Collusive Bidding Agreements A Case Study

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The use of 'collusive bidding agreements' among bidders for Chinese construction contracts is a recently publicized phenomenon that sheds further light on an industry beset with irregular behaviour. Project sponsors, for instance, have been known to use 'black and white contracts' (see our September bulletin) to exert pressure on winning contractors to collude in falsifying project costs in order to leave a margin of funding to be used in unidentified, possibly corrupt ways. Collusive bidding agreements, on the other hand, are used by bidders to cheat project sponsors out of competitive bidding. This ensures a 'reasonable profit' for the winning contractor, and also guarantees a share of the profit for the contractors who agreed to lose the bid beforehand.

The Wenzhou Case

On November 3 2005, at the Wenzhou City Ouhai District People's Court, the criminal trial began for China's largest collusive bidding case to-date for municipal works contracts. The case involved collusive bidding among seven construction companies in 2002 and 2003 for three Wenzhou City municipal works construction contracts. Twenty four managers from these respective companies allegedly colluded to obtain reasonable profits. To this end, they signed written agreements for collusive bidding and the sharing of reasonable profits. In total, the value of these contracts was nearly Rmb300 million, with the 'losing' companies receiving Rmb12.16 million in fees from the winning bidder.

Although the 24 defendants were prosecuted under the Criminal Law for collusive bidding with serious circumstances, in a less serious case, under the Invitation for the Submission of Bids Law, administrative fines and confiscation of illegal income could have been imposed. The maximum criminal penalty for collusive bidding with serious circumstances is three years imprisonment and/or a fine. The court's judgement in the Wenzhou case is consistent with these provisions. On November 15 2005, the court sentenced 13 defendants to prison terms varying from two years with two years' probation to six months with one year's probation. These prison terms were in addition to fines in the range of Rmb150,000 to Rmb800,000. Fines ranging from Rmb50,000 to Rmb500,000 were imposed on nine other defendants. Only two defendants escaped criminal punishment. The court also ordered the confiscation of all illegal income. It is unclear whether the defendants will appeal their convictions.

Lessons from the Wenzhou Case

It is possible that while some defendants in the Wenzhou case might regret engaging in collusive bidding, others might simply regret signing the collusive bidding agreements in writing. As this case becomes more publicized, it is likely that future collusive bidders will increasingly rely on gentlemen's agreements, rather than formal collusive bidding agreements, thus leaving no paper trails for prosecutors. In collusion cases, the difficulty of gathering evidence is one of the chief impediments to prosecution. As prosecutions become more vigorous, collusive bidders will surely become more cunning, and their activities will become even harder to detect and prosecute at the back-end. When asked about the pervasiveness of collusive bidding activities in the construction industry, a defendant in the Wenzhou case reportedly said that others in the industry "are doing it" and that if a project sponsor announced that the lowest bid would win the contract, it would create even more temptation for bidders to collude and maintain a 'reasonable profit'.

The government is now promoting the use of public bidding for municipal works contracts as a method to reduce corruption and help ensure that the government gets the best value for its investment in such projects. If collusive bidding and other abuses become prevalent in the bidding process, public bidding will risk becoming a charade. The government seems well aware of the pervasiveness of collusive bidding activities and is currently trying to implement preventive measures at the front-end. Numerous ministries and provincial governments have issued regulations and notices to address the problem. For example, in 2005, the Liaoning Provincial Government issued a Notice for the Further Standardization of Bidding Activities, emphasizing the necessity of proper public announcement of projects open for bids and the independence of project sponsors' agents from the bidding exchange centres.

Large Chinese companies are also becoming increasingly sophisticated in protecting their interests as project sponsors from collusive bidding. For example, a company may maintain a roster of reputable contractors and invite several of those contractors to bid for a construction project. The company will keep the identities of the invited bidders secret from one another, and inform the bidders that there is zero tolerance for collusive bidding or any other irregular activities (i.e. any such behaviour will cost the bidder its place on the company's roster). The company might also require the invited bidders to sign a 'contract for ethical conduct', where the bidder undertakes not to bribe company employees. The existence of these ethical contracts, in addition to collusive bidding agreements and black and white contracts, reflects the serious underlying problems involving bidding activities in the PRC construction industry. Recognition of such problems is the first step in finding a solution and it is clear that various government agencies and companies are taking steps to address the problem of collusive bidding. As foreign investors hire local contractors for construction projects, it is important they be aware of the collusive bidding problem and consider developing methods for self-protection.