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Small and developing competition agencies – WORLD BANK – December 2017 OECD discussion

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This presentation by the World Bank was made during Break-out Session 3: Creating Legitimacy in the framework of the discussion on “Overcoming adversity and attaining success: Small and developing competition agencies” held at the 16th meeting of the OECD Global Forum on Competition on 8 December 2017. More papers and presentations on the topic can be found out at oe.cd/sda.

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Small and developing competition agencies – WORLD BANK – December 2017 OECD discussion

  1. 1. Connecting competition and public procurement policies: the challenge of implementation Graciela Miralles Senior Economist Competition Policy Team WBG Trade and Competitiveness Global Practice OECD Global Forum on Competition Paris, December 8th 2017
  2. 2. Effective public procurement is critical for economic development Governments in developing countries are significant purchasers of good and services, and these markets represent huge opportunities to enhance competition and development. • Low-income countries have the highest share of public procurement in their economies, at 14.5 percent of GDP. • Upper-middle income countries follow at 13.6 percent. PPP procurement, score by region and income group (score 1–100)
  3. 3. Embedding competition in public procurement requires… • (1) to select the most pro-competitive procurement procedure; • (2) to design the terms of the tender in order to favour competition; • (3) to prevent anticompetitive decisions during the tendering process; • (4) to avoid anticompetitive decisions after the tendering process. • (5) to detect, prosecute and sanction cases of bid rigging and related anticompetitive practices. Regulatory level • Connect public procurement policy/reform with broader policy objectives • Competition as a tool to help achieve public procurement goals • Cost efficient public procurement procedures need not reduce competition (E.g. negotiated procurement, outsourcing procurement) • Importance of governance framework • Encourage pro-competitive design of tenders through capacity building • Punish unlawful/anticompetitive behavior Institutional level PP officials Competition authorities • Effectively prosecute bid rigging cases (enforcement) • Collaborate with public procurement authorities to prevent and flag bid rigging (advocacy) … to be implemented throughout the different stages of the public procurement process …a multi-layered approach …
  4. 4. …challenges remain at the core of the interaction between both policies… Source: Curbing Fraud, collusion and corruption in the road sector (WBG 2011) Trade off between Transparency & Collusion
  5. 5. …as well as regarding effective enforcement against bid rigging cartels  In the road sector, evidence shows that that collusion can increase the per-kilometer cost for building a road by as much as 40 percent.  Bid-rigging cartels represent approximately one third of cartelized markets: estimations of a sample of cartels operating in 532 markets indicate that one-third (34 percent) are affected by bid-rigging cartels, while the remaining 66 percent of the cartelized markets are “classic” price-fixing cartels. (Connor J, 2014). Source: Curbing Fraud, collusion and corruption in the road sector (WBG 2011) Estimated cartel overcharges in the road sector
  6. 6. Sanction Prosecution Detection Key challenges addressing bid rigging in less developed economies  Lack of mandate/implementation to request information  Lack of access to direct evidence • Lack of tools to collect in situ evidence: - Competition Authority (CA) does not have mandate to conduct dawn raids - CA has mandate to conduct dawn raids, but cannot effectively implement them (i.e. only available in criminal cases, court warrants are not granted, lack of access to premises) • Lack of key tools to conduct investigations/access direct evidence (e.g. leniency)  Limited role of indirect evidence • Indirect evidence does not count (enough) • Lack of access to data held by public procurement authorities.  Lack of institutional resources to build solid cases • Limited resources to conduct investigations/ lack of trained staff • Inadequate institutional setup (e.g. no cartel unit) • Lack of procedural framework/secondary legislation  Sanctions are not deterrent/lack of incentives to comply • Fines are too low or non-existent (e.g. “Cease and desist” only) • Fines are not accorded by the competition authority (e.g. specialized/non-specialized courts) • Fines are not cashed  Multiple/too broad information requests  Concerns in collecting direct evidence: • The competition authority conducts searches with purposes beyond its mandate/investigation (e.g. violations of constitutional rights) • The competition authority disrespects leniency conditions/misuses the information obtained in the context of the leniency application. (e.g. confidentiality)  Concerns in using indirect evidence: • Indirect/circumstantial evidence is enough to substantiate violation (regardless of justification)  Concerns related to (lack of) procedural fairness • Communication with CA • Access to file/Knowledge on the grounds of the accusation • Timely defence  Sanctions are excessive • Dissolution of the company • Termination of the operating license • Excessive fines (i.e. over 50 percent of annual turnover) • Lack of immunity/reduction for cooperation (e.g. leniency, settlements) …for Competition Authorities …for the Private Sector
  7. 7. The role of the World Bank Group Public Governance Global Practice • The WBG Governance Global Practice (GGP) supports client countries to help them build capable, efficient, open, inclusive, and accountable institutions. • GGP engages with counterparts to design and implement effective public procurement policies that ensure sustainable public resource management Trade and Competitiveness Global Practice • The WBG Trade and Competitiveness Global Practice fosters rapid and broad-based economic growth, centered on strong contributions from the private sector. • The Competition Policy team works in more than 60 countries across the world to promote and implement pro-competition rules in key sectors, deterring anticompetitive business practices, and minimizing distortive government interventions in markets. Integrity Vice-presidency • The WBG Integrity Vice-Presidency investigates misconduct in Bank-funded projects and advises World Bank staff and borrowing country personnel on corruption prevention measures. When INT finds misconduct in a World Bank-funded project, the Bank can bar the firms or individuals involved from bidding on future World Bank-financed contracts.
  8. 8. I. Generating knowledge: WBG Anticartel Enforcement Database  More than 300 cartels from 1980 and 2015  10 economies in Latin America  9 economies in Africa, including South Africa  Source of data: first instance decision documents of authorities
  9. 9. Systematizing bid rigging data: bid rigging versus other types of cartels • Bid rigging cases account for 21% of all cartel cases Proportion of Bid Rigging cases Bid Rigging, 21% Other types of cartels, 79% Source: World Bank Latin American Cartel Database. It considers 184 cases from 9 countries: Argentina, Brazil, Chile, Colombia, Costa Rica, El Salvador, Honduras, Panama and Peru.
  10. 10. Systematizing bid rigging data: bid rigging by sector Sectors affected by non-bid rigging cartelsSectors affected by Bid Rigging Source: World Bank Latin American Cartel Database. It considers 38 cases from 9 countries: Argentina, Brazil, Chile, Colombia, Costa Rica, El Salvador, Honduras, Panama and Peru. Other: E - Water supply; sewerage, waste management and remediation activities, I - Accommodation and food service activities, K - Financial and insurance activities, D - Electricity, gas, steam and air conditioning supply, P - Education Source: World Bank Latin American Cartel Database. It considers 143 cases from 9 countries: Argentina, Brazil, Chile, Colombia, Costa Rica, El Salvador, Honduras, Panama and Peru. Others: K - Financial and insurance activities, J - Information and communication, L - Real estate activities, N - administrative and support service activities, P – Education, E - Water supply; sewerage, waste management and remediation activities, I - Accommodation and food service activities, S - Other service activities
  11. 11. Systematizing bid rigging data: bid rigging fines vs excess profits • Level of fines seems insufficient to deter/punish cartel activity yet the gap is smaller than for other cartels • Considering affected sales and fines for a sample of bid rigging and non-bid rigging cartels, bid rigging cases are estimated to fine at 10% rate while other cartels at 20% rate 1. Estimated illicit profits and Fines imposed in Bid Rigging cases 2. Estimated illicit profits and Fines imposed in other types of cartels Source: World Bank Latin American Cartel Database. It considers estimated illicit profits and fines imposed in 22 bid rigging cases from 5 countries: Brazil, Chile, Colombia, El Salvador and Peru. Source: World Bank Latin American Cartel Database. It considers estimated illicit profits and fines imposed in 29 non-bid rigging cartels cases from 8 countries: Brazil, Chile, Colombia, Costa Rica, El Salvador, Honduras, Panama and Peru 553,198,495 57,176,238 - 1,000,000,000 2,000,000,000 3,000,000,000 4,000,000,000 5,000,000,000 6,000,000,000 7,000,000,000 8,000,000,000 9,000,000,000 Estimated excess Profit (2014 USD) Fines (2014 USD) 10.3% 8,436,681,242 1,745,758,548 - 1,000,000,000 2,000,000,000 3,000,000,000 4,000,000,000 5,000,000,000 6,000,000,000 7,000,000,000 8,000,000,000 9,000,000,000 Estimated excess Profit (2014 USD) Fines (2014 USD) 20.7%
  12. 12. Systematizing bid rigging data: complaints versus ex-officio investigations • Bid rigging cases rely more on complaints (62%) than in ex-officio investigations • Other types of cartel cases are mostly initiated ex officio (50%) How Cartel cases are initiated Source: World Bank Latin American Cartel Database. It considers 173 cases from 9 countries: Argentina, Brazil, Chile, Colombia, Costa Rica, El Salvador, Honduras, Panama and Peru. 62% 50% 38% 50% 0% 10% 20% 30% 40% 50% 60% 70% Bid Rigging Other Conducts Complaint Ex officio
  13. 13. II. Helping clients tackle procurement challenges  Promoting better Competition and procurement regulatory frameworks  Providing targeted analytics  Supporting reforms  Promoting effective implementation of Competition and procurement policies  Fostering cooperation among relevant authorities  Building capacity
  14. 14. Indonesia: embedding competition through regulatory and behavioral changes in public procurement  Key changes in regulatory and behavioral terms Procurement notices were widely publicized in both national and provincial papers in prominent place and in large typefaces. Local authorities’ attempts to limit eligible bidders to local firms were rebuffed. Bidders’ qualifications were evaluated after, rather than before, the tender. Mandatory participation in pre-bid meetings, which had given colluders an opportunity to agree on prices and intimidate firms not part of the ring, was ended. A complaint handling mechanism was introduced that allowed contractors and community members to anonymously report fraud, collusion, corruption, and intimidation. Estimated savings of 15–30 percent on contracts post-changes • Indonesian Competition law (art. 22): bid-rigging as conspiracy with public authorities. • Approximately 61% of complaints received by KPPU are qualified as bid-rigging. World Bank supported Bali Urban Infrastructure Project:  Three bids submitted  Prices in all three within 0.02 percent of the engineer’s estimate  Investigation confirmed existence of a bid-rigging cartel
  15. 15.  Supporting pro-competition amendments to the Public Procurement Rules.  Promoting cooperation among relevant authorities: The Competition Commission of Pakistan (CCP) has entered into a Memorandum of Understanding (MoU) with the Public Procurement Regulatory Authority of Pakistan (PPRA) for strengthening public procurement and combating anti-competitive practices.  To share information, including possible cases of anti-competitive practices.  To strengthen their own capacities in detecting anti-competitive practices in public procurement  To build the capacity of the public procurement agencies to identify and report the instances of bid rigging. (Source: Competition Commission of Pakistan) Pakistan: embedding competition through interinstitutional cooperation
  16. 16. Ukraine: embedding competition through innovative tools  The Antimonopoly Committee of Ukraine (AMCU) is the appellate body of first instance on public procurement matters (AMCU Law, art. 3).  Mechanism for the publication of a list of undertakings that engaged in bid rigging. AMCU Staff breakdown by area of activity Source: “OECD Reviews of Competition Law and Policy: Ukraine 2016”
  17. 17. III. Showcasing successful competition advocacy initiatives in public procurement • ICN-WBG Competition Advocacy Contest awards impactful result- driven initiatives. With string presence of procurement/bid rigging:  Mexico: Saving public resources through a comprehensive advocacy strategy to fight bid rigging (3.7 billion pesos in savings that will be used to improve hospital infrastructure and equipment purchases)  South Africa: educating, training and empowering government officials to detect and take action against bid rigging and other collusive practices in public procurement.  Pakistan: recommendations to enhance the procurement process for electrical equipment, which were adopted by the Water and Power Development Authority.  Hong Kong led a multifaceted campaign to increase detection and reporting of bid rigging.  Portugal launched the first national campaign to fight bid rigging: “Playing Fair Isn’t a Secret.”
  18. 18. ANNEX: Awarded Public Procurement Initiatives ICN-WBG Competition Advocacy Contest
  19. 19. Mexico • Mexico’s Federal Economic Competition Commission (COFECE) implemented a comprehensive advocacy strategy in the procurement of pharmaceuticals. • COFECE worked with IMSS (Mexican Institute of Social Security) on its tender design and procurement processes to reduce the risk of bidders secretly agreeing to eliminate competition. • The Competition Commission’s approach combined enforcement actions with advocacy. • Results amounted to USD 4.5 billion in consumer savings. • Got the attention of other government agencies that saw the solid gains from a more open and competitive procurement process.
  20. 20. Educating, training and empowering government officials to detect and take action against bid rigging and other collusive practices in public procurement.  The Competition Commission of South Africa holds an annual Public Sector Forum that serves as a platform for debating key competition concerns and addressing issues such as bid rigging in procurement spending. The National Treasury amended the procurement policy to include bid rigging detection. State-run service providers and enterprises (ESKOM, TRANSNET and DENEL) committed to using a Certificate of Independent Bid Determination as part of their standard bid documentation.  Special procedure is offered by the Commission to construction firms involved in bid rigging in exchange for voluntary disclosure of implicated projects. This procedure enables the Commission to expedite the prosecution of cases involving a large number of projects that otherwise would take several years to prosecute. South Africa
  21. 21. The Water and Power Development Authority adopted recommendations to enhance the procurement process for electrical equipment  Privatization of the power sector  Alleged unfair practices in the bidding process by the buyers of power sector equipment in particular  The Competition Commission of Pakistan invited all stakeholders, buyers and sellers, involved in the process of procurement of electrical equipment to participate in an open hearing.  The Commission received feedback and issued a public opinion recommending enhancements to the procurement process. Pakistan
  22. 22. Many Thanks! gmiralles@worldbank.org

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