Competition law and competitive neutrality in Government procurement

How does the competition law apply to Commonwealth procurement?

Usually, price fixing, bid-rigging and similar anti-competitive conduct relating to procurement would contravene Part IV of the Competition and Consumer Act 2010 (Cth) (Act). However, the Commonwealth and Commonwealth authorities are bound by the Act only where their conduct is undertaken in the course of ‘carrying on a business’.¹  The justification is that persons dealing with the Commonwealth in relation to the conduct of a business should have the same protection as when dealing with a private trader that is carrying on a business, but will not have such protection in other dealings with the Commonwealth.

For all activities that are not ‘carrying on a business’, Crown immunity applies and the Commonwealth is exempt from the Act.

What does ‘carrying on a business’ mean, and does it apply to Commonwealth procurement?

It has been noted that the ‘carrying on business’ test suffers from a lack of clarity, and may be ill-equipped to deal with an increasing amount of government commercial activity, in particular, government procurement.

Factors that may suggest particular conduct by a Commonwealth authority is done in the course of ‘carrying on a business’ include where the conduct:

• is sufficiently systematic and regular, and sufficiently similar to commercial activities that private persons might engage in, to justify being characterised as a business;
• is a succession of acts, and not simply the undertaking of one sole transaction; and/or
• has a ‘commercial flavour’.

Factors that suggest particular conduct by a Commonwealth authority is not done in the course of ‘carrying on a business’ include where the conduct:

• is separate from the usual activities undertaken by the Government authority;
• is part of the inherent functions of government in the performance of statutory duty; and/or
• is purely governmental or regulatory.

The Act provides some express carve-outs from what constitutes ‘carrying on a business’, which include:²

• collecting taxes or fees;
• granting or revoking licences; and
• transactions involving only persons who act for the same Crown authority, or that are between non-commercial authorities.

Private parties participating in a government tender process

Even though Commonwealth departments and authorities themselves may sometimes have the benefit of Crown immunity, its tender respondents will usually be subject to the Act.³

Government tenders can be susceptible to manipulation by anti-competitive conduct. A tender process can create an environment for bidders to collude, including by bid-rigging, which occurs when two or more competitors agree not to genuinely compete with each other for tenders. The outcome of such conduct can harm competition, and usually harms the procurer by not resulting in the best-priced or otherwise most competitive outcome.

Indeed, Commonwealth departments may sometimes need to exercise caution to ensure that they are not including tender requirements which could lead to anti-competitive conduct, putting respondents at risk of breach. The risk of including such requirements was at the heart of the ACCC’s recent warning to public sector bodies. As ACCC Chair Rod Sims put it, “encouraging businesses to discuss their bids with each other, or to make agreements about who will bid for a particular tender, is likely to amount to cartel conduct which is against the law.”

Competitive neutrality principles and Commonwealth procurement

Commonwealth procurement processes are also subject to the competitive neutrality principles agreed to by each Australian government in 1995.⁴  The competitive neutrality principles aim to ensure that government businesses do not enjoy a net competitive advantage over private sector competitors (or potential competitors), simply because of their public sector ownership.

Relevant to procurement, competitive neutrality principles mean that Commonwealth procurement should seek to:

• ensure no advantage is available to public sector bids or baseline costing exercises; and
• ensure transparency and auditable accountability arrangements.

Collusion in the acquisition of goods or services

It will often seem efficient for different government entities to achieve economies by jointly procuring goods or services or otherwise working together to achieve favourable acquisition terms.

However, if Government entities that would otherwise compete to acquire goods or services in the course of ‘carrying on a business’ make arrangements:

• to not deal with a certain supplier;
• to share competitively sensitive information (like confidential supply agreement terms);
• to procure at the same price or and/or on the same terms; or
• that otherwise has the purpose or effect of substantially lessening competition,

they may be at risk of a breach.

There are certain exceptions to the competition law that can permit joint procurement by Government and, failing that, authorisation from the ACCC may be available where the public benefits of the coordinate conduct outweigh the anti-competitive downside. Nonetheless, organisations must be wary of this risk.

Practical tips for Commonwealth departments and agencies

Competitive outcomes tend to result in better, more efficient cost outcomes. The following practical tips may assist:

• Review Government procurement terms to ensure that they do not encourage or require collusion between respondents – leave it to the respondents to establish whether they can fulfil the requirements, and what to do if they do not.
• Consider if Government tenders contain terms which might encourage a company with a very strong market position for a certain product or service to leverage that position in ways that may make it difficult for others to compete.
• Do not work jointly with other government entities to acquire goods or services, unless the risk of a competition law breach has been carefully assessed.