Prof. Alberto Heimler has recently published the interesting piece 'Cartels in Public Procurement' (2012) J Comp L & Econ 8(3): 1-14 [available, but maybe for subscribers only, here]. In his paper, Prof. Heimler discusses the specific features of bid-rigging as a particularly stable instance of collusion and presents some proposals to reduce the administrative burden and increase the incentives for procurement officials to track potential instances of bid rigging and to report them to the competition authorities, even on the basis of a mere suspicion (ie without need to provide full proof of the infringement).
The abstract of his piece shows these general ideas:
Public procurement markets differ from all others because quantities do not adjust with prices but are fixed by the bidding authority. As a result, there is a high incentive for organizing cartels (where the price elasticity of demand is zero below the base price) that are quite stable because there are no lasting benefits for cheaters. In such circumstances, leniency programs are unlikely to help discovering cartels. Since all public procurement cartels operate through some form of bid rotation, public procurement officials have all the information necessary to discover them (although they have to collect evidence on a number of bids), contrary to what happens in normal markets where customers are not aware of the existence of a cartel. However, in order to promote reporting, the structure of incentives has to change. For example, the money saved from a cartel should at least, in part, remain with the administration that helped discover it and the reporting official should reap a career benefit. In any case, competition authorities should create a channel of communication with public purchasers so that the public purchasers would know that informing the competition authority on any suspicion at bid rigging is easy and does not require them to provide full proof.
This 'mainstream' description of his paper is perfectly in line with most economic and legal scholarship in this field and his work is an interesting reminder of the need to increase the liaison between public procurement and competition authorities, as well as to create a set of incentives (or a dedicated position) for public buyers to act as competition watchdogs of sorts or, more generally, as competition advocates [along the same lines, see A Sanchez Graells, Public Procurement and the EU Competition Rules (Oxford, Hart Publishing, 2011) 385-389]. Moreover, Prof. Heimler offers a couple of interesting insights that should be taken into consideration in the design of effective public procurement systems against bid rigging.
On the one hand, Prof. Heimler clearly indicates the diverging financial interests in bidding rings as opposed to 'general' cartels, which make leniency programs (potentially) less effective in this type of market settings:
Contrary to what happens in normal markets, bid-rigging cartels are much more stable. While in normal markets, quantities and prices are found simultaneously, in bidding markets, quantities are set by the organizer of the bid and the bidding is just used to find the lowest price associated with those quantities. Bid riggers know that by reducing prices (with respect of the agreed ones), they do not achieve any increase in the quantities sold. Rather, they just increase their profit at the expense of competitors and, most importantly, only for one bid. Once there is defection for one bid, the cheater knows (because of the transparency rules in public procurement) that he will be discovered and competition will prevail for all future bids. As a result of these characteristics, partly structural and partly rule-based, the incentive to cheat in bid rigging is much less pronounced than in normal markets (where cheating can be kept secret, at least for some time) (p. 7).
On the other hand, the level of transparency that is structurally implicit in public procurement settings makes it much easier for (properly trained) procurement officials to detect instances of bid rigging and to react:
Contrary to normal cartels, where the participating firms agree on prices or on territories so that customers face an information gap with respect to competitive prices, bid rigging in public procurement requires that the participating firms agree on the bid participation strategy (who wins and at what price; who will participate today; and who wins and who participates in future bids). As a result, bid riggers leave a lot of evidence on the strategies pursued that a well-trained public administration official could indeed identify. As a result, while a public procurement cartel is stable on the supply side, it could be discovered by due diligence on the demand side. This is the opposite of what happens with private market cartels (p. 12).
However, Prof. Heimler also includes a couple of final recommendations to make bid rigging more difficult that, in my opinion, would raise more issues than they would solve. Indeed, he proposes that:
There are also some very important procedural and legal steps that should be taken to make bid rigging much more difficult.
The first is to centralize purchases (or make sure that bids are not made artificially too small so that the construction of a large infrastructure project cannot be easily divided up among all the firms in the industry). This way, the information on the different bids can be found within the same organization so that any irregularity across different bids can be more easily identified. Furthermore, a centralized purchasing agency can organize bids of higher value (purchasing for a number of administrations) so that bids would be more infrequent and bid-rigging agreements would be more difficult to maintain.
Also, the rules that favor small firms in their participation in tenders, in which individually they would not be able to participate because of their small size, should be made much more rigorous. In particular, temporary consortia should only be allowed if comprised by firms producing complementary goods or services, while simple horizontal consortia should be prohibited. In fact, temporary consortia between rivals are very often a tool for enforcing a cartel more so than a way to increase competition (p. 13, emphasis added).
In my opinion, the first objective (centralization of information to make detection easier) can be attained simply by improving reporting and analysis mechanisms (along the lines of Articles 83 to 87 in the 2011 proposal for new EU public procurement Directives, now significantly reduced), rather than by conducting centralized procurement (which can lead to market foreclosure and other knock-on effects that are detrimental in economic terms).
Regarding the second proposal, I do not see how restricting SME's participation through consortia (ie limiting participation to larger companies) would reduce rather than increase the likelihood of collusion--since it would be equivalent to creating an oligopolistic (sub)market for larger companies, to which those large(r) contracts would be reserved.
Hence, I would strongly recommend not taking any of those two actions, at least until some further (empirical) research is conducted in this field.