What is compulsory competitive tendering?
Compulsory competitive tendering (CCT) is not new. Since 1980 many manual services operated by local authorities have been let out to private competition. Within the central government sector – both the Civil Service and NHS – the search for “value for money” through “market testing”, is now well established. The momentum towards reducing the size of local government and taking the politics out of the management of service delivery, the concept of the local authority acting principally as an enabling authority, has increased in pace and is likely to continue.
This might be seen as part of the present government’s long-established desire for privatisation and a reduction in the public sector generally and, although the philosophy might seem to run counter to the vision of the Labour party, initial resistance appears to be declining as CCT becomes increasingly institutionalised and most commentators expect its continuance irrespective of government hue.
Clearly CCT has created conflict between the major vested interests – employers, managers and contractors – and recent legislation has sought to clarify the rules governing the process. With effect from April 1996 CCT is to be extended to a range of professional services, including construction and property services, and this will have major implications for surveying practitioners in both the private and public sectors.
Definitions
CCT can be defined as the process of exposure to competition to be followed by a local authority before it can allow its staff to carry out work in categories defined by the legislation. For CCT to be effective in providing real opportunities for outside contractors to tender successfully it has been necessary to introduce extensive regulations to prevent anti-competitive behaviour. Market testing within central government departments does not require enabling legislation and is the responsibility of the minister concerned and is less subject to regulatory mechanisms. In the local government sector, understandable resistance and a desire to seek out and exploit loopholes has resulted in a stringent regulatory framework.
CCT requires specific legislation and this identifies defined authorities and defined activities to be included. Defined authorities are the public bodies which must comply with CCT and, in addition to local authorities, these include urban development authorities, new towns, police and fire authorities and metropolitan transport authorities. Defined activities cover refuse, cleaning and other manual services (1988 Act), extended to cover a range of professional services: legal, information technology, finance and corporate administration as well as construction-related services (1992 Act).
Construction-related services include property management, architecture, quantity surveying, engineering and landscape architecture. Property management services include the management of non-residential property holdings and the operational management of buildings including energy management and commercial estate management. The latest phase begins a three-year rolling programme with the London boroughs and Metropolitan districts commencing in April 1996. From then, Direct Service Organisations (DSOs) wishing to continue to provide these services above a de minimus threshold, must be subjected to competition. DSOs have been defined as “the staff employed by the authority itself . . . the contractor side of the authority, operating on a trading basis with client departments".
Legislative background
The Local Government Planning and Land Act 1980 required the tendering of construction and highways services. The Act of 1988 extended this to cover other blue-collar services such as refuse collection, street-cleaning and vehicle maintenance. The 1991 White Paper, Competing for Quality, announced the intention to broaden the scope of CCT to include white-collar services, an intention now enshrined in the Local Government Act 1992 and the Local Government (Direct Service Organisations) (Competition) Regulations of 1993 which also defined the concept of anti-competitive behaviour.
In addition to UK legislation, it is necessary to take account of the European dimension. EC Directives exist to ensure fair competition between suppliers of goods and service. The EC Services Procurement Directive 92/50 of 1993 covers advertisement, contracting procedures, the award of contracts, and specification and standards of service. This is reflected in the UK Public Service Contracts Regulations SI 1993/3228. The EC Acquired Rights Directive (1977) was brought into UK law by the Transfer of Undertakings (Protection of Employment) Regulations (TUPE) of 1981. The latter requires that, where a commercial venture is taken over by another employer, the new employer inherits responsibility in relation to staff. This issue has been the subject of considerable debate and legal action, but there now seems to be a general consensus that TUPE does apply to CCT and will require successful tenderers to take on existing staff on the same terms and conditions.
The rules
This and other legislation, taken together with DOE directions such as the DOE Guidance Notes CCT for Construction and Property Services, 1994, set out the rules which apply to the CCT process.
Within the area of defined services, authorities cannot keep more than 35% or £450,000 annual value in-house, whichever is the greater. Services they wish to continue to deliver must be demonstrated to be cost-effective by comparison with bids from the private sector. Where the authority has no intention of retaining work above these levels, CCT does not apply and the work can be contracted out in whatever way is deemed appropriate. That an authority is allowed to retain this proportion is driven by the need to preserve their status as the “intelligent client” to monitor and interpret those contracts which are tendered out.
The DOE guidelines are detailed and specific. Their intention is to ensure fair competition and a means of evaluating bids which ensures a level playing field. The requirements include the need for competing DSOs to make a financial return to equate their position with the external bidder. Contracts have to be suitably packaged to ensure the best response (a bit like “prudent lotting”); it would otherwise be easy for the authority to manipulate the size and range of work to make it unattractive to outside bidders.
Contracts have to provide sufficient term periods having regard to the size of the contract, and contain no onerous conditions. Contracts can specify only standards of work, they cannot prescribe methods. Outside bidders cannot be obliged to use local authority accommodation and the value of such assets is credited against the tender. Where they are used they should be available at the same cost. Local authorities must advertise their intention to let a contract, making a detailed specification of the service available to all interested parties. In short they are required “not to act in a manner having the effect or likely to have the effect of restricting, distorting or preventing competition”.
Evaluation
Evaluation of tenders has to be carried out by the authority but at arm’s length from the DSO. The DOE criteria for market testing of central government services simply requires “the best combination of quality and price” and, clearly, local authorities are required to seek the best contractor for the job in terms of price, value for money and quality, ignoring any non-commercial considerations.
The precise criteria defining value for money are not specified, but, in practice, include a wide range – tender price, the external costs of awarding the contract such as redundancy costs, technical considerations, financial standing, experience, local knowledge and so on – but price is clearly the overriding factor.
Effects of CCT
It is clear that CCT has affected the organisation of defined activities within local authorities preparing for the legislation. In some cases in-house teams have been taken over by private-sector firms taking the work outside the scope of CCT. This would simply involve the transfer of existing staff and assets to an existing private sector firm. This process is known as hosting. Local authorities could contract out certain elements to ensure that the remaining work remains below the thresholds. Others might avoid CCT by management buy-outs.
Whatever approach is taken, one of the major effects has been the need to distinguish between the client and contractor, between procurement and delivery, which hitherto has been somewhat obscured within the public sector. Preparation for CCT requires the identification of separate business units. The client exists to support the elected members of the authority in terms of policy and strategy. The client role includes strategic management, budgeting, the definition of standards, quality monitoring and performance review. The consultant or contractor is concerned with the provision of services which, in construction and property management services, is likely to include the provision of technical reports, development and disposal appraisals, valuation and estate management services and the design, procurement and maintenance of buildings. The relationship between the client and internal service supplier is defined by a Service Level Agreement which provides specifications and charging mechanisms.
The DOE has commissioned research to identify the effects of CCT on local authorities as a consequence of the 1988 Act. These appear to be significant and include a widespread review of local authority structures as a whole (even those areas not subject to CCT). The separation of client and contractor functions outlined above is just one element. CCT has resulted in reviews of accounting, specification and monitoring procedures generally. It is claimed to have been responsible for improvements in practice, knowledge and standards with a refocusing on performance and output rather than direct service provision with better control of staff and other costs, clarification of responsibility and greater workforce flexibility identified as indirect benefits. Naturally, the DOE might be expected to find approval, but this research does reflect the views of those within the local authorities. This amounts to a significant change in culture and attitude.
There are, however, costs. The process itself is expensive and, while there have been reductions in the cost of service delivery, there are often increases in management costs. The separation of client and contractor has tended to extend lines of communication, creating further bureaucracy. It can, in some cases result, in an atmosphere of antagonism and conflict.
There are also more difficult philosophical questions about the effect of CCT on local democracy and the role of the elected member.
But the perception appears to be positive overall and the general view seems to be that the decline in local authority estates and the corresponding increase in the work carried out by the private sector looks set to continue. Most view CCT as a new business opportunity in a large and reliable long-term market with expanding potential, which is unlikely to be hampered by problems such as bad debt.
References
1Walsh K Competitive Tendering for Local Authority Services; Initial Experiences, DOE HMSO (1991).
2 ibid. and Walsh K & Davis H Competition and Service: The Impact of the Local Government Act 1988, DOE HMSO (1993).
For more detailed information on the CCT process, the reader is referred to:
Sparke A The Compulsory Competitive Tendering Guide, Butterworths 1993.
