India: Public Procurement and Competition

‘Public procurement’ refers to the purchase by governments, state-owned enterprises, municipalities and statutory authorities of goods, services and works undertaken for execution. As public procurement accounts for a substantial portion of the taxpayers’ money, governments are expected to carry it out efficiently and with high standards of conduct and ensure there is full participation and fair competition.1

Globally, public procurement accounts for 15 per cent of gross domestic product. However, in India this figure is 30 per cent,2 owing to procurement of goods and services by various ministries, departments, municipals and other local bodies, statutory corporations and public undertakings both at the centre and at the state level. When competition is curtailed in the supply market – for example when suppliers engage in bid-rigging – taxpayers’ money is wasted as governments pay more than the fair price.3 This is where the Competition Commission of India (CCI) steps in, to ensure that end consumers who are the ultimate beneficiaries do not taste the unfairness in the price or quality of goods or services.

The antitrust activity in this sector dealt with by the CCI has cut across sectors related to cement, railways, gas cylinders, healthcare and chemicals.

Cartel enforcement

The importance of effective competition in public procurement has not been lost on the CCI. In re: Western Coalfields Limited v SSV Coal Carriers Pvt Ltd & Ors,4 it was stressed that:

the Commission notes that bid-rigging is one of the pernicious form of anticompetitive conduct prohibited under the Act [Competition Act, 2002]. Further, Informant is a public sector undertaking supplying input to customers in an important sector such as electricity. The Commission considers the criticality of the services procured under public procurement as an aggravating factor.

The CCI therefore imposed a penalty of 120 million rupees on 10 transportation companies and also imposed penalties on eight office bearers who were responsible for the conduct of the transportation companies for rigging bids in relation to tenders floated by a public utility for coal and sand transportation.

The CCI has time and again emphasised the importance of public procurement and has always dealt with competition concerns in the instant sector with an iron rod. Since the Act was enforced in 2009, the CCI has imposed penalties in 11 cases relating to public procurement. Some of the more notable ones are discussed here.

In re: Suo-motu case against LPG cylinder manufacturers,5 the CCI initiated proceedings against LPG manufacturers which were found to be involved in bid-rigging in supplying LPG cylinders to a public sector undertaking pursuant to a tender floated by it. Having found that the parties submitted identical bids, the CCI imposed a penalty of 165 billion rupees on 48 manufacturers. In its order, the CCI also laid down various factors, to test markets, which may be prone to bid-rigging or repeated collusion. The CCI emphasised that markets where there exists low demand, a small number of players (though in the present case, it was dealing with 48), industry associations, repetitive bidding, homogeneous products, and few new entrants, are prone to cartelisation. In the instant case, the CCI found that various bidders used to meet before the tender opening dates and there were a number of identical bids, despite varied costs.

In re: Aluminium Phosphide Tablets Manufacturers,6 the CCI examined the allegation of bid-rigging in a tender for procurement of aluminum phosphide tablets floated by the Food Corporation of India. The CCI noted that identical bids quoted by different players were not possible unless there is some sort of prior understanding. But this case has become famous for two other reasons – first, that the case involved a tender that has been issued and the cartelised bids submitted a few days prior to the date on which the Competition Act, 2002 (the Act) came into force, ie, 20 May 2009. The applicability of the law to the cartel was thus questioned. The CCI noted that although the cartelised bids were placed before the crucial date, the negotiations and finalisation of the contract occurred after the 20th thereby bringing the conduct within the purview of the Act. Second, the CCI also imposed a penalty amounting to 318 billion rupees7, which was based on the total turnover of the companies even though they produced several different products of which these tablets was only one.

The appellate tribunal upheld the decision of the CCI8 and the application of the Act to the bids in question, but reduced the quantum of penalty by restricting it to the relevant turnover. The matter reached the Supreme Court, which upheld the decision of the CCI on merits including the applicability of the Act to infringing bids, but agreed with the tribunal on the application of relevant turnover while calculating penalties.9

The cement sector, notorious for being prone to cartelisation, also felt the Commission’s ire In re: Director, Supplies and Disposals, Haryana and Shree Cement Ltd and Ors,10 where seven cement companies were penalised a total of 205.7 billion rupees for indulging in bid-rigging by having quoted higher prices and allocating the bids among themselves for tenders floated by the state of Haryana. In order to arrive at a finding of collusion, the CCI analysed the trend of bids quoted, the lowest bidder position secured among the seven, capacity utilisation, quantities offered by the parties, wholesale price index of cement, as well as call data records and SMSs.

Leniency

The CCI also came out with its first decision in a leniency proceeding in a matter relating to public procurement by the railways. In re: Cartelization in respect of tenders floated by Indian Railways for supply of Brushless DC Fans and other electrical items,11 the CCI, while imposing monetary penalties on the cartelists, noted that one of the parties (Pyramid) had acknowledged its wrongdoing by way of a leniency application and extended its cooperation to the investigation. Normally this would have resulted in Pyramid being granted a full waiver of the penalty. However, as the disclosure was made at a later stage in the investigation and thus Pyramid’s penalty was reduced by 75 per cent as against the original amount of 6.236 million rupees. The remaining cartelists did not receive any such reduction.

Bidding by group companies

A rather curious order was passed by the CCI in October 2017.12 The matter related to a tender issued by the Delhi Jal Board and two of the participating companies were Grasim Industries and Aditya Birla Chemicals. These two argued that they formed part of the same group and hence a single economic entity, which negates the application of section 3 of the Act dealing with anticompetitive agreements, including cartels. The CCI, however, clarified that even though the companies may be sister concerns or part of the same group:

Where two or more entities of the same group decide to separately submit bids in the same tender, they have consciously decided to represent themselves to the procurer that they are independent decision making centers and independent options for procurement. They will, under such circumstances, have to comply with the provisions of the Act in letter and spirit.

Strangely enough, the same parties had approached the Commission before, under its merger regulation provisions in 2015. In that case, the Commission, by majority, had held that Grasim and Aditya Birla form part of the same ‘group’13 of the Act and hence ‘that the Parties are not likely to have exercised a competitive constraint on each other irrespective of the Proposed Combination’.14 However, in this case, the CCI held that the concept of ‘group’ would have no application to proceedings under section 3 of the Act. The position seems to be quite questionable and contrary to jurisprudence in the EC, where such conduct would be immune from the application of article 101 of the Treaty (akin to section 3) but may be objected to by the procuring authority separately depending on the tender terms and other applicable laws.15 By taking such a contradictory position it appears the CCI wants to have its cake and eat it too.

The need for a ‘relevant market’

In Mr Ramakant Kini v Dr L H Hiranandani Hospital16 and Builder Association of India v Cement Manufacturers Association & ors,17 the CCI held that in cases concerning section 3 of the Act, there is no need to determine a relevant product or geographic market. However, the Hon’ble Supreme Courts’ holding in its first substantive judgment on the merits of a competition matter18 concerning a cartel has put this into question. While tracing the origin and importance of competition laws, the Court also stressed the importance of defining a relevant market and that the:

Purpose of defining the relevant market was to assess with identifying in a systematic way the competitive constraints that undertakings face when operating in market.19

Defending counsels have naturally latched onto this to argue that it is necessary to delineate a relevant market in all cases concerning anticompetitive agreements. The CCI has moved an application before the Supreme Court seeking clarification on the necessity to define a relevant market and the position taken will clear up the fog. In the event it is confirmed, a number of CCI’s past orders currently pending appeal would be liable to be struck down as none of them appear to have defined the relevant market.

Abuse of dominance

The CCI has also been presented with complaints relating to abuse of dominance in tenders floated by government departments. The core allegation is that these bodies have limited the number of participants eligible to tender, thereby granting preference to certain bidders. The CCI has taken a somewhat narrow view of the allegations and preferred a hands-off approach. According to the Commission, such allegations fall within the purview of anti-corruption laws rather than the Competition Act.20 The Commission has also buttressed this approach by holding that:

A consumer of services must be allowed to exercise its consumer choice and freely select between competing products or services. This right of consumer’s choice must be sacrosanct in a market economy because it is expected that a consumer would decide what is best for it and free exercise of consumer choice would maximise the utility of the product or service for the consumer. . . . The consumer is the best judge. In case of public entities, the entity is a representative consumer on behalf of the public. There are administrative mechanisms in place for carrying on the due process of exercising consumer’s choice on behalf of the public.

The only caveat being ‘competition concerns in rare cases where a monopoly/dominant buyer exercises the option in an anticompetitive manner. . .’ .21 To date, no case appears to have fallen within the ambit of this caveat, thus giving procurers wide discretion in setting the eligibility criteria.

Conclusion

Due to the CCI’s continued policing, many enterprises and associations have commenced implementing compliance programmes and altering processes to ensure that such conduct is not repeated. The CCI has also noted that the tender systems issued by certain state actors themselves do not foster fair competition. For example, in In re: Deputy Chief Materials Manager, Rail Coach Factory vs M/s Faiveley Transport India Limited & Others, the CCI found that the system of procurement in railways in India was not conducive to competition. This was paid heed to by the Ministry of Finance, which revised its Manual for Procurement of Goods in March 2017. The government’s efforts are also evidenced from the update to the Code of Integrity for Public Procurement, likely to raise the awareness of competition laws among bidders (especially smaller players) and reduce instances of infringement.

Notes

1 www.oecd.org/governance/public-procurement/.

2 www.thehindu.com/business/public-procurement-needs-to-be-opened-up/article17395912.ece.

3 www.cci.gov.in/sites/default/files/presentation_document/p4.pdf?download=1.

4 Case No. 34 of 2015, Order dated 14.09.2017.

5 Case No. 03 of 2012, Order dated 06.08.2014.

6 Suo Moto Case No. 02 of 2011, Order dated 23.04.2012.

7 Nine per cent of the average turnover of the parties.

8 Appeal No. 79, 80 and 81 of 2012, Order dated 29.10.2013.

9 Excel Crop Care Ltd. and Ors v CCI and Anr, (2017) 8 SCC 47.

10 Ref. Case No. 05 of 2013, Order dated 19.01.2017.

11 Suo Moto Case No. 03 of 2014, Order dated 18.01.2017.

12 Delhi Jal Board v Grasim Industries Ltd and Ors, Ref. Case No. 03 of 2013, Order dated 05.10.2017.

13 As defined in Explanation (b) to Section 5 of the Act relating to combinations.

14 C-2015/03/256, order dated 31.08.2015.

15 See eVigila, Case C-538/13, judgment dated 12.03.2015 and Opinion of the Advocate General Campos Sánchez-Bordona delivered on 22.11.2017 in Case C-531/16.

16 Case No. 39 of 2012, Order dated 05.12.2014.

17 Case No. 29 of 2010, Order dated 31.08.2016.

18 Competition Commission of India v Co-ordination Committee of Artists and the Technicians of WB Film and Television and Ors., (2017) 5 SCC 17.

19 Ibid.

20 Surendra Prasad v MAHAGENCO & Ors., Case No. 61 of 2013, order dated 11.12.2013.

21 Sh. Kailash Chander Sharma v Coal India Ltd & Or., Case No. 40 of 2016, Order dated 14.07.2016; In re: XYZ v HSCC (India) Ltd, Case No. 44 of 2016, Order dated 09.08.2016.