Hong Kong gets tough on bid-rigging – Implications of the Garden Vista case
Following the first successful conviction resulting from the ICAC’s investigations into bid-rigging in a renovation project in Sha Tin, Mohan Datwani FCIS FCS(PE), Senior Director and Head of Technical & Research, The Hong Kong Institute of Chartered Secretaries, looks at the new determination of regulators and the courts in Hong Kong to crack down on bid-rigging.
Property investment has traditionally been a source of wealth creation for many Hong Kong people. It is a highly emotive topic as it carries with it the hopes and aspirations to provide for loved ones and future generations, in addition to providing immediate shelter and comfort. Many Hong Kong people work all their lives to own the property they live in.
Eventually, of course, the need arises to renovate and maintain the common parts of buildings. Given the fact that multi-storey buildings are the main form of property developments in Hong Kong, the challenges for renovations of the common areas become complex as many owners are involved. Seldom can decisions to renovate and maintain the common parts of a building be left to individual choice, but rather these become a complex process of negotiation between owners. In many instances, renovation is a prolonged process and involves the need for individual owners to contribute substantial sums of money.
Building renovation projects, which can run from tens to hundreds of millions of dollars in value, have become a prime breeding ground for corrupt and unethical practices. The reality is that not everyone is trained like the Chartered Secretary to adhere to the highest standards of ethical behaviour and best governance practices. Building renovations are often run by part-time volunteers, and the lack of control systems can lead to those with greedy fingers colluding with others to profit themselves at the expense of the owners.
A malfeasance that is no stranger to building renovations in Hong Kong is ‘bid-rigging’. This involves contractors coming together to secure building renovations at high prices and thereby maximising profit for themselves. This can take a variety of forms. For example, contractors who are able to bid for projects may agree on which contractor should bid for which renovation project. They may also collude together and allow a high price bid to look attractive by putting in even higher bids, or submitting lower bids and then pulling out at the last minute without those organising the bid knowing such arrangements.
In various instances, unscrupulous contractors are able to engage in bid-rigging with the help of ‘insiders’. Garden Vista is one such case.
The Garden Vista case
In 2010, the Incorporated Owners (IO), which represents all owners, obtained approval from the owners for the renovation of Garden Vista in Sha Tin in 2010. It took a number of years to organise the tender and documents for the renovation works. Disputes between certain owners and the IO then ensued. By June 2015, certain owners were already taking the IO to court in relation to the amount that they should contribute to the renovation works.
This sequence of events is not unusual where trust falls apart between owners during a renovation project, but in this case it eventually transpired that the chairman of the IO and others were on the take with others such as Yau Shui-tin, a former engineering boss and his cronies. In 2016, the ICAC took Yau Shui-tin to the District Court, with pending cases and investigations of the others involved still going on.
In September 2016, Yau Shui-tin pleaded guilty to four counts of conspiracy to offer an advantage. As there was a guilty plea, there was little information as to the details of the case, but the ICAC issued a press release on the matter which shows that the case is significant. The following is reconstructed from the press release and media reports as to the central issue of bid-rigging.
Reportedly, this is the first case that the ICAC has taken on in relation to bid-rigging over renovations, and in any event this is the biggest case involving rigging. The amount relating to the renovation works for Garden Vista was some HK$260 million. The bribes that Mr Yau and his co-conspirator paid amounted to some HK$45 million for projects relating to Garden Vista and two other projects. The District Court also sentenced Mr Yau to what is regarded as a steep sentence of 35 months’ imprisonment. From the media reports, the bribes were paid to the chairman of the IO and a senior executive of a property management company, as well as another property manager.
The legal provisions that the ICAC used were Section 9(2)(a) of the Prevention of Bribery Ordinance and Section 159A of the Crimes Ordinance. Section 9(2)(a) says that ‘any person who, without lawful authority or reasonable excuse, offers any advantage to any agent’, to do or forebear to do something in relation to the principal’s affairs or business shall be guilty of an offence. Section 159A extends this to the conspiracy to commit such an offence.
The ICAC honed in on the irregularities relating to the tender process, where owners of Garden Vista were presented with a HK$260 million renovation contract, requiring each of the about 800 households to pay around HK$350,000. It was also reported that some of those that refused to pay received death threats. About 10 people were arrested by the ICAC over the case, and, in addition to the Yau Shui-tin case, the investigations are continuing.
The implications of the judgment
The District Court judge in the case, Josiah Lam Wai-kuen noted that bid-rigging was a common practice in Hong Kong, albeit that Mr Yau was the first person to be convicted. If we pause for a moment, we can refer to the Competition Ordinance for a definition of bid-rigging.
According to Section 2(2) of the Ordinance, bid-rigging refers to an agreement that is made between or among two or more undertakings (like contractors) whereby ‘one or more of those undertakings agrees or undertakes not to submit a bid or tender in response to a call or request for bids or tenders, or agrees or undertakes to withdraw a bid or tender submitted in response to such a call or request’. The important point is that all these agreements must ‘not be known to the person calling for or requesting bids or tenders at or before the time when a bid or tender is submitted or withdrawn by a party to the agreement or by an entity controlled by any one or more of the parties to the agreement’.
Under the Ordinance, bid-rigging also extends to ‘a submission, in response to a call or request for bids or tenders, of bids or tenders that are arrived at by an agreement that is made between or among two or more undertakings and that is not made known to the person calling for or requesting bids or tenders at or before the time when a bid or tender is submitted or withdrawn by a party to the agreement or by an entity controlled by any one or more of the parties to the agreement’.
The District Court judge said that the practice of bid-rigging was ‘rampant’ and people need to be more aware of it. Also, he pointed out that the government could consider setting up a statutory body to regulate building renovations because of the lack of professionalism of owners and their inability to determine when certain renovations are necessary or not, and issues as to costs. While the Development Bureau praised the judge’s ruling for its future deterrent power, it said that there is no intention to set up a new statutory body as there would be regulatory overlap with the current regulator’s authority. The bureau added, however, that it will study the judgment to find ways to provide more assistance to property owners.
The view of the Competition Commission
Immediately following the Garden Vista case, the Competition Commission (the Commission) issued a press release in which it stressed that ‘bid-rigging is a matter of grave public concern and the Garden Vista case has been closely followed. The successful prosecution of the defendant drives home the message that participants in building renovation and maintenance projects should steer clear of bid manipulation practices’. It went on to explain that ‘under the Competition Ordinance, bid-rigging is considered to be a serious anti-competitive conduct and combating bid-rigging cartels is an enforcement priority for the Commission’.
It further explained that the ‘Commission undertook a study into certain aspects of this market and released the findings in May 2016. The overall result of the study is consistent with the widespread concern that bid-manipulation practices were prevalent in the local residential building renovation and maintenance market in the recent past. The results enabled the Commission to better understand the market and inform the Commission’s enforcement actions’.
The Commission then went on to call ‘upon market participants to bid for projects on a competitive basis. Those contemplating rigging a bid should desist, while those already involved in rigging bids should consider approaching the Commission for leniency. Members of the public should also be alert and they are encouraged to report any potential bid-rigging to the Commission. Bid-rigging is a complex issue and it may sometimes involve elements that contravene different areas of law. The Commission will work closely with other relevant law enforcement agencies such as the ICAC and the police to ensure a coordinated and effective approach to tackling this problem’.
Mohan Datwani FCIS FCS(PE)
Senior Director and Head of Technical & Research, The Hong Kong Institute of Chartered Secretaries
The Competition Commission’s ‘Report on study into aspects of the market for residential building renovation and maintenance’ (May 2016) is available on the Commission’s website (www.compcomm.hk – see ‘Media, Publicity & Publications/Research Reports).