Implications of the recent Office of Fair Trading (OFT) reports on bid rigging in the property and recruitment industries

Report: 6
Date: 3 December 2009
By: Director of Resources on behalf of the Commissioner

Summary

The Office of Fair Trading (OFT) have recently completed 2 widely publicised investigations into bid rigging in a series of public and private tenders for Property/Construction Services and Recruitment services to support Construction Projects.

As a result of these investigations, a number of companies have been named, and fined for a breach of competition law.

This decision has raised issues regarding how the MPS and other public bodies treat these offences as part of the qualification process for any future tenders where suppliers in general, in addition to those fined by the OFT in particular, bid for work.

It is of note, that some of those suppliers fined by the OFT are current MPA/MPS suppliers.

A. Recommendations

that Members

1. Approve the view that the contracting Authority is currently not able to exclude any organisation from a future tender, as a result of being fined by the OFT for a breach of competition law, given that the OFT process is still in progress and the results are or may be challenged by effected bodies.
2. Approve the changes to MPS processes outlined at paragraph B.18.
3. Note the review activity with regard to existing contracts highlighted in paragraph B8

B. Supporting information

1. In the last week of September 2009, we have seen the publication of two reports by the Office of Fair Trading into corrupt practices, including bid rigging, and market fixing in the Property/Construction/FM industry and Recruitment services to these industries. MPS Property and Procurement Services and MPA Internal Audit were aware of such investigations previously and have been awaiting the final reports before they could examine the implications for the MPS/MPA.

2. A number of individual contractors have been identified and their associated tendering action deemed to be illegal and in breach of the Competition Act 1998. As a result a number of property companies (over a 100) and 6 recruitment agencies have been fined varying levels of financial penalties.

3. A number of the MPS’ current and previous suppliers are amongst the companies named in the report. In particular a number of the MPS’ key suppliers have received the biggest fines principally in relation to property related contracts. (For note the OFT appear to have based the size of the fines on the size of the organisation and its turnover, not the extent of the practices within the organisation)

4 The main suppliers involved, are listed in Table 1 below:

Property/Construction/FM industry

Recruitment

5. A number of companies that have been fined by the OFT, including some of the above, have indicated in both the media and , in the case of current MPS suppliers direct to the MPS that they disagree with the finding of the OFT, the size of the sanction imposed and are in the process of either considering an appeal or actively pursuing one.

6. For the MPS/MPA and other public bodies, there are potential media and reputational implications for the continued usage of these suppliers. However, the OFT decision also raises the following pertinent questions:

What does the decision mean for existing contracts?

7. The Construction report lists, on a project by project basis, individual projects /tenders where improper behaviour was found. There are no MPS projects involved. However, the list of incidents appears to stem from whistle blowing activity. It is not therefore considered to be an exhaustive list, and therefore impossible to exclude the possibility of improper practice on other contracts by those contractors that have been found to have breached competition law.

8. The contracts concerned have already been the subject of Value for money considerations at the time of award. However the MPS, for completeness, have examined the process by which contracts, such as FMS, Safer Neighbourhoods etc .were won by the above organisations in the recent past, for any evidence of collusion. No evidence was found. A summary of our findings is contained in exempt Appendix 1.

What does it mean for procurement exercises in the future?

9. The MPS must address the issue of how it will treat organisations, found to be at fault by the OFT, during the qualification stage of any future tendering process.

10. The MPS uses a series of standard questions, as part of its process to qualify bidders as suitable to receive a tender, which seek information confirming the legal probity and adherence to legal business practices of bidders. Whilst these types of questions are standard in most complex EU regulated procurements these questions can differ in complexity dependant of the type or value of the tender.

11. Competition between bidders is the most practical means by which the maximum value for money is achieved for externally sourced goods and services. A key factor in this process is the presence of a sufficiently large number of organisations able to compete for work. In this case, Procurement and Property Services consider the removal of over a hundred organisations (including some of our current strategic suppliers) if we were to rigidly apply the disqualification standards at the PQQ stage, would severely curtail the potential market of suppliers and our ability to achieve value for money in future procurements.

12. The only aspect where we are proposing to differ from the OGC/OFT advice is whether we wish to follow a policy of failing/rejecting organisations if they do not declare the OFT have fined them for breach of Competition law, at the pre-qualification stage. This is purely on the grounds of integrity.

13. Given that the OFT process is still in progress and the results are or may be challenged by effected bodies, Procurement Services are of the view that the contracting Authority is not able to exclude any organisation currently from a future tender as a result of any highlighted possible breach. Once any appeal process has been concluded, the MPS must have a clear position.

14. To arrive at a recommendation on this position, we have sought the advice of other Public Bodies on how they are approaching this issue.

15. The OFT, in announcing the result of their investigation, have recommended that they believe that the fines they are seeking to impose are sufficient punishment and that this should not be a future excluding factor.

16. The OFT further states, on their website, that whilst their investigation suggests that cover pricing was uncovered in over 4000 tenders involving over 1000 companies because of limited resource, investigations were focused on a limited number of companies and instances where the evidence was strongest. They believe “the endemic nature of the practice within the industry suggests that many other companies are likely to have been involved in bid rigging, even though such activity remained undetected”

17. This advice has been endorsed by the Office of Government Commerce (OGC) but this endorsement consists of a simple sentence and a link to the relevant OFT web page.

18. Procurement Services have also sought the views of DLS (whose views are noted in section E) and MPA Internal Audit to confirm consistency of thought and application.

19. As a result of this consultation Procurement Services propose that the following action be implemented now. This, we believe, will ensure that the OFT report issue is addressed during the Qualification stage of tendering in a consistent and clear manner in keeping with an appropriate evaluation process and minimise overall risk:

• amend standard qualifying questions to explicitly state that bidders must highlight any judgements by the OFT on their organisation which are finalised or are in train
• instruct bidders to, where they indicate such a finalised judgement , highlight the actions they have taken as a result of the relevant judgement
• continue to disqualify any bidder who fails to highlight such examples in their responses or has been found guilty previously of such an action against the MPS, the MPA or any member of the GLA Group
• allow through bidders who have highlighted such an example and have confirmed actions in line with the relevant recommended actions resulting from said qualification
• Ensure the above are reflected in the evaluation schemes for tenders, which are communicated to bidders as part of the tender process as required by EU regulations, as a pass/fail criteria in the qualifying process

20. We believe that implementing the recommendations within this report safeguards the MPS regardless of when the OFT process comes to a final conclusion.

21. The MPS will review its position, on a case by case basis, in the event of further OFT investigations into other industries and markets or a change of policy or advice by OFT, OGC or other GLA Group members.

C. Race and equality impact

There are no diversity implications arising from this report.

D. Financial implications

There are currently no financial implications directly arising from this report. However, there are potentially financial implications arising from individual contracts in terms of securing the most competitive tenders.

E. Legal implications

1. The Competition Act 1998, like the procurement legislation, is designed to make sure that businesses compete on a level footing. It does so by prohibiting certain types of anti-competitive behaviour. The OFT has strong powers to investigate businesses suspected of breaching the Competition Act 1998 and can impose tough penalties.

2. The OFT has issued a specific note, which is attached at Appendix 1, which advises contracting authorities not to exclude the companies that have been fined as a result of its enforcement action in future tenders.

3. The MPA/MPS must adhere to both EU law and the Public Contract Regulations 2006 in respect of procurement and tendering requirements, and the rules which govern tenders and contract awards in the Contract Regulations, under Part F, of the MPA’s standing orders.

4. The contracting authority must exclude a bidder where the bidder falls within one of the ground specified under regulation 23 of the 2006 Regulations, and is entitled to ask supplementary questions on information relation to those matters under regulation 27. The contracting authority can request additional PQQ questions, but must comply with Part 4 of the Regulations.

5. All evaluations, methodologies and scoring etc, must be agreed and set out prior to any documentation being returned by the bidder, and this approach is supported by the decision in Lianarkis which requires transparency at all stages of the procurement process.

6. In addition to the steps recommended in this report, the MPS/MPA mitigates the risk of collusion amongst suppliers by ensuring it evaluates all tenders on criteria other than price, e.g. the most economically advantageous tender.

7. This report not only provides Members with an update on the OFT investigation, but also raises visibility of the MPS/MPA’s procurement decision making and aims to reduce risk.

F. Environmental implications

1. The table below indicates the expected effect (Higher; Lower; No impact; or Mitigation/management of any higher impact) of the recommended option (compared to the ‘do nothing’ option) on:

• Level of energy use and associated carbon dioxide emissions:  No impact
• Level of water consumption: No impact
• Level of waste generation/waste requiring disposal: No impact
• Level of travel and transport and associated emissions: No impact
• Raw material use and finite resources (use of recycled materials and sustainable alternatives): No impact

G. Background papers

None.

H. Contact details

Report authors: Chris Gibson - Procurement Services, MPS

For more information contact:

MPA general: 020 7202 0202
Media enquiries: 020 7202 0217/18

Appendix 2: OFT Information note to procuring entities in the public and private sectors regarding the OFT’s decision on bid rigging in the construction industry

22 September 2009

This information note has been prepared in conjunction with the OFT's press release of 22 September 2009 announcing its decision (the Decision) that 103 construction companies (the Parties) have infringed competition law through their involvement in bid rigging activities, in particular cover pricing.

Introduction

This note sets out the OFT's views on steps that procurers may be considering as a consequence of the OFT's Decision: specifically, the exclusion of the Parties from future tenders. This note has been prepared following consultation with the Office of Government Commerce (OGC). It is, however, a matter for individual procurers to decide what action, if any, they should take in their own particular circumstances, having taken appropriate legal advice as necessary.

Background

The findings in the OFT’s Decision relate to the conduct of the 103 Parties named in the OFT’s press release. However, the OFT’s investigation suggests that cover pricing was a widespread and endemic practice in the construction industry. Indeed, the OFT uncovered evidence of cover pricing in over 4000 tenders involving over 1000 companies but had to focus its investigation on a limited number of companies and instances where the available evidence was strongest, in order to make best use of its resources and conclude its investigation within a reasonable timeframe. The OFT could not, therefore, pursue every firm suspected of involvement in cover pricing. Moreover, the endemic nature of the practice within the industry suggests that many other companies are likely to have been involved in bid rigging, even though such activity remained undetected. For this reason, it cannot be assumed that the Parties are the only companies that may have engaged in cover pricing.

Exclusion of the Parties from bidding for future tenders

In light of the above, it is the recommendation of both the OFT and the OGC, that the Parties should not be excluded automatically from future tenders on the grounds that they are Parties to the Decision, or be the subject of similar adverse measures making it more difficult for them to qualify for such tenders.

Public authorities are advised to consider the specifics of their procurement, as well as the points outlined below, in deciding the most appropriate course of action on a case by case basis.

The OFT considers that the following factors are relevant to the above:

• The Parties have received significant financial penalties appropriate to the infringement findings in the Decision;
• It would be wrong automatically to assume that construction companies that are not named in the Decision have not also been involved in bid rigging;
• As a result of the OFT’s investigation, the Parties can be expected to be particularly aware of the competition rules and the need for compliance and, if anything, are more likely to be compliant; and
• Many of the Parties have cooperated fully with the OFT’s investigation and a significant proportion have taken measures to introduce or reinforce formal compliance programmes and to ensure that their staff are aware of their competition law obligations.

For the avoidance of doubt, this recommendation is only intended to apply to this case. It should not be assumed that the OFT would take a similar view in future cases.

Avoidance and detection of bid rigging

Through this Decision, and previous decisions involving the roofing sector, the OFT has sent a clear message to firms both in the construction industry and more generally that bid rigging, including cover pricing, is a serious breach of competition law attracting serious penalties. However, procurers can also take steps to limit the risk of bid rigging occurring in the first place, and to increase the likelihood of detection should it occur.

To that end, the attention of procurers is drawn to the following guidelines:

• ‘Making competition work for you’, a general guide for public sector procurers prepared by the OFT and OGC, which includes guidance on the mitigation of the risks of anti-competitive behaviour
• ‘Guidelines for Fighting Bid Rigging in Public Procurement’, ‘Designing tenders to reduce bid rigging’ and ‘Detecting bid rigging in public procurement’, three ‘best practice’ guidelines prepared by the Organisation for Economic Cooperation and Development (OECD) with input from the OFT

Although these guidelines were designed with public procurers in mind, the principles apply equally to private procurers.

The OFT will continue to work with the construction industry, government and others to ensure effective competition. Should you have any queries regarding this notice, these should be directed to the construction case team at the following email address: construction@oft.gsi.gov.uk

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