Tendering, affiliate companies bidding for the same project, acceptable or not?

An article, copied here below regarding affiliate companies bidding, attracted my attention. It concerns the question whether companies of the same group can participate to and compete against each other in the same public tendering. It also gives some practical guidelines. But let us first look at the general context.

General context

Companies from the same group, often named affiliate companies, are companies (mother, daughter or sister companies) that have the same majority shareholders (50% +1) and control.

Intuitively, one would be against multiple bids from group companies.

What is the opinion from the World Bank?

The following quote from World Bank (WB) guidelines shows the general principle applied by WB and other Multilateral Development Banks (MDBs):

4.1 A Bidder shall not have a conflict of interest. Any Bidder found to have a conflict of interest shall be disqualified. A Bidder may be considered to have a conflict of interest for the purpose of this Bidding process, if the Bidder:

(a) directly or indirectly controls, is controlled by or is under common control with another Bidder;

(Source: “World Bank, Standard Procurement Document, Request for Bids, Works [without prequalification]”)

Therefore, WB doesn’t allow several bidders from the same group of companies to participate to the same tender. It is currently not the case – but I would personally prefer – that WB and other MDBs apply the same rule for state owned companies. This would avoid that several state-owned companies participate to the same tender and differentiate their bidding strategy (coordinated at ministerial level) to maximize the chances of success for the country (typical “low price/high price” bid strategies).

The reality for large multinational companies

On the other hand, I’ve seen situations where big multinational companies have entities with distinct specializations that may wish to team up with third party companies to prepare a complete bid. They had no internal rule establishing who could participate on priority basis to a specific tender. And, no active direct management oversight to allocate participation on a case-by-case basis nor establish a joint strategy. At best, a corporate risk management team could notice both entities were participating to the same tender. But such corporate risk team looked at each tender separately in interaction with the relevant entity only and did not interfere with bid/no-bid decisions. If a “Chinese wall” principle is applied and no commercially sensitive information is exchanged, one could consider this acceptable. The problem is for the contracting entity (and other companies participating to the same tender) to be entirely sure that no information is shared within the relevant group.

The relevant article

(Source: “https://www.lexology.com/library/detail.aspx?g=6b244399-4dd0-411d-9160-ba0ba685f51d“)

If two companies that are in same group both participate in a public procurement procedure with their own tenders, are they allowed to exchange information? Is it all right for them to use the same people and the same sources of information when preparing their tenders, or do they have to genuinely compete against each other?

These questions may sound surprising. After all, the prohibition of bidding cartels under competition law does not apply to companies that are part of the same group and that are in a relationship of control. For example, a group’s parent company may exchange information or allocate customers with its subsidiaries in the daily course of its business without this being considered a competition infringement.

Public procurement is a different ball game, though. According to the Court of Justice of the European Union, companies participating in a public procurement procedure must compete against each other and make their tenders independently even if they are part of the same group.

The CJEU has lately charted the territory between competition law and procurement law. It recently handed down judgments in two cases, Lloyd’s of London and Specializuotas transportas, in which it held that tenderers in a relationship of control must not be excluded from procurement procedures, but their tenders must be autonomous and independent of each other.

If in doubt, the contracting entity must ascertain whether the relationship between the group companies had a specific effect on the tenders they submitted in the procedure. This is required by the principles of transparency and non-discrimination. The contracting entity must ask for additional clarification if it knows, for example, that the same persons are involved in the decision-making bodies of both companies or that the two tenders make use of the same resources.

Asked about connections, be prepared to clarify

How does the CJEU’s new case-law translate into practice? Contracting entities seek to generate as much competition as possible. It is important for them to ascertain that tenders are actually in competition against each other, especially in the case of framework agreements with multiple tenderers or if tenderers are allowed to submit partial tenders. Group companies, in turn, must be able to show that they have not cooperated when preparing their tenders. Finally, it is in everyone’s interest to avoid messy appeal procedures after the procurement decision is made.

The following simple checklists will help contracting entities and group companies avoid pitfalls.

Checklist for Contracting Entities

1. Ask the tenderers to declare their group connections in your tender documents.
2. When reviewing the tenders, look out for tenders with a large number of similarities. This may indicate that the tenders are not competing genuinely against each other.
3. Ask for further clarifications if you have an obvious reason to suspect that the tenders have not been prepared autonomously.
4. If the tenderers cannot present a sufficient and credible clarification showing that their tenders are autonomous and independent, reject the tenders and explain your decision.

Checklist for Tenderers

1. If two companies from your group are participating in the same public procurement procedure as tenderers, introduce a bidding cartel prohibition within your group. In other words, act like you would with your main competitor.
2. Check that the tenderers do not liaise and cannot access each other’s tender materials. Make sure that the preparation of tenders is not discussed in meetings between the two companies. Have adequate confidentiality agreements in place where necessary.
3. Prepare to give clarifications to the contracting entity: maintain sufficiently detailed records of the tendering procedure and group actions in advance.

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