Government-to-Government Contracting: Stewardship,Agency, and Substitution

ABSTRACT

This paper provides empirical evidence detailing the distinctive nature of service delivery provided through contracts with other governments. The results of a survey of Ohio city and county managers both confirm and stand in contrast to implications derived from stewardship theory. Consistent with stewardship, our data demonstrate that contracts with public sector service partners generate less intensive monitoring by contracting governments than do services contracted with private entities. In contrast to stewardship theory, we find that contracting governments do not use other governments for services requiring intensive monitoring. In an era of accountability and results-oriented management, reliance on trust may not satisfy constituents who seek evidence of effective service delivery. The inability of the contracting government to affect another government's service delivery reduces the attractiveness of that government as a contracting partner. If the tools of stewardship prove to be inadequate, the imposition of carrots and sticks appropriate for a principal-agent relationship could undermine the trust central to stewardship. Given these tensions, it is not surprising that governments are contracting less with other governments.     

Is There a Future for Contracting in the Australian Public Sector?

Contracting has moved from the margins to the centre of public management. Significant sections of the public workforce, from benefits delivery to corporate services, now find their functions open to tender. Governments prefer to concentrate on policy analysis and development, leaving service delivery to the market. As purchasers rather than providers, governments are redefining the role and scope of the state. But are Australian governments ready for this shift to contracting? Do they possess the full array of control and reporting mechanisms necessary if contracting is to deliver its promised benefits? There are significant difficulties finding evidence that answers such questions. Yet on the basis of concerns discussed across Australian jurisdictions, it appears contracting has developed so quickly it outstrips the capacity of government to monitor what is happening, and so learn from mistakes. In time governments will become better at maintaining accountability for contracted functions, because experience reduces the risks of moral hazard.     

Nonprofit organizations as contracted local social service providers in eastern Europe and the Commonwealth of Independent States

Today nonprofit organizations (NPOs) are an important provider of social services in some countries in the eastern Europe‐CIS region. Based on field reports from seven countries in the region, we find that the pattern is highly variable, however; and only in central Europe and Croatia are local governments contracting with NPOs to deliver services. More commonly, local governments give grants to NPOs for this purpose. But in some countries local governments provide essentially no support to NPOs for social service delivery. This article outlines the case for NPOs being contracted as service providers, and inventories the current situation in the region with respect to local governments. It concludes with a discussion of the possible reasons for the low incidence of contracting by local governments with NPOs as service providers. Copyright © 2002 John Wiley & Sons, Ltd.     

Contractualism, Democracy and Ethics

Contractualism, as concept and practice, may be defined in different ways (Yeatman 1995, 1998). In this article I am concerned with contracting out or outsourcing as it is otherwise known. That is, I focus upon the process whereby functions undertaken formerly by government are now performed by private or voluntary organisations in a contractual relationship with public service departments and agencies. Whereas departments and agencies once provided a full panoply of services directly, government purchasers now select providers by tendering competitively for an expanding range of employment, education, health, social welfare and local government services. Contractualism, then, involves the recon-figuation of public service provision to favour quasi-commercial rather than bureaucratic forms.     

Caring, Controlling, Contracting and Counting: Governments and Non-profits in Community Services

Performance measurement and contracting out are central elements of new public management systems. At first sight these elements seem necessarily connected for reasons of accountability. However, for some kinds of services, implementation of conventional performance measurement systems may exacerbate tensions in contracting out. Using a case study of child and family welfare services in NSW, this paper shows that differences in the missions and operating modes of public and non-government community service providers are thrown into sharp relief by performance measurement, when observed from the perspective of practitioners in service-providing agencies. Practitioners perceive that their priorities in service provision differ sharply from those of the department funding their activities — and seeking to measure their performance. These findings pose challenges for the 'partnership' model now prevalent in community services provision.     

Outsourcing: Uncovering the Complexity of the Decision

ABSTRACT

Outsourcing is a phenomenon that, on the surface, is used to reduce costs and enable an organization to focus on its core competencies. In researching into outsourcing and whether this assumption holds true, this article focuses on public health organizations where outsourcing has been applied to both clinical and non-clinical services. In the cases observed, public sector managers assumed contracting would lower production costs for peripheral services whose outcomes could be easily measured and monitored. Clinical services were not usually outsourced because these core services were more difficult to measure. In implementing contracts for non-core services, decision makers' political and ideological objectives overshadowed management imperatives that are necessary for effective contract design and implementation, leading to poor service outcomes and little cost savings. Choosing the “right” services to contract does guarantee good outcomes such as lower costs and improved labor flexibility, but it is necessary to understand that optimum outcomes are only achievable if the service is clearly non-core, has measurable outcomes, and has low transaction frequency. It is also clear that outsourcing will not remove management problems; it simply adds another layer of complexity on top of managing staff who still provide the service.     

Government capacity to contract: health sector experience and lessons

Using case-study material of contracting for clinical and ancillary services in the health care sector of developing countries, this article examines the capacities required for successful contracting and the main constraints which developing country governments face in developing and implementing contractual arrangements. Required capacities differ according to the type of service being contracted and the nature of the contractor. Contracting for clinical as opposed to ancillary services poses considerably greater challenges in terms of the information required for monitoring and contract design. Yet, in some of the case-studies examined, problems arose owing to government's limited capacity to perform even very basic functions such as paying contractors in a timely manner and keeping records of contracts negotiated. The external environment within which contracting takes place is also critical; in particular, the case-studies indicate that contracts embedded in slow-moving, rule-ridden bureaucracies will face substantial constraints to successful implementation. The article suggests that governments need to assess required capacities on a service-by-service basis. For any successful contracting, basic administrative systems must be functioning. In addition, there should be development of guidelines for contracting, clear lines of communication between all agents involved in the contracting process, and regular evaluations of contractual arrangements. Finally, in cases where government has weak capacity, direct service provision may be a lower-risk delivery strategy. © 1998 John Wiley & Sons, Ltd.     

Municipalities’ Choices of Service Delivery Modes: The Influence of Service,Political, Governance,and Financial Characteristics

This study investigates the influence of service, political, governance, and financial characteristics on municipalities’ choices of four service delivery modes (in-house, inter-municipal cooperation, municipality-owned firm, and private firm) in the Dutch local government setting. The results show that as a service involves more asset specificity and more measurement difficulty, the likelihood that municipalities contract this service out is lower. Also, although some differences in preferences are found between boards of aldermen and municipal councils, for both political bodies a more right-wing political orientation is shown to be positively related to privatization of services. Furthermore, contracting out is also shown to be related to the governance model of municipalities, as services of municipalities that (in general) put relatively less emphasis on input, process, and output performance indicators, and more on outcome performance indicators, are more likely to be privatized. Finally, the results also show that services of municipalities that have a better financial position are less likely to be contracted out to a private firm.     

Moving Toward Mixed Service Delivery: The Growth in Schools Run by Non-Governmental Providers in Ten Cities

ABSTRACT

The delivery of public services by a mix of government and non-governmental organizations can offer many public policy benefits. When direct governmental provision has predominated, however, achieving these benefits requires building the supply of non-governmental service providers, which requires understanding how to improve their availability and quality. Integrating the literature on contracting and mixed delivery, this article specifies three categories of supply-building tactics: creating markets, buying smart, and managing markets. We then report on 10 cities that have nurtured the supply of schools run by non-governmental organizations. We find that cities’ supply-building efforts fall along a continuum from passive to active, and they employ some types of tactics (creating markets, buying smart) more than others (managing markets). Differential changes in market share across the cities we studied suggest a relationship between supply-building activities and movement from exclusive governmental provision toward the mixed delivery of schools. These findings suggest hypotheses for future research on governmental efforts to build the supply and capabilities of non-governmental service providers in order to pursue mixed service delivery.     

Competition and Collaboration in the Contracting of Family Relationship Centres1

In 2005–06 the Australian government announced the establishment of 65 Family Relationship Centres (FRCs) – a ‘gateway’ service assisting separating couples to reach agreement about child custodial arrangements without recourse to courts. The use of a multi‐round competitive contracting regime for the purpose of selecting service providers gave rise to a number of tensions amongst not‐for‐profit organisations (NFPOs) which, to a degree, compromised the full realisation of stated public policy aims. Reporting on fieldwork conducted with a sample of FRC operators, industry representatives and key government officials this article evaluates the extent to which the case of FRCs conforms to critiques commonly aired in the social policy literature that attribute various forms of policy failure and/or social capital depletion to the competitive contracting of human services within quasi‐markets. Although the competitive selection process imposed significant costs on the NFPOs involved, the program also exhibited substantial collaborative and collegial behaviours between government and NFPOs, thus diverging from the critique usually portrayed in the literature.     

Cream‐Skimming,Parking and Other Intended and Unintended Effects of High‐Powered,Performance‐Based Contracts

As performance‐based contracting in social welfare services continues to expand, concerns about potential unintended effects are also growing. We analyze the incentive effects of high‐powered, performance‐based contracts and their implications for program outcomes using panel data on Dutch cohorts of unemployed and disabled workers that were assigned to private social welfare providers in 2002 to 2005. We employ a difference‐in‐differences design that takes advantage of the fact that contracts gradually moved from partial performance‐contingent pay to full (100 percent) performance‐contingent contracting schemes. We develop explicit measures of selection into the programs and find evidence of cream skimming and other gaming activities on the part of providers, but little impact of these activities on program outcomes. Moving to a system with contract payments fully contingent on performance appears to increase job placements, but not job duration, for more readily employable workers.     

US state government privatization: Implications for social equity and inequality?

Privatization of state government services is commonplace, but our understanding of its effects is limited by data availability. We study the relationship between American state government contracting and public sector wages. Governments have used public sector employment to support a variety of goals, including social equity and economic development, but privatization, as a new public management (NPM) reform, may shift the focus. Our empirical analysis shows that state privatization of service delivery is associated with decreases in the public sector wage premium, but that these effects are not driven by gender, race, or low-levels of educational attainment. The fidelity of the implementation to NPM values conditions these effects. We also find that contracting service delivery is associated with a lower public sector wage premium for middle-class workers.     

Contract–Management Capacity in Municipal and County Governments

Under pressure to do more with less, governments across the country have moved from direct service provision to providing services by contract. Proponents argue that contracting can reduce costs and improve flexibility and customer satisfaction. Critics point to a growing number of failed contracts, arguing there are numerous pitfalls associated with contracting. Missing from these debates is a discussion of how governments' managerial capacity can improve contract performance. In this article, we identify specific capacities that governments can use to harness the promise of contracting while avoiding its pitfalls. We present analyses of data on municipal and county government contracting activities that show how governments invest in contract– management capacity in response to several internal and external threats to effective contract performance. Because government investment in contract–management capacity is uneven—that is, some governments invest in less capacity even when circumstances would call for more—our analyses may help to explain why some contract arrangements are more successful than others.     

Contracting for management: Assessing management capacity under alternative service delivery arrangements

Contracting critics suggest that when governments outsource, they reduce their capacity to produce services and manage service delivery. In this paper, we decompose the service delivery decision into service production and service management components. When governments contract for service production, they may also choose to contract for a portion of service delivery management. Studies that only compare the management activities of contracting and direct service delivery governments, without examining the management activities contracted to vendors, are likely to be incomplete and biased. Drawing on a unique survey of governmental refuse collection service directors, matched with a survey of refuse collection vendors operating under municipal contracts, we show that the vendors' management activities offset the decline in management capacity that occurs when governments contract for service delivery for this particular service. Governments can “buy” management activities when contracting for service production. © 2006 by the Association for Public Policy Analysis and Management     

The Mythology of Privatization in Contracting for Social Services

States and municipalities have privatized services in an effort to improve their cost‐effectiveness and quality. Competition provides the logical foundation for an expectation of cost savings and quality improvements, but competition does not exist in many local marketplaces—especially in the social services, where governments contract primarily with nonprofit organizations. As government increases its use of contracting, it simultaneously reduces its own public‐management capacity, imperiling its ability to be a smart buyer of contracted goods and services. This article examines two questions about the privatization of social services based on interviews conducted with public and nonprofit managers in New York state: Does social services contracting exist in a competitive environment? And do county governments have enough public‐management capacity to contract effectively for social services? The findings suggest an absence of competition and public‐management capacity, raising the question of why governments contract when these conditions are not met.     

Reassessing Privatization Strategies 25 Years Later: Revisiting Perry and Babitsky's Comparative Performance Study of Urban Bus Transit Services

Privatization appeals to citizen and politician desires for more cost-effective methods of service delivery. For this reason, it is important for public administrators to know when gains can be made by contracting out or privatizing services and when it is better to keep service provision in house. This article assesses the viability of contracting out and privatization of transit services. Following up on the 1986 work of James Perry and Timlynn Babitsky, which used data from the early 1980s, the authors revisit whether certain service delivery arrangements are more efficient and effective than others in the provision of transit services. Twenty-five years later, they find results similar to those of Perry and Babitsky's original study. Neither the type of government nor whether an agency contracts out has much impact on the efficiency and performance of urban bus services. The main difference between the two studies is that private transit agencies are no longer more efficient or effective than public providers.     

Outsourcing Public Service Delivery: Management Responses in Noncompetitive Markets

Capturing the benefits of competition is a key argument for outsourcing public services, yet public service markets often lack sufficient competition. The authors use survey and interview data from U.S. local governments to explore the responses of public managers to noncompetitive markets. This research indicates that competition is weak in most local government markets (fewer than two alternative providers on average across 67 services measured), and that the relationship between competition and contracting choice varies by service type. Public managers respond to suboptimal market competition by intervening with strategies designed to create, sustain, and enhance provider markets. In monopoly service markets, managers are more likely to use intergovernmental contracting, while for‐profit contracting is more common in more competitive service markets. The strategies that public managers employ to build and sustain competition for contracts often require tangible investments of administrative resources that add to the transaction costs of contracting in noncompetitive markets.     

BUREAUCRATS AS PURCHASERS OF HEALTH SERVICES: LIMITATIONS OF THE PUBLIC SECTOR FOR CONTRACTING

Contracting out of health services increasingly involves a new role for governments as purchasers of services. To date, emphasis has been on contractual outcomes and the contracting process, which may benefit from improvements in developing countries, has been understudied. This article uses evidence from wide scale NGO contracting in Pakistan and examines the performance of government purchasers in managing the contracting process; draws comparisons with NGO managed contracting; and identifies purchaser skills needed for contracting NGOs. We found that the contracting process is complex and government purchasers struggled to manage the contracting process despite the provision of well‐designed contracts and guidelines. Weaknesses were seen in three areas: (i) poor capacity for managing tendering; (ii) weak public sector governance resulting in slow processes, low interest and rent seeking pressures; and (iii) mistrust between government and the NGO sector. In comparison parallel contracting ventures managed by large NGOs generally resulted in faster implementation, closer contractual relationships, drew wider participation of NGOs and often provided technical support. Our findings do not dilute the importance of government in contracting but front the case for an independent purchasing agency, for example an experienced NGO, to manage public sector contracts for community based services with the government role instead being one of larger oversight. Copyright © 2011 John Wiley & Sons, Ltd.     

Employment,privatization, and managerial choice: Does contracting out reduce public sector employment?

We examine the effects of governments' use of alternative service provision on public employment using panel data from a nationally representative sample of local governments. We model the effects of alternative service provision on the size of the public workforce and hypothesize that alternative provision jointly impacts both full‐ and part‐time employment. We find evidence of an inter‐relationship between these employment types. Our results from seemingly unrelated and 3SLS regressions indicate that full‐time employment in the public sector declines when additional services are provided by for‐profit providers, while part‐time employment increases. The net employment effect in the public sector is negative when government services are moved to the for‐profit sector. These combined effects result in a compositional shift toward more part‐time public sector employment. © 2006 by the Association for Public Policy Analysis and Management     

Performance Monitoring Public Services in Australia

The Industry Commission, the former Bureau of Industry Economics and the Economic Planning Advisory Commission have amalgamated on an administrative basis to prepare for the formation of the Productivity Commission. Legislation establishing the new commission is before parliament.
The Industry Commission has been involved in a number of projects that monitor the performance of a range of government services across Australia. The first monitors the performance of a large number of Australia's major government trading enterprises and the second has begun the process of monitoring the performance of a range of government service providers.
This article outlines why measuring and monitoring performance can be used to improve public sector performance and provides two examples of how this tool can successfully be used in practice.