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Commerce Act 1986. Illegal agreements and collusive conduct Workshop: Protect your procurement. Presentation to Southern Response 2 November 2012. Key points for today. Why is competition law in place and why is anti-competitive behaviour harmful

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illegal agreements and collusive conduct workshop protect your procurement

Commerce Act 1986

Illegal agreements and collusive conductWorkshop: Protect your procurement

Presentation to Southern Response 2 November 2012

slide2
Key points for today

Why is competition law in place and why is anti-competitive behaviour harmful

What are illegal agreements under sections 27 & 30 of the Commerce Act - including collusive (or “cartel”) conduct?

The four main types of collusive conduct and how to detect them.

What can you do to protect your company and its procurement?

slide3
A bit about the Commerce Act 1986

Commerce Commission enforces the Commerce Act

Competition law is in all major economies

Purpose = promote competition in markets for long-term benefit of New Zealanders

Competitive markets important for

  • domestic economy
  • international trade
slide4
Why is Collusive Conduct Illegal?

Collusive and other anti-competitive conduct affects consumers and businesses, also damages the economy and even society:

  • increases prices
  • limits output and choice
  • inhibits innovation
  • lowers quality
  • skews investment incentives
  • lowers competitiveness of exports
slide5
Risks to Competition

Competition generally ensures that purchasers get the best price, best quality and best choice of supplier

Christchurch works are on an unprecedented scale, demand outstripping supply:

  • Increased risk that competitors will agree prices on works/bids
  • Increased risk that competitors will agree bids/outputs/market sharing
  • For example where specialist services undertaken by few players
slide6
Illegal Agreements – sections 27 and 30 of Commerce Act

Communication between at least two parties that shows an agreement

  • (communication includes nods & winks)

Contracts, arrangements, & understandings

Can be verbal and informal

May involve agreeing not to do something

“Entering into” = making an agreement; and

“Giving effect to” = putting the agreement into action

slide7
Anti-competitive agreements – section 27 Commerce Act

Can be between any parties, not just competitors;

  • egmanufacturer and wholesaler

To be illegal the agreement must the have the purpose, effect, or likely effect of substantially lessening competition in a market

Often restrictive in nature,

  • eg refusing to supply(Resource – fact sheet on Agreements that Substantially Lessen Competition)
slide8
Price fixing provisions – section 30 Commerce Act

Agreement must involve competitors

Per se illegal conduct

“fix, control, or otherwise maintain the price of a good or a service”

Includes components of price (such as margin), a price level, or a formula to calculate price

Even agreeing a price for one party is illegal

(Resource – fact sheet on Price Fixing and Cartels)

slide9
Four types of collusive agreements

Price fixing agreements

Bid rigging agreements

Market sharing agreements

Output restriction agreements

This serious behaviour is often referred to as “cartel” conduct

Captured by sections 30 and 27 of Commerce Act

slide11
Price fixing

More than just exact price matches

Fix, control or maintain

Any component of price

Margins, rebates, discounts, formulas

Floors & ceilings

Only has to involve one price

slide12
Price fixing behaviour – what to look for

Timing and magnitude of price increases

Very sudden end to a period of discounting by multiple suppliers

Blanket refusal to negotiate price by multiple suppliers

Timing and magnitude of any changes to rebates etc

slide13
Price Following is not Illegal

Price Following is not Illegal

slide14
Bid Rigging

Agreement between competitors as to which one will win bid

Can be verbal or written

Common types:

  • Cover bidding (vs. “cover pricing”)
  • Bid suppression
  • Bid rotation
  • Bid withdrawal
slide15
Bid rigging – what to look for

Suspicious bidding patterns

  • (may be sophisticated)

Suspicious behaviour or prices

Clues in documents

Clues in things said by bidders

Relationships amongst bidders

  • egsub-contracting
slide16
Design tenders that minimise the risk

Ensure appropriate number of bidders able to bid

Avoid predictability

Reduce opportunities for communication

  • egpre-tender group meetings

Include anti-collusion clauses in tender documents

Raise awareness of bid-rigging – use Commission Guidelines

slide17
Market sharing

Competitors agree on market, regions, customers or types of contract/customer

Competition in the shared area is curtailed or removed

Difficult to spot, may look like stable supply

May occur in conjunction with other behaviour

  • egbid rigging to ensure customer stays with the incumbent supplier
slide18
Market sharing – what to look for

Supplier’s lack of interest in certain customers/areas/ contracts etc

  • eg non-incumbents prices are much higher, not willing to negotiate

Steady market share by type of customer, in certain regions, in certain contract types etc

Lack of entry with no good reason

  • eg already doing same kind of work in one part of Christchurch but refuse to enter another part
slide19
Output restriction

Capping or lowering output

Aim is to increase price and/or reduce other benefits to the customer

What to look for

  • coordinated reductions in output by multiple suppliers with little or no justification
slide20
Competing buyers

Also need to be careful as purchasing can be done “in competition”

Any coordination interferes with the competitive process

Same rules apply for purchasers as to bidders

  • eg meat buyers cartel
slide21
Sometimes competing businesses lawfully collaborate – care required
  • EXEMPTIONS
  • s31 Joint Ventures (exempt from s30 only), s33 Joint Buying (s30 only)
  • S32 Certain price recommendations, 50 or more parties (s30 only)
  • AUTHORISATIONS
  • Only if public benefits outweigh detriments
  • (Resource – fact sheet on Exemptions under the Commerce Act)
slide22
Trade associations

Provide many important benefits for those involved. However, care needed as:

  • Members usually also competitors
  • Any illegal agreement entered into by association captures all members too!
  • If member disagrees with conduct, to avoid liability, must object in writing or prove could not have reasonably known
  • Price recommendations possible if more than 50 members - but risks involved

(Resource – Guidelines for Trade Associations)

slide23
Possible penalties
  • If civil proceedings result, significant fines available for companies and individuals, both per breach
  • Also $ damages for victims under private actions
  • Individuals banned from being managers or directors
  • Those in authority and third parties also need to be careful (section 80)
  • Attempt to make an agreement is enough to break the law
  • 2012– Cartel Criminalisation Bill under consideration - significant changes to the Commerce Act may result
slide24
Monitor your procurement process, you are the experts

Keep good records, eg all tender documents and data

Look for indicators of price fixing, market sharing, bid rigging and output restriction outlined earlier

Include anti-collusion clauses in tender documents (see example in your pack)

If you are suspicious, be careful with any evidence and inform Commission of any suspicions about suppliers

Please read our resources and any Commerce Act related material provided by your organisation

What can you do to protect

your company ?

slide25
Work-through hypothetical scenarios

These are designed to help illustrate practical examples.

So you can put the knowledge gained today into practical application

slide26
In summary – our key messages

When you are procuring, look out for the indicators of bid-rigging, price fixing and other unlawful conduct

Knowing the key rules & having good processes will help you protect your company from being subjected to unlawful conduct.

slide27
Quick survey

You are all important stakeholders for our work

Please take a few minutes to fill out our quick survey as it assists to target and improve our advocacy

slide28
Questions?

Further enquiries welcome:

Nicky Beechey

Chief Adviser

Competition Branch

Commerce Commission

nicky.beechey@comcom.govt.nz

04 924 3623  

Barrie Sutton

Chief Adviser

Competition Branch

Commerce Commission

Barrie.Sutton@comcom.govt.nz

04 924 3631

*All images sourced from Google Images