Problem

Collusive tendering in international trade

Nature:

Collusive tendering is the practice whereby suppliers, among themselves, fix prices and/or other conditions for sale of goods or services. It is a pervasive feature of international trade, distorting patterns of trade and hindering, in particular, the trade and economic development of developing countries. Both in developed and in developing countries, governments and enterprises owned or controlled by the state are usually the largest purchasers and such procurement amounts for as much as 10% of the GNP in certain countries. Government procurement is one of the main means employed by developing countries for imports of essential goods and services. These countries are particularly dependent upon developed countries for supplies of capital goods. For specific items developing countries account for more than 70% of developed countries' exports. The practice of collusion between enterprises in respect of submitting bids is clearly in contradiction with the intention for calling tenders.

Collusive tendering can occur as a result of an exchange of information between two or more enterprises concerning their prices and conditions of sale on a regular or ad hoc basis. Collusive tendering also takes place as a result of agreements among enterprises to share markets and to fix prices generally or in relation to certain types of business. Whether written or unwritten, formal or informal, such agreements or arrangements between enterprises engaged in rival or potentially rival activities generally have as their objective to obtain the highest possible price for the goods and services in question by eliminating competition amongst the parties. To the extent that competing enterprises remain outside such arrangements, in particular cases quotations can be made at prices designed to eliminate such outsiders or to force them to join the arrangement. Once the price at which the enterprise designated to submit the lowest bid has been determined, all or some of the others will agree to submit 'cover' bids, that is, bids at higher prices or not fulfilling the requirements of the tender. In such a case, the resulting monopoly profit may be shared among the members to the arrangement in a predetermined fashion. Alternatively, under such arrangements, each of the members or certain of them may agree to bid for less than the total amount required, the objective being to share the work amongst them. Where specific areas or countries have been allocated to specific members under a market-sharing arrangement, other members will either submit cover bids or refrain from bidding. Collusive tendering may also involve agreement among members that the enterprise awarded the contract will subcontract parts of the project to fellow members.

In developed and developing countries having restrictive business practice legislation, collusive tendering is considered to be a type of horizontal price-fixing and market allocation agreement and subject to prohibition or control afforded to these types of restrictive agreements. In certain countries, however, collusive tendering may be singled out for stricter control than other types of agreements, since the objective of calling tenders is based on the assumption that receipt of independent bids will result in obtaining the most favourable terms for specific projects, which collusion clearly negates.

Values:
Collusion
Problem Type:
E: Emanations of other problems
Related UN Sustainable Development Goals:
GOAL 10: Reduced Inequality
Date of last update
06.05.2019 – 21:13 CEST