Public sector procurement - summary terms of reference

Background

The UK public sector is diverse in scope and purchases goods and services in a wide range of markets. In the majority of cases, these transactions are unlikely to have an impact on competition. Even where the public sector has a degree of purchasing power, it will have a strong incentive to ensure that supplier markets remain competitive so that it can secure good value for money. In addition, public procurement may be able to enhance the benefits of competition through, for example, openness to new and innovative ideas. Nonetheless there may be markets where public procurement is dampening competition. One possible example is whether public procurement might be restricting entry by new firms.

This piece of research is being commissioned by the Markets and Policy Initiatives (MPI) division of the OFT. MPI complements and supports enforcement teams by taking a broad look at how markets work. It identifies areas for study and reports on markets where concerns have been raised but where enforcement action under the Competition Act 1998 does not, at first sight, appear to be the most appropriate response.

Research objectives

The objectives of the proposed research are to:

• conduct an in-depth economic analysis of when and how public sector procurement might affect competition
  
• identify particular markets where public sector procurement is likely to be affecting competition and which the OFT should consider further.

The OFT expects the research to inform both the OFT and other parts of Government about the relationships between public sector procurement and competition and to highlight areas where further market studies should be conducted.

Questions to be considered within the research project include:

• to what extent is public sector buyer power different from private sector buyer power?  How do the competition concerns differ when the buyer is in the public rather than the private sector?
  
• are there specific forms of tendering that exacerbate competition concerns? Are there likely to be significant efficiency gains from such tendering? How can these be weighed against the costs? In what sort of markets might one expect the costs to exceed the efficiency benefits?
  
• when is the exclusion of small firms (or firms with small market shares) likely to be a significant issue?

This research is expected to last three months and to be completed by July 2004.

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