[Condensed from Competitive Neutrality: Ensuring a Level Playing Field in Managed Competitions, RPPI How-to Guide #18, 1998.]

Increasingly, when governments decide to contract out services, in-house units are also given the opportunity to bid for providing the service. This model of public-private competition is often referred to as "managed competition." It has brought competition to many jurisdictions where public services had long been the exclusive domain of public monopolies, but increasingly, private providers are crying foul, arguing that the playing field is often tilted against them in public-private competitions.

For managed competition to be an effective tool to cut costs and increase efficiencies, an ample supply of private firms must be eager to bid against the public sector for the opportunity to deliver public services. This requires that the potential bidders be confident that the playing field will be level.

What Is Competitive Neutrality?

Competitive neutrality means designing a set of policies and legal arrangements ensuring that all individuals and organizations - public, for-profit, and nonprofit - are treated in an equal manner in the bidding process. To the extent possible, all protections and special privileges that public units usually enjoy over private firms simply by virtue of public-sector ownership should be removed, as should barriers that hamper the public-sector unit's ability to increase productivity and therefore effectively compete with the private sector.

To create a level playing field in a managed competition, the government must do many things that are not necessary if the service is contracted out only to private entities, including: determine the fully loaded costs of in-house service, build a firewall between the government as purchaser and the government as service provider, and make transparent any differences between the public and private bids.

Governments often do a poor job of ensuring competitive neutrality. Anti-competitive practices include: failing to fully cost out in-house services, requiring excessive performance bonds from private firms, rejecting lower bids from private firms, and permitting in-house teams to adjust their bids or proposals after seeing the private bids.

Needed: A Uniform Template for Managed Competition

When designing a managed-competition program, public officials should strive to ensure as much equality as possible for each component of the procurement process, ranging from determining current in-house costs to defining the consequences of performance failure. While it may not be possible to have absolute equality in each area, governments should strive to get as close as possible.

Currently, there are no real guidelines that lay out how governments should conduct fair public-private competitions. The result is that the rules of the game vary from city to city, county to county, and state to state (sometimes the rules even change during the course of individual procurements). The following guidelines can assist governments in achieving a level playing field in managed competitions.

Costing the Public-Sector Bid

• Bring in an objective third party to determine the department's true costs.
  
  
• Extend competition as completely as possible into the department.
  
  
• Allocate to the target department or service a portion of the overhead costs, based on its use of overhead support.
  
  
• Include depreciation costs, interest expenses on borrowed funds, and the cost of hiring outside consultants in any calculation of total costs.

Sealed Bids

• Subject in-house bidders to the same requirements concerning sealed bids as private bidders.

Subsidies

• Any subsidy should be available to both the in-house unit and external providers.

Qualifications

• Public units should not be automatically pre-qualified in the competition process.
  
  
• Consider the varying qualifications, technical, and managerial expertise of both public and private bidders when awarding the contracts.

Risk Valuation and Allocation

• Examine the issue of risk before embarking on a managed-competition project.
  
  
• Value and include in the public bid any risk allocated to the private sector in a transaction.

Performance Guarantees

• Establish provisions for loss sharing (as well as gain sharing) for the public units.
  
  
• Apply sanctions if the public team fails to achieve the service levels agreed upon at the promised price.
  
  
• Do not permit the in-house unit to bid in the next round if it exceeds its bid by some threshold amount.
  
  
• When possible, avoid requiring a performance bond from private bidders.

Preparing the In-House Units for Competition

• Give maximum flexibility to in-house units to re-engineer their operations.
  
  
• Don't set an arbitrary time period for re-engineering in-house operations and commencing a competition, but as a general rule, the period should be as short as possible and no more than two years.

Bidding on External Contracts

• Either prohibit or restrict in-house units from bidding for outside contracts in areas where a commercial market exists.
  
  
• If you choose to allow external bidding, do not provide the in-house units with any funding for capital or additional personnel that would be used for beefing up their operations for fulfilling outside contracts.

Using Consultants

• Use separate consultants to manage the competition process and assist the in-house team in preparing its bid.

Unnecessary Requirements

• Avoid saddling the contractor with government wage and benefit mandates.

Public-Private Joint Ventures

• Research the legality of public-private joint ventures.
  
  
• Allow both partners to share in the risks and rewards, but make sure the taxpayers are protected from any loss.

Creating the Right Institutions for Competitive Neutrality

• Organizationally split the government as purchaser from the government as provider.
  
  
• Give managers the flexibility to decide whether managed competition is appropriate on a case-by-case basis.
  
  
• Consider transforming winning public-sector bidders into corporatized or commercialized organizational forms.

If managed competition is to become a major tool for driving change and increasing efficiency in the public sector, then governments must do a better job of creating a level playing field between public and private bidders.

By following the set of common sense guidelines laid out above, governments at all levels can maximize the benefits of competition and minimize charges of unfair favoritism or discrimination from private and public bidders alike.