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Public Policy: Using Market-Based Approaches services. We then discuss how these problems were dealt with and the success of this process. POTENTIAL PROBLEMS IN PRISON PROCUREMENT Political Constraints Sometimes the implementation of a market mechanism may be affected by political constraints that prevent the full potential benefits of the policy being realised. One such constraint in prison procurement was the limit placed on the size of the private sector market that could develop by the Government’s commitment to retain most of the prison estate under public sector management. In 1993 the then Home Secretary announced a target for 10 per cent of prisons to be privately managed. This target reflected a balance between concerns about private sector involvement in the delivery of a politically sensitive service and the need to offer a sufficient number of contracts for a private market to develop. However, the fact that there are only four private sector suppliers of prison services today in the UK suggests that current procurement levels might not guarantee a sufficiently high level of demand to encourage new entry. Today there are 11 prisons under private sector management out of more than 139. There is no explicit target under the current administration for the level of private sector involvement but rather a desire to maintain healthy competition between public and private sector providers. 86 Plans to extend market testing could result in an increase in the level of private sector involvement. Another constraint acting on prison procurement policy-makers was the internal resistance felt at the time competition was first introduced. This continues today and is particularly strong in the Prison Governors’ Association and Prison Officers’ Association (POA), trades unions representing public sector prison workers. A recent example of this opposition is the POA’s vote against plans to market test clusters of prisons from 2005. With a 70 per cent turnout, union members voted by 87 to 13 per cent not to take part in the market testing on the grounds that it is likely to lead to increased privatisation of prisons. The POA’s general secretary, Brian Caton, has warned that industrial action is likely if the Government continues with its plans. 87 The proposed market testing of Emley, Standford Hill and Swaleside has since been suspended and there is no certainty about whether it will be resumed. Economic Constraints In the main report, we identified a number of problems with outsourcing suggested by economic theory. These problems arose from issues of market power, the hold-up problem, asymmetric information and incomplete contracts. We now consider each of these potential problems in turn, looking at why they may arise in the context of prison service procurement and how the procurement process was designed to mitigate their effect. 86 White Paper (2002) Justice for All, London: The Stationery Office. 87 Prison Reform Trust (2005) Private Punishment: Who Profits?, Briefing Paper, p.11. 88
MARKET POWER The full benefits of competition can be realised only if there is sufficient competition between firms. However, this can be undermined if there are a small number of bidders, for example, because of incumbency advantages and other barriers to entry, or if bidders engage in collusive behaviour. These sources of market power are addressed in turn below. INCUMBENCY ADVANTAGES AND OTHER BARRIERS TO ENTRY Incumbency advantages can arise from a variety of sources, including preselection criteria, switching costs and asymmetric information. Each of these has the potential to arise in the prison service. Given the concerns over quality in the prison service, the potential barriers to entry created by pre-selection criteria can be a major concern. For example, one method that is sometimes used to try to avoid poor-quality service delivery is to require that the bidders have a proven track record in the area. This obviously gives incumbents an advantage over new entrants. Furthermore, because winning firms are required to take on existing staff, considerable switching costs exist when transferring staff to a new contractor. Incumbents are also likely to enjoy superior information regarding costs and the prison building concerned. They will be better acquainted with tender requirements, and as such will not only incur lower tendering costs but will also enjoy a higher probability of success. Incumbency advantages combined with high bidding costs could be expected to impose substantial barriers to entry. Both incumbency advantages and barriers to entry reduce competition for the market in the future, leading to higher procurement costs in the longer run. Controlling for incumbency advantages Section 9 – Competitive Tendering of Prisons Although only a few prison contracts have yet come up for renewal, HMPS has taken several steps to try to reduce incumbency advantages. When a contract comes up for renewal, the incumbent supplier has an informational advantage over rival bidders in relation to costs. The incumbent supplier has gained years of experience in how the prison operates and how much it costs to run. In order to try to reduce this advantage, the incumbent is required to disclose cost information to potential bidders and to allow access to the prison being offered for re-tender. Although increasing cost transparency is beneficial in limiting incumbency advantages, there is a trade-off to be made against the increased scope for collusion. As described in Section 7, one of the factors that makes a collusive agreement easier to sustain is readily available information on rivals’ costs and prices. The sharing of information on costs would tend to increase the likelihood of collusion between suppliers. However, since it is difficult for other bidders to 89
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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 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
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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: (e.g. lighting). This impact could
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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
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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
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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
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Page 135 and 136: DEVELOPMENTS OVER TIME The major mo
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Page 141 and 142: In several areas, registrations by
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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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