Competitive tendering is an extraordinarily powerful tool for driving down price. Absolutely no one disagrees with this proposition.
Rather, the debate over the use of competition in selecting the providers of public services has always focused on the way in which intense tendering based heavily on price encourages a 'race to the bottom', compromising quality of service, workers' terms and conditions, corporate profits and ultimately the political and commercial sustainability of the market.
This was the experience with the compulsory competitive tendering regime established in UK local government and the NHS in the late 1980s and early 1990s. One study of CCT in local government found that procurements which attracted a larger number of bids (and thus were more intense) were associated with lower levels of compliance, presumably because the winning bidders were more likely to submit unsustainable prices in order to win.13 A study of hospital cleaning contractors under CCT concluded:
From more than fifty firms expressing a serious interest in tendering over the period from 1984 to 1990, it is doubtful if more than a handful came out of that experience in net profit over this seven-year period.14
This tendency to a 'race to the bottom' was one of the principal reasons why the unions were so strongly opposed to CCT, and why the Labour government replaced it with 'Best Value' when it came to office in 1997. A senior union official told me in the course of this survey that CCT had poisoned outsourcing from the outset. In this sense, the CCT market had become politically unsustainable.
But it was also commercially unsustainable. By the early 1990s, companies that understood the importance of attracting and retaining high-quality staff began to withdraw from the market, and number of experienced providers welcomed TUPE as a way of softening the incentive to slash terms and conditions in procurements based heavily on price.
The problems associated with pursuing low-price bids for complex public services have long been understood, and over the years, a succession of NAO reports and government reviews have warned about the consequences. In going back over some of these old reports, it is striking how often it was the industry which objected, pleading with government not to pursue low-ball bidding. Experienced public service providers understand that it will be difficult for them to abstain from bidding if their competitors persist. They also understand the impact that low-price competition will have over time on relations with their government customers, with the public at large, with staff and unions, and ultimately with investors and analysts.
Sir Michael Latham raised this issue in his report on procurement and contract management in public sector construction as far back as 1994 (although the Audit Commission and the National Audit Office has already discussed it in some of their earlier reports):
. . . clients should choose their contractors (and consultants) on a value for money basis, with proper weighting of criteria for skill. Choice of the lowest tender may neglect considerations of cost in use or indeed final (out turn) cost of the project. . .
This concern was echoed by a senior official of a particular local authority: 'Local authorities are severely hampered by being forced to accept the lowest tender. I know that we are not so forced but the overpowering attitude of local authority officers is that for all intents and purposes we are. . .'
The National Audit Office have made it plain that it is not necessary to choose the lowest tender. The best tender should be accepted. . .15
Price-based procurement continued to be a major concern for industry over the decade that followed, repeatedly being raised in meetings with government. Peter Gershon mentioned this in his 1999 review of procurement in civil government:
Despite declared Government procurement policy being based on value for money rather than lowest initial cost, many inputs from industry highlighted a perception that the culture of the Civil Service is risk averse and the 'safe' option is justifying the lowest up front cost. While Invitations to Tender do usually specify the value for money criteria, it does not appear to be standard practice even to specify the relative priority and weightings of the different criteria.16
It was raised again in 2003 in a report by the Office of Government Commerce on 'increasing competition and long-term capacity planning in the government marketplace':
As far as price is concerned, there is still a widespread supplier perception that many public sector procurers continue to over-emphasise lowest cost at the expense of other factors. Departments sometimes claim that they cannot afford to do anything else. If true, the implication is either that those willing the ends are not providing the means or that the departments concerned are trying to do too much.
Lowest price does not, of course, necessarily mean best value for money. The public sector may be buying wrong or inadequate things. Low initial prices may be followed by substantial bills for post-contract variations. . .17
There have been times when greater emphasis has been placed on value than on price, but almost a decade and a half after the OGC's report, the problem of low-price bidding has returned. Indeed, based on the remarks of survey participants, it would seem that the problem is worse now than ever, reinforced by the government's sustained focus on austerity.
While the Crown Commercial Service has recently acknowledged the need for a 'balanced scorecard' in capital works procurement, with a focus on value for money rather than just price, in practice, the past few years have been dominated by low-price bidding.18
Several survey participants gave examples of tenders where price and quality were meant to be balanced but where, because of the structure of the assessment process, tenders wound up being assessed solely on price. It was not unusual, they said, for potential customers to speak about quality and innovation in the early stages of the procurement, but then to focus almost exclusively on price.
Examples were cited where suppliers had signed contracts that reduced prices by 25-30% for services that had already been market-tested several times. The NAO provides a number of studies which corroborate these accounts.
As the Home Office was being subjected to ongoing spending cuts, it chose to make significant savings from its contracts. When Yarl's Wood Immigration Removal Centre was re-tendered in 2014, the successful proponent promised a cost reduction of around 25%. Savings were to be made, in part, by having detainees undertake more activities on their own behalf, a proposal that seemed to have merit. However, the NAO has since reported that the assumptions were unrealistic, and the facility wound up with insufficient staff.19
With the procurement for the management of primary care support services undertaken by NHS England in 2015, the annual cost of the service was said to have been reduced by 30%.20 Government sought to acquit itself of responsibility for the initial poor performance of this contract, seeking to lay the blame entirely on the contractor.21
This is madness - in the absence of some major technological breakthrough, no provider can hope to deliver real productivity savings of this scale over the short-term, particularly with a service that has already delivered significant cost savings. Some successful bidders have lost money on such contracts and/or they have run into performance problems. In some cases, they have been forced to surrender their contracts early due to financial stress and/or reputational harm.
There are harsh realities here that cannot be wished away. It is rarely possible to cut costs by one-third on services that have previously been market-tested, or to fundamentally reconfigure the delivery of complex services at short notice - and this applies whether services are delivered by the public or the private sectors. If you attempt to do so, you end up with frigates without missiles, aircraft carriers without aircraft and prisons that are so understaffed that assaults and suicide rates soar.