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Public Sector Contracting

September 9, 2009

Anyone who wants to study the effects of regulation might start with public procurement. It is a sector apparently fraught with failing contracts and massive project overruns. It is also a sector surrounded by rules and procedures designed to ensure open competition and ethical standards. Is there a connection between these two characteristics?

First, of course, we must establish whether the public sector does indeed suffer a disproportionate number of failures. The fact that public money is at stake, plus the level of transparency in democratic societies, means greater scrutiny and more publicity for government-funded projects. So far as I am aware, there is no specific evidence to show that the proportion of ‘troubled projects’ is higher in the public sector than it is in the private sector. But given the scale of many such projects, the level of failure and the resulting waste of resources is unacceptably high.

Second, there is evidence that public sector procurement policies carry a cost. A recent Rand Corporation report on EU public procurement (supported by research from IACCM) suggested a 28% price premium due to the risk-averse nature of public sector contracts.

And Governments themselves clearly believe that their procurement and contracting capabilities leave much to be desired. The Obama initiatives in contract reform are not the only example of growing government interest. Australia, Canada, New Zealand and the Scandinavian countries have all focused on this topic in recent times. In the UK, work has been led by the Office of Government Commerce, until recently largely depending on its powers of persuasion, but at last perhaps being given the resources to drive real improvement.

One issue with regulation is that it tends to drive out judgment and broader organizational competence. Those charged with managing the process become administrators rather than managers. To this is added the natural inclination in public sector agencies to avoid accountability – everyone (from the top down) wants to be able to point fingers elesewhere, so roles and responsibilities often remain vague and there is little incentive to build personal skills (except to achieve a higher salary).

The Institute for Public Policy Research recently illustrated this point when it highlighted the reasons for public sector underperformance: tolerance of underperforming staff, lack of training in specific skills, hostility to change.

In an era when so much is changing so fast, when success increasingly depends on the ability to manage collaborative projects, the rules surrounding public procurement must be updated. Rigid procedures are not the only way to enable proper scrutiny and rules are not the only way to establish and manage principles.

It is time to place greater demands on public sector employees, forcing them to develop professional competence in contracting and project delivery. For those that have the right talents (and many do), the introduction of more rigorous performance management will be welcome – especially if these are accompanied by criteria that enable objective oversight of ethical and moral principles and enable greater professional judgment.

Politicians are right to be focusing on this aspect of government performance. Major suppliers are right to make noises about the inefficiency of today’s practices. Taxpayers should be demanding rapid improvement. And those who question the wisdom of regulation should be pointing to the problems and weaknesses it has created in the public sector.

  1. Well timed article Tim. The impending cuts in government funding in the UK, whether or not the Labour party win the next general election is going to have a fundamental impact on the way that public sector organisations in the UK provide public services. Many believe that more services will need to be outsourced; which will increase the requirement to manage service provider contracts to control costs and ensure continuity of service – see here for additional commentary: – or here:
    for how Contract Management issues are coming to the fore in the US public sector.

  2. The history of public sector contracting is definitely not without its examples of fraud, waste and abuse, as well as incompetence, but it also has outstanding achievments, not well known, notwithstanding the very well publicized wrongs. There are many issues that impact public contracting, not the least in the US, are the many legislative mandates infused into the contracting process, which complicate any real reform efforts. It would be naive to assume that the Obama Administration could just simply improve public sector contracting without knowing the myriad of issues that have compiled over the long legislative history of public sector contracting. A process that is highly scrutinized by the media and highly politicized within the legislative branch, will not easily give up its sacred cows. It may be, in attempting such a reform, we are creating new ones.

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