Identical bids by linked owners can mean higher prices in govt tenders

Singapore

WHEN public tenders in Singapore receive identical bids from firms with common ownership connections, government contracts can end up being awarded at a higher price, a research study by two academics has found.

In the absence of such ownership networks, winning prices tend to be lower by an average of 4.6 per cent, "suggesting a government savings of over S$4.7 million", said Kentaro Asai from the Australian National University and Ben Charoenwong from the National University of Singapore.

They stressed that their study does not pinpoint the cause of these statistical correlations, but noted that Singapore's laws prohibit anti-competitive behaviour such as price fixing and bid-rigging; anti-competitive actions having attracted penalties such as fines and termination of contracts for transgressors.

The study used data from government procurement portal GeBiz between Sept 21, 2016 and April 2, 2018, focusing on the 22,098 "auctions" - referring to quotations and tenders - with more than one bidder.

The academics noted that their research was "only possible due to the Singapore government's open data policies".

The average number of identical bids across the sample was 0.45, with 9.8 per cent of auctions having at least one instance of an identical bid.

In an interview with The Business Times, Dr Charoenwong said that economic theory suggests that identical bids are unlikely to occur in the absence of co-operation if firms have different cost structures.

In their as-yet unpublished paper, the researchers noted that the OECD Competition Committee recommends governments to "avoid splitting contracts between suppliers with identical bids and investigate the reasons for the identical bids and, if necessary, consider re-issuing the invitation to tender or award the contract to one supplier only".

The researchers further found that identical bids were correlated with ownership connections.

They looked at ownership information supplied by analytics platform Handshakes, which is powered by data from the Accounting and Corporate Regulatory Authority.

Four types of ownership linkages between companies participating in the same tender were studied. Two of these types were found to be significantly correlated with the presence of identical bidding.

Based on the study's statistical estimates, for each pair of firms in a tender with a common shareholder - what the researchers called a "second-degree connection" - there is an additional 0.562 identical bid.

For each pair of firms owned by two other firms that have a common shareholder - "fourth-degree connection" - the number of identical bids rises by 0.374.

To investigate the relationship between identical bidding and tender award prices, the researchers looked at cases where the lowest bid won.

They found that for every identical bid related to such ownership connections, the award amount is 4.9 per cent higher than normal.

If there are multiple low bids in a tender, the winning firm might not be the one with the lowest cost, resulting in an inefficient outcome, noted the researchers.

To arrive at this result, the researchers first estimated the cost distribution across participating firms based on the 315 tenders in which the lowest bid won and participating firms had an ownership connection.

Using their statistical model, they then considered what the outcome would have been without ownership connections.

They estimated that removing second-degree connections would, on average, reduce the winning bid by 4.7 per cent and the estimated costs of the winning firm by 4.9 per cent.

Removing both second-degree and fourth-degree connections would, on average, reduce the winning bid by 4.6 per cent and the winner's cost by 4.9 per cent.

This would translate to an average of S$4.7 million savings relative to a total government expenditure of S$102 million, said the researchers. The study does not draw conclusions about the causes of the statistical correlations found.

But it does suggest that it is worth paying attention to identical bids and ownership links between firms taking part in the same tender, Dr Charoenwong told BT.

"When the government decides who to award, they should look at the ultimate owners (of firms)," he added.