OFT chief warns of risks created by long-term contracts, problems ensuring level playing field

Competition must be “hard wired” into the commissioning and procurement of public services to ensure its full benefits are gained, the chief executive of the Office of Fair Trading said this week.

Speaking at a conference on public service reform in London, John Fingleton also warned of the dangers of being locked in to long-term contracts that make it difficult to switch supplier, and of potential collusion among tenderers.

The OFT chief executive added that the unique character of public service markets meant the benefit of choice and competition were by no means guaranteed, and there may be cases where it will simply not be an appropriate mechanism. “In many others, careful design will be needed to deliver the beneficial incentives of competition,” he added.

Fingleton said policy makers should not adopt a simplistic “private good/public bad” argument when it comes to reforming public services. “Replacing a public monopoly with a private monopoly will not change much, and many of the problems we have seen with private provision of public services have been where government procurers have found themselves becoming, effectively, locked in via long-term contracts and find it difficult in practice to switch supplier once the contract ends," he said.

The OFT chief executive added that there is still “much to be done” to ensure that when competition takes place between the public and private sector it is on an equal footing, warning delegates that ensuring “competitive neutrality” between different providers has proved to be a significant stumbling block.

He said: “Major obstacles to competitive neutrality include incumbency advantages enjoyed by existing providers, which have an inside track on the costs of doing business, unrivalled access to key decision makers and controlling access to key facilities. There are also often differences in regulation, taxation and pensions treatment between private, third sector and state-owned firms.”

Fingleton warned that if such incumbent advantage was allowed to go unchallenged, there was a serious risk that “potential new markets go unexploited, that service delivery processes ossify and efficiency and growth are damaged”.

An OFT report published this week on competitive neutrality in mixed public/private markets highlighted examples of government departments implementing measures to achieve neutrality. These include the separation of commissioning, procurement and bidding functions into different departments to try and avoid conflicts of interest, or the application of an uplift on payroll costs to all public sector bids to address differences in pensions treatment.

The OFT chief added: “Given the ongoing difficulties we think there would be advantages in developing over-arching competitive neutrality principles that can be followed across the public sector and within which individual commissioners could then design sector specific approaches.”

Much more could be done to evaluate the effectiveness of initiatives to address competitive neutrality and whether they are delivering the intended outcomes, he said.

According to Fingleton, it is vital – if reform of public services is to be successful – that in addition to ensuring a level playing field, restrictions on the entry and exit from a market are minimised, and active consumer choice is given a key role in driving efficiency and innovation.