The procurement laws of all countries provide that with a few, narrowly drawn exceptions public contracts are to be awarded on the basis competition. As the drafters of the UN model procurement law explain, the reason is straightforward. A competitive procurement gives all those seeking the government’s business an equal chance to win the contract while at the same time maximizing the chance that government will receive quality goods, services, or civil works at the lowest price.
The problem comes when would-be suppliers do not compete for government’s business. When instead of each one preparing its bid independently, based on what price the firm can charge and still make a reasonable profit, the bidders sit together and agree which one will “win” the contract and at what price, a price that can sometimes be twice what it would have been were there competition.
How can a government reap the benefits of competition when bidders have rigged the bid? The answer is that it cannot. At least not immediately. It can, as both the U.S. Department of Justice and the OECD recommend, institute procedures that make it harder for firms to collude, and it can, again as both these agencies regularly urge, vigorously enforce laws that outlaw bid rigging. But these measures take time to have an effect; in the meantime, a government cannot halt all procurements. It still needs to buy computers, desks, and other goods, to contract with cleaning, fumigation, and other service providers, and it must continue to build and repair roads, damns, and other civil works.
So in the face of collusion or cartel-like behavior by its suppliers, is government powerless in the short-run? Must it accept whatever price the bid riggers offer? No matter how high it might be? Continue reading