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Procurement Perspectives: Bid rigging could be costing the public billions

STEPHEN BAULD
Procurement Perspectives: Bid rigging could be costing the public billions

There is good reason to fear bid rigging in the public procurement field, as it’s not only pervasive but it could be costing the public billions.

For instance, even as far back as 1986, the Florida attorney general’s department became concerned with suspicious-looking bid patterns in relation to the supply of milk to public school districts in that state.

The department contacted the Department of Justice Antitrust Division’s Atlanta field office and requested an investigation.

This led to the discovery of a state-wide conspiracy to rig the supply of dairy products as well as evidence of similar conspiracies in Georgia, Virginia and other states. Ultimately, 109 milk bid rigging cases involving 61 corporations and 68 individuals were uncovered, leading to eventual fines of more than $53.7 million as well as the imposition of custodial sentences on 26 individuals. Nor, as this paragraph might suggest, is it likely that the problem is confined to isolated types of supply such as school milk.

Indeed, apparently, the mere fact that bid rigging may endanger national security is no reason for business not to avail itself of the opportunity to profit by cheating the tender system.

While in the United States, the antitrust division has pursued the problem of price-fixing vigorously, in Canada the corresponding efforts have been far more limited in scope and smaller in scale. Moreover, even in the United States, recovery of the damages suffered by the public sector has been far from exemplary.

For instance, as a result of its action in relation to the Florida milk bid rigging scandal, the antitrust division obtained civil recovery in the range of $8 million.

One study of the effect of bid rigging on school milk prices in Ohio found that the price increase resulted from the rigging scheme was as much as 11.3 per cent in any given year and averaged 6.5 per cent over the scheme’s lifespan.

A 1989 study of the effect of bid rigging in sewer construction found price increases of “at least 36 per cent.”

A 1992 comparative study of the effect of bid rigging on highway construction has found an increase of 18 per cent in North Carolina and an increase of 6.5 per cent in South Dakota.

A 1993 study on the supply of frozen fish to the United States Defense Department found that prices increased by 23 to 30 per cent over the life of the scheme.

Similar effects have been identified when public authorities auction off their surplus assets.

For instance, a 1993 study of the effect of bid rigging on auctions of used police cars found a 17 to 28 per cent decrease in the prices received, while a study on real estate auctions found a decrease of 32 per cent in price.

The limited information available in relation to Canadian bid rigging suggests a similar impact here.

Even the criminal fines for bid rigging appear ridiculously low in comparison to the damage caused.

Although prosecution in Canada is isolated, fines imposed in Canada compare to those in America. In contrast, European fines tend to be much lower.

The United States Sentencing Commission’s Sentencing Guidelines direct that: “In selecting a fine for an organization within the guideline fine range, the court should consider both the gain to the organization from the offence and the loss caused by the organization. It is estimated that the average gain from price-fixing is 10 per cent of the selling price. The loss from price-fixing exceeds the gain because, among other things, injury is inflicted upon consumers who are unable or for other reasons do not buy the product at the higher prices. Because the loss from price-fixing exceeds the gain, subsection (d)(1) provides that 20 per cent of the volume of affected commerce is to be used in lieu of the pecuniary loss under 8C2.4(a)(3).”

Stephen Bauld is a government procurement expert and can be reached at swbauld@purchasingci.com. Some of his columns may contain excerpts from The Municipal Procurement Handbook published by Butterworths.

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