OFT highlights competition fears

20 October 2004
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21 October 2004 | Mark Whitehead

Big public-sector purchasing deals will come under the spotlight in an investigation by the Office of Fair Trading (OFT) following an inquiry into whether they could stifle competition among suppliers.

Nine sectors, including weapons manufacturing, health services, shipbuilding and pharmaceuticals were identified in an initial report as areas where there are fears of spending policy distorting the marketplace.

But it says public-sector spending - worth an estimated £117 billion a year - could also promote competition by grouping buyers together to mitigate the power of suppliers or encouraging new firms to bid for contracts. The OFT is carrying out further research before making recommendations for action early next year.

The initial findings come as central and local government, the NHS and other branches of the public sector grapple with implementation of the Gershon efficiency review, which identified £21.5 billion in savings, in part through improved purchasing.

It also comes amid fears that aggregation - combining several buyers to increase market power, as recommended by Gershon - could face legal challenges from smaller suppliers that may claim to have been squeezed out.

The OFT report, commissioned from external consultants, says heavy emphasis on saving money could lead to too much contract aggregation.

There may be concerns about "too much emphasis being given to short-term cost savings at the expense of maintaining competitiveness in the long term", it says.

The report says competition could be restricted by, for example, imposing very long contracts, overly restricting the number of participants allowed to take part in a tender process, or bundling too many contracts together.

It also notes that only 22 per cent of tenders allow bidders to bid for less than the entire contract, which could stifle innovation from smaller suppliers and limit procurement's ability to switch suppliers quickly when needed.

The Office of Government Commerce (OGC) has been pushing for more aggregating of requirements and has set up several large framework agreements including S-Cat, a legal services deal, launched in mid-2003.

Purchasers can use the contract to call on more than 30 legal firms that specialise in IT, property and services, construction and finance.

The OGC estimated that the contracts if used by departments could save £7 million over three years (see News, 9 September).


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