It is generally understood that, in a climate of austerity, public officials may feel that they have no alternative to using competition to drive down price. But this was a problem long before the global financial crisis, and the question remains as to why, given the likely consequences, departments and agencies are not more measured in their use of price-based tenders.
In large part, providers see it as a function of risk aversion. Despite repeated clarifications over the years, there is still a widespread belief that civil servants who do not place a heavy emphasis on price will be criticised by the NAO and the PAC. There is concern that relying on criteria that are less easily specified and thus scrutinised might lead to more corruption. As one survey participant expressed it: 'No one ever gets fired for going with the lowest price'.
A senior executive with a large provider, who used to work on procurement in the public sector, suggested that there is a profound difference between the annual budget framework within which public officials usually operate, and the commercial mindset which prevails in the private sector:
The mentality [in government] is that you are managing a budget, rather than managing value. Value is seen as 'jam tomorrow'. Budgetary issues are today.
But ministers and civil servants also assume that the self-interest of providers will act as a natural brake to prevent a race to the bottom: they fail to understand that companies can be induced to act against their own long-term interests. This too has changed over the years. As one experienced executive explained:
It used to be the case that government would call out unsustainable low prices - that has stopped over the last 4-5 years. They are now accepting bids that can't succeed.
One senior civil servant involved in the commercial service told the author that, in his view, if two bidders persisted in offering exceptionally low prices, he felt obliged to accept the lowest, even if he believed that it might be unsustainable. It has not always been so.
That this is a problem right across government is implied by the NAO's report on the DWP contracts for health and disability assessments:
In the Department's view, it considered and challenged potential bidder optimism and did not know bidders' assumptions were unrealistic. It told us optimism in targets was not its responsibility, rejecting provider concerns is a normal outcome in negotiations, and that as providers signed contracts they had accepted the contract terms and risks.25
Again, this is not a recent insight: a major report commissioned by the Chancellor and published by the Office of Government Commerce in December 2003, warned:
An essential part of client capability is to ensure that sufficient attention is paid to implementability and to what the supply market can deliver when policy is formulated and targets are set. There is considerable evidence from Gateway reviews that this is not yet sufficiently firmly embedded within departments' psyches. Suppliers can often make this worse by promising more than they can reasonably expect to achieve. Officials do not want to be left looking less ambitious about public sector reform than the private sector. Neither helps effective competition. Moreover, failure to ensure that policy is implementable may appear as an industry capacity problem when in reality it is a problem with the way in which the requirement is formulated.26