Challenges in Detecting and Proving Collusive practices Ezzeddine Nciri Lead Integrity and Investigation Specialist Group Integrity Office Islamic Development Bank Group
IDB Poli ID licy Article of of Agre greement IDB has an obligation to ensure that its resources and facilities are used only to their intended purpose Obj Objective To ensure that the projects under Bank’s financing are free of fraud and corruption
Group Integrity Office Initial contact for allegations of integrity violations Integrity Due Diligence Investigate allegation of Corrupt and Fraudulent Practices Promote awareness of Anticorruption Policy Advise and provide recommendation to management of investigative findings
Sanctionable Practices 1. Corruption 2. Fraud 3. Collusion 4. Coercion 5. Obstruction
The schemes often are linked. For example… 1. A BRIBE may be demanded in exchange for the promise of a contract award, which leads to… 2. Some form of BID RIGGING by project officials and the bribe payer to exclude competitors and finally … 3. FRAUD by the corrupt bidder to recover the cost of the bribe and exploit the corrupt relationship.
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People of the same trade seldom meet together, even for merriment or diversion, but the conversation ends in conspiracy against the public, or in some contrivance to raise prices. Adam Smith, The Wealth of Nations
A “ collusive practice ” is defined as… “An arrangement between two or more parties designed to achieve an improper purpose, including to influence improperly the actions of another party.” The collusion schemes are designed to undermine competitive bidding which is a cornerstone of the Procurement Guidelines. The result is higher costs as prices are artificially inflated.
Where are the risks of collusion the highest? Construction sector especially roads Sectors where there are few qualified bidders compared to the number of contracts In some cases domestic preferences priced-out international competitors enabling a local cartel to operate In other cases international bidders colluded with local firms offering to represent them locally or serve as subcontractors Some inspections or pre-bid conferences were used to organize collusive arrangements
Who are the Players in a collusive bidding scheme? Government insider(s) The The designated designated The losers winner leader Companies outside the control of the cartel 13
Primary methods of collusive bidding • Bid rotation Agreement among bidders to take turns in winning contracts • Market division Cartel members agree to divide their market (e.g. geographical territories and client segments) • Price fixing Agreement among competitors to fix prices at which goods and services are sold in a specific market
Collusion between Contractors and Officials • A previous reputation or history of bid rigging in the country or type of project • Bid specifications are too narrow or too vague • Unreasonable pre-qualification requirements • Unreasonably short time to submit bids • similarities between a bid and the Owners’ Estimate and/or Engineering Estimate • No explanation, or weak explanation, provided for the lowest bidder not being awarded the contract • Based on the information contained in the bid proposal a bidder should have been disqualified
Collusion between Contractors: Cartel • Persistent unexplained high prices • Rotation of winning bidders • Same bidders always bid, new bidders are excluded • Losing bidders become subcontractors • A very narrow variance between the Owners’ Estimate and the bidders • A very narrow variance between the bids of the lowest bidders • Bid prices drop when a new bidder enters
Collusion between Contractors: Cartel • Sequential false or forged bid securities • Similarities between the unit prices quoted by separate bidders • The bid proposals use the same formatting and language • Documentation contained in bid documents appear to be photocopies of information from other bid documents • A site visit indicated that the address of the vendor was inconsistent with the information provided in the bid documents • Apparent connections between the bidders such as same addresses or fax numbers on different bids, physical similarities in different bids
Collusive bidding • Obtain bidding documents - look for red flags such as similarities in bids, sequential bid securities, etc. Detection steps • Do background asset checks on the bidders - identify common owners, addresses or other indications of affiliations between firms • Interviews • Contact excluded and losing bidders; use the evidence obtained above to solicit the cooperation of losing bidders • Exercise audit rights on the winning bidder - look for communications between bidders or other evidence of collusion • Interview the winning bidder
An Investigation Case of Collusion Infrastructure Project: roads 3 lots with condition: No more than one lot for each bidder Out of 16 companies requested the bidding documents, only 6 submitted their bids ( one local company and five from Non Member Countries out of them four are from the same country ) Financial bids: (Millions Euro) A B C D E F (local) Lot 1 81 69 47 87 Lot 2 54 45 37 Lot 3 41 31 38 24 42 56 Companies E and F ? They disqualify company D (Lowest bidder for the three lots). Reasons? The total amount of the project would be 132 instead of 161 if the offer of company D was not rejected The total amount of the project would be 108 if it was not foreseen that a company can not have more than one lot
1. Establish and clearly communicate Practical a zero-tolerance countermeasures 2. Learn the most common schemes and their red flags 3. Encourage, facilitate and follow-up on complaints Basic steps to deter 4. Exercise “professional skepticism:” look behind submitted documents and the reports; independently determine the relevant facts 5. Do closer supervision of project implementation 6. Be accountable for results: Quality, Cost and Timeliness 7. Publicly sanction collusion and the other sanctionable practices
1. Adequate legislation prohibiting collusive practices Practical 2. Analyses of the public procurement countermeasures data to understand the specific market or industry and assess the bidders’ behavior 3. Reliance on procurement officials to detect collusion 4. Strengthen the cooperation between the competition and anticorruption authorities 5. Political will to prosecute, especially large domestic firms 6. Enhance the capacity of the national investigative bodies 7. Effective prosecution 8. Severity of the punishment
THANK YOU FOR YOUR ATTENTION
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