11 August 2016
The Competition Commission (the "Commission") recently released the results of its study into the residential building renovation and maintenance market (the "Study") and has also launched its "Fighting Bid-rigging Cartels" campaign. Bid-rigging has long been considered a matter of serious public concern in Hong Kong and the Commission appears to be determined to tackle the issue.
What does the Commission suspect?
The Commission's Study focused on analysing tender data provided by the Urban Renewal Authority and the Hong Kong Housing Society, using screening techniques to review tender records from about 500 past projects. The tenders were for the appointment of consultants to plan and oversee renovation and maintenance projects and for the appointment of contractors to carry out the renovation works.
As the tenders took place prior to the Competition Ordinance (Cap. 619)(the "Ordinance") coming into effect, the practices studied could not have been in breach of the Ordinance. The results of the screening analysis are nonetheless widely consistent with the public perception that widespread bid-manipulation practices occur in the residential building renovation and maintenance market in Hong Kong.
The screening analysis revealed that consultants and contractors were participating in the same tenders more often than it would be expected if the decisions to bid were made independently, suggesting practices of "cover bidding" whereby bidders and consultants agree beforehand on who will win the tender and submit higher or inadequate bids to allow the designated bidder to win the tender.
The Commission also screened for bid amounts when these did not appear to reflect the underlying costs of the consultant and/or contractors. In a competitive environment, a direct link between the costs and the bid submitted is expected. However, the Commission noted that the bids were too often out of line with the underlying costs. In particular, 65 percent of the bids submitted by consultants appeared suspiciously low, most likely in order for the consultant to win the project and then organise for his/her allied contractor to win the bid for the renovation work at an inflated price. Similarly, many consultant bids did not seem to vary according to the size of the project, indicating that bids were not always genuine. As a result home owners could end up paying an inflated price because of bid-manipulation practices.
What will the Commission do now?
While the findings above are not conclusive proof of collusive activities, and in any case concern tenders that occurred prior to the Ordinance coming into effect, the techniques developed in the context of the Study are expected to be used by the Commission to detect bid-rigging practices going forward. The Commission now has a better understanding of what has been taking place and has said it will investigate further where similar patterns are observed.
The warning sent by the Commission is not only addressed to the construction and building management sectors, but also to every company which is involved in tenders.
Ms. Anna Wu Hung-yuk, Chairperson of the Commission, emphasised that bid-rigging is a form of serious anti-competitive conduct and combating bid-rigging is a major enforcement priority for the Commission. She reiterated that the Commission will use the full extent of its power to end such practices and will cooperate closely with other law enforcement agencies and public bodies to tackle bid-rigging problems in Hong Kong. Bid-rigging cartels may well attract severe penalties under the law.
The Commission has also set up a hotline for anyone to report suspicions of bid-rigging, and launched its "Fighting Bid-rigging Cartels" Campaign with a view to raise public awareness of bid-rigging and to strengthen the detection and prevention of bid-rigging.
What should you do now?
Prevention is better than cure. Infringing the Ordinance could lead to fines up to 10 percent of group turnover, disqualification of directors/officials for up to five years, follow-on private claims for damages, agreements being declared void, reputational damage etc.
It is also important to note that bid manipulation involving elements of corruption is a criminal offence under the Prevention of Bribery Ordinance (Cap. 201), carrying a maximum fine of HK$500,000 and seven years imprisonment.
Bid-rigging cartels can occur in any market where tenders are used. Facing risks of enforcement, you should ensure that your company and its business practices are compliant with the law, take proactive steps to limit the risks of bid-rigging and raise employees' awareness of bid-rigging cartels with appropriate competition compliance training.
In order to enhance detection, the Commission has also called upon procurement officers to be vigilant and report any signs of bid-rigging, such as consultants quoting disproportionately low prices, suspicious signs in bid documents such as similar wordings, amendments, spelling mistakes or similar postmarks and suspicious behaviour or patterns such as regular bidders who fail to bid, bids that are suddenly withdrawn, patterns of similar winning bidders, bidders that rarely bid but always win when it does so etc. The Commission will accept complaints in any form, including those provided anonymously.
You are therefore strongly advised to undertake a review of your procurement and bidding practices as the risks of complaints from unhappy bidders and subsequent Commission enforcement action are high. By doing so you can avoid the inconvenience and cost of responding to an investigation and the potential for substantial fines. Always consult your legal advisors when you are in doubt.