Competitive provision of public services: cost savings over successive rounds of tendering

ABSTRACT

We study the evolution of the cost of public service provision when subjected to a competitive tendering process. We add to the existing literature by analysing cost savings over successive rounds of tendering. Previous results in the literature show that initial cost savings tend to disappear over time with the age of the contract. Our findings suggest that each additional round of tendering will be followed by a renewal of cost savings. Thus, keeping competitive pressure via periodic tendering appears to address the problem.

KEYWORDS:

• Competitive tendering
• cost savings
• the United Kingdom
• hospital cleaning and catering services

JEL CLASSIFICATION:

• H51
• I18
• H83

Acknowledgements

Very many people have assisted in this study. It relied on the officers of the various Health Boards and NHS trusts to provide and, on occasion, give permission for one of the authors to access confidential information on the competitive tendering process. The staff at the Department of Health at the Scottish Office and Scottish Executive provided centrally collected information as a check on the completeness of the study. The Information and Statistics Division of NHS Scotland provided assistance in the interpretation of its annual publication Scottish Health Service Costs. The Information Services Division and the National Archives of Scotland both proved valuable sources on the development of competitive tendering policy within the NHS in Scotland, and Gordon Craig has advised on our interpretation of it. Fiona Brough helped with the collection of the earlier data, and Mary Latham assisted considerably in the preparation of the whole set of data for this analysis. Needless to say, responsibility for errors and omissions remain with the authors.

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

¹ Please refer to Angeles and Milne (2015) for more details on the data set and for an historical overview of the process.

² This may not be the case if coefficients for years 3 and onwards are biased and the true cost reductions are larger. It seems more likely, however, that any selection bias would work in the opposite direction as contract extensions would be offered to the better performing firms. In that case, true cost reductions for years 3 and onwards would have been even smaller, reinforcing the result.

³ Please refer to Angeles and Milne (2015) for a discussion of why external contractors were able to implement larger cost cuts. Among other factors, Direct Service Organizations (DSOs) were tied to nationally agreed wage rates whereas external contractors could offer lower wages and employed more part-time workers. This would also explain why cost cuts were smaller in catering services, where nonwage costs are more important than in cleaning.

Additional information

Funding

Support from the Nuffield Foundation [SGS/00033/C] and from the Economic and Social Research Council [R 000 23 2109] is gratefully acknowledged.