WRITTEN BY Alan Bradbury
Competitive neutrality is about creating a level playing field between in-house and external tenderers in a tender process. It aims to eliminate resource allocation distortions which can arise when public entities participate in significant business activities. Competitive neutrality principles are therefore relevant when councils are undertaking a tender process and also wish to submit an in-house bid for the service. Applying competitive neutrality principles can encourage participation in a tender process. More competition generally increases the prospect of a council achieving a good value for money outcome and reduces the likelihood of a challenge to the outcome of a tender process. It is also appropriate for councils to consider the principles of competitive neutrality when they use internal cost data as a tender evaluation benchmark to ensure they are comparing like with like.
The Competition Principles Agreement underpins the National Competition Principles. Local councils are bound by this Agreement even though they are not a party to that document. The NSW Government has published three key guidance documents on competitive neutrality which are relevant to local councils:
The Policy Statement sets out the broad requirements of competitive neutrality as they apply to all government businesses at the State and Local level. The Guidelines are intended to assist local councils to decide when to engage in competitive tendering and outline the processes involved generally. The Neutrality Guide is designed to assist Local Councils to apply the requirements contained in the Policy Statement to their business activities.
Councils often participate in a competitive tender process to assist them to decide whether to transition from a model of public service provision to private service provision under contract. The Guidelines list a number of procurement areas in which councils regularly participate in competitive tendering. This includes waste and recycling collection, maintenance of council properties, roadworks and management of public facilities such as swimming pools, caravan parks and libraries. However, this list is not exhaustive. Depending on the in-house capabilities of the council, there may be other services for which it is appropriate that a council participate in a competitive tender process.
Under the Policy Statement, councils have an obligation to maintain competitive neutrality during a tender process for a business activity of a council in which the council also intends to submit an in-house bid.
When determining whether an activity is a business activity the Neutrality Guide requires a council to consider the nature of the activity, whether it is, or is likely to be, subject to competition from other providers and its importance to the council’s customers. Matters which indicate that an activity is not a business activity include where it is a small-scale activity included within a larger function of a council, or where it forms part of a community service function of the council. The Policy Statement identifies activities such as water supply, sewerage services, abattoirs and gas production and reticulation as business activities.
The competitive neutrality obligations which apply to a council will also depend on the income generated (or proposed to be generated) from the business activity which is being tendered for. The Neutrality Guide imposes different obligations depending on whether or not the annual sales turnover/annual gross operating income of the business activity is over or under $2 million. The competitive neutrality obligations imposed on a procurement for a Category 1 business activity ($2 million or over) are greater than those which apply for Category 2 business procurement (under $2 million). For Category 1 business activities it is expected that the benefits of applying competitive neutrality will outweigh the costs of doing so. For the procurement of a Category 2 business activity a council must still compete on the basis that they do not use their public sector position to gain an unfair advantage in the tender process, but they have flexibility in how they apply the Neutrality Guide. For example, councils have discretion to determine the extent to which the activity is separated from the other operations of the council, and need only adopt a full cost attribution where practicable. For Category 2 business activities, applying the principles of competitive neutrality on this flexible basis may still be helpful to encourage competition and reduce the likelihood of a challenge to a council’s decision to award the contract to any particular tenderer.
The first step is to consider when your council needs a new service, or an existing contract is coming to an end, is whether the Council may wish to participate in the tender process. It is important to identify this early in the process so that the Council can ensure that the in-house business unit is separated from the team running the tender process and that the relevant systems (such as the complaints handling system) are put in place prior to the release of the tender documents
Where a council is participating in a tender process then steps a council can take to implement the competitive neutrality principles include:
Additional detail on some of these steps is set out in the Neutrality Guide. For step by step guidance to assist with your council’s next procurement, please contact Alice Menyhart and the Local Government & Planning team.
We acknowledge that the content contained in this guide is, of course, general commentary only. It is not legal advice. Readers should contact us and receive our specific advice on the particular situation that concerns them.
Please note that the law detailed in this Essential Guide is correct as at 19 November 2018.
Our series of Essential Guides are comprehensive yet simple to understand guides on how to deal with certain legislation and problems that Local Government and Councils often face.
 Competition Policy Agreement 11 April 1995
 Clause 7 of the Competition Policy Agreement
 Competitive Tendering Guidelines January 1997 p.5
 Pricing & Costing for Council Businesses: A Guide to Competitive Neutrality (July 1997) p1.
 Policy Statement on the Application of Competitive Neutrality: Policy and Guidelines Paper (June 1996 and amended January 2002) p6.
 Pricing & Costing for Council Businesses: A Guide to Competitive Neutrality (July 1997) p3.
 Policy Statement on the Application of Competitive Neutrality: Policy and Guidelines Paper (June 1996 and amended January 2002) p4.