The process of securing government contracts discriminates against private companies and is holding back improvements to public services, the Confederation of British Industry (CBI) has alleged.
A new report from the pressure group warns that public procurement rules are biased in favour of public sector providers, leaving suppliers in the private sector and voluntary community at a severe disadvantage.
The CBI blames "muddled" regulation and an unfair tax code for creating the inequality and has called for a full inquiry to prevent "in-built biases" in the system from damaging the country's economic efficiency.
"The private, voluntary and public sectors have all raised this as an issue, so the system clearly isn't working as it should," said John Cridland, CBI deputy director-general.
He stressed that the disparity in public procurement prevents the government from making the best possible use of all providers and restrains its ability to reform public services, particularly health, education, social housing and local authority support services.
"There is also a real danger that providers will create structures for artificial reasons to get around arcane rules governing market entry, rather than creating partnerships that add public value," Cridland said.
The report places particular emphasis on reforming the VAT system which it claims has created an uncompetitive environment. Cridland said the current public procurement rules have developed a culture that has provided incentives for avoiding tax.
Public sector providers also often fail to fully account for their costs, making their bids more attractive to public sector organisations.
Cridland said the report is not intended to increase the range of services being opened up to competition but to ensure that the existing rules are clearer and fairer.
"A mixed economy can't succeed if the rules aren't fair for all providers," he added.
