Public Procurement: A Tool for Reviving Economy or Raising Competition Concerns?
Keywords: Collusion, Competition, Public procurement, Rigging
The impact of COVID-19 on economies across the globe is disastrous. Countries over the world are attempting to revive their sinking economy by using distinct tools. A look at the Indian model shows that the government is relying on Public-Private Partnerships (PPPs), a form of public procurement, to recuperate the economy. This is evident from the measures announced by the Finance Minister. These measures aim at boosting PPPs, especially in the infrastructure sector. A few of these measures pertaining to PPPs are as follows: First, twelve airports to be auctioned on PPP basis; Second, discoms of Union Territories to be privatized through PPP; Third, all the sectors have been opened up for the private entities, including India’s future inter-planetary and outer space explorations, and access has been granted to the facilities and services of ISRO.
The implementation of PPPs is going to face various obstructions. One such impediment is the competition concerns arising out of a public procurement process. The role of the Competition Commission of India (CCI) will be imperative while dealing with such issues. This post attempts to briefly introduce the interplay between ‘public procurement’ and ‘competition law’. Further, it aims to highlight the possible competition concerns arising out of public procurement, along with a few case laws demonstrating the approach taken by CCI while detecting collusion.
Interplay Between Competition Law and Public Procurement
Public procurement, being a principal economic activity of the government, can be defined as “a process of purchasing goods or services by the public sector”. It aims to promote efficiency, i.e., the selection of the suppliers with the lowest price, or to obtain the best value for public money. In India, government procurement constitutes about 30% of the GDP. Similarly, PPP, as defined by the Government of India is:
“an arrangement between Government or statutory entity or Government owned entity on one side and a private sector entity on the other, for the provision of public assets and/or related services for public benefit, through investments being made by and/or management undertaken by the private sector entity for a specified period of time, where there is a substantial risk sharing with the private sector and the private sector receives performance linked payments that conform (or are benchmarked) to specified, pre-determined and measurable performance standards.”
Although there is no central legislation exclusively dealing with the issues arising out of public procurement, there exist comprehensive rules and regulations in the General Financial Rules, 2017, Delegation of Financial Powers Rules and the guidelines issued by the Central Vigilance Commission through which a procurement process is guided by the central government. Additionally, there are several state legislations like the Tamil Nadu Transparency in Tenders Act, 1998, Karnataka Transparency in Public Procurement Act, 1999, the Rajasthan Transparency in Public Procurement Act, 2012, that govern the procedure for procurement in these states. In India, before the enactment of the Competition Act, 2002, matters relating to public procurement were dealt with by the High Courts under contract law, constitutional law, or administrative law. However, the High Courts were barred from interfering with the decisions related to the structuring of a project, as it would fall under policy decision, and therefore, cannot be subject to judicial review.
This limitation of policy decision was cured by the enactment of the Competition Act, which imposes a duty on the CCI to eliminate the practices having an adverse effect on competition, promote and sustain competition, and protect the interests of the consumers. There is no restriction imposed upon the CCI, and it has been granted the power to interfere in policy or administrative decisions if such decisions raise any issue falling within the above-mentioned duties of CCI. The practices of a government department relating to production, supply, distribution, storage or control of goods, and provision of any service would fall within the ambit of duties of CCI, which can be inferred from the definitions of ‘enterprise’ ‘practice’ and ‘trade’ provided under the 2002 Act.
A cursory reading of the definitions leads to the inference that the CCI takes into its ambit any kind of activity performed by the government at any level, central or state, and excludes only the sovereign functions performed by the government, which include any dealings in atomic energy, currency, defence, and space. Therefore, any dealing of the government under the public procurement process cannot fall under the exception of sovereign function and will be subject to CCI’s scrutiny.
Competition concerns arising out of public procurement
The existence of competition is essential for a public procurement process to realize its purpose, which is to determine the most efficient price offered in a market. But when collusion takes place among the competitors in a public procurement setting, the objective of the whole process is diluted. Some of the competition concerns and the factors responsible for such behavior among the competitors in a public procurement setting are:
Firstly, the position of a public purchaser involved in a public procurement process is more vulnerable as compared to a private purchaser, because of factors like limited strategic options, transparency requirements, legislation, and procedural constraints. These rules are to avoid any abuse of discretion by the public sector and to increase transparency and objectivity in public procurement. However, the requirement of transparency can facilitate free-flowing communication among the bidders participating in a government tender process. This free flow of communication can indirectly promote collusion among bidders, thereby, reducing the competition which can eventually lead to inefficiency of the procurement process. Collusion in public procurement can have more detrimental effects compared to a private procurement, this is because the fund involved in such a structure is public money, and it can affect the disadvantaged groups of the society, that mainly rely on public provisions. Apart from this, public procurement involves high-value projects which can lure the parties into corruption or collusion.
Secondly, certain competition concerns arise when the procurement mechanism adopted by a government department is not designed efficiently enough, keeping in mind the importance of competition. Sometimes, it is also the case that the mechanism adopted by the government itself facilitates anti-competitive practices, therefore, such mechanism or rules and policies require periodical reviews. There can also be an instance where the characteristics associated with the nature of the market facilitate collusive behavior. Factors which can cause such distortion to the competition as highlighted by the CCI in its Toolkit for Public Procurement Officers are:
a) Barriers to entry – Public procurers often restrict the number of participants in a bidding process. This may be done to involve only big and reputed firms, however, the same can result in high entry barriers for new entrants.
b) Competitive neutrality – Markets can be distorted as a result of structural advantages a public entity holds. There is a need for the level playing field to the public, as well as, the private sector.
c) The existence of a small number of companies in a market can make it feasible for the sellers to reach an understanding to rig bids.
d) When the flow of demand is stable in a market, it gives rise to the possibility of collusion. Also, when there is economic downfall like the one in present, the companies tend to involve in collusion to regain their losses.
e) Industry associations can act as a hub for the companies to communicate their material information, thereby leading to collusion.
Section 3 of the 2002 Act prohibits horizontal as well as vertical anti-competitive agreements. As per Section 3(3), to establish the existence of a cartel, the CCI must find that competitors had entered into an agreement to fix prices, limit supply, share markets, or rig bids. Once it is established that a cartel or horizontal agreement exists, it is presumed to cause an AAEC unless the agreement relates to an efficiency-enhancing joint venture.
A cartel is a form of offence which is not apparent for a regulator to act upon it in the first instance. In most cases, circumstantial evidence is considered while determining collusion. The Commission has been proactive in its role of identifying the collusion among bidders participating in the public procurement process.
There are several warning signals and diminutive evidence which authorities have to take note of while detecting the existence of collusion. In Foundation for Common Cause & People Awareness vs. PES Installations Pvt. Ltd. & Ors, CCI found common mistakes like similar typographical errors in the forms filled by the bidders. The Commission took these similarities as indicative of collusion. Similarly, in Re: Aluminum Phosphide Tablets Manufacturers, the Commission came across matching bids and simultaneous entry into the premises before submission of bids as indicative of the existence of an understanding between the parties. In Director, Supplies & Disposals, Haryana vs. Shree Cement Limited and Ors., CCI, while determining collusion, took into consideration few factors, which are, quoting of unusually higher rates than those quoted in the previous tender, exchange of SMS and calls, and their increased frequency during the period close to the date of tender amongst the officials of the OPs. In the case of In re: Delhi Jal Board vs. Grasim Industries Ltd and Ors., OPs were colluding by decreasing the prices, identically. The Commission observed that similar bid prices and simultaneous increases over the years cannot be a matter of mere coincidence. It was also noted that the three bidders had a huge variation in variable cost of production, transportation, taxes, etc., which reduces the possibility of quoting bids analogous to each other, without a meeting of the mind.
The post-COVID world is going to witness a lot of commercial actions in private, as well as, public sectors. The government is banking on public procurement to revitalize the country’s economy as evident from the recent measures announced. Such a scenario is going to foist a crucial responsibility on CCI’s shoulders. To address the competition concerns arising out of public procurement, there is a need for strict implementation and adherence to competition law. Along with that, there is a need to educate public procurement agencies at all levels of government, so that they can efficiently design procurement processes and detect collusion. CCI has been determined to establish its role in public procurement, firstly, through enforcement, by which it is identifying the anti-competitive activities and enforcing the law strictly on such activities and, secondly, through advocacy, by which it is trying to increase awareness regarding the risks relating to competition law in procurement tenders.
While exercising its enforcement role, CCI can effectively prevent bid-rigging by increasing the detection rate of bid-riggers. The Act prescribes numerous sources through which CCI can register an information and increase its detection rate. Under section 19(1)(a) and (b) of the Competition Act, the Commission can enquire into any contravention in three ways: (i) on its own motion (ii) on receipt of any information (iii) on a reference made to it by central or state government or by any statutory body. Apart from this, CCI can look into any collusion through a leniency application filed under section 46 of the Competition Act, and the Competition Commission of India (Lesser Penalty) Regulations, 2009. Bid-rigging in the Competition Act is prohibited under section 3(3)(d), and after inquiring into an agreement, the Commission can impose a heavy penalty on the party at fault under section 27.
As a part of its advocacy efforts, CCI has released a Toolkit for Public Procurement Officers to guide such officers to detect possible bid-rigging in a government tender. Similarly, CCI also published an advocacy booklet highlighting the key aspects relating to public procurement. Further, the State Resource Person Scheme was launched which aims to disseminate awareness on competition law by imparting training and organising workshops/seminars in each State/UT for the procurement officers.
In the future, the relationship between competition law and public procurement will be worth keeping an eagle-eye on. Undoubtedly, Covid-19 might have posed new challenges for CCI, but the Competition Act is quite flexible and far-sighted as it equips the Commission with the autonomy to address the challenges arising out of current-like situations.
[i] Yagya Sharma is a 4th year law student at Institute of Law, Nirma University. His interest lies in competition law among other commercial laws. For any discussion related to the article, he can be approached via mail firstname.lastname@example.org
This article is co-edited by Arnav Maru (Co-founder and Managing editor) and Yagnesh Sharma (Associate Editor).
Preferred Citation: Yagya Sharma, “Public Procurement: A Tool for Reviving Economy or Raising Competition Concerns?”, Arbitration and Corporate Law Review, Published on 16th July 2020