88. In conjunction with this trend towards more aggressive strategies which led to companies facing difficulties, there has been more and more concentration in some public service markets. The Minister told us that in some markets, for what he described as "the provision of complex public services" there was significant concentration, as the top five suppliers have nearly "60% of the market by value".203 However, he also argued that there were markets for facilities management, construction and business processes (such as accounts or pensions administration) where the market is less concentrated.204 Phil Bentley, CEO of Mitie, agreed with the Minister: he said that the government's facilities management contracts had the "least concentration" he had ever seen in a market.205
89. Other witnesses to our inquiry agreed with the Minister that some markets for government contracts were too concentrated. Paul Davies said that "concentration is an issue" in the market.206 Reform, a think tank, said that the "supply side is concentrated and becoming increasingly concentrated".207 Sir Amyas Morse, the Comptroller and Auditor General, argued that "there has been an unhappy tendency for market concentration to happen and I do not think that the Government have done very much to prevent it".208 Matt Dykes from the TUC said "we have seen market concentration reducing choice and contestability".209 While Rupert Soames of Serco disagreed that there was concentration in the entire government services market, he acknowledged that "if you get particular specialisms like prisons … you can get narrow individual markets".210
90. The Minister agreed with these concerns about the concentration of some public sector markets. However, he cautioned that "getting in new big contenders for that particular market in complex public services is not straightforward because you need companies that have the administrative financial capacity to provide services of that character".211
91. However, this point was challenged in our evidence. Professor Sturgess argued that it was not competition but contestability ("the credible threat of competition") which "seems to make the difference".212 He argued that "as long as the barriers to entry are low and there is a credible threat of competition, the monopolists will act in a competitive manner."213 As Chris Ham stated "the stimulus to improve performance… exists when providers know that purchasers have alternative options" even if they do not immediately exercise them.214 The Australian Productivity Commission argued that in situations where you have long or medium term contracts the real impetus to reform comes from what they described as "periodic contestation".215 Domberger and Jensen (University of Sydney) argue that contestability should ensure that even natural monopolies "need not result in losses of economic efficiency".216 Therefore Professor Sturgess argued the Government should be less concerned about the number of participants in each market, than about the barriers of entry to new entrants.
92. Barriers to entry however do appear to exist in public sector markets. Small and medium sized enterprises (SMEs) have difficulties in gaining in government contracts. The Government "reckon that about a quarter of all Government expenditure with third parties goes to SMEs either directly or indirectly", this includes spending which goes through large companies who buy from SMEs.217 Reform told us that "government does not have the expertise to procure and manage contracts with SMEs" and describe onerous bidding processes involving hundreds of meetings and documents.218 Competitions exist in which bidding processes take over 18 months and require the equivalent of 12 A4 boxes of information.219 89 per cent of firms working with the public sector, according to the Federation of Small Businesses, received late payments of bills.220 The Federation also argues that small businesses struggle to get accepted onto Government framework contracts.221 The British Institute for Facilities Management linked concerns about price and risk transfer had both "deterred businesses, both large and small, from bidding".222
93. The Government are committed to "lively, innovative and dynamic markets".223 The Minister argues that the Government will "maximise the number of alternative suppliers" through "requiring" Departments to follow a "playbook of guidelines, rules and principles that will encourage new entrants to the market."224 In particular, the Minister committed the Government to remove barriers to entry for small businesses.225
94. There is widespread agreement that contestability (the credible threat of competition) is important in order to support an efficient market for public sector services. Contestability motivates firms to improve services and cut costs and motivates the public sector itself in the same way. The combination of limited competition and high barriers to entry generates worse outcomes however for the Government.
95. The Government needs to ensure that the market for Government contracts remains contestable from within the public sector, from existing companies and new entrants. We welcome the Minister's commitments in this area and we await to see in the Government's response details on its new measures to increase small and medium sized enterprises' participation in the market.
96. The Government should test the thesis that less competition (as opposed to contestability) also undermines outcomes for the public sector. This reflects a widely held consensus but it would be useful for the Government to commit in its response to commission further research. The Government should outline in its response to our report the detail behind the Minister's commitment to a new playbook of guidelines, rules and principles.
________________________________________________________________________________
203 Q750
204 Q750
205 Q627
206 Q577
207 LCC0006
208 Q503
209 Q684 (Matt Dykes)
210 Q626
211 Q751
212 Q394
213 Q417
214 Chris Ham, Contestability: a middle path for healthcare, British Medical Journal, Vol. 312 (January 1996)
215 Australian Productivity Commission, Introducing Competition and Informed User Choice into Human services: reforms to human services, No. 85, October 2017, p. 24
216 S. Domberger and P. Jensen, Contracting out by the public sector: theory evidence and prospects, Oxford Review of Economic Policy, Vol. 13, Issue 4, December 1997, p. 69
217 Q753
218 Reform LCC0006
219 Public Accounts Committee, Contracting out public services to the private sector Forty seventh report of the Session, Forty-seventh Report of Session 2013-14, HC 777, p. 9
220 Federation of Small Businesses, Nine out of ten public sector suppliers hit by late payments, April 2018
221 A framework agreement is an arrangement made with providers that sets out terms and conditions for specific purchases, which can be made through the term of the agreement Federation of Small Businesses, UNSTACKING THE DECK: BALANCING THE PUBLIC PROCUREMENT ODDS p. 5
222 LCC0020
223 David Lidington, Chancellor of the Duchy of Lancaster speech to Reform (June 2018)
224 Ibid
225 Ibid