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

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