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

Public Policy: Using Market-Based Approaches
riot, the contract was terminated (Domberger and Jensen, 1997). 79 Other wellpublicised
incidents of poor performance have occurred at private prisons in
Colorado, Louisiana, Oregon, South Carolina and Texas. 80
The UK experience has differed to date for two main reasons. Firstly there have
been no instances of speculative build prisons. Private firms can enter the
market for prison services only by winning a tender for a specific contract.
Speculative build prisons in the US have been the most difficult to monitor and
regulate. 81 Secondly, the UK has devoted a significant amount of resources to
contract specification, monitoring and enforcement. Where management
failures have occurred in the US, they have typically been the result of problems
in the contractual framework.
DESCRIPTION OF THE MARKET MECHANISM
The process for procurement is identical for both MO and DMCF contracts, and
between contracting out and market testing. The main dimension in which
contracts differ is that of contract duration. DCMF contracts are typically
awarded for 25 years and MO contracts and SLAs for 10 years.
There are some technical differences in the way a DCMF contract is drawn up,
reflecting the complexity of the contract, which must cover the construction of
the prison. DCMF contracts are made between NOMS and a Special Purpose
Vehicle, a type of holding company in which the construction company,
architect, operating company and finance provider all have a stake. All operating
risk is passed to the operating company through a sub-contract between the SPV
and the operating company, so that, in practice, all negotiations pertaining to
contract enforcement occur between the operating company and NOMS.
Tendering out operations
Procurement is centralised and conducted by the NOMS Commercial and
Competitions Unit, working closely with the Office of Government Commerce.
HMPS publishes an announcement inviting private companies to express an
interest. To qualify for bidding, bidders must demonstrate the capability to
operate a prison safely, either through a proven track record or related
experience, and the capacity to meet necessary financial obligations arising
during the contract life. Only bidders who meet these criteria are invited to
submit sealed bids. As noted in Part III, the use of sealed bids helps to limit the
scope for collusive behaviour amongst potential bidders because this implies
that bids are private rather than public information. This means that rival bidders
lack information about each other’s bids, and that it is therefore more difficult to
79 Domberger, S. and Jensen, PH (1997) ‘Competitive tendering and contracting out: theory, evidence, prospects’,
Oxford Review of Economic Policy 13(4).
80 Austin, J. and Coventry, G, ‘Emerging Issues on Privatized Prisons’, p.59, Bureau of Justice Assistance.
81 Austin, J. and Coventry, G, ‘Emerging Issues on Privatized Prisons’, P.xi, Bureau of Justice Assistance.
82