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Public Policy: Using Market-Based Approaches verify that cost data represent the true running costs of the prison, this effect is unlikely to be very strong. One prison operator observed that requiring cost disclosure has little effect on incumbency advantages in practice because there are means of presenting cost information in a way that is not helpful to potential bidders. HMPS also tries to limit incumbency advantages through multi-sourcing, so that there are more companies with experience in operating prisons. For example, in 1995 and 1996 a PFI contract was awarded to each of Securicor and GSL, despite the fact that one bidder had offered a lower price for both contracts. This attracted criticism from the NAO 88 but HMPS defended its decision with reference to the need to ensure competition for future contracts. An additional way in which competition is encouraged is through a proactive approach to encouraging firms to bid. There are no examples of potential suppliers being pre-qualified without previous relevant experience, largely as a result of strict pre-qualification criteria. However, these criteria do not require previous experience in running prisons, but only experience in security issues. For example, Securicor and GSL had no prior prison experience but satisfied tender requirements by proposing to recruit experienced prison staff from the UK public sector. Whilst the HMPS procurement group is unable to relax its preselection requirements, it has nonetheless tried to encourage entry by actively inviting bidders with experience in custodial services both in the UK and abroad to submit tenders. The Prison Service is aware of other potential providers who could be encouraged to submit tenders in the future, and has taken an active approach to increasing the size of the market by speaking to these firms directly. As a consequence, two new entrants have submitted bids for the management of a Scottish prison and competition for the prison management market in future tenders is hoped to increase. The considerable expense involved in the bidding process represents a barrier to entry, particularly in the case of PFI contracts. 89 One way to encourage bidding in spite of high costs is to increase the reward for winning a tender by offering more valuable contracts. It can be achieved by aggregating contracts horizontally, vertically or over time. Contract aggregation refers to the bundling of service requirements into fewer, larger contracts that are tendered less frequently. Contracts are aggregated horizontally when identical requirements are pooled and put out to tender, for example, if one contract were offered for the management of multiple prison centres. Vertical aggregation refers to the bundling together of different stages of the value chain, for example, sourcing one supplier to design, construct, manage and finance a new prison under a DCMF contract. 88 See National Audit Office (1997) The PFI Contracts for Bridgend and Fazakerley Prisons, London: The Stationery Office. 89 See Competition Commission (2002) Group 4 Falck A/S and The Wackenhut Corporation: A report on the merger situation, available at: http://www.competition-commission.org.uk/rep_pub/reports/2002/471group4.htm, p.21. 90
However, it should be noted that tendering larger contracts may also impede entry, both directly by excluding smaller firms who are unable to provide the complete bundle of requirements and indirectly by reducing the chances of winning a contract. Furthermore aggregating contracts not only influences the entry decision but also has wider implications for market performance, some positive and some negative. For example, contract aggregation helps provide incentives for long-term investment and limits the scope for collusion, but may exacerbate incumbency advantages. It may also reduce procurement costs by reducing the number of tenders conducted and the number of ongoing contracts that must be monitored, as well as allowing for the exploitation of economies of scale and scope. Economic theory provides no clear answer regarding the appropriate degree of contract aggregation because this will vary with individual industry characteristics. In the case of prison management, there are efficiencies from aggregating together the provision of all services provided at one location (see below). Dividing the requirement up into smaller contracts, or allowing contractors to bid for part of the contract, could prevent these efficiencies from being realised and lead to higher procurement costs. Prison management contracts are aggregated both across time and horizontally. MO contracts are for all aspects of prison management and no DCMF contract tenders have yet separated design, construction and finance from management. There are efficiencies from aggregating contracts in this way arising from natural synergies between the designer and the operator. The poor performance of early PFI schools gives an example of problems that can arise when the interests of designer and operator are allowed to diverge. 90 Theory suggests that a high level of contract aggregation could lead to problems of incumbency advantages lessening competition for future tenders. The issue of advantaged incumbents is discussed above, but it is worth noting that HMPS has retained many of the benefits of multi-sourcing despite high levels of individual contract aggregation. These benefits include competition within the market as well as for future tenders. Ensuring the continued existence of multiple private-sector suppliers and encouraging new entry to the market have helped secure these benefits. Performance in practice Section 9 – Competitive Tendering of Prisons The fact that few tenders have come up for renewal makes the assessment of incumbency advantages difficult. However, there is some evidence to suggest that incumbents have an advantage in bidding. Incumbent providers have won four out of the six contracts put to re-procurement, with the other two being won by the public sector rather than another private sector firm. Although this suggests that incumbents have an advantage in the re-tender process, the fact that the price of bids in tenders has tended to fall over time suggests that the process is competitive. 90 For example, a report by the Audit Commission found that early PFI schools performed significantly worse than those that were traditionally funded. See The Audit Commission (2003) PFI in schools: the quality and cost of buildings and services provided by early Private Finance Initiative schemes. 91
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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 48 and 49: 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 and 94: at HMPS began as an equal mix of th
Page 95 and 96: (e.g. lighting). This impact could
Page 97: MARKET POWER The full benefits of c
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
Page 145 and 146: extent though, it was competition b
Page 147 and 148: 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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