LETTER | Bid-rigging conspiracies in public procurement

EDITOR'S NOTE: This letter has been amended to clarify that the fines recommended for eight companies over bid-rigging had been proposed by the MyCC but had yet to be finalised.

LETTERS | The public sector projects are huge, costly and a large number of public funds are channelled into the market through public procurement. The procurement process continues to be vulnerable to high risks and distorted by problems of abuse of power and corruption. Bid-rigging occurs in industries and under many circumstances and in all part of the world.

In fact, in 2020, the government is spending an estimate of RM173 billion on development (asset and service). The Malaysian Competition Commission (MyCC) estimates that public procurement is to take up to 35 percent of the GDP.

A MACC report states that between 2013 and 2018, among the sectors that suffered significant financial loss through public sector procurement, topped the list at 43 percent. This happens when there are unlawful manipulations of the procurement process.

However, it is shocking when Mokhtar Samad, the president of the Malaysian Malay Contractors Association confessed that in the past, 10 crony companies would take part in selected tenders through bid-rigging and working in cahoots with one another. In other instances, the contracts would be awarded by direct negotiation and jobs are given directly to cronies “with all sorts of excuses to justify the giving of the direct awards”.

Bid-rigging or collusive bidding in public procurement is fraud schemes that involve agreement among the contractors in the bidding process. Collusion between the contractors and corrupt public officials involved in the contract will result in corruption and abuse of power.

In Malaysia, bid-rigging is expressly prohibited by Section 4(2)(d) of the Competition Act 2010 (CA 2010) but unfortunately, the term itself is not defined. However, the MyCC has been given wide-ranging investigation power including to search and obtain documents to assist in the gathering of information and evidence.

Collusion among competitors, meanwhile, prevent healthy competitive forces. There are five basic schemes involved in most bid-rigging conspiracies in public procurement:

Bid suppression

This is a form of bid-rigging where a group of contractors participate in a particular tender agreed among them not to bid to ensure that the pre-agreed contractor wins the contract.

This is done by refraining or declining them from bidding. Withdrawing from participating in the tender takes place at the end of closing bid date.

It is a form of a conspiracy among bidders to protect their group’s monopoly. Sometimes, they prevent outside contractors from bidding. Forceful measures, threat and violence are also used to deter competition.

Bid rotation

Bid rotation is a form of market sharing where two or more bidding companies collude together and share the bidding by taking turns to be the winning bidder. The modus operandi is pre-arranged by being the lowest bidder or by withdrawing from the bid to allow a friendly contractor to win the bid.

All the participating contractors in this scheme will have an equivalent chance to win the bid. They share this information illegally to control the price, percentage of the profits or be hired as a subcontractor. Bid rotation is normally workable in a stable and understanding community of bidders.

Market division

In the market division, the contractors agree to bid and divide markets based on the product, customer, service or geographical areas. In this scheme, cooperating contractors refrain from competing with each other but have an equal chance to win the bidding through collusive measures such as submitting complementary bids as agreed by all parties.

Complementary bidding

Complementary bids, also known as protective or courtesy bids, are merely to give the appearance of a genuine bid but are actually intended not to be successful. The motive is to act as a vehicle for another contractor to win the bid.

The contractors should submit bids that are too high to be accepted by the buyers. This is to ensure that the pre-selected bidder is chosen.

In exchange, the winning contractor may share the profit, hired as sub-contractor or allow to win in another bidding.

A phantom bidder

A phantom bid is a fraud bidding scheme and involves contractors creating a fake or dummy company and submit a variety of bids on one contract. This bidding is placed where the bidder does not intend to win the bidding but is attempting to raise the price of the contract being offered.

A deterrence to bid-rigging is to set pre-qualifications of the companies or contractors by requiring them to submit audited financial statements for recent years.

As reported in the Bernama on March 5, 2019, the MyCC has proposed that eight companies be fined a total of RM1.94 million in penalties for bid-rigging in the tenders by the National Academy of Arts, Culture and Heritage (Aswara).

This was Malaysia’s first bid-rigging case and found that the companies colluded to share tenders, prepare documents together and manipulate the tender price. For example, because of the bid-rigging, the government had to pay RM150 million for an RM100 million contract, thus incurring a loss of RM50 million.

Their action is detrimental to national development and unfair to the taxpayer’s money. Strict action needs to be taken against those companies and the MyCC must conduct more investigations as in 2013 when made it clear that bid rigging would not be tolerated.

Some procurement officials are vulnerable to corruption due to power, opportunity, pressure and rationalisation factors. They can facilitate the bid suppression efforts (e.g., by disqualifying other legitimate bidders during the bidding process) and take a cut of the profits as bribes from the conspirators. In most countries, due to unhealthy political pressure, part of corrupt money usually ends up in the coffers of corrupted politicians or parties to be used for their political expenses.

The public sector needs to be aware of these risks and should consider strengthening and actively reviewing the existing internal control policies, undertaking risk assessment and reviewing and updating the detection mechanism and putting the best practice in place to address these problems. Accept good recommendations from the MyCC.

Healthy competition should be encouraged among contractors as it helps the government to obtain the best value for money for goods and services they procure.

However, the best internal control policies alone in tender exercise is not sufficient enough to prevent the corrupt practice. Although it is more effective if the committees and board members possess high integrity. In the public service profession, integrity is fundamental.

The consequences of procurement fraud, especially bid-rigging, may not only be about high costs, taxpayers’ money will be wasted and diminution of value, but may also imperil personal safety, image and organisational capabilities.

AKHBAR SATAR holds a professorial chair at Institute of Crime and Criminology, HELP University.

The views expressed here are those of the author/contributor and do not necessarily represent the views of Malaysiakini.