Public‐Sector Outsourcing and Charging in‐house Bidders for their use of Capital

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Abstract
In the formal process of determining whether there are potential savings from contracting out, public‐sector agencies in Australia and Great Britain are required by various government‐issued guidelines to measure the relevant costs of in‐house activities and to compare these with external bids. The cost comparison methodology explained and demonstvated in some of the most rigorous of these published guidelines is mistaken in its treatment of the costs to agencies of owning and using capital assets. There are two distinct mistakes in the demonstrated treatment of capital costs, both adding to the apparent costs associated with in‐house capital, and hence to some degree tilting the analysis against acceptance of any in‐house bid.