Does a High Profile Cartel Investigation Reduce Bid-Rigging?

(by Andreas Stephan) The OFT have published survey research suggesting greater awareness of competition laws in the construction industry following enforcement, but not the sea change we would hope to observe in an industry recently subject to significant cartel fines.

The OFT imposed fines totalling almost £130 million in 2009, on 103 construction firms found to have been involved in bid-rigging and cover pricing. The OFT had commissioned a study to be carried out by Europe Economics in two parts: an initial survey was completed in 2008 before the OFT had issued its statement of objections; a second survey was carried out in 2010. The main findings are:

  • 44% of contractors perceived a drop in cover pricing since 2008
  • 76% now aware of competition law penalties, compared to 49% in 2008
  • 65% have introduced compliance mechanisms in the last two years
  • 75% had heard of the OFT decision; 80% of those cited media reports as the main source

The study certainly makes for interesting reading. However, it is perhaps a little disconcerting that the OFT’s investigation has not made an even bigger impact. As the study acknowledges, respondents may have been more likely to suggest increased compliance, in the knowledge that the survey was being funded by the competition authority. We cannot say with any certainty how prevalent cartel practices are in the economy, but most of us would probably agree that at least some infringements will go undetected. In this context, it is a little worrying that only 44% of contractors perceived a drop in cover pricing following the imposition of such high fines.  One possible explanation is that the construction industry is characterised by a very large number of small contractors – many of whom run what are essentially family businesses.

A particularly interesting finding is that media reports played a far greater role in disseminating information about competition law and the OFT’s investigation, than did industry channels such as trade associations.  Indeed, only 18% were aware of any recently adopted codes of conduct in relation to competition, while 30% claimed to be members of trade bodies who recently adopted such codes. This finding highlights the importance of competition authorities attracting positive media coverage. Unfortunately, competition law – like many other areas of white collar crime – is not naturally newsworthy and often competes with headlines more likely to have a populist appeal.

Finally, there should be a severe warning attached to any survey addressing illegal activity.  For example, most respondents described bid-rigging practices as very rare or non-existent in 2008.  This is despite the OFT’s subsequent decision which claimed that practices such as cover pricing* had been endemic in the industry.  Might it be that some firms still do not see ‘cover pricing’ as ‘bid-rigging’?

* ‘Cover pricing’ is where a bid is entered in a tendering process which is not designed to win the contract but is intended to give the appearance of competition.  This generally involves asking a competitor what they intend to bid and entering a higher bid. Motivations for doing this might include being too busy to carry out the work while not wanting to appear as ‘small fish’. It may also occur where a contractor is worried they will be taken off the tender list (and therefore not invited to bid for future contracts) if they do not bid for the present one.

One Response to Does a High Profile Cartel Investigation Reduce Bid-Rigging?

  1. David Elliott says:

    I should declare an interest here in that prior to retirement I did advise one company and spoke to two others about their role in the cartel. This was at the early stages of the OFT investigation. These firms were not small firms. What was clear to me and also from the OFT’s statement of objections was that very few of the tender examples the OFT looked at actually involved any intention to raise price. I was told by industry contacts that “cover pricing was what we were taught at college”. To understand this we need to think what the firms were actually trying to do. The tendering authorities (typically local authorities) maintained a list of approved tenderers. As each job came up the authority would pick the next 5 or 6 on the list to send out invitation for tenders to. Those 5 or 6 would the drop to the bottom of the list until their turn came around. It was quite common to come to the top of the list for a job that you did not want ie. too small/too large, not in you geographic area, not matching your skills. However refusing to tender was not an option since to do so risked being removed from the list. So the only option was to a) not carry out any detailed costing of the work, typically expensive to prepare a tender and b) get a price from a firm who you knew or believed would tender so that your bid would exceed that i.e. make sure you did not win a job you did not want. For what its worth my own statistical analysis of bids where a firm gave a cover price to a rival showed that relative to the actual winning price giving a cover price or not made on average no significance difference to the bid. The problem is really with the tendering authorities and the methods they used. My own feeling is they got what they deserved but that the practice had in most cases no effect. Of course the OFT can be equally lazy as the tendering authorities in not having to show effect.

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