To tender or not: how transparent is the process?

05 Jun 2015

Professor David Hensher

There is a general sense in many government circles that society is better off if service contracts are put out to competitive tender, for this ensures value for money which comes out of the taxpayers’ purse. But is this always the case? What if the incumbent is doing a great job? Why should we disrupt (or risk) the continuity of good service provision because of some possibly strong simplistic view that the market (and it assumption of full knowledge surrounding all bidders) will always deliver the best outcome?

We now know that the cost of undertaking a tendering exercise in contrast to negotiation with an incumbent who has satisfied all the required key performance indicators adds significant transaction and transition costs. For example, in Adelaide, over $12m extra costs (on awarded contracts of approximately $750m over 5 years) associated with tendered bus contracting ($5m for government and $7m for operators) compared to negotiation were incurred in an annual assessment leading to renewal of contracts simply in the administration of the process and changeover matters (for government and operators), money that might be better spent on improved services. Before deciding if one could claw back this amount and some more from a lower bid price through tendering, one has to also add in additional risks associated with potential (and known real)  disruption when there is a transition from an existing operator to a new operator.

We believe from research that this could be as much as an additional 10 percent mark up and should be factored into the assessment of offer prices as a way of neutralising the relative risk and uncertainty in deliverable outcomes. We suspect that the tender assessment committees know this but ignore it. The implication is that this is a cost of society and if we believe in value for money as the overall basis of assessing the welfare benefits to the community, then the lowest offer price may not cut the mustard.

So where does this leave us in practical terms? If transparency is the basis of justifying a course of assessment action, then ignoring this important matter is effectively covering up a real cost, and it violates the notion of transparent government. Society might well be justified in raising a concern about whether those looking after our interests are actually doing so? We should factor these costs in and do the comparison which may still result in the same outcome as before, but at least we can then have a straight face and say the assessment is based on a truly level playing field. This can be broadened to a more pressing concern about the institutional arrangements in place that are used in ranking (often a narrow set of) alternatives (using some form of Cost Benefit Analysis), and how this might be improved.