Understanding the Public Services Industy

Public Services Industry Review
others. There is a range of work which looks specifically at the cost savings which
have been generated when competition is introduced in services previously supplied
exclusively by the public sector. Frequently these show cost savings of around 20 per
cent. However, studies do tend to concentrate in a number of specific areas where
more robust comparisons can be made – typically where many similar contracts have
been issued, such as by a range of local authorities. Refuse collection and prisons are
examples, as illustrated in Boxes 3.1 and 3.2.
Box 3.1: Refuse Collection in the UK
The 1988 Local Government Act introduced Compulsory Competitive Tendering (CCT)
for a variety of local government activities including refuse collection. Prior to this,
although local authorities could choose to contract out, the practice was uncommon.
CCT required local authorities to regularly compete their refuse collection contracts
and laid down guidelines for how in-house providers would be allowed to participate
in the tender process in order to ensure fair competition.
The introduction of CCT led to significant reductions in the average cost of refuse
collection, with most estimates suggesting savings of the order of 20 per cent in the
first year 22 . Although there is evidence to suggest that the average cost reduction was
greater in authorities who awarded the contract to a private rather than the in-house
bidder, the latter still delivered significant savings. This suggests that it was the act of
opening up services to competition, rather than the nature of the provision (private or
public) which reduced costs.
The data on the impact of CCT on service quality in refuse collection is more
ambiguous, hampered by the fact that prior to its introduction service standards were
often poorly specified making it difficult to compare ex-ante and ex-post measures of
service quality. Analysis of what data are available suggests that there is no systematic
link between cost savings generated by the introduction of CCT and quality shading
by providers 23 .
3.9 Work in other areas has also found that substantial cost reductions were achieved
when competition was introduced into areas where it previously did not exist. In
hospital domestic services competitive tendering has been found to reduce costs by 34
per cent (Domberger et al, 1987) – and it matters little whether the bid is won in-house
or by the private sector. As described in Box 3.2 competition and contracting have
brought significant benefits in the prison sector as well where cost savings appear to
be more than 20 per cent (CBI, 2003). International evidence also points to significant
cost reductions. The Australian Industry Commission’s meta study (1996) of 203
international studies of competitive tendering found savings across sectors of between
10-30 per cent. Recent findings from the contracting of primary care services through
22 Domberger, Meadowcroft and Thomson (1986), Szymanski and Wilkins (1993) and Szymanski (1996).
23 Szymanski (1996).
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