Tweet of the Week July 15 2012 Equipment vendors fined for refusing to meet ICE’s conditions.

Posted on Monday, July 16, 2012

Equipment vendors fined in Costa Rica for NOT bidding. Competition bureau says they “colluded” since none accepted #ICE conditions

Here is the link for the story that inspired me but I have since seen it elsewhere.

Full disclosure: I don’t have all the facts: only what I have read and surmised. Also I  did a consulting project a few years ago which did nothing to correct my impression that Costa Rica has the best marketing team in Latin America: how can they be considered so advanced when they have a telecommunications system so backwards, inefficient and monopolistic? And the government not only supports this but seems to encourage this.

As I understand it, ICE — Costa Rica’s government owned and union controlled unrepentant telecom and electrical monopoly —  put out a tender and none of the equipment vendors or their local distributors bid. The anti-competition bureau concluded that if nobody bid, there must have been collusion between the players.

Maybe there was documented evidence of collusion — I’ve seen such things in my time in the region. Maybe there was a whistle-blower. Maybe they did talk it over in violation of the law whether or not there was sufficient evidence for the bureau to “convict” them.

But it strikes me that if you call a tender and nobody answers it would seem that there was something basically wrong with the tender; that nobody answered because nobody could make money meeting the conditions.

In non-government tenders, the buyer may indicate a budget but vendors are free to set the price they think they need to meet the conditions and still be profitable. In fact, not being profitable would be a violation of the law.

But not in government tenders, at least in Latin America. The price is often fixed or the budget is an immovable ceiling: you can bid less but you can’t bid more. Vendors must meet the conditions or improve the conditions but fit within the prescribed ceiling.

I don’t know about this particular tender but often governments include a clause that says “If the winner on points doesn’t have the best price, we will negotiate.” which essentially means if the winner doesn’t accept the lowest price, the government will keep working through the list of qualified bidders until they find someone stupid enough to meet the winner’s conditions but at the loser’s price.

My belief is that the price ceiling was so low and the conditions were so onerous that no one thought they could make money — even ZTE which usually chases anything that moves. (A practice which has started to catch up with them given today’s announcement of a  profit warning and last week’s rumor in the Chinese press that they are rapidly shedding overseas staff.)

So nobody bid. They might have discussed it but maybe they didn’t even have to: it was that ridiculous. An alternate vendor strategy, often used in the region, is to put in a non-compliant bid. It sends the message that the vendor couldn’t meet the conditions but without the unpleasantness of a “no bid”. This happened in the Colombian satellite project a few years ago — a project mercifully killed by the current minister — when all the legitimate players dropped out leaving a Russian company that nobody had heard of that, thankfully for the country’s taxpayers, had a non-compliant bid.

Government anti-corruption campaigns are unfortunately necessary in Latin America. Gaming the specification or out-right bribes for information or slanting of the spec has been common practice to the detriment of taxpayers who ended up paying too much for substandard infrastructure. And its not just small time local crooks: earlier in this century (sounds strange doesn’t it?) Alcatel (pre-Lucent) got caught paying massive bribes to politicians in Costa Rica to win an ICE contract. So equipment vendors have lost the chance to say “trust us”.

But the reaction by governments has been to impose increasingly stringent — borderline ridiculous — conditions that no one can meet. Or to have an RFI stage, collect specifications and then write a tender which joins all the most stringent conditions, not recognizing that there are are trade-offs. When one vendor promises something fantastic, it usually comes at the expense of something else. Sometimes that “something else” is price. Sometimes it is a different specification — like the trade off between energy consumption, heat-generation and processor speed.

Collecting the most extreme specifications from all vendors (the fastest processor and the lowest energy consumption) and putting a ceiling at ZTE’s price creates a tender that no one can meet. And the rational answer — for each player separately with no need for collusion — is that no one can bid.

Bottom-Line: I’d say that governments have to move to more rational tendering processes — starting with hiring better engineers in their purchasing departments — but that is probably dreaming in technicolor. In the short term, I’d recommend that vendors fight the fine if the can, pay it if they can’t and declare that they will never bid for an ICE contract again.

 

 

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