing about 7% of their annual revenue to procurement fraud each year, according to international studies conducted recently.
Loxton, a forensics specialist and director at Werksmans Attorneys, said procurement fraud was one of the most costly types of economic crime and tended to go unnoticed .
Procurement fraud affected businesses across a broad range of industries. It usually involved price-fixing, mischarges of goods and bid-rigging.
Loxton said the global economic recession had placed increasing pressure on employees and directors to commit fraud.
It tended to be easier to commit an undetected economic crime, such as procurement fraud, during a recession because companies, in an effort to cut costs, often weakened their own internal controls through injudiciously targeted retrenchment.
Like predatory pricing, predatory bidding involves the use of market power to make other rivals unable to survive in the market. Once a predatory bidder succeeds in clearing the market, it will lower the input prices to earn extra profit that would at least cover the damage caused by predatory bidding.
Some common types of bid-rigging that can contravene the criminal bid-rigging provisions of the relevant public procurement act include:
‘Cover’, ‘courtesy’ or
Some firms submit bids that are too high to be accepted, or with terms that are unacceptable to the buyer, to protect an agreed upon low bidder.
One or more bidders that would otherwise bid agree to refrain from bidding or withdraw a previously made bid.
All parties submit bids but take turns being the low bidder according to a systematic or rotating basis.
Suppliers agree not to compete in designated geographic areas or for specified customers.
Parties that agree not to submit a bid, or submit a losing bid, are awarded subcontracts or supply agreements from the successful low bidder.
In order to establish a bid rigging offence, all of the following elements must be established: (i) an agreement or arrangement between two or more persons (or bidders or tenderers as the case may be), (ii) to not submit a bid or tender, withdraw a bid or tender already made, or submit bids or tenders arrived at by agreement, (iii) intent, (iv) a call or request for bids or tenders and (v) the agreement or arrangement is not made known to the person calling for bids or tenders at or before the submission or withdrawal of a bid or tender by any party to the agreement.
Agreement or arrangement
The first necessary element to establish bid-rigging is the existence of an agreement or arrangement (to not submit a bid, withdraw a bid already made or submit a bid arrived at by agreement).
Also as under the criminal conspiracy provisions, Canadian courts have articulated this element as requiring a “consensus of minds” or a “mutual understanding” between the parties to an agreement.
It has been held, however, that mere consultations between parties bidding in relation to pricing, where there has been no agreement or arrangement between the parties and their respective bids are not communicated to the other before tenders are submitted, does not contravene the relevant public procurement regulations.
Of course, as under the Act’s conspiracy provisions, discussions or interaction with co-tenderers, where such interaction is not part of a bid consortium or other legitimate joint bidding arrangement, may well raise significant issues and risk for the parties.
As with criminal conspiracies, a bid-rigging agreement may also be inferred from circumstantial evidence (for example, the submission of identical bids following a meeting of bidders).
The second necessary element to establish bid-rigging is intent. In this regard, it must be established that an accused intentionally entered into an agreement or arrangement with one or more persons (or bidders as the case may be) to not submit a bid, withdraw a bid already made or submit a bid arrived at by agreement. It is worth noting, however, that while it must be established that an accused intended to engage in conduct proscribed under the law, motive is irrelevant to establish an offence.
Call or request for bids or tenders
To establish a bid-rigging offence, it must also be established that a bid or tender is made “in response to a call or request for bids or tenders”. It has been held that the requirement that there be a call or request for tenders will not be met where mere price quotations are submitted where there is ‘no specific direction or call’ for bids or tenders (for example, where price quotations by subcontractors are submitted to a general contractor, where the call for tenders or bids has been made to general contractors and not to the subcontractors).
Agreement not made known to person calling for bids or tenders
Finally, to establish a bid-rigging offence, it must be established that an agreement or arrangement has not been made known to the person calling for bids or tenders at or before the submission or withdrawal of a bid or tender by any party to the agreement. In this regard, the Act in essence provides a defense for parties that are engaged in joint bidding projects, such as bidding consortia or other types of joint ventures that may involve the submission of joint bids.
The time when a bid or tender is made is critical to ensuring that this requirement is met, which has been held to be when the contents of a tender are communicated to the party calling for tenders (for instance, when a tender is opened).
It is also critical that communication of any joint tendering be expressly made, as merely inferring the submission of joint bids (like when bids are identical) will be insufficient.
The only actual bid-rigging exception is for agreements between affiliates (that is, where an agreement or arrangement is entered into only between affiliates).
As discussed above, however, a bid-rigging offence will also not be established where parties (or bidders) expressly communicate an agreement to a party calling for bids or tenders at or before the time when a bid is submitted or withdrawn. Where this is effectively achieved, the elements necessary to establish a bid-rigging offence cannot be made out.