Presentation to the Third International Conference on Public Procurement Law in Africa

1. Presentation to the Third International Conference on Public Procurement Law in Africa 1 November 2018 Tebogo Makube (Ph.D.) THE REVIEW OF POLICY, LEGISLATIVE AND INSTITUTIONAL FRAMEWORKS DEALING WITH COLLUSIVE TENDERING OR BID-RIGGING IN THE SOUTH AFRICAN PUBLIC PROCUREMENT SYSTEM Disclaimer: views presented here are the author’s sole responsibility and not those of his employer

2. Introduction and purpose of the study Background • One of the policy objectives of competition policy is to deter, detect, and punish collusion, whereas the objectives of public procurement are fairness, equity, transparency, competition and achieving value for money. • These objectives though complementary can represent a trade-off or ‘dual challenge for good governance ’ which needs to be managed, especially in a highly concentrated economy like South Africa. • This study examines of policy, legislative and institutional frameworks dealing with collusive tendering or bid-rigging as an anti-competitive practice in the South African public sector procurement system. • This study also attempts to close the gap between competition and public procurement policies, practices and literature, mainly from the South African perspective.

3. Problem statement • Section 217 of the South African Constitution and procurement statutes require a public procurement system which is fair, equitable, transparent, competitive and cost-effective. • Collusion or bid rigging is a practice in which competing bidders collude and coordinate their bids in order to determine the winner at a particular price. • Bid rigging is an anathema to the value for money and competition. • It is also against the public interest in economics. • Public procurement rules in South Africa are not robust enough on measures to detect and safeguard against collusive behaviour and practices. • Enforcement of competition law in the public procurement environment has received much less attention than it deserves (Sanchez Graells, 2015). • Therefore, there are concurrent matters of jurisdiction that are unexplored in competition and public procurement policies.

4. Treatment of collusive tendering in the South African Competition Act Background • All forms of collusive tendering are prohibited by section 4(1)(b)(iii) of the Competition Act (Act No. 89 of 1998) as amended. Cartel activities are regarded as the most serious of all competition law contraventions . • The Act distinguishes between horizontal and vertical restrictive practices which are prohibited. • A restrictive horizontal practice is any agreement, or cooperative or concerted conduct, between competing firms that prevents or lessens competition. • Collusive tendering or bid rigging is treated as a restrictive horizontal practice. • The prohibition of horizontal and vertical restrictive practices is based on behaviour alone. • Abuse of dominance is also prohibited as an anti-competitive practice. • Dominance is defined in terms of market share and market power • The prohibition against dominance includes size or structure, and behaviour of the offending firm. • The Competition Amendment Act ( Act 1 of 2009) introduced individual liability for directors and individuals directly responsible for engaging in price fixing or cartel-like behaviour.

5. Theory of market power and concentration of companies Background • Market concentration is an important consideration in competition policy and there are several methods that may be used in calculating market concentration levels. The two most common methods are N-firm concentration ratios (CR-N) and Herfindahl-Hirschmann Index (HHI). • "HHI" measures market concentration and determines the extent of competition in an industry. It is calculated by squaring the market share of each firm competing in the market and then summing the resulting numbers. • Number of firms: measure market power & industry concentration. • A firm with a market power of 45% is dominant and 35%-45% is presumed to dominant, rebuttable. • Dominant firm has market power if it has the ability to control prices, exclude competition, behave independently of competitors, customers, suppliers. Identify market, again.

6. Forms of collusive tendering or bid rigging (“Private Corruption”) • Cover Bidding: complementary bidding or courtesy bidding, occurs when some of the bidders agree to submit bids that are intended to be unsuccessful, so that another conspirator can win the contract. • Bid Suppression: this occurs when conspirators agree not to submit a bid so another can win the contract. • Bid Rotation: this refers to the practice of competing bidding firms “taking turns” at winning the contract. Bid rotation is in effect a form of market allocation where competitors are entitled to their “fair share” of the industry profits. • Bid Shopping: this is the practice of divulging a contractor's or subcontractor's bid to other prospective contractor(s) or subcontractor(s) before the award of a contract in order to secure a lower bid. • Market allocation schemes: these are agreements in which competitors divide markets among themselves. In such schemes, competing firms allocate specific customers or types of customers, products, or territories among themselves. • Cover Pricing: this practice involves one or more bidders in a tender process submitting an artificially-inflated price with the aim of not securing the contract. • Price fixing. • Anti-competitive information exchange.

7. Forms of bid rigging (“ Public-Private Corruption”) • Bid specifications, designs, industry and technical standards, and technological choices are sometimes used to aide certain bidders • These practices relate to the concept of the ‘chiffre noir’ (black number), known in French criminal law as the number of crimes which remain undetected. • Such crimes remain mostly undetected because they are not considered corruption acts by the mainstream legislation (e.g. competition law, procurement law, criminal law).

8. Institutional Challenges: Organs of state dealing with competition and public procurement policies Background • The Competition Commission has jurisdiction on all competition matters in South Africa. It is the investigation and enforcement agency. • The Competition Tribunal is the adjudicative body, very much like a court. • The Competition Appeal Court considers appeals against decisions of the Tribunal. • According to the National Treasury, there are at least 770 Public institutions are directly involved in public procurement • 41 National and 115 Provincial Departments • 278 municipalities (including 41 municipal entities) • 9 Constitutional bodies, • 21 Major Public Entities (Schedule 2) • 266 other public entities (Schedule 3) • Section 217(2) of the Constitution does not prevent organs of state from implementing a procurement policy that caters for preference in the allocation of contracts and the protection or advancement of persons disadvantaged by unfair discrimination. • This is the horizontal objective of public procurement which has an impact on competition (Arrowsmith, 2010).

9. Factors found to facilitate cartels in South Africa Background Source:

10. Concentration of companies: CorporateTaxable Income Group, 2007-2016 The concentrated nature of the South African economy is evident from the data, with few large companies liable for an average 52% of Corporate Income Tax (CIT) assessments. Source: SARS

11. Economic impact of uncompetitive behaviour and practice Background For PC, output will be set at P = MR (D)=MC The monopoly price is higher than the perfectly competitive price The monopoly output is less than the perfectly competitive output • Monopolistic and oligopolistic competition, including cartels are regarded as the most outstandingly bad of all competition law contraventions. • The idea of a deadweight lossrelates to the economic welfare that is lost as a result of higher prices, too much or too little production. • P>MC impedes effective competition which harms or inflicts consumer welfare insofar as prices and choice of products are concerned. • This also hinders development and innovation in the economy.

12. International law, precedents and local case law Background • UNCITRAL Model Law on Public Procurement (2011) contains procedures and principles aimed at promoting objectivity, fairness, participation and competition and integrity • The EU competition law framework incorporates two key provisions: • Article 101 of the Treaty on the Functioning of the European Union (TFEU) prohibits anti-competitive agreements and other forms of coordination between economic actors. • Article 102 of the TFEU prohibits the abuse of market power held by an economic entity which holds a dominant position in the market. • The EU Court of Justice judgments in C-470/99, Universale Bau; C-532/06 Lianakis v Dimos Alexandroupolis, C‑557/12 Kone and others, and C‑629/11 P-Evropaïki Dynamiki v Commission. • In 2013, the Competition Commission fined 15 construction firms a collective R1.46 billion for collusive tendering relating to construction projects concluded between 2006 and 2011. • In 2017, The Competition Commission charged seven companies with fixing prices and colluding in a tender to provide stationery to the Free State provincial government. • In 2018, furniture removal company Stuttaford Van Lines was charged with 649 counts of collusive tendering relating to hundreds of government tenders issued for furniture transportation.

13. Remedies and enforcement in competition policy Background • Extensive enforcement and punitive powers are conferred on the Competition Tribunal. The Tribunal has the power to: • grant interim relief in respect of a prohibited practice (s 49C) • interdict a prohibited practice • order a party to supply or distribute goods or services to another party on terms reasonably required to end a prohibited practice • impose administrative fines • order divestiture • declare conduct of a firm to be a prohibited practice • declare the whole or any part of an agreement to be void • order access to an essential facility on terms reasonably required

14. Corporate leniency in competition policy Background • South Africa has, in line with other international competition authorities, adopted the Corporate Leniency Policy (CLP) in 2004, which was substantially revised in 2008. • It is used as a tool to detect, prosecute and deter cartel activity. • Incentives cartel members to self-report in an attempt to obtain immunity from competition law prosecution. • SA’s largest steel maker, ArcelorMittal SA, settled on a record competition commission fine of R1.5bn for monopoly pricing. • Factoring of broader public interest considerations like supplier development in cartel and collusion proceedings (Construction case).

15. Remedies for non-compliance or corruption in the public procurement system Background Section 14 of the Preferential Procurement Regulations: Remedies • 14. (1) An organ of state must, upon detecting that a tenderer submitted false information regarding BBBEE, Local Content or any other matter: (a) inform the tenderer accordingly; (b) give the tenderer an opportunity to make representations within 14 days (c) if it concludes, after considering the representations that false information was submitted – disqualify the tenderer or terminate the contract in whole or part and if applicable claim damages from the tenderer. • 14. (2) An organ of state must inform the National Treasury of any actions taken. • 14. (3) The National Treasury must decide whether to restrict the tenderer for 10 years and publish on website a list of restricted suppliers • Remedies in the conditions of contract. • The Prevention and Combating of Corrupt Activities Act (Act No. 12 of 2004) treats collusive tendering as corruption and provides for sentences ranging from five years to life imprisonment.

16. Recommendations Background • The enforcement of competition laws requires a strong alignment with public procurement regulations to help deal with anticompetitive behaviour in the public sector markets. This will require a focus on: • Institution capacity of organs of state to deal with competition matters in the design of procurement methods. • Concurrent powers of competition and public procurement authorities, especially on: • Treatment and imposition of fines • Corporate leniency pertaining to public sector contracts • Cancellation of contracts • Debarment • Public interest remedies • Treatment of collusion as offence in Competition Law, Public Procurement Law and the Prevention and Combating of Corrupt Activities Legislation.

17. Thank You