Competition and Costs: Evidence from Competitive Tendering in the Scottish National Health Service
| Published date | 01 February 2004 |
| Author | Robert E. Wright,Robin G. Milne |
| DOI | http://doi.org/10.1111/j.0036-9292.2004.05101001.x |
| Date | 01 February 2004 |
COMPETITION AND COSTS:
EVIDENCE FROM COMPETITIVE
TENDERING IN THE SCOTTISH
NATIONAL HEALTH SERVICE
Robin G. Milne
n
and Robert E. Wright
nn
Abstract
This paper estimates the impact of competitive tendering on cleaning costs in
Scottish National Health Service hospitals. Unlike previous studies, which have
relied on cross-sectional data, a five-year balanced panel of 176 hospitals is used to
estimate a series of fixed effects regression models. These panel estimates suggest
that previous studies have likely over-estimated the cost-savings associated with
competitive tendering. The findings also suggest that the lower costs associated
with competitive tendering have more to do with auction theory than with any
intrinsic efficiency of the private sector.
I Intro ductio n
It was commonplace in the 1970s for support services in the British public sector
to be provided ‘in house’ by direct service organisations (DSOs). Control over
costs of a largely unionised workforce was exercised through the use of incentive
payment schemes, the publication of comparative data on unit costs, and
managers and supervisory staff. The arrival in 1979 of a succession of
Conservative Governments, initially under the leadership of Margaret Thatcher,
brought with it a broadly based policy to test the efficiency of these support
services by requiring them to be put out to tenderFa process usually referred to
as ‘competitive tendering’.
A distinctive feature of this experiment is that public bodies were expected to
follow the policy of competitive tendering as against ‘choosing to do so’. That is,
at the outset competitive tendering was ‘compulsory’ (Domberger and Rimmer,
1994). One of the earliest applications of these pseudo-privatisation exercises
was in National Health Service (NHS) hospitals, with the focus being on the
supply of support services such as cleaning, catering and laundering. The
economic motivation for competitive tendering was that subjecting these
n
University of Glasgow
nn
University of Stirling
Scottish Journal of Political Economy, Vol. 51, No. 1, February 2004
rScottish Economic Society 2004, Published by Blackwell Publishing, 9600 Garsington Road, Oxford OX4 2DQ, UK
and 350 Main Street, Malden, MA 02148, USA
1
activities to competition should result in services being delivered at a lower cost
thereby releasing resources for other services, such as patient care.
There have only been two studies that have attempted to estimate
econometrically the cost impact of competitive tendering on support services
in NHS hospitals. Domberger et al. (1987) pooled data on a large sample of
English hospitals (N=2,947) for two financial years (1984–86) and performed a
cross-section regression analysis which suggested that it reduces the costs
associated with supplying domestic services by about 20 per cent. Milne and
McGee (1992), using data on a smaller sample of hospitals specific to a single
English region covering the financial year 1985–86, concluded that the cost
savings associated with competitive tendering were even larger once recognition
is given to the effect of market testing on labour costs. Their cross-section
regression analysis confirms the National Audit Office report (1987) findings on
projected costsFthe actual costs saved tended to be much lower for catering
than for domestic services, in the order of 12% and 40%, respectively. Clearly
such effects are not small and have been used by the Government (including the
current Labour Government) to praise the cost saving advantages of privatising a
variety of public services.
The purpose of this paper is to estimate the impact of competitive tendering
on cleaning costs in Scottish NHS hospitals. The reminder of the paper is
organised as follows. Section II describes the institutional background in which
competitive tendering operated in Scotland and the United Kingdom. Section
III describes the data and the statistical models used. The results are presented in
Section IV. A discussion, along with concluding comments, follows in Section V.
The main conclusion is that previous studies that have relied on cross-section
data have likely over-estimated the cost-savings associated with competitive
tendering in the National Health Service.
II Insti tutiona l Background
Competitive tendering (CT) has been directed at local and central government
and the NHS. In the case of local government, statutory powers have been used.
The first Bill to be enacted under the new Conservative Government was the
Local Government Planning and Land Act (1980); though, as Walsh (1995,
p. 119) notes, its early appearance suggests some endorsement by the outgoing
Labour Government. The Act required local authorities to put building and
highways construction and maintenance work out to tender. The tasks covered
by CT was extended through the Local Government Act (1988) to include such
‘blue collar’ services as building cleaning, catering and refuse collection, though
contracts with a value of up to d100,000 were exempt from the requirement to
put out to tender. The range of services was further extended in 1995 to include
‘white collar’ jobs such as finance, personnel and information technology. There
were also exemptions for them, usually for contracts with values up to d300,000
(see LGMB, 1995, Appendix 4).
CT has been carried out more discretely, but probably more comprehen-
sively, in central government. One of the first exercises arose from a Rayner
ROBIN G. MILNE AND ROBERT E. WRIGHT2
rScottish Economic Society 2004
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