Cheating the system: Bid-rigging of roading contracts sees firm fined

The country’s first criminal prosecution for cartel conduct concluded at the High Court in Auckland today, with the sentencing of a second company involved in the bid-rigging of public roading contracts.

The sentencing follows that of Munesh Kumar and his construction company, MaxBuild Ltd, in December last year. Mr Kumar was earlier sentenced to six months community detention and 200 hours of community work, while MaxBuild was ordered to pay a $500,000 fine.

Mr Kumar admitted he instigated and was the only direct beneficiary of the conduct.

At today’s sentencing, Justice Sally Fitzgerald determined a fine of $595,000 would be appropriate for the second company involved, which has been granted interim name suppression.

However, due to the company’s inability to afford such an amount, the company was sentenced to a $30,000 fine, which was all it could pay.

The penalty took several factors into consideration, including that the company was no longer actively trading and was in a negative financial position.

During sentencing, Justice Fitzgerald described cartel conduct, in this case in the form of bid-rigging, as inherently deceptive, hidden from the customer and difficult to detect.

While it was right parties who initiate and benefit from the conduct should receive higher penalties, the second company took “active steps in the collusive behaviour”.

“But for them, the conduct could not have taken place,” Justice Fitzgerald said.

While the second company involved did not directly benefit from the conduct, submitting bids did allow it to remain in the picture for future work from the procurer.

Commerce Commission Chair Dr John Small says the historic case sets a precedent and reinforces that the Commission will go after cartels and see that they are punished.

“Cartel detection and enforcement are a priority for the Commission, and we are particularly concerned when we see conduct that targets taxpayer-funded projects,” Dr Small said.

“Where we suspect businesses and individuals are cheating the system by committing these crimes, we will take action against the conspirators.”

The proceedings follow a Commerce Commission investigation into the alleged bid rigging of contracts commissioned by the New Zealand Transport Agency for its Northern Corridor Improvement Project, and Auckland Transport for its refurbishment of Middlemore Bridge.

While convictions send a strong deterrence message, Dr Small says the Commission also remains committed to prevention.

“If a competitor asks you to put in a fake bid on a project, say no. It’s illegal, could result in jail time and can cost taxpayers,” he said.

“We have continued our education outreach work with construction businesses, both big and small, to reduce the risk that cartel conduct occurs."

Businesses or individuals that want to report cartel conduct can do so via the Commerce Commission’s Anonymous Reporting Tool or by making a leniency application.  

Background

The investigation

The investigation, which began in April 2022, was triggered when a spreadsheet with pricing information was inadvertently sent by an employee of the second company involved in the conduct to the Joint Venture overseeing the Northern Corridor Improvement Project on behalf of the New Zealand Transport Agency.

The employee was acting under the instruction of his boss, had attended meetings with Maxbuild’s Munesh Kumar, and knew of the plan to rig the tender bids.

The spreadsheet contained references to MaxBuild’s prices for the tender, as well as meetings between MaxBuild and the second company involved in the conduct.

In May 2022, after learning of the spreadsheet, the Commission executed six early morning search warrants simultaneously at two commercial and four residential properties.

This operation involved 40 Commission staff, police officers, and several specialised digital forensic investigators.

During the search, the Commission collected extensive hardcopy and digital evidence, including emails, telecommunications records, photographs, text messages, and pricing documents.  That evidence revealed that Auckland Transport’s Middlemore Bridge was also subject to the cartel conduct.

Numerous interviews were conducted with both parties and other witnesses, allowing the Commission to construct a detailed timeline showing when and how the parties met to collude, and how documents were created or modified using competitor pricing.

Dr Small says part of the ongoing work of the Commission’s cartels team is educating procurers about bid-rigging.

Cover-pricing is an issue the Commission is detecting more of, and is committed to stamping out, Dr Small says.

What is a cartel?

A cartel is where two or more businesses agree not to compete with each other. Cartel conduct can take many forms, including price fixing, sharing markets, rigging bids or restricting output of goods and services.

Because cartel members make more profit than they would if they competed fairly, goods and services become more expensive, consumers end up with fewer choices, and quality and service levels are likely to deteriorate. Tackling cartels is one of the Commission’s enforcement priorities.

Bid rigging

Bid rigging or collusive tendering is when there is an agreement among some or all of the bidders about who should win a tender or have an unfair advantage in the tender. This may involve potential bidders not bidding for a tender to support the proposed winner, or bidders may agree the prices that each party will bid. This often occurs in the form of “cover pricing.”

Cover pricing

Cover pricing is where one or more parties submits a tender bid or bids at an inflated price with a view to increasing the prospects that another designated firm wins the tender. Such an agreement prevents open and effective competition and means procurers are unlikely to achieve best value for money for their business, customers, and in some cases, taxpayers.

The Commerce Act

Section 30 of the Commerce Act prohibits any person entering into a contract or arrangement, or arriving at an understanding, that contains a cartel provision. A cartel provision is any provision in an agreement between competitors that has the purpose, effect, or likely effect of fixing prices, restricting output or allocating markets.

An agreement to restrict output or allocate markets is illegal regardless of whether the agreement actually affects price. These types of agreements (in addition to price fixing) are deemed to substantially lessen competition and therefore are illegal. As of 8 April 2021, cartel conduct is punishable with a term of imprisonment of up to 7 years, as well as civil pecuniary penalties.