Contracting Out Public Services: The Need and Necessity of Government Intervention for Safeguarding Public Interests

Abstract

The Western welfare states are under reform (Pierson 1996; Gilbert 2002; Taylor-Gooby 2004; Henman and Fenger 2006). An important part of those reforms is the introduction of forms of privatization. Over the last decade, in most Western countries private elements have been introduced in (former) public sectors such as health care, home care, public transport, and social security. One of the components of the welfare state that has been subjected to privatization is the provision of public services. Over the years, many countries have chosen to contract out public service delivery (Domberger and Jensen 1997; Majone 1997; Scott 2000). The contracting out of public services is a specific form of privatization. In the case of contracting out, the production or the provision of public services is commissioned to the market. As a result, the role of the state changes from public provider to buyer of public services.

Underlying the notion of contracting out is the belief that the introduction of market elements in the production of public services increases effectiveness and efficiency (Raad voor Werk en Inkomen 2003; Van Berkel and Van der Aa 2005). However, as we will explain in section two, this expectation only holds under specific circumstances. When contracting out public services, the agency that is outsourcing is faced with several challenges, such as opportunistic behavior on the part of the supplier. It may turn out to be difficult and costly to have the contractor supply according to the agency's preferences and policies. More specifically, the question arises whether contracts are sufficient for the safeguarding of public interests or whether supplementary government intervention is required. By analyzing the contracting practices of reintegration services in the Dutch reintegration market, we hope to gain a better understanding of the mechanisms of public private contract relations and the extend to which it is possible to safeguard public interests within the contract relation.

Keywords: Privatisation, public interest, contracting-out, welfare reform, Netherlands

JEL Classification: I3, I38, L33