Our insights - Henry Davis York

Competition watchdog's focus on government procurement

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1 April 2016

"There is … real public interest in ensuring that competitive public tender processes are not undermined by bid rigging or other cartel conduct"1

Cartel conduct that impacts government agencies has been set as a priority for the ACCC in 2016. Competition in the context of government procurement was flagged in the Competition Policy Review Final Report that was released in March 2015 (Harper Review) and in the Australian Government Response to the Competition Policy Review of November 2015 (Government Response to the Harper Review). It was a key issue in the case of Obeid v Australian Competition and Consumer Commission (Obeid Notice Case)2 and will be a feature of the substantive hearings between those parties set to commence next week.

In this Insight, we review the recommendations of the Harper Review and the Government Response to the Harper Review in the context of competition and government procurement and the Obeid Notice Case. We also consider the processes and procedures which may be implemented by government agencies to prevent anti-competitive activities in procurement and to ensure compliance with the Competition and Consumer Act 2010 (Cth) (CCA).

Introduction - ACCC Enforcement Policy and Harper Review

On 23 February 2016, Rod Sims, Chairman of the ACCC, announced the ACCC's compliance and enforcement priorities for 2016. Cartel conduct in the context of government procurement was one of a number of areas singled out by the ACCC. Mr Sims stated: "…detecting and deterring cartel conduct continues to be a major focus for the ACCC" and "there is still more work to do in the area of government procurement".3

Mr Sims' recent announcement follows on from the Harper Review and the Government Response to the Harper Review where several recommendations were made in relation to Australian competition law and government procurement. Those most relevant to the public sector are summarised below:

Recommendation 18 - Government agencies should review their policies governing commercial arrangements with the private sector, including procurement policies, commissioning, public private partnerships, and privatisation guidelines and processes to ensure that such policies and practices do not restrict competition, except where:

   (a)   the benefits of the restrictions to the community as a whole outweigh the costs; and

   (b)   the objectives of the policy can only be achieved by restricting competition.

Recommendation 24 - Sections 2A, 2B and 2BA of the CCA should be amended so that the competition provisions apply to the Crown in right of the Commonwealth and the States and Territories insofar as they engage in trade or commerce, rather than carry on a business which is the existing language of the legislation.

In the Government Response to the Harper Review the Federal Government states that it supports in principle Recommendation 24 and will consult further with the States and Territories on the implications of extending the CCA to apply to government activities in trade or commerce. The Federal Government also supports in principle Recommendation 18.

Why the current focus on government and anti-competitive conduct?

Evidence of the ACCC sharpening its focus on government procurement is seen in the suite of proceedings concerning alleged bid-rigging by parties involved in the 2009 tender process for exploration licences over coal tenements in the Bylong Valley, which we discuss further below (Obeid Cases). The increase in attention given by the ACCC to conduct affecting businesses and government procurement reflects the detriment that such conduct could cause to consumers as well as the public interest.

The Obeid Cases are part of the broader suite of investigations and proceedings by the ACCC against others in respect of cartel conduct. For example, in early March 2016, the ACCC filed a Notice of Appeal challenging the Federal Court's decision to dismiss a claim alleging the Australian Egg Corporation Limited and other parties attempted to induce egg producers to enter into an agreement or understanding to restrict or limit the production or supply of eggs. On 21 March 2016, the Full Federal Court found that conduct engaged in by PT Garuda Indonesia and Air New Zealand relating to surcharges on cargo from outside Australia to destinations within Australia took place in a 'market in Australia' and contravened Australia's price fixing laws.

The Obeid Cases

The substantive hearing in connection with the Obeid Cases is due to commence on 4 April 2016, and follows:

  • A Parliamentary Order for Production in 2009 in relation to the tender process.
  • An investigation by the NSW Independent Commission Against Corruption (ICAC) into the conduct of certain members of Eddie Obeid's family, as well as former Minister Ian Macdonald and others in connection with alleged corrupt conduct and bid-rigging in a 2009 Expression of Interest (EOI) process that was run by the NSW Department of Primary Industries (DPI) for a coal exploration licence over the Mount Penny and Glendon Brook coal tenements in the Bylong Valley.
  • Amendments to legislation effectively cancelling coal exploration licences and High Court challenges to those amendments.
  • Proceedings commenced by the ACCC in May 2015 alleging bid rigging in connection with the 2009 EOI process.
  • A Full Federal Court challenge to notices issued under section 155 of the CCA in respect of the EOI process (the Obeid Notice Case, discussed  below).
  • Final case management orders made in the Federal Court on 24 March 2016, ahead of the substantive hearing commencing on 4 April 2016.

The Obeid Notice Case concerns whether the ACCC had the power to issue various notices in respect of the EOI process and has already raised some significant matters in the context of government procurement. We examine the pre-proceeding challenge below.

The Obeid Notice Case

Following the ICAC investigations, the ACCC launched investigative action against several entities, as well as Moses and Paul Obeid (Obeids) and companies associated with them. As part of this investigation, the ACCC served notices on the Obeids under section 155 of the CCA in order to gather further information about potential breaches. Section 155 gives the ACCC significant powers concerning the provision of information, production of documents, and the giving of evidence relating to a matter that constitutes, or may constitute, a contravention of the CCA.4
 
For a notice to be valid under section 155, it has to specify a matter which does or may amount to a contravention of the CCA.
 
The cartel conduct provisions of the CCA refer to conduct which in general terms restricts or limits the supply of goods or services. Relevantly, 'services' is defined to include a requirement that they be 'provided, granted or conferred' in trade or commerce.
 
In the Obeid Notice Case, the central argument advanced by the Obeids was that the 'services' were not 'in trade or commerce', focussing on the activities of the DPI and the Minister as the supplier of the alleged 'services'.
 
The Obeids submitted that the specified services were no more than rights and benefits provided by the Minister as part of the exercise or potential exercise of statutory power, closely governed by the Mining Act 1992 (NSW). They argued that such an exercise of statutory power does not have any trading or commercial character in order to fall within the definition of 'services'.
 
The Full Federal Court found that by adopting the EOI process, the DPI and the Minister 'set out a commercial basis for approval of the right to explore for the State’s coal reserves'. Through the EOI process, the Minister involved himself in the providing of a 'right, benefit or privilege in a commercial setting'. Further, the EOI gave the State the opportunity to realise large sums of money through the tender process even if no coal was ever mined from any of the areas. That is, the bidding occurred with the object of maximising financial gain to the State.
 
Given this commercial context, the grant of the exploration license was held by the Court to be in 'trade or commerce'. This is to be distinguished from 'a mere application for a licence renewal or approval in a statutory or regulatory context' as such conduct is unlikely to be in 'trade or commerce'.
 
The Court also held that the requirement for services to be 'provided, granted or conferred in trade or commerce' is not to be interpreted to apply solely to the activities of the supplier. Such an interpretation 'would be artificial and…. undermine rather than promote the object of the legislation'. The focus should be whether the relationship or dealing as a whole is of a trading or commercial nature.
 
As a result, the Court found that the section 155 notices were validly issued by the ACCC.
 
It is likely that documents produced in response to the section 155 notices helped the ACCC eventually frame and finalise the claim due for hearing next week.

Implications for government agencies

The Obeid Notice Case, the pending substantive hearing, the ACCC's ongoing focus on anti-competitive conduct in government procurement, the Harper Review and the Government Response to the Harper Review together reinforce the need for government agencies to ensure that their policies, agreements and practices do not restrict competition or fall foul of mandatory procurement policy or the CCA.

Some of the steps which government agencies may wish to undertake at different stages of the procurement process and on a 'business as usual' basis to prevent and mitigate against anti-competitive practices are outlined below.

At all stages, agencies should ensure compliance with mandatory guidelines and frameworks that relate to probity and corruption risks in procurement (for example, in the NSW government context, the NSW Procurement Policy Framework and ICAC Guidelines for Managing Risks in Direct Negotiations; and in the Commonwealth government context, the Commonwealth Procurement Rules).

HDY_INsight-Competition-watchdog-diagram2.jpg

As the flowchart shows, internal processes within a government agency are as important as keeping a close eye on the conduct of external suppliers and contractors during any procurement process. To this end, preventing anti-competitive conduct which may impact upon government is closely aligned to preventing corruption - the principles are the same: education, communication, binding others, early detection, mitigation, reporting and prevention through the ongoing assessment of the effectiveness of your controls.

1 Rod Sims, "ACCC takes action for alleged cartel conduct in the NSW Government's Mount Penny coal exploration licence tender process", media release, www.accc.gov.au.
2 [2014] FCAFC 155.
3 Rod Sims, "ACCC Compliance and Enforcement Priorities for 2016" address at the Committee for Economic Development of Australia, 23 February 2016.
4 Section 155 notices are also the subject of commentary and recommendations in the Harper Review, including in relation to providing an excuse in respect of reasonable searches (to relieve burden in relation to electronic searches).

Peter Mulligan

Partner

61 404 861 244

61 2 9947 6240

peter.mulligan@hdy.com.au

Monique Azzopardi

Senior Associate

61 423 658 956

61 2 9947 6369

monique.azzopardi@hdy.com.au

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