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.