Anti-competitive practices in procurement

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Practices that hinder fair competition are prevalent in the supply markets. They are two dimensions to unfair competition practice. Suppliers can create situations that provide unfair advantage over competition. This is easily identified and is challenged by the market players unfairly prevented from trading successfully.

The other dimension is the agreements on standard rates or percentages to apply on contracts, a practice never challenged since it is beneficial to the competitors. The buyers’ dilemma is the determination of the supplier to contract since rates are the same.

Laws are being promulgated internationally to promote healthy competition. Mentioning healthy competition implies the existence of unhealthy competition. Unfair competition is the encapsulated conducted by business, which amounts to gaining advantage over competitors or preventing other businesses from trading successfully. The international laws aim to ban anti-competitive agreements that fix prices, rates or percentages for specific products and services.

Current situation

Such associations could be formal or informal. The professional services sector leads in the formal associations that stipulate rates or percentages. The ultimate cost to the buyer is normally the percentage of the overall cost of the project. Projects with a significant budget would cost more and the opposite is true. The method of charging does not take into account man hours committed and is centred on the project cost.

The basis of a charge is to recover overheads and make a margin and profit. The practice of setting rates assumes that all businesses operate on the same level of overheads, a situation that is practically unattainable.

The United States introduced anti-trust laws to deal with this problem. The legal profession is a good example of a sector that is regulated and the costing is not related to the value of the project being managed but is rather related to the level of expertise required and the amount of time spent on the project.
Conveyance is the only element that is charged by lawyers in relation to the value of the project, the same way other professions do and results in profiteering.
Unlike the current environment locally, where professional services do not participate in competitions to secure contracts, the anti-trust laws provide for competition in these sectors.

These anti-competitive practices are more of cartels, from a procurement view. Two principle categories maybe identified:

One could be a cartel that shares the market. The so-called competitors divide the market among themselves and such practices can be used as a barrier to new entrants to that market.

The other dimension is the price fixing cartel, where members agree to charge a certain rate or price, which if the procurement is subjected to competition, lower prices or rates could be obtained.

Individual competitors would consider the time required to accomplish the task and the level of resources and expertise required. A margin or markup would be added to recover overheads and realise a profit from the employment on a project. The ultimate result for restricted competition is the avoidable higher costs to the buyer that could be eliminated only if competition was introduced.

Participants would charge different rates under free market conditions.

Limiting open competition has profound implications on the choice of trading partners. It further restricts the professionals to compete on price and capacity and to offer different prices to different customers.

The ultimate burden is on the customer who has to pay for the avoidable costs through higher prices of goods and services by business and the public sector in order to recover input costs.

●Nyasha Chizu is a fellow of the Chartered Institute of Procurement and Supply writing in his personal capacity. Feedback: nya.chizu@gmail.com; Skype: nyasha.chizu

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