How Much Can Competition Enforcement Bite?

Governments have deployed multi-billion stimulus packages, such as the Next Generation EU and the US Inflation Reduction Act, to cushion the impact of steep inflation, energy crisis, and climate change on consumers and businesses.

They will allocate much of this public spending via procurement tenders and public contracts, which makes it essential to ensure that they are competitive, to make the most of taxpayers’ money. Further, as State measures have the highest positive effects when applied to competitive markets, it is more important than ever that collusive practices are effectively deterred.?

It is well known that cartels typically overcharge consumers between 10 and 20%, while bid rigging can increase prices by up to 60%. And this, without mentioning the negative lasting effects on quality and innovation.

The OECD Competition Committee just had a discussion on Director Disqualification and Bidder Exclusion with experts Peter Whelan Emmanuelle Auriol and Amanda Athayde .

Debarment measures include two main types of sanctions. The first is director disqualification, which involves excluding an individual typically from managerial roles and from taking decisions on any company’s operations and strategy for a specific amount of time. Depending on the jurisdiction, a director may be disqualified when his conduct led to a competition infringement, but also when he was aware, or should have been aware, of the infringement and did nothing to avoid it (for instance, this is the law in the UK, Lithuania and Hong Kong).?

Director disqualification is most often applied to cartels, but some jurisdictions allow imposing it with abuses of dominance and other infringements. Because of its powerful deterrence effect, it has also, more recently, been considered suitable for application to digital markets as a response to breaches of digital regulations.

The second type of debarment measure is bidder exclusion, which involves the exclusion of a company from a public procurement tender or from future tenders, either by all or a specific contracting authority and for a limited amount of time. Bidder exclusion in competition enforcement is associated with bid rigging and other competition infringements that compromise the professional integrity or credibility of the economic operator.

In the context of the debate about the low deterrence of antitrust fines and the declining rate of leniency applications worldwide, these measures exercise strong deterrent power. They can substitute or add to the financial cost of fines and do so, either by directly putting at stake the reputation and livelihood of an individual or by excluding a company from revenue opportunities. They also protect the public interest, preserving the integrity of the tender or protecting the community from corporate misconduct.

The decision about their application entails 2 extremely delicate trade-offs:

1. For director disqualification, it is about ensuring competition compliance without eliminating incentives to hold managerial positions or to engage in decision-making.

2. For bidder exclusion, it is about preserving the integrity of the tender process without disrupting competitive market dynamics.?

The risk is that bidder exclusion may actually create the problem that it tries to solve potentially reducing the competitive pressure on bidders.

To address this conundrum and avoid the potentially unnecessary exclusion of a competitor, several alternative measures may be used, such as self-cleaning mechanisms, reward systems (such as the Italian Legality Rating System) and the use of advocacy powers.

The OECD background paper also proposes a checklist to determine whether bidder exclusion may be appropriate, based on i) whether other measures are more suitable to address the situation, ii) whether the market is oligopolistic, and iii) whether it is possible to limit the application of the bidder exclusion to the ringleader only, or to a specific contracting authority, contract value, or market.

The application of bidder exclusion, by shrinking the number of competitors, is especially problematic in smaller economies, concentrated industries, or where interlocking directorates are more frequent. In these cases, it may be worthwhile considering applying director disqualification instead, if it is an option, as a way not only to sanction ex-post the cartel but also to limit the risk of recidivism.

The savvy use of these measures can achieve deterrence, public integrity and public confidence in good business administration. As they entail significant risks, however, the consequences of their application must be assessed carefully. This means that the competition authorities’ involvement not only in their design but also in the decision-making process about their application in concrete cases may be decisive to avoid debarment measures coming at the cost of healthy market dynamics.?

Additional sources:

OECD background paper (2022), Director Disqualification and Bidder Exclusion in Competition Enforcement.

Athayde, A. and Cruvinel, R., Non-Monetary Antitrust Sanctions: the Brazilian experience between 2012 and 2022 and some additional reflections for international antitrust practice (November 12, 2022).

Whelan, P. (2021), “The Emerging Contribution of Director Disqualification in UK Competition Law”, in Rodger, B., P. Whelan and A. MacCulloch (eds.), The UK Competition Regime: A Twenty-Year Retrospective, Oxford University Press.

Auriol, E., E. Hjelmeng and T. S?reide (2017), “Deterring corruption and cartels: In search of a coherent approach”, Concurrences N° 1-2017.