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Public Policy: Using Market-Based Approaches felt to be lagging behind similar prisons. It ensures the competitive stimulus is present throughout the contract duration and provides flexibility to renegotiate contracts to reflect significant changes in industry conditions. The first prison management contracts contained no provision for performance measures to be revised during the contract duration. Later contracts addressed the potential need for renegotiation of a DCMF contract, if industry costs were to fall during the contract life, for example, by allowing for benchmarking of the operational subcontract at 15 years. The most recent contracts have introduced benchmarking to the entire contract at 10 and 20 years. Benchmarking will be undertaken if NOMS believes it could obtain the same service more cheaply from another supplier. In this case, the incumbent is invited to re-tender at a lower price. If the incumbent does not re-tender, or HMPS is not satisfied with the offer, the contract may be opened for bids from other private firms. This leads to greater risk for the contractor, which is reflected in a higher contract price, but reduces the risk of tendering long-term contracts for HMPS. Performance measure rationalisation Early contracts were designed with a greater number of performance measures than were required to achieve the desired outcome, implying excessive contract specification and monitoring costs as well as unnecessary restrictions on innovation. Recently tendered contracts have taken this into account, and have not only rationalised the number of performance measures but have also introduced a system of bonuses as well as penalties. One criticism of the performance measure system is that it focuses on specifying inputs (e.g. hours of education per prisoner per week) to achieve desired outputs rather than outlining desired outputs (e.g. 50 per cent of prisoners to pass a level 1 literacy certificate) and giving the contractor freedom over how best to deliver these. One operator of private prisons felt that this restricted its scope for innovation as HMPS began specifying operational requirements in increasing detail. This operator hopes this problem will be addressed in the near future as contracts are refreshed and performance measures revised. They note that a number of input-related measures contained in existing contracts have recently been changed to focus more on outputs. For example, a measure stipulating the number of hours that each prisoner must spend learning in a classroom has been replaced by a target number of level 1 literacy certificates to be obtained. Another side-effect of using performance measures is that it encourages operators to concentrate their resources on the measurable aspects of service quality to the detriment of others. One such example is the requirement to repair or replace all broken items in the building within 24 hours. This requirement caused problems when one prison introduced a new initiative to provide inmates with toasters in their cells: when toasters broke they were not replaced within the required timeframe and so the operator began to accumulate penalty points. Even though it was not a contractual requirement to provide toasters, the penalty points were the same as those for more important breakages 86
(e.g. lighting). This impact could have caused the operator to withdraw its toaster scheme altogether, although its eventual solution was to buy a large stock of toasters to allow for speedy replacement in the event of a fault. Conversely, other important areas of performance, such as staff attitude towards prisoners, which may be equally important for a harmonious regime, are not directly measurable, although anecdotal evidence suggests that prisoner-staff relations are better in private-sector than public-sector prisons. Risk-sharing As the private sector now has experience in the management of prisons, it is more comfortable taking on risks at a lower premium than before, making it efficient for the Government to shift more risk to the private sector. Initially, the main risks borne by the private contractor were the design, construction, management and financing of the prison. Whilst the public sector continues to retain responsibility for the risks of adequate demand and the residual value of the property, it has been able to transfer risks such as insurance to the private sector. Dovegate Therapeutic Centre (TC) is the only centre in which the private sector is able to influence the number of places as courses provided by the centre are voluntary and can be advertised to other prisons to attract applicants. Accordingly, the public sector has shifted some volume risk to Dovegate TC in the design of its contract. The contracts for Ashford and Peterborough saw the contractor taking on the risk of filling the top 5 per cent of places, despite being unable to influence demand. This approach was largely as a result of new accounting treatment standards, and has been found an inefficient means of allocating risk because both contractors simply charged a higher premium to reflect the increased risk. It will therefore not be pursued in future competitions. Potential problems Section 9 – Competitive Tendering of Prisons In Part III, we noted that although economic theory says that introducing contestability can lead to greater efficiency and can provide incentives for innovation, these benefits can only be achieved if there is adequate competition. Moreover, although the incentives for cost reduction can be stronger in the private sector, if not properly controlled through well-specified and effectively monitored contracts, these costs reductions can come at the expense of the quality of the service. This problem is a particular concern in an area such as prisons, where a poor quality service can have outcomes such as riots or increased prison suicides. Competitive tendering may also lead to problems of market power and asymmetric information. In this section we first summarise these potential problems, focusing on those that theory suggests are most likely to impact the procurement of prison 87
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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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Page 44 and 45: Public Policy: Using Market-Based A
Page 50 and 51: SECTION 7 Market-Based Mechanisms W
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: at HMPS began as an equal mix of th
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 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 and 118: 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
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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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