Public Policy: Using Market-Based Approaches - Department for ...

Public Policy: Using Market-Based Approaches
Moreover, the fact that two prisons previously under private-sector management
were lost to an in-house bid, indicates that the incumbency advantage is not
absolute. An evaluation report by HMPS and the NAO report both concluded that
these bids were won by the public sector on the basis of cost and quality, rather
than as a result of discrimination. 91 Indeed, to the extent that the procurement
process has encouraged the public sector to become more competitive,
competition may even have been increasing over time.
COLLUSION
The nature of public procurement means it can be susceptible to collusion
amongst bidders. Collusion is most likely to arise when many similar contracts are
tendered at frequent intervals because this can allow bidders to allocate contracts
between themselves. Requiring bidders to meet certain pre-selection criteria helps
HMPS guarantee the quality of its suppliers but restricts the number of potential
bidders and creates barriers to entry. These latter effects may increase the scope
for collusion, as might the practice of publishing tender information. As noted
above, when information regarding rivals’ bids is in the public domain it is much
easier for colluding bidders to detect any deviation from their agreement. This
increases the likelihood that defectors will be caught and subsequently punished,
and so lowers the returns to cheating. Reducing the temptation to renege on an
agreement in this way makes collusion easier to sustain.
Controlling for collusion
Although HMPS has not made any conscious efforts to try to prevent collusion
in tenders for prison contracts, the way the process is run means that such
collusion is unlikely. First, the use of a sealed bid auction design reduces price
transparency, making it more difficult to detect and punish any member cheating
on the agreement. As collusive agreements require an effective punishment
mechanism to be sustainable, this has the effect of making coordination more
difficult. Second, the number of contracts is few – just 21 in total since 1991. This
has reduced the potential for collusion in two ways. First, as each contract is very
valuable, it is always tempting for firms to cheat on any collusive agreement to
secure the contract. Second, as there have been few of these contracts put to
tender there have been limited opportunities for interaction amongst the
competing firms. Because collusion is easier to sustain where rivals interact
frequently, this naturally limits the scope for collusion. 92
The allocation of public sector funding in the UK is such that plans can only ever
be made three years in advance at most. This limits the extent to which collusion
can be sustained by introducing a large amount of uncertainty into the future
demand for private prison services. However, the overall effect of this practice
91 A level playing field is ensured whenever an in-house team puts forward a bid by adding the costs of their bid to
the proposed contract, as well as an allowance for public sector overheads and differences in pension service
provision.
92 For example, two firms competing for twenty-one contracts may allow for collusion whereas twenty firms
competing for the same number of contracts is unlikely to do so.
92