31 May 2016

Hong Kong Competition Commission targets construction sector bid-rigging

This article was written by Neil Carabine and James Wilkinson.

The Competition Commission will prioritise enforcement of construction cartels after detecting potentially widespread bid-rigging in the building maintenance and renovation market in Hong Kong.

The Commission found patterns consistent with bid-rigging after analysing tender records from about 500 public projects. The findings are set out in the Commission’s report on its market study into the sector published on 26 May 2016.

The Commission reported receiving substantial anecdotal and other market intelligence suggesting regular bid-manipulation practices.

The suspected bid-rigging occurred prior to the Competition Ordinance coming into effect in December 2015, and as such would not have breached competition law. However, the Commission is likely to investigate further if it detects bid-rigging going forward.

Companies in the construction sector should undertake a competition compliance “health” check to identify any issues and put in place mitigation measures. Doing this successfully can avoid an investigation and the potential for substantial fines.

Types of bid-rigging

A typical form of bid-rigging is “cover bidding”, where tenderers agree between themselves who will win a tender. The “losing” tenderers agree to submit high or non-compliant bids to give the false impression that the tender is competitive. This allows the allocated “winning” tenderer to successfully submit an inflated contract price.

Sharing information with competitors about prices or plans to bid in relation to future projects can also amount to bid-rigging.

What is the risk?

Companies suspected of bid-rigging and other anti-competitive conduct may be investigated by the Commission. The Commission’s investigation powers include compelling a company to produce documents or requiring a person to answer questions. The Commission may also obtain a warrant to enter and search premises for relevant documents.

If anti-competitive conduct is discovered, the Commission may prosecute the company and individuals involved in the Competition Tribunal. The Tribunal may impose fines of up to 10 per cent of a company group’s annual turnover for each year of contravention. Companies may also be exposed to private damages actions.

For comparison, the South Korean competition regulator recently fined 21 construction companies a total of HK$900 million for colluding in a railway project bid. In the UK, 103 construction firms were fined a total of HK$1.5 billion for bid-rigging and other anti-competitive conduct.

Time for a competition compliance check

The “health” check should assess the adequacy of your company’s procurement practices and compliance policies. Key staff should be trained on the types of conduct that may breach the competition law.

If the “health” check does not identify compliance issues, this is great news for the company. Undertaking the check will improve the compliance culture within the organisation and this should make future deviations less likely.

If compliance issues are identified, they must be properly investigated and addressed. There are a range of possible solutions, from restructuring how business is being done to self-reporting to the Commission. Under the Commission’s leniency policy, a company will receive immunity from prosecution if it is the first cartel member to come forward and cooperate with the Commission. However, a company that receives leniency may still be exposed to private damages actions.

For more information on Hong Kong’s competition law and its impact on your company, see our Survival Guide for the Construction Industry.

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