Competing For State Contracts is Not Competition

Here in Britain, we hear the word competition a lot. Since Margaret Thatcher, there has been a general trend — in the name of competition — toward the selling-off of utilities such as water, railway, electricity and telecoms providers. More recently, there has been a trend toward government services being provided by private companies, such as the bungled Olympic security arrangements contracted out to multinational security giant G4S, as well as work capability assessments contracted out to French IT consultancy ATOS, and the contracting-out of some medical services.

The way this works is that the government provides the funding for services, which private sector companies then bid to undertake. This is also the way in which defence contractors have historically competed for defence contracts, a sector which is renowned worldwide for its profligacy, waste and inefficiency.

This is a bizarre arrangement. Competing for government contracts is nothing like the free market. In a true market environment businesses compete for the custom of individuals based on their ability to provide the best products and services. Individuals spend their money to satisfy their needs. New businesses can generally enter the marketplace at any time, and take business away from existing competitors. Competition is beautiful, because it allows economies to quickly adjust capital, labour and resource allocation to the preferences of society based on which goods and services people choose to purchase.

Under a model where private contractors compete for government cash, this is impossible because contractors are essentially bidding for a state-backed monopoly. State bureaucrats determining which contractor will get the money is not competition; there is no market mechanism, there are no consumer preferences. Contractors are just bidding for handouts from the taxpayers’ purse based on the preferences of economic planners. Consumers cannot take their custom elsewhere, because the custom is involuntarily coming out of their taxation.

This has also been the reality of privatisation. Although I am no fan of government-controlled industry, the reality of privatisation in the UK has been the transfer of state monopolies into private hands.

One very clear example of this is telecoms infrastructure. BT Openreach, an arm of the privatised BT, has a complete state-enforced monopoly on telephone exchanges. Other telecoms providers have to lease their infrastructure in order to operate.

And the same for railways; rail lines are sold off as monopolies for ten-year periods. For travellers who want to travel by rail from one destination to another, there is no competition; there is only a state-backed monopoly operating for private profit. No competition, only endless fare hikes, delays and a complete lack of market accountability as contractors take the government cash and do whatever they want.

Ultimately, the state-backed-monopoly model seems to manifest the worst of all worlds. Costs for taxpayers remain high, budget deficits continue to grow, and utilities remain inefficient and messy. The only difference appears to be that taxpayers’ money is now being funnelled off into corporate pockets.

A free society cannot be based on economic planners allocating resources based on a bidding process. A free society is based on the state letting society allocate resources based on the market for goods and services that people want and need.

18 thoughts on “Competing For State Contracts is Not Competition

  1. I tried to apply for a contract to provide grass cutting services to a local council. A chance to earn some money while enjoying the country air, and escape the monotony of paperwork.

    The terms of the tender require an operator so large it was not feasible. I complained to council and said you are pricing out smaller competitiors that keep the money in the community and could provide at a lower cost (Barriers to entry cause monopolisitic pricing power). Their excuse was they can’t manage the smaller operators. I said what happened to individual integrity to do a good job, and yearly tenders?

    No comment?

  2. As devils advocate, the people who award the contracts to the private contractors would argue that they selected the best value for money contractor so they are the individual consumer in this case, maintaining competition.

    Also generally working within this system with all the fraud and lies that are inherent within it, which you highlight in your blog, once someone becomes aware of them…it is impossible not to be dis-illusioned and to see criminals everywhere….it can ultimately destroy the system if we stop playing their games. I see corruption at all levels…the top private bankers to the small line managers of 1000 employee ‘public sector’ companies. Everyone it seems is out to milk the system with minimum input…a recipe for disaster.

    • Yo mo,
      The first step towards “resolution” is understanding each of our parts in the over-all system, then changing that behavior.

      In other words, we are all complicit in this pathetic economic system. The Elite were able to convince a great deal of the population that speculation is a prudent way to go about things, that goosing the necessities of life were the best way trap people in a convoluted web of their own greed.

      For example, take my home state of California. In many [if not most] areas, housing went from being merely unaffordable, to being a complete travesty, where, in some towns, over ninety percent of the residents could not afford to buy a home.

      The people who happened to own homes and were “beneficiaries” of the asset bubble(s) [albeit temporary, in many cases], were celebrating by taking all kinds of equity out of their property and buying every damn thing. Do you think anybody cared that an entire generation would not be able to afford a home? Hell no.

      When somebody buys a stock for their retirement account, desperately hoping that a greater fool will come along a bid it up, these people are playing this same corrupt game, buying into a system they know is seriously tainted, but, again, what the hell.

      So, it is people’s base desire to get something for nothing [it’s ultimate expression being the corporation] that drives this insane system of lying, cheating, stealing, etc., to the point where the entire thing has come crashing down.

      Much more important have been the personal crashes, people drawn into a miasma of deceit, corruption, and treachery at all levels of society.

  3. A very good post that crystallizes my own suspicions/concerns about the model of UK privatizations adopted since the 1980s and has been pursued by both the mainstream political parties.

    An additional factor worth noting is the growth of an entirely parasitical regulatory framework around the privatized entities. Just look at the ‘alphabet soup’ of regulatory bodies in the rail industry.

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  8. As a general rule, public funding of private enterprise (or privatisation of public assets) is a disaster across the board. Unfortunately it’s a mainstay of neo-con economics/politics (“stop Government waste”) and thus has been proceeding with enthusiasm since the late 70s/early 80s.

    In Australia we have the same problem with both the privatisation of infrastructure (telecoms, electricity, etc) and the ongoing use of giving public funds to private industry (here called Public-Private-Partnerships).

    However, you need to draw a distinction between the real infrastructure – the natural monopolies – and the complimentary products and services that leverage that infrastructure which can benefit from the competition of privatisation. In telecoms, the infrastructure is the poles and wires, which is the portion that should remain publicly owned and funded, with private companies able to purchase the use of it to provide their services. With rail, the infrastructure is the rails – private companies that wish to provide the trains to run services should be able to (subject to safety standards, etc). With power it is – like telecoms – the poles and wires. Private companies can then get into the generation or retail business.

    These models also have the benefit of better maintaining equality of access.

    • G’day Drsmithy, I am glad you agree with my view points on deregualtion in Australia,

      I do think that Corporatisation of Public assets is the best option, i.e. ROI and other KPI benchmarks set for Management of Government owned assets, rather than wholesale privatisation. I saw the waste in Australia Post. It is changing now under stronger Management, but there is room for improvement. The Public Private relationship of Citilink was wrong. It should have been State owned with a Toll. The cost of capital is lower for a sovereign than a Corporation.

      Buddy Rojek
      Australian Nationalist Party

    • Dr Smithy — I don’t really have any problem with infrastructure and natural monopolies being in public hands. A problem in the UK has been the privatisation not just of the services, but of the natural infrastructure too. Not only this, it has been notoriously difficult for new startups to be able to lease the natural infrastructure. The train lines all operate as monopolies. A new company could start using their own trains on the public railway lines — I don’t think that in theory there is anything to stop the government awarding a dual contract to two companies — but government has so far awarded the 10-year contracts as monopolies.

      Buddy — I don’t know the situation in Australia, but I would say be careful in trying to advocate corporatisation and privatisation of monopolies. Here in the UK the corruption and cost to the taxpayer seems to have been made worse in many cases.

      • My definition of Corporatisation is different to your understanding of it. It is not a Private company being directed by the State, it is the State, with professional Managers from a corporate background who are driven by profit and efficiency principles.
        It is the benefit of State/Public sharing the profit with the increase in efficiency. The dividend goes to the people instead of an offshore Corporate investor,

  9. My point still stands, BT do not have a monopoly on exchanges. One organisation obviously has to own and maintain particular parts of infrastructure, be it gas, power or telecomms.

  10. Where do BT have a monopoly in London? Other operators have their own ducts and cables so the article is wrong and is 2.5 years old, so what has happened? Do Virgin Media use BT exchanges to operate?

    This topic suffers from limited knowledge…

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