Public Services Management: Fair play wanted on pricing of public contracts: Local authorities fear higher costs and falling standards unless collusion by private firms is checked, writes Paul Gosling

COMPANIES winning public contracts are organising themselves into cartels to rig prices and divide work, according to an investigation by the Office of Fair Trading.

The OFT looked at grounds maintenance contracts awarded by the Property Services Agency and concluded that 11 companies - which between them won 40 per cent of such PSA contracts - had entered into restrictive trading agreements. The OFT described it as 'a secret price-rigging and market- sharing agreement', which appeared to have operated since at least 1976.

Sir Bryan Carsberg, the Director General of Fair Trading, said: 'Collusion and lack of competition between tenderers inevitably lead to higher prices and poorer services, and I consider agreements to fix prices and share markets as very serious breaches of the law.'

The investigation found that contractors discussed between themselves invitations to tender issued by the PSA, and agreed which of them should submit tenders, and at what prices.

A statement made to the OFT by Mr J C Evans, director of Cliff Evans (Knockin) Ltd, a leading contractor with the PSA, said: 'An informal understanding evolved over a number of years from about 1978 whereby the companies agreed that they would not generally compete with each other for Property Services Agency contracts relating to ground maintenance work where one of them was the holder of the existing contract to supply those services and wished, or might be expected to wish, to retain the contract.'

The agreement has been referred to the Restrictive Practices Court for a ruling on whether it acts against the public interest. The companies named by Mr Evans were Basil H Childs, Tyler Environmental and Mitchell & Struthers (Contracts). Others named by the OFT were G Burley & Sons, R Hewison & Sons, Landscape Maintenance, J V Strong & Company, Tonrin Contractors, Turfsoil, and Welbourn Sportsgrounds.

Since the OFT released details last August of its investigation, the Association of London Authorities has asked it to look into possible restrictive practices in grounds maintenance in local authority contracts.

An ALA study found that seven of the companies named by the OFT were leading contractors with local authorities. Alan Taylor, employment and environment officer at the ALA, said: 'Typically, we found that one tender was priced at two- thirds of that of the direct services organisation (DSO), with the others twice that of the DSO, which is staggering. It doesn't prove anything about motive, but it is disturbing.'

The ALA's report found that there is very limited competition for grounds maintenance contracts. 'It can be concluded that the market is dominated by a limited number of firms. Six firms is a small number when the number of contracts advertised is so large. It is evident that there is a classically weak market, with the limited number of private firms producing a low probability of them competing against one another. Therefore the market conditions are unlikely to lead to long-term competitive pressures keeping prices down. Instead there is the danger of higher prices and falling standards,' the report said.

Looking at 58 contracts, the ALA concluded that ''in only four cases did major firms compete against one another at all closely in terms of price'. In 12 cases big firms did compete, but without being price-competitive. In 18 instances only one large firm tendered. In 19 there were no bids from big firms. The ALA also found that on many occasions the large firms expressed interest in bidding and were invited to tender, but failed to do so. The association's prime concern is that an initial loss-leader tender could force out a local authority's own DSO, which acts as a price regulator while it exists. Tenders could rise steeply in subsequent contract awards.

'The OFT has now replied and makes the reasonable point that it proves nothing about motives,' Mr Taylor said. 'They add that they can't do anything without us naming the companies, which we can't do without permission from our members, as the information has come from confidential reports. We don't know whether (the member authorities) will (give permission).'

The Local Government Management Board submitted material from its database on council contracts to the OFT during the PSA investigation. This helps to have details on all public contracts cross-referenced. Any OFT investigation of the pattern of tendering for council contracts would win the full co-operation of the local authority associations, said the LGMB's Jon Sutcliffe, who runs its CCT (compulsory competitive tendering) advisory service.

Although investigations have centred on grounds maintenance contracts, there is greater competition in this sector than in most others. In London there were 2.5 ground maintenance tenders per contract, compared with 1.8 for building cleaning, and just 1.2 tenders per contract in welfare catering and leisure management. This indicates there is little private-sector interest in bidding against DSOs for some types of contract, and little competition within the private sector for others. Competition is stronger outside London, the most competitive sectors being building cleaning, with 4.2 tenders per contract, and grounds maintenance with 4.1 per contract.

Representatives of all but two of the companies named by the OFT were either unavailable or declined to comment.

Ken Hewison, a partner in

R Hewison, said the company did not accept the findings of the OFT investigation. 'It's not true, basically,' he said.

Jeremy Sleeman, managing director of G Burley & Sons, stressed that his company had only one local authority contract in London, pre-dating CCT. 'We're still waiting to see the response of the Restrictive Practices Court, which could be up to two years hence. We were horrified by the report, and made a full response to the OFT. We have been linked to larger companies. It would not be fair to say that we reject the report. We say we were implicated quite innocently. The facts that emerged show a different picture from that we thought we were involved in.'

Mr Sutcliffe said that the question of propriety in public- sector contracts was increasingly important, as private firms were winning a much higher proportion of work. 'The DSOs are not picking up the current contracts: they are winning just 33 per cent of new contracts awarded. Government ministers still harp on that local authorities are cheating (for DSOs) to win, but they can't now say that. Few contracts are awarded on any basis other than to the lowest tenderer. It is probably unfair for the Government to allege local authority cheating without facilitating investigations into alleged unfair trading practices by outside contractors.'

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