A report, commissioned by the OFT to look into public procurement in various sectors including waste, could lead to an OFT investigation next year if recommendations are acted on.
Significant concerns raised by the report include local authorities favouring Direct Service Organisations in the tender process; that bidders for tenders enjoy advantages if they hold the existing contract; and that large contracts restrict the number of organisations able to bid for them.
The report, carried out by London-based consultants dot-econ also suggests the tender process could be vulnerable to collusion among waste management companies, and that industry consolidation could be reducing the competition for tenders.
Commenting on the report, a spokeswoman told letsrecycle.com that the OFT is now looking into the recommendations and could undertake investigations next year. The spokeswoman said: “At the moment, we are undertaking further contextual analysis of the document. We will make an announcement on the recommendations early next year.”
Self-supply
The report suggests that comparing Britain to other countries in Europe that use competitive tendering for local authority waste contracts, councils here appear to favour in-house teams, Direct Service Organisations (DSOs).
It pointed out that in Denmark, 85% of council waste services are private sector contracts, in Norway the figure is 73% and in Sweden 63%. In the UK, the figure is closer to 40% for waste collection services and 60% for waste disposal contracts, the report said.
“The prevalence of self-supply might well indicate a preference of local authorities to award contracts to the DSOs and to discriminate in favour of in-house bids, it said.
Some local authorities, however, told the OFT researchers that the high proportion of publicly-held contracts in the UK is because waste companies are “cherry picking the best contracts”. But, the study said that waste companies are unlikely to go for local authority contracts where they believe in-house bids are “very likely” to win.
Entry barriers
The second significant concern raised by the OFT report was that “Given the size of contracts awarded by the public sector, there may be only a few firms capable of delivering the services required.”
This could be despite smaller companies being able to carry out their own specialist operations more cost effectively than a larger company undertaking the same work as part of a larger contract, the report suggested.
To some extent, central government policy is to blame for this, but it can be a myth that larger contracts lead to economies of scale – particularly in waste collection, the report said. Where a settlement is larger than 50,000 inhabitants in size, costs increase proportionately to population size. The report recommended that local authorities could do more to encourage sub-contracting as part of tender applications.
Incumbency
Another barrier reducing competition for tenders is the “incumbency advantage”, where existing waste contractors gain a head start in the bidding process because of their existing relationship with a council, existing local facilities and knowledge of the local operation.
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