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Public Policy: Using Market-Based Approaches ● Benefits of competition among suppliers: introducing competition among suppliers can lead to lower costs and better quality services. For example, competitive tendering of UK prison services has led to cost savings of around 10 to 22 per cent. These benefits can arise even when provision of the service remains in the public sector, provided it is subject to the discipline of competition. We also found that when competition is introduced in one area, it can lead to cost savings in other areas where competition has not been introduced through the transfer of best practice. In emissions trading, the choice of how emissions are to be reduced is decided by competition among suppliers, rather than by government decree as in a conventional administrative scheme. It is estimated that this had led to costs savings of up to $800 million per year in the US. ● Benefits of greater consumer choice: the ability of firms and individuals to make choices can lead to a better allocation of goods and services. The use of choice-based lettings in UK social housing has led to a better allocation of properties, reducing the time that properties remain vacant by 37 per cent for a sample we examined. Market-based mechanisms can also create other benefits such as increasing transparency and accountability. For example, a tradable permit scheme makes the cost of reducing emissions more transparent. Introducing these mechanisms still leaves an important role for the state because market mechanisms will typically need to be designed and managed in some way. For example, when a competitive tender is introduced, the public sector still needs to manage the contract with the private-sector supplier. While market mechanisms can lead to significant benefits, the scale of these benefits depends crucially on how the mechanism is implemented. We found that the competitive tendering of prisons has been more successful in the UK than it has been in the US as a result of differences in implementation. There may also be a need for creative thinking in order to adapt a market mechanism to the particular public-policy issue being tackled. In Part II we offer specific lessons for the implementation of each mechanism we have considered. These lessons are drawn in large part from the three case studies we carried out, which we briefly summarise below. Case studies COMPETITIVE TENDERING OF PRISONS Prison services in England and Wales have been subject to competitive tendering in one of two ways: 6
Section 1 – Introduction and summary ● management-only contracts: which involve tendering the management of an existing prison; and ● design, construction, management and finance contracts: which involve tendering the construction and subsequent operation of a new prison in a single contract. The first management-only contract started in 1992 and the first full design, construction, management and finance contract in 1995. Competitive tendering was introduced in order to improve efficiency and innovation in the provision of prison services. It coincided with a need to replace and expand the existing stock of prisons in the UK and it was expected that the private sector would be able to achieve this expansion more efficiently than the public sector. Initial contracts were open only to private-sector bidders but subsequent tenders have been open to in-house public-sector suppliers. Tenders have attracted enough bidders to generate competition, with four or more bidders in most cases. Different contracts have been won both by privatesector and by public-sector bidders. There are currently four different private firms managing prisons in England and Wales. The contracting process appears to have worked well. We found no evidence either of collusion or of incumbents having an unfair advantage in subsequent tenders. One of the main concerns regarding competitive tendering is the impact it can have on the quality of service provided. Quality of service can be difficult to specify and write into a contract with a private-sector supplier. When services are subject to a competitive tender the public sector can find itself locked into a contract which makes it difficult to address unanticipated problems regarding quality of services. This issue has been important in the provision of prison services given that experience in the US has involved a number of significant failures. The UK has avoided many of the problems seen in the US. There are a number of reasons for this improvement. First, quality has been an important part of the process for assessing tenders. Tenders are not automatically won by the lowest bidder. Instead price is only one factor in the decision process. Second, significant effort has been devoted to setting explicit performance measures, which are monitored and enforced through financial penalties for poor performance. More recently, contracts have also allowed for financial rewards to encourage improvements in quality above the stated performance target. Third, the UK Government has learned from experience, both experience in other countries and experience gained from operating competitive tenders in the UK. For example, the number of performance measures has been rationalised over time, with more focus on outputs (e.g., the skills that prisoners have learned) rather than inputs (e.g., the amount of time prisoners spend in classes). 7
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Page 5 and 6: Contents Acknowledgements vi Forewo
Page 7 and 8: Contents Section 11 Emissions Tradi
Page 9: Foreword There is increasing intere
Page 12 and 13: SECTION 1 Introduction and summary
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Page 22 and 23: SECTION 2 Using market mechanisms U
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Page 40 and 41: SECTION 4 Introduction This part of
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Public Policy: Using Market-Based A
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SECTION 8 Framework for assessing m
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Part IV Case Studies 73
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● the Green and White papers behi
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A prison failing to deliver on its
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Table 9.3 Companies providing priso
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Section 9 - Competitive Tendering o
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detect any deviation from a collusi
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at HMPS began as an equal mix of th
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(e.g. lighting). This impact could
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MARKET POWER The full benefits of c
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However, it should be noted that te
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on competition is uncertain. The ab
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Controlling for problems of asymmet
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Procurement process design One way
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however, financial deductions are m
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The Independent Monitoring Board at
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Figure 9.1: Difference between the
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‘While there were staff in the pu
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design the invitation to tender and
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and demand conditions. Second, we d
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DEMAND Anyone can apply to a local
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● Rent deposit guarantee by the l
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The Green Paper stated the Governme
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It was not an objective of ODPM or
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DESCRIPTION OF MARKET MECHANISM The
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Once the outcome is determined, fee
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DEVELOPMENTS OVER TIME The major mo
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Concerns about capacity constraints
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from those already located within t
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In several areas, registrations by
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Controlling for information problem
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extent though, it was competition b
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Section 10 - Choice-Based Letting i
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levels are reducing and new tenants
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desired effect of limiting points-c
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efficiency savings in some areas. T
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SECTION 11 Emissions Trading Introd
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Section 11 - Emissions Trading coex
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Section 11 - Emissions Trading emis
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A more detailed and diagrammatic de
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The costs of monitoring and reporti
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INITIAL ALLOCATION OF PROPERTY RIGH
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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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