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Public Policy: Using Market-Based Approaches ● It may be possible to specify aspects of service quality in a contract using measurable and enforceable performance criteria. Combined with an adequate monitoring system, contract design may therefore be used to limit quality shading in competitively tendered services. This runs counter to the predictions of economic theory, which assumes that quality is difficult to measure and therefore concludes that private sector involvement in public services may lead to cost cutting at the expense of quality. Conducting the competitive tender process through a beauty contest mechanism may also be useful where quality is an important aspect of the service because this prevents an excessive focus on cost. ● Targets and performance measures should be well defined and based on clear objectives. Most aspects of service quality involve trade-offs. Contractors are therefore likely to focus on delivering the outcomes that are most easily measurable. When designing targets it is important to bear in mind that measurable performance indicators will be preferred over those that are less easy to measure. The potential for a target to have an unintended consequence should be taken into account when setting the target. As no system is perfect, targets should also be regularly reviewed over time to take their actual performance into account. ● The benefits of contract aggregation can be realised without creating problems for long-term competition from incumbency advantages. Requiring disclosure of information by incumbents to bidders and encouraging entry by suitable firms operating in relevant fields can help to maintain a competitive market. ● When a market is relatively new, it may be necessary to select bidders not offering the lowest price for a contract to ensure competition for future contracts. Awarding early contracts to one provider only may realise shortterm cost savings, but it can prevent the entry of competitors who can help to keep costs down in the future. ● The appropriate use of self-supply can be an effective constraint against collusion, but must be managed carefully to avoid creating an impression of discrimination in favour of in-house bids. Excessive self-supply may also limit the number of private sector firms the market can support, preventing the development of competition. ● The risk of a winner’s curse can be reduced by increasing the information available to bidders, restricting the number of bidders through pre-selection criteria and allocating tenders through a beauty-contest mechanism. ● Pre-committing to an appropriate transfer rate for specific assets at the end of the contract life can help to ensure an efficient amount of investment is undertaken. One means of pre-committing to this transfer payment is through the contract price. 110
Section 9 – Competitive Tendering of Prisons ● There are likely to be important trade-offs in contract design when there are multiple objectives for quality; as, for example, in the observed trade-off between meeting safety/security criteria and meeting decency criteria contained in contracts for privately-managed prisons. ● Learning and adapting the process as both the procuring body and the contractors gain in experience can improve the benefits to be gained from competitive tendering. In the case of prison services, HMPS has modified the type and length of contract it offers, introduced bonus points for good performance and allowed for benchmarking against other suppliers mid-contract. ● Introducing competitive tendering for the provision of a service requires a heavy resource commitment, in both up-front and ongoing costs. Any public sector body seeking to introduce competition in this way must be able to guarantee the availability of these resources for the policy to be implemented effectively. However, competitive tendering has the capacity to deliver substantial net cost savings. 111
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DTI ECONOMICS PAPER NO.14 Public Po
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DTI ECONOMICS PAPER NO.14 Public Po
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Contents Acknowledgements vi Forewo
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Contents Section 11 Emissions Tradi
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Foreword There is increasing intere
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SECTION 1 Introduction and summary
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Public Policy: Using Market-Based A
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SECTION 2 Using market mechanisms U
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SECTION 3 Lessons for the design an
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SECTION 4 Introduction This part of
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SECTION 7 Market-Based Mechanisms W
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Page 68 and 69: Public Policy: Using Market-Based A
Page 78 and 79: SECTION 8 Framework for assessing m
Page 81 and 82: Part IV Case Studies 73
Page 83 and 84: ● the Green and White papers behi
Page 85 and 86: A prison failing to deliver on its
Page 87 and 88: Table 9.3 Companies providing priso
Page 89 and 90: Section 9 - Competitive Tendering o
Page 91 and 92: detect any deviation from a collusi
Page 93 and 94: at HMPS began as an equal mix of th
Page 95 and 96: (e.g. lighting). This impact could
Page 97 and 98: MARKET POWER The full benefits of c
Page 99 and 100: However, it should be noted that te
Page 101 and 102: on competition is uncertain. The ab
Page 103 and 104: Controlling for problems of asymmet
Page 105 and 106: Procurement process design One way
Page 107 and 108: however, financial deductions are m
Page 109 and 110: Section 9 - Competitive Tendering o
Page 111 and 112: The Independent Monitoring Board at
Page 113 and 114: Figure 9.1: Difference between the
Page 115 and 116: ‘While there were staff in the pu
Page 117: design the invitation to tender and
Page 121 and 122: and demand conditions. Second, we d
Page 123 and 124: DEMAND Anyone can apply to a local
Page 125 and 126: ● Rent deposit guarantee by the l
Page 127 and 128: The Green Paper stated the Governme
Page 129 and 130: It was not an objective of ODPM or
Page 131 and 132: DESCRIPTION OF MARKET MECHANISM The
Page 133 and 134: Once the outcome is determined, fee
Page 135 and 136: DEVELOPMENTS OVER TIME The major mo
Page 137 and 138: Concerns about capacity constraints
Page 139 and 140: from those already located within t
Page 141 and 142: In several areas, registrations by
Page 143 and 144: Controlling for information problem
Page 145 and 146: extent though, it was competition b
Page 147 and 148: Section 10 - Choice-Based Letting i
Page 149 and 150: levels are reducing and new tenants
Page 151 and 152: desired effect of limiting points-c
Page 153 and 154: efficiency savings in some areas. T
Page 155 and 156: SECTION 11 Emissions Trading Introd
Page 157 and 158: Section 11 - Emissions Trading coex
Page 159 and 160: Section 11 - Emissions Trading emis
Page 161 and 162: A more detailed and diagrammatic de
Page 163 and 164: The costs of monitoring and reporti
Page 165 and 166: INITIAL ALLOCATION OF PROPERTY RIGH
Page 167 and 168: only 242 in the second year. The di
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COST-EFFICIENT EMISSIONS REDUCTIONS
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consultants to Defra of £11 per to
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Participation has helped us to rais
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Section 11 - Emissions Trading emis
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SECTION 12 Issues in the implementa
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