COMPETITIVE TENDERING IN UK HEALTH and LOCAL AUTHORITIES: WHAT HAPPENS TO THE QUALITY OF SERVICES?
| Date | 01 November 1995 |
| Published date | 01 November 1995 |
| Author | Robert McMaster |
| DOI | http://doi.org/10.1111/j.1467-9485.1995.tb01167.x |
Srornsh
Journal
of
Polirical
Econonty.
Vol. 42,
No.
4.
November
19YS
0
Scottish Economic Society
1995.
Published by Blackwell Publishen. 108 Cowley Road, Oxford
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IJF.
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COMPETITIVE TENDERING IN
UK
HEALTH
AND LOCAL AUTHORITIES: WHAT HAPPENS
TO THE QUALITY
OF
SERVICES?
Robert
McMaster'
I
INTRODUCTION
UK
Central Government advocates competitive tendering (CT) of health and
local authority activities as a vehicle for attaining greater efficiency in the
allocation of resources. The argument
runs
that by subjecting auxiliary health
and local authority services to external competition those activities will be more
efficiently delivered thereby releasing resources for other welfare services, such
as patient care. Health and local authorities have been compelled to submit
various defined activities to external rivalry through Compulsory Competitive
Tendering (CCT) legislation (Local Government Act,
1988
applying to local
authorities and bodies such as new town development corporations, and
HC(83)18
and
1983(GEN)13
applying to health authorities in England and
Wales and Scotland respectively). CCT has acted as a catalyst for further
central government initiatives, such as market testing and the creation of the
NHS internal market. Collectively those policy initiatives represent
a
shift in the
way in which state services are delivered. The emphasis has changed from the
state as welfare provider to the state as welfare enabler through contract
provision.
The economics literature on CT in the
UK
tends to be confined to the
empirical investigation of the extent of cost savings. Examples include the
well-cited papers of Domberger
et
ul.
(1986, 1987),
who concluded that
considerable cost savings were evident in the tendering of refuse collection and
hospital domestic services. Other studies, such as Judge and Knapp
(1985),
Knapp
(1986),
Milne
(1987),
Milne and McGee
(1992),
and Szymanski and
Willuns
(1993)
have also commented on the cost saving potential of contract-
ing. An exception to this trend is a recent paper by Domberger and Hensher
(1993),
who investigate the relationship between contract characteristics and
performance in Australian public sector tendering.
At a more theoretical level the implementation of CT can
be
viewed as a
resolution of
an
underlying agency problem. Agency theory (Jensen and
MecMing,
1976;
Fama and Jensen,
1983;
inter
ah)
demonstrates that the
division of ownership and control can detract from profit maximising potential,
University
of
Akrdeen
409
410
ROBERT
MCMASTER
as agents pursue their own objectives as opposed to those of their principals’.
The problem is resolved through market pressure, particularly the capital
market, adjusting agents’ incentives and bonding their interests to those of their
principals’ (Fama and Jensen, 1983).
Property
rights theorists
(Furubotn
and
Pejovich, 1972; De Alessi, 1980) contend that the absence of any capital market
in state activities renders the state intrinsically inefficient. Without the right to
sell all property rights principals have limited ability, and hence incentive, to
prevent agent discretion and shrking.
Two agency based approaches provide some theoretical insight as to how the
perceived agency problem
in
state provision may be resolved. The first
of
the
approaches, the Virginia or Public Choice School (PC), presents a model of
bureaucracy based on the managerial discretion models of the 1950s and
60s.
The PC model predicts that the state is both allocatively (Niskanen, 1971) and
X-inefficient (Migue and Belanger, 1974; Orzechowski, 1977; Peacock, 1983),
due to underlying informational asymmetries of the ‘bureaucratic environment’,
favouring agents. State agents are
thus
less meterable than their private sector
counterparts.
This
difference is redressed by submitting bureau activities to
competition; additional information generated, prevents incumbent agents from
exploiting their underlying information advantage. Competition for state
services thus serves as
an
efficiency-enhancing mechanism. However, the
managerial discretion approach has been superseded, to some extent, by the
New Institutional Economics (NIE). The NIE examination
of
institutional
choice is of particular relevance to the issue of competitive tendering and the
agency problem.
The central tenet of institutional choice in the
NIE
turns on a comparative
analysis of alternative institutional arrangements (Masten
et
a!.,
1991). The
appropriate governance structure is determined by which of the alternatives
minimises transaction costs (Williamson, 1985, p.
26.
1993, p. 125). The
agency problem in the ME, particularly the Williamsonian variant, is manifest
in terms of agent ‘opportunism’ and informational asymmetries, which are
determined by the degree of asset specificity in
a
transaction (Williamson,
1985, p.
32).
Where idiosyncratic assets have to
be
employed, contract
durations are lengthened, and individual bounded rationality implies that such
contracts are incomplete. A possible hold-up situation arises whereby opportun-
istic individuals can exploit any informational advantages. Opportunism, then,
raises transaction costs. Transactions involving highly specific assets must be
supported by sophisticated governance arrangements which attenuate opportun-
istic potential. Williamson (1985) maintains that transactions requiring
idiosyncratic assets should
be
conducted internally, for example through vertical
integration. Lower specificity implies less sophsticated governance and some
form of market exchange. Picot and Wolff (1994) have applied the William-
sonian framework to the (German) state sector to ‘develop a set of (transaction
cost minimising) rules’. The notion of tendering for activities involving non-
specific assets was forcefully made.
Such a contracmian approach, however, provides only a partial explanation of
institutional choice (Hodgson, 1988; Simon, 1991; Foss, 1993;
inter
ah).
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