The Australian Government's Industry Commission Examines Competitive Tendering and Contracting by Public Sector Agencies

llTplth a vigorous debate emerging U/ on when and how competitive VY tendering and contracting should be used by the public sector, the Australian government asked its Industry Commission to examine these issues. The commission is the government's independent adviser on macroeconomic reform with a charter to take an economywide view. After a year-long public inquiry, the commission made 25 specific recommendations on how governments can make the best use of competitive tendering and contracting (CTC).On the first issue, when to use CTC, the debate largely revolves around the following: * Whether the formal separation between service specification and delivery enhances the achievement of policy goals; * Whether introducing competition among providers leads to more efficient and effective provision of services. The commission concluded that there are no simple answers to these questions. The suitability of a service for CTC will depend on the nature of the service, the circumstances of the responsible agency, and the potential market of nongovernment providers. However, the commission could see no rationale for declaring across government that some services were out of bounds for CTC, often described as core functions, and others were always suitable or noncore. Much of the debate on when, or indeed whether to use CTC has focused on its cost-effectiveness. Key issues are: * Can CTC provide cost savings that are maintained in the long term? * Are any cost savings the result of unintended reductions in quality? * Do savings largely represent efficiency gains or are they simply transfers from one group to another? After examining the Australian and international evidence, the commission concluded that CTC generally reduces costs, although there are instances where costs have increased. The commission also found that quality has improved under CTC in many cases, and declined in others, but there is no systemic reason to expect a decline in quality when CTC is done well. A full evaluation of CTC needs to take into account how the effects feed through the economy. The magnitude of the economywide effects of contracting depends on several factors. General equilibrium modelling by the commission suggests that for Australia the long-term gains might be in the range of 0.3 to 1.7 percent of GDP a year.