Sharing experiences: bid rigging in procurement

by Juanita Riaño and Marianela López Galdos, from IDB’s Office of Institutional Integrity*

Seguir a @jrl44

As part of its knowledge sharing activities, the Office of Institutional Integrity (OII) invited two experts from the Mexican Federal Competition Commission (COFECO, in Spanish), Paolo Franco Benedetti and Angel López Hoher, to talk about COFECO’s efforts to investigate and sanction bid-rigging in public procurement.  It was a fascinating presentation in which COFECO experts discussed some of their experiences and we thought it would be interesting to highlight some of the main points of the presentation in this blog post.

The key factors that make public procurement prone to bid rigging are:

1. Lack of an appropriate framework to investigate and sanction collusive practices;
2. Lack of competition among bidders;
3. Perverse incentive to favor form over substance when following public procedures; and
4. Requirements of making all bids public–winner and losing –after the process is finalized.

We have decided to focus on the fourth factor since it is one of the most complex: Requirements of making all bids public–winner and losing –after the process is finalized.

First, information made public can be used to determine prices in future bidding processes to set reference prices at the upper-end range, increasing the costs of procured goods. Second, the participants in the collusive agreement that were not awarded the contract can use the information to monitor compliance of the winner with the agreement –how much money the winner will be paid and therefore of how much money s/he will need to pay them back –. The World Bank reached a similar conclusion in a report on collusion in the road sector.

Do not take this as an argument against transparency; instead take it as an argument for targeted transparency.

To foster accountability, it is not enough to make everything public.  What is important is to always analyze who the potential users of the information in question are, in order to decide what and how to share the relevant information.

Mr. Benedetti and Mr. Hoher explained how the procurement system of the Mexican Institute of Social Security (IMSS, in Spanish) unintentionally created opportunities for collusive practices and had a negative impact on the provision of health care services. In fact, the IMSS consistently paid higher prices for medicines; encounter winning bidders that did not fulfill their contracts; and did not generate incentives for innovation in the sector.

In 2010 COFECO investigated providers of generic medicines.  Its investigations resulted in the imposition of fines to 6 companies “for a total of $151.7 million Mexican pesos, the maximum amount allowed by the competition law applicable at the time in Mexico”.[1]More importantly, as a result of the investigations the IMSS modernized its procurement processes and became the first public institution to pilot the OECD Guidelines for Fighting Bid Rigging in Public Procurement.