As you are aware, the NSW Government is committed to achieving world class levels of performance in public sector service provision. It is essential that NSW Government administration be highly effective in pursuing its service objectives and be characterised by best practice levels of quality and efficiency.

That will require the application of a range of tools and techniques including implementation of service competition policy. Service competition policy harnesses competitive forces to drive performance improvement. It involves identifying and market testing suitable activities currently performed in-house and, where there are clear benefits in doing so, contracting with other parties to provide the services.

Savings obtained through the service competition policy are to be applied to achieving improvements in core services. Experience indicates that substantial savings can be achieved without loss of quality of service or access and equity for clients. Organisations making real savings through market testing and contracting will be allowed to retain those savings for their core priority services.

The policy was announced in the June 1995 Financial Statement by the Treasurer and summarised in the Premier's Memorandum to Ministers 95-36 issued on 4th September, 1995. The purpose of this circular is to further elaborate on the policy and its implications.

Focus to be on Contestable Activities

The policy is aimed particularly at contestable activities performed by budget-sector agencies. Other government organisations should ensure that similar strategies are considered in their business planning.

A contestable activity is one which does not need to be performed by the organisation's own staff and could be opened to competition. It may be administrative or service provision and will usually be characterised by clarity of outputs and the ability to objectively measure performance including quality.

For many contestable activities, the course of inviting competitive tenders will be the appropriate means of pursuing best practice levels of performance.

The selection of activities for opening to competitive tender will be a matter for the CEO, Minister or Cabinet, as appropriate to the strategic implications in each case.

In-House Options to be Fully Assessed

The benefits of market testing and contracting arise from competition and not necessarily from whether the private or public sector undertakes the function. In recognition of this and to ensure adequate protection for employees, the option of contracting to in-house service providers must be fully assessed and in-house providers should be given every opportunity to compete on an equal footing with external contractors. This will require the application of competitive neutrality policy including proper and accurate costing of in-house options. It may also mean organising in-house providers into separate business units to compete for contracts.

As well, preference amongst the private sector bidders should be given to proposals which provide employment opportunities for existing staff, subject to satisfaction of value for money and other relevant requirements. This and any likelihood of an inhouse bid should be made clear to tenderers.

Innovation to be Fostered

Innovation is to be fostered by ensuring that specifications are focused on outputs and standards, rather than processes. This will enable the agency to benefit from the experience, technology and ideas of bidders.

Implementation to be Planned and Monitored

It is the responsibility of CEOs to drive the implementation of the policy.

As part of their business planning, all budget-sector agencies are to incorporate processes to identify their contestable activities and consider their suitability for market testing and contracting. These processes may be combined with program evaluations, audits and similar activities.

Whilst all activities should be considered for suitability for market testing, an early emphasis should be placed on opportunities within corporate services as part of the complementary initiative to improve corporate service efficiency.

A high level view will be needed to identify the most rewarding opportunities in both corporate service and program areas. For example, market testing a complete function or a group of complementary functions and activities may offer far more potential than a focus on individual activities. The emphasis should be on identifying and achieving substantial benefits and not on generating paper.

It is essential that processes be sound, particularly in relation to the rigour of analyses undertaken, timely consultation with staff, competitive neutrality and impartiality in tender processes and the application of well developed skills in specification development, contract negotiation and contract management.

Progress over the whole of government will be monitored through surveys conducted by the Premier's Department. Selected post implementation audits will be undertaken both to check that the policy is being followed and to keep the appropriateness of policy under ongoing review.

Assistance to be Provided

The Premier's Department will act as a research and information provider to assist agencies with policy implementation. The Department has also made arrangements with other organisations for provision of publications, workshops and research.

Publications available from the Government Information Service (telephone 02 743 7200) include Contracting and Market Testing Policy, Competitive Tendering and Contracting Out Guidelines, Competitive Tendering and Contracting Out Costing Guidelines and Procurement and Disposal Guidelines. These have previously been distributed to organisations and will continue to apply subject to changes notified from time to time. The recently released Contracting Casebook is also available from the Government Information Service and contains studies of nine cases covering most facets of market testing including in-house bidding.

Workshops available through RIPAA (telephone 02 228 3705) include Decisions Leading to Contracting, The Tendering Process, How to Cost an In-House Activity, Managing Contractual Relationships, The Legal Pitfalls, and Lessons From Experience.

The CTC (Competitive Tendering and Contracting) Research Team of the Graduate School of Business located at the University of Sydney (02 550 8613) publishes the CTC Newsletter and will assist this Department with surveys, implementation reviews and research.

The Premier's Department is developing other forms of assistance and will be available to provide direct assistance with review processes in selected cases. Approaches should be made by CEOs or Ministers to Ms Anne Rein, Assistant Director-General, Premier's Department or to the Service, Performance and Operations Division Director for the relevant portfolio. The telephone number for general enquiries to Service, Performance and Operations Division is 02 228 4870.

(K.P. Baxter)
Director-General