Rigging the bids

IT IS Spain’s biggest corruption case in decades. Last month 37 businessmen and former politicians, including members of the ruling Popular Party (PP), went on trial on charges of fixing the government procurement system to steer construction contracts to their buddies. Frances Correa, the prime suspect, went by the nickname Don Vito, a character in the “Godfather” films. His alleged partners in crime dubbed themselves El Bigotes (“The Moustache”) and El Albondiguilla (“The Little Meatball”). Caribbean holidays and call girls were used as kickbacks, prosecutors say. The PP even produced a PowerPoint presentation to help mayors channel their gains. The cost to the public is estimated at €120m ($130m).

This kind of corruption is one reason Europeans are growing angry at governing elites. It is also a disturbing indicator of rot at the heart of European governance: all across the European Union, competition for government contracts is falling. According to the Tenders Electronic Daily (TED) database, an archive of 4m purchases by European governments during the past decade, 17% of calls for tender in 2006 received only one bid. By 2015 that figure had risen to 30%. The median number of offers per tender fell from five to three.

Governments use competitive bidding in procurement both to obtain the best service for the lowest price, and to prevent cronyism and graft. The fewer the bids, the higher the risk of bid-rigging, says Mihaly Fazekas, a corruption expert at Cambridge University. Single-bid contracts are the worst, but even a drop from eight bidders to four increases the risk of collusion. Experts see the drop in the number of bidders per tender as a worrying sign.

The risk is all the greater because of the vast size of Europe’s government procurement market. Overall, EU countries spent €1.9 trillion on procurement in 2015, around a fifth of their GDP. States have been farming out more of their functions to private contractors for decades, partly in hopes of greater efficiency. That imperative has grown stronger in the budget crunches that followed the financial crisis of 2008-2009. Almost all European countries now contract out more than they did in 2007—roughly 20% more in Britain, France and the Netherlands. Yet a bigger share of those contracts is being harvested by just a few companies. According to the Spend Network, a British non-profit group, the top 20 firms’ share of government contracts rose from 10% in 2012 to 14% last year.

Some of the causes of dwindling competition are innocent. Governments happen to spend a lot on sectors that have been growing more concentrated, such as health care. The total value of health-care mergers and acquisitions in Europe was 60% higher in 2015 than in 2009. Little wonder that the share of single-bid health-care contracts in rich European countries jumped by seven percentage points. Transport and IT show the same pattern.

Meanwhile, the European Commission has encouraged governments to have departments team up when buying similar goods. Italy is trying to slash the number of purchasing authorities from at least 8,000 to 35. But it takes a big company to fulfil a big contract. According to the TED, tenders worth less than €10m get an average of six bids in rich European countries, whereas those worth €40m-50m get only four. Governments are also giving bidders less time to respond to tenders, which cuts the number who participate.

I scratch your back

Other explanations for reduced competition are darker. Bid-rigging may be growing more common. Antonio Capobianco, a competition expert at the OECD, a club of mostly rich countries, thinks that with fewer legitimate opportunities for increasing revenues since the euro crisis, companies may be resorting to dodgy deals. Data compiled by John Connor of Purdue University show that the number of cartels detected in Europe rose from eight per year in the 1990s to 29 in the 2000s, a shift that can only partly be chalked up to better enforcement. Although many Europeans assume such problems are confined to eastern countries, some 60% of the price-fixing cartels discovered between 1990 and 2016 were in western Europe.

Another theory is a spread of so-called “soft corruption”, where tenders are manipulated in order to award contracts to favoured bidders without technically breaking any laws. Governments may prefer a local firm to a foreign rival or set or evaluate requirements so that only one supplier can meet them. This year Britain’s Nuclear Decommissioning Authority (NDA) was found by the High Court to have been "fudging" the evaluation of tender requirements to prevent the disqualification of the Cavendish Fluor Partnership consortium, in a £7bn ($8.5bn) tender to clean up several nuclear sites. CFP went on to win the bid against a rival consortium, Reactor Site Solutions—wrongly, said the judge. Though he found no proof that documents had been shredded, the judge said the NDA had at one stage intended to destroy bid evaluators’ notes. He criticised the NDA's restrictions on note-taking, which he described as "verging on the extraordinary". The NDA is appealing against the decision.

Other strategies abound. Associates can be alerted to upcoming contracts before the official announcement, or a tender can be issued at an inconvenient time: 50% of Slovenian contracts announced in the week of Christmas received only one bid. Rejecting offers because of typos and charging thousands of euros to download crucial documents work well, too.

To each according to his greed

In one egregious case in 2007, Slovakia’s construction ministry issued a €120m tender to provide legal and advertising services, co-financed by EU funds. To ensure that a favoured company won, the ministry posted it only on a bulletin board in a corridor inside one of its own buildings.

Procurement problems are worst in the EU’s newer members. In many ex-communist countries, single-bid contracts are not the exception, but the rule (see chart 2). In Transparency International’s corruption-perceptions index, where higher scores are better, eastern European countries average 55 out of 100; the rest of Europe rates a 72. Nine Romanian politicians are accused of accepting $50m in bribes for dishing out software contracts. Croatia’s former prime minister and other members of his party are on trial for allegedly taking donations in exchange for state contracts. Indeed, the worst offender on single-bid tenders is Croatia. In 2015 43% of government contracts went uncontested.

Hungary is worrying, too. Istvan Janos Toth of Corruption Research Centre Budapest (CRCB) scrutinised more than 120,000 calls for tender from 2010 to 2015. He used Benford’s law, a mathematical rule that forensic accountants use to spot potentially suspicious patterns in large data sets. The patterns he found looked different from what would be expected if all was above-board. The effect has intensified since Viktor Orban, who proclaims himself a fan of “illiberal” governance, became Hungary’s prime minister in 2010.

The overall impact of reduced competition in procurement is hard to calculate. One study by PwC, a consultancy, found that it increased costs by 2% to 15% depending on the sector. A study by Rand, another consultancy, calculated that the annual increase in contract costs due to corruption in the EU was $5 billion.

Worse, the contracts most susceptible to corruption are those backed with EU funds, which make up about 15% of the total. A CRCB study in Hungary and Czech Republic found that they are significantly more likely to be abused. Governments seem less worried about misspending money from Brussels than that of their own taxpayers. European integration was intended to promote public integrity and competition. In some cases, it seems to be doing the opposite.

Clarification (November 23rd): An earlier version of this story contained the sentence: "This year Britain’s Nuclear Decommissioning Authority (NDA) was found to have fudged numbers and shredded vital documents to block an American contractor from winning a £7bn ($8.5bn) tender". This has been amended to clarify the findings of the High Court and note the NDA's appeal.