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

Controlling for problems of asymmetric information
Although there is no explicit provision to deal with the winner’s curse in the
procurement of prison services, there are two aspects of the tender process that
reduce this risk.
First, there is no obligation on HMPS to purchase from the lowest bidder. The
tender evaluation process begins with a deliverability test that does not consider
costs at all but focuses on whether the proposed operational plans are feasible.
Bids are often eliminated at this stage. Even though, in theory, all remaining bids
are deliverable, the evaluation team will still not necessarily accept the lowestpriced
bid, but instead will apply a complex matrix marking for quality. They
then attempt to price quality, and select the contract with the lowest qualityadjusted
price. Of the nine DCMF contracts in existence, four were not won by
the lowest-priced bidder.
Second, rival bidders are provided with detailed information on costs. The
publication of contract competition, and the requirement that incumbent providers
make cost information available to interested bidders, should both reduce the risks
in bidding. However, there is some anecdotal evidence to suggest that the latter
measure is less effective in practice because it is possible for incumbents to
present cost information in a way that is unhelpful to other bidders.
Performance in practice
There are some concerns that competition between providers has led to contract
prices that will not cover costs adequately. Parc prison saw very poor
performance as a result of failing to provide sufficient staff with the appropriate
level of experience. The same was true of Ashfield, whose assessment of the
costs involved in recruitment and retention of the required staff fell short of the
actual costs, with the result that staffing levels fell significantly below
requirements. After several months of warnings, HMPS relocated half of the
Ashfield inmates and installed its own Governor in place of the private
management team. As a consequence, the operating service provider, Premier,
improved the terms and conditions it offered staff, was thus better able to recruit
and retain staff and has since performed well against contractual criteria.
Problems at Ashfield may have arisen partly because the role of the prison was
changed after the contract was signed from a centre for three-hundred juveniles
and one-hundred young offenders to a centre for four-hundred juveniles.
Although the contract was revisited accordingly, it is possible that the failure
occurred at the renegotiation stage.
Controlling Service Quality
Section 9 – Competitive Tendering of Prisons
For the market to deliver an efficient outcome, contracts must be complete.
However, in reality contracts are almost always likely to be incomplete. For
example, there may be some aspects of service quality that are too difficult to
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