PUBLIC sector projects are huge, costly and large amounts of public funds are channelled into the market through public procurement.
The procurement process is vulnerable to high risks and distorted by problems of abuse of power and corruption.
The Malaysian Anti-Corruption Commission (MACC) report states that public sector procurement topped the significant financial loss list through corruption and fraud between 2013 and 2018, at 43 per cent. This happens when there are unlawful manipulations of the procurement process.
However, it is shocking when Mokhtar Samad, president of the Malaysian Malay Contractors Association confessed that in the past, 10 crony companies would take part in selected tenders through bid rigging. In other circumstances, the contracts would be awarded by direct negotiation and jobs given directly to cronies.
Bid rigging in public procurement are fraud schemes which involve agreement among contractors in the bidding process. In Malaysia, bid rigging is prohibited by section 4(2)(d) of the Competition Act 2010 (CA 2010). The Malaysia Competition Commission (MyCC) has been given wide-ranging investigation powers, including to search and obtain documents in the gathering of information and evidence.
There are five basic bid rigging schemes in public procurement:
1. Bid Suppression. Where a group of contractors participating in a particular tender agree among themselves not to bid to ensure the pre-agreed contractor wins. This is done by declining from bidding, a form of conspiracy to protect their monopoly. Sometimes, they prevent outside contractors from bidding. Forceful measures, threats and violence are used to deter competition.
2. Bid rotation. This is where two or more bidding companies collude and share the bidding by taking turns to be the winning bidder. The modus operandi is pre-arranged by being lowest bidder or by withdrawing from bidding. All the participating contractors in this scheme share information illegally to control the price, percentage of the profits, or be hired as subcontractor, normally workable in a stable and understanding community of bidders
3. Market Division. This is where contractors agree to bid and divide markets based on product, customer, service or geographical areas. Contractors refrain from competing with each other but have equal chance to win the bidding through collusive measures such as submitting complementary bids as agreed by all parties.
4. Complementary bidding or also known as protective, or courtesy bids, are merely to give the appearance of a genuine bid but are actually intended to fail. The motive is to act as a vehicle for another contractor to win the bid. The contractors would submit bids that are too high to be accepted by buyers to ensure the preselected bidder is chosen. In exchange, the winning contractor may share the profit, be hired as sub-contractor or allowed to win another bidding.
5. A phantom bidder. Involves contractors creating a dummy company and submitting a variety of bids on one contract. Bidding is placed where the bidder does not intend to win but is attempting to raise the price of the contract being offered.
A deterrence to bid rigging is to set prequalifications by requiring companies or contractors to submit audited financial statements. Conduct a thorough and an honest due diligence on suspicious rigging schemes.
As reported on March 5, 2019, MyCC fined eight companies a total of RM1.94 million for bid rigging in the tenders by the National Academy of Arts, Culture and Heritage. This was Malaysia's first bid rigging case where companies colluded to share tenders, prepared documents together, manipulated the tender price, apart from the winner of the tender sharing profits with the losing bidder.
Because of this, the government had to pay RM150 million, for a RM100 million contract thus incurring a loss of RM50 million. Strict action needs to be taken against these companies, and MyCC must conduct more investigations.
Some corrupt procurement officials are vulnerable to corruption due to power, opportunity, pressure and rationalisation factors. They can facilitate bid suppression efforts (for example, by disqualifying other legitimate bidders during the bidding process) and take a cut of the profits as bribes from the conspirators.
The public sector needs to be aware of these tactics and consider actively reviewing existing internal control policies, undertake risk assessment review, update the detection mechanism and put best practices in place. Accept good recommendations from MyCC. But, it is more effective if the committees and board members possess high integrity.
Those who handle procurement processes can take steps to reduce the likelihood of wrongdoing. The consequences of procurement fraud, especially bid rigging, may not only be about high costs, taxpayers money will be wasted and diminution of value, but may also imperil personal safety, image and organisational capabilities.
The writer holds a professorial chair at Institute of Crime & Criminology, HELP University and is the president of Malaysia Association of Certified Fraud Examiners
The views expressed in this article are the author's own and do not necessarily reflect those of the New Straits Times