Construction Services Conspiracy in the hand of The Guidelines

In a discussion in Jakarta, in 2011, Executive Director of INDEF (Institute for Development of Economics and Finance) Ahmad Erani said that, in addition to the factor of funding availability, infrastructure development in this country has been weak thus far due to a lack of good governance as well. What has happened in Indonesia, said Erani, is an unhealthy business competition, namely rampant conspiracy in project tenders funded by the state budget (APBN). "The tender winner usually colludes in order to obtain profits that are far above the normal price," he said. He mentioned a number of factors behind the conspiracy. For such example, a limited number of companies so that they can control prices in the market, or, market conditions or public sector tenders that tend to be easy to predict. "They are usually done by easing the regulations for old players and making it difficult for new players," added Erani.

The business practice that may cause unfair competition is tender conspiracy, one of the conducts which is prohibited by The Law No. 5 of Year 1999 (“The Law No.5/1999”).  General principles in tender which necessarily is considered, among others, transparency, respect for money, effective and open competition, fair negotiation, accountability and assessment process, and non-discriminatory.  In line with such, The Law No.5/1999 stipulates the prohibition of tender conspiracy that may be occurred through agreements either in writing or verbal.  The conspiracy involves wide range of behaviors, including the production and or distribution business, activities trade associations, price fixing and auction manipulation between business actors as well as business’ owner

From the perspective of alleged articles being reported, the reports that go to Business Competition Supervisory Commission (“KPPU”) were still dominated by reports about tender conspiracy since 2000 until 2011, i.e. 72% or 169 out of 201 written reports.  In the framework of The Law No.5/1999, conspiracy could be conducted in such manner:

1.      Arranging and/or determining the winner of the tender thus causing unfair business competition.

2.     Obtaining information of their competitor’s business activities classified as company’s secret thus causing unfair business competition.

3.    Hampering production and/or marketing of the goods and/or services of their competitors with the intention to reduce the quantity, quality, and the required delivery punctuality of the goods and/or services offered or supplied in the relevant market.

As implementation the guidelines concerning conspiracy, KPPU has been drawn up The Guidelines for Article 22.  This Guideline brings many interpretations for Article 22, however, point of view and opinions of KPPU in examination for tender practices alleged conspiracy on its implementation will be set in priority and not only confined by The Guideline.  Notwithstanding this Guideline does not specifically regulate concerning construction services conspiracy, the point of view of KPPU in conspiracy may be referred to.     

Furthermore, The Guidelines also describes the indication of conspiracy in every step that may be possible occurred indication of conspiracy at the time of, among others, planning, establishment the committee, pre-qualification or pre-tender, tender’s announcement, tender document pick-up, Self-Estimation Price or tender base price, tender open house, delivery of tender offering document, evaluation or decisions of tender awardees, announcement of tender awardees, submission of rebuttal, implementation and its evaluation.  The impact of tender in view of employer as follows, first, consumer or employer has paid the more expensive price than the actual price. Second, the quality of goods/service will be poor (both in terms of quality, quantity, time, or the value).  Third, barriers to entry will be inevitably in the light of potential participants in order to award the tender.  Fourth, project value will be high caused by markup carried out by the parties.

Tender conspiracy may be carried out in explicit or tacit through, among others, conformity conduct, backdoor private offerings, creating apparent competition, approving or facilitating or granting exclusive opportunity, not refusing to undertake an action though known that such action is intended to arrange the winner of certain tender’s participant.  Conspiracy according to The Guidelines comprises into horizontal conspiracy, when is occurred between business actors or between goods producers or their competitors, vertical conspiracy which involves tender committee or the parties related with the tender and business actors and combinations between them.

Compare to basic Types of Collusive Tendering adapted from U.S., Department of Justice, "Price-Fixing, Bid-Rigging and Market Allocation Schemes as follows :

Bid Suppression: In bid suppression schemes, one or more competitors who otherwise would be expected to bid, or who have previously bid, agree to refrain from bidding or withdraw a previously submitted bid so that the designated winning competitor's bid will be accepted.

Complementary Bidding: Complementary bidding (also known as "cover" or "courtesy" bidding) occurs when some competitors agree to submit bids that either is too high to be accepted or contain special terms that will not be acceptable to the buyer. Such bids are not intended to secure the buyer's acceptance, but are merely designed to create a (false) appearance of genuine competitive bidding.

Bid Rotation: In bid rotation schemes, all conspirators submit bids but take turns being the low bidder. The terms of the rotation may vary; for example, competitors may take turns on contracts according to the size of the contract, allocating equal amounts to each conspirator or allocating volumes that correspond to the size of each conspirator company.

Subcontracting as a compensating mechanism: Competitors who agree not to bid or to submit a losing bid frequently receive subcontracts or supply contracts in exchange from the successful low bidder. In some schemes, a low bidder agrees to withdraw its bid in favor of the next lowest bidder in exchange for a subcontract that divides the illegally-obtained higher price between them. Note, however, that sub-contracting is not necessarily anti-competitive if it is not done in furtherance of efforts to limit competition in the award of the main contract.

Unfair business practices may be created through tender activity in form of as following:

1.   The closed tender or not transparent with no wider announcement that cause the interest business actors and meet the qualification of tender unable to participate the tender

2.   The discriminative tender that unable to be participated equally;

3.  The tender complemented with certain requirements or specifications or trademark which tends to certain business actors that cause the other business actor to be participated  

The Guideline asserts that tender conspiracy shall be approached by rule of reason which requires the examination to determine whether the infringement of unfair business practices has been carried out.  In 1911, The Supreme Court U.S ruled that, the Sherman Act reached only those trade restraints which are unreasonable. This so-called rule of reason has since been the hallmark of judicial construction of the antitrust laws. The anti-competitive consequences of a challenged practice are weighed against the business justifications upon which it is predicated and its putative pro-competitive impact and a judgment with respect to its reasonableness are made.