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Journal of Public Administration Research and Theory Inc.
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Privatization and Its Reverse: Explaining the Dynamics of the Government Contracting ProcessAuthor(s): Amir Hefetz and Mildred WarnerSource: Journal of Public Administration Research and Theory: J-PART, Vol. 14, No. 2 (Apr.,2004), pp. 171-190Published by: on behalf of theOxford University Press Public Management Research Association
Stable URL: http://www.jstor.org/stable/3525868Accessed: 16-12-2015 00:25 UTC
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Privatization
n d
I t s
R e v e r s e
Explaining
t h
Dynamic s
o f t h overnment
ontract ing
P r o c e s s
Amir
Hefetz
Technion,
srael nstitute
f
Technology
Mildred
Warner
Cornell
University
ABSTRACT
Empirical
vidence hows ocal
governmentontracting
s a
dynamic
rocess
hat ncludes
movements rom
public
delivery
o markets nd frommarket ontracts ack o in-house
delivery.
his
reverse
ontracting
eflectshe
complexity
f
public
ervice
rovision
na
world
wheremarket lternativesreused
along
with
public elivery.
We
develop
methodology
o
link
responses
o
national
urveys
and createa
longitudinal
ata set that
captures
he
dynamics
f
the
contracting
rocess.
We
present
a framework
hat
ncorporatesrincipal
agent
problems,
overnment
management,monitoring
nd citizen
oncerns,
nd
market
structure. ur tatistical
nalysis
inds
governmentmanagement,
monitoring,
nd
principal
agentproblems
o be most
mportant
n
explaining
othnew
contracting
utand
contracting
back-in. rofessional
anagers
ecognize
he
importance
f
monitoring
nd
the need
for
public
ngagement
n he
service
elivery rocess.
heresults
upport
he new
public
ervice
that
argues
public
managers
o more hansteera market
rocess; hey
balance echnical
and
political
oncernso secure
public
alue.
INTRODUCTION
The new
public
management
ncourages overnments
o be
moreefficientand
responsive
by employingmarketapproacheso publicservicedelivery(EggersandO'Leary1995;
Hood
2002;
Kettl
1997;
Osbore and
Gaebler
1992).
Recent
critiques
of the new
public
management
hallenge
he notion hatmarket
ased
approaches
re
adequate
o
capture
he
full set of
political
considerationshatare
part
of local
government
ervice
delivery Box
1999;
Denhardt ndDenhardt
003;
Kaboolian
1998;
Kelly
1998;
Moore
1995;
O'Looney
1993;
Stark
2002).
Privatization nd market
heoriesof
public
management
re driven
by
Funding
for this research
was
providedby
the U.S.
Department
of
Agriculture
National Research
Initiative,
Affinito
Stewart Grants
Program,
Corell
University;
the U.S.
Department
of
Agriculture
Hatch
Program;
nd the
Economic
Policy
Institute.Amir Hefetz was a
PrivatizationFellow with
EPI,
based
at
Cornell
University.
He
is now a Ph.D.
studentat Technion n
Haifa,
Israel. Mildred
Warner
s an
Associate
Professorof
City
&
Regional Planning
at
Cornell
University.
DOI:
10.1093/jopart/muh012
Journal
of
Public Administration
Research and
Theory,
Vol.
14,
no.
2,
pp.
171-190
?
2004 Journalof Public Administration
Research and
Theory,
Inc.;
all
rights
reserved.
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3/21
172
Journalof Public
Administration
Research
and
Theory
government
failure
to
meet economic and
organizational
efficiency
(Niskanen
1971;
Savas
2000).
However,
the
need
for
public
goods
provision
arises from
market
failure,
and
contract markets exhibit
many
of these
same failures
(de
Leon and
Denhardt
2000;
Lowery
1998). A theoretical framework is needed which gets beyond the market versus
government
failure
dichotomy
and
explores
the full
range
of
components
in the
public
service
delivery
decision
(Zebre
and
McCurdy
1999).
Some scholars have used transac-
tion cost
approaches
to
compare
the costs of direct
public
delivery
with the
contracting
process (Alexander
2001;
Brown and Potoski
2003;
Nelson
1997).
We
present
a
broader
framework that
also includes
attention to the
uniqueness
of citizen
interaction
and
pro-
fessional
management
in
public
service
provision.
Pragmatic
local
government
managers
use markets
in
a
dynamic approach; they
contract out and
bring
unsuccessful contracts back in-house for
direct
public provision
(Warner
and Hebdon
2001; Warner, Ballard,
and
Hefetz
2003).
They
also mix
public
provision
and
private
contracts
for
the same service
(Miranda
andLerner
1995).
Even with
careful
attention to
monitoring,
local
government experience
with
contracting
has
not
always
been
positive
(Adler
1999;
Sclar
2000).
Local
government practice
has
always
involved
a mix of
public
provision
and
government contracting
(Sonenblum,
Kirlin,
and
Reis
1977).
However,
this behavior was
reinterpreted
as
privatization
in
the 1980s as
part
of a broader
push
for market
approaches
to
government
service
delivery (Henig
1990).
This enthusiasm
for market
solutions
was reflected
in
new data series. The
International
City County Management
Association
(ICMA)
in
1982
and the Census of
Governments
in 1987
began quinquennial surveys
of local
government
contracting,
and
these
remain the
primary
sources
of
national
data. Because the
presumption
of
government
failure was so
strong,
and the
political support
for
market solutions so
widespread,
these
surveys
do
not
attempt
to
capture
the
dynamic
movement between
market and
government
provision typical
of
local
government practice.
Rather,
they
focus on
contracting
as a
one-
way
street,
asking
only
which
services
have been contracted
out.
In
this article we
present
a
methodology
that links
responses
to the
ICMA
surveys
to
create
a
longitudinal
data
set
that enables
us to address the
dynamics
of
the
contracting
process.
We find that from
1992 to
1997,
93
percent
of
the
628
governments
that
responded
in both
survey years newly
contracted out
at least one
service,
and 81
percent
of these
governments
contracted back-in at least
one
service.
Almost
three-quarters
of
governments
engaged
in
both new
contracting
out and
contracting
back-in.
These
findings challenge
the
adequacy of a singular focus on contractingout. On average, governments newly contract
out
six services and contract back-in
four services. That
contracting
back-in would
be so
common-over
half
the
level of
new
contracting out-requires
that researchers
give
attention
to the
dynamics
of
the
contracting process.'
Private
firms that contract out balance concerns
with
efficiency, quality, timing,
reliability, security,
and
internal
capacity
(Nelson
1997).
The new
public
service literature
argues
local
government managers
who use market
approaches
to deliver services must
balance
an even
wider set of
concerns,
including
accountability
and
public
preference
(Blanchard,
Hinnant,
and
Wong
1998;
Feldman
and Khademian
2001;
Sanderson
1998;
Stirton
and
Lodge
2001).
1 For
our
study,
only
services once
provided by government
are
included
in
our definitionof
contracting
back-in.
This could include
contracting
back-in from
nonprofit,
or
profit,
or
other
government
providers.
In their definitionof
contracting-in,
Welch and Bretschneider
1999)
include new
contracting
out such as
intermunicipal ooperation
and
governmentalentrepreneurship.
Our
study distinguishes
new
contracting
out from
contracting
back-in.
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Hefetzand
Warner
Privatization
nd
Its Reverse
What
is
Contracting
Back-in?
The
debate over
privatization
s
shifting
from
an
ideological
debate
(Savas 2000)
to
a
proper
discussion of
the
political,
economic,
and
community
actors that determine
choice of market rgovernment elivery FeigenbaumndHenig1994;Kirkpatrick999;
Lowery
1999;
Sclar
2000).
The same
concernswith
efficiency,quality,
and nnovation hat
motivate
privatization,may promote
contracting
back-in
(Henig
1990;
Warner and
Hebdon
2001).
Contracting
ack-incan
be
several
hings.Typically
t
is assumed o be
competitive
bidding,
where
ocal
employees
contract o
bring
he workback
(Martin1999).
However,
in
an
analysis
of
twenty-six
case
studies of reverse
contracting,
ompetitivebidding
explained
less than half of the cases
(Ballard
and
Warner
2000).
In
all
of the
cases,
disappointment
with
service
quality
or difficulties with
contract
specification
and
monitoring
were
factors
driving
he
decisionto
bring
he contract
back
in-house.
In
most
of the cases, internalprocess improvementby labor managementcooperationwas
associated
with
contracting
ack-in.
Contracting
back-in
may
reflect market success where
competition
increases
efficiency (Lavery
1999).
In
other
cases
it
reflects failure of markets o
meet desired
outcomes
or failure of
government
o
adequatelymanage
and monitorcontracts
Sclar
2000).
It also
may
represent
new form of
partnership
etween
public
and
private
actors
(Freeman
000;
Rhodes
1996)
where
both
cooperate
n
service
provision.
The
debate on
privatization
as been
highly
ideological,
relying primarily
on
case
studies
where
proponents
ind
cost
saving
efficiencies
(Eggers
and
O'Leary
1995;
Savas
2000)
and detractors
ind cost
overruns,
orruption,
nd erosion
n
wages
and
in
citizen
voice
(Hebdon
1995;
Sclar
2000;
Starr
1988).
Although empiricalanalyses
find
only
limited
support
or
market
advantages
Boyne
1998;
Ferris
1986;
Hirsch
1995;
Milne
1997),
the debateremainsdominated
y public
choice
theory
andhas
rarely
addressed he
dynamic
and mixed
(public
and
private)
natureof
local
government
ervice
delivery
(Boyne 2002).
Local
government
ontracting
has been
treatedas a one
way process-
towardmarkets-and most studieshave
only
lookedat
contracting
ut
(Boyne
1998;
Ferris
1986;
Hirsch
1995).
Those studies that have
acknowledged
he
possibility
of reverse
privatization
r
contracts
eing
brought
ack n-house
Kodryzcki
998;
Lopez
de
Silanes,
Shleifer,
and
Vishny
1997)
havenot
given
it
detailed
attention.
Warner
nd
Hebdon
2001)
are the onlyones to empiricallymeasurecontracting ack-indirectly,as another orm of
service
provision,
but their
analysis
s
limited
to
New
York
state.
Reverse
contracting
demonstrates he
complexity
of
service
provision
in
a world
where marketalternativesare used
along
with
public delivery.
It
may
involve market
failure,
government
ailure,
or both.
To
gain
a
better
understanding
f the
contracting
processrequires
an
analysis
of both
contracting
ut and
contracting
ack-in,
which
gives
attention o
economic,
managerial,
nd
politicalperspectives.
A
Framework or
Understanding
he
Complexity
of
Government
Service
Delivery
Both theories of
government
ailureand market ailure
rely
on the market
paradigm
o
definethe
necessary
evel
of
government
ntervention.
ublicchoice
theory
argues
iberal
policies
that allow market-like
olutions
may
replace
central
planning
and
improve
he
efficiency
of
the
political process (Buchanan
nd Tullock
1974). Throughprivatization,
173
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174
Journalof Public
Administration
Researchand
Theory
private
irms
compete
for
public
service
delivery
which
may
lead to
cost
savings,higher
efficiency,
and less
government
nvolvement
Domberger
nd Jensen
1997;
Savas
2000).
Critics of
public
choice
challenge
the
separation
of
provision
from
production,
he
methodologicalndividualism f aggregatingndividual onsumerpreferenceso achieve
the collective
public good,
and
competition
as
a
substitute
or
planning
n
local
public
service markets
Lowery
1998,
1999;
Starr
1988).
The social
values
inherent
n
public
services
may
not be
adequately
ddressed
y
the
economic
efficiency
calculusof markets
Kelly
1998;
Starr
1988).
The
consumer otion
of
citizenship
does not
adequately
ddress
he
broader
ocial
concerns
of the citizen
(deLeon
and Denhardt
2000).
Likewise,
governments
are
more than a
business;
they
reflect
collective
identity,
espond
o
diversity,
and
promote
ocial
equity
Box 1999).
Increasing
attention
is
being given
to the
intrinsic value
of
interactionbetween citizens and
government
n
the
public
service
delivery
process
to
promotedemocracy,community
building,and a moresocially equitable ystemof urban erviceprovision Denhardt nd
Denhardt
000;
Frug
1998;
Marmolo
1998;
Potapchuck,
Crocker,
nd Schechter
1998).
To
provide
a better
understanding
f
the
dynamicprocess
of
government
ervice
delivery restructuring,
we
present
a
framework that
includes attention to both
organizational
ehaviorand market tructure.
Principal Agent
Problems
Transaction cost
theory
in
public organizations
combines both
individual
and
organizational
ehavior o address
principal
agent
problems
n
government
rganization
(Williamson1996).
Goal
incongruence
etween
governments
nd their contractors
may
reduce
privatization
r increase
contracting
ack-in.Political
pressure
rom
government
employees,
unions,
and
budget-maximizing
ureaucrats lso
may
limit
private
contracts
(Savas
2000;
Siegel 1999).
However,
empirical
tudieshave found
conflicting
videnceof
the
impact
of labor
opposition.
n
some cases it is shown o reduce
privatization
Chandler
and
Feuille
1991;
Ferris
1986;
Hirsch
and
Osbore
2000);
in
others
t has
limited
or
no
effect
(O'Brien
1994;
Warner
nd Hebdon
2001).
Recent
studies
of
public
managers
ave
challenged
he self-interest laims of
public
choice
theory
and
emphasized
professional
motivation
or
public
service
(DiIulio
1994;
Francois
2000;
Moore
1995).
Management
More
professional ity
management,
s
found
n
the council
manager
orm
of
government,
may
minimize the
effect
of
politics
on
local decisions and lead to a
higher
level of
privatization
Feiock
and
Kim
2000;
Moon and deLeon
2001).
The
government
manager
must
decidewhether
o
makeor
buy
a
service
subject
o market
onditions,
nternal
res-
sure,
and state restrictions n
debt
limit
and taxes
(Hirsch
1995, 1970;
Lopez-de-Silanes,
Shleifer,
and
Vishny
1997;
Nelson
1997).
Political climate also
may
affect
managers'
decisions
Savas2001).
Politics
s
part
of
public
management,
nd
good
managers
o not
ust
make
technicaldecisions.
They
interact
n
the
political process (Nalbandian
1999)
and
facilitate
publicengagement Feldman
ndKhademian
001;
Svara
1998).
Market
Structure
Theoretically ompetition
s
the
key
to
ensuring
avings
from
privatization
Boyne
1998;
Savas
2000).
Publicchoice
theory mplies
competition
will
be
greatest
n
fragmented
ocal
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Hefetzand
Warner Privatization nd Its Reverse
government
ettings
(Tiebout 1956).
Lack of
alternative
uppliers
has been
shown
to be
a barriero
privatization
n
both nner
cities
(Hirsch1995)
andrural reas
Kodrzycki
994;
Warnerand
Hefetz
2003).
In
order o create
competition,
ocal
governments
ngage
in
mixedpublicandprivatedelivery nthe same servicearea Miranda ndLerner1995)and
competitivebidding
(Martin1999).
These movements rom
public delivery
to contracts
andfrom
contracts ack
to
publicdelivery
llustrate he
dynamic
nature f service
delivery
and the
pragmatism
f
local
governmentmanagers.
Monitoring
and
Citizen
Engagement
Contractingequires
lear
specification
f all the attributes f a
good
or
service
even
latent
ones associatedwith
citizen
voice).
In
addition,
t
requires
clear criteria
or
evaluating
performanceEggers
1997;
Poisterand
Strieb
1999).
Performancemeasurement emands
a
professional
monitoring
ystem (Perrin1998)
to enhancethe likelihoodof successful
contracting.ncontrast,heabsenceof a good monitoring ystemmayleadtohigher evels
of
contracting
ack-in.
However,
performance
measurement as been criticized
or
failing
to measure some of
the
most
important spects
of citizen voice and
engagement
hat
are
core to the
governance
process (Sanderson
1998).
A recent
study
measuring
itizen
voice and
privatization
ound that
governments ngaging
in
higher
levels
of
privatiza-
tion
gave
more attention
o
technical
efficiency
measuresbut
not to citizen voice
(Warner
and
Hefetz
2002).
Studies
of
contracting
how that when contract
specification
and
monitoring
are
difficult,
ervicesaremore
ikely
to be
provided
n-house
Nelson
1997).
The
complex
and
changing
nature
of
many public
services
requires
governments
o
engage
in
relational
contracting o thatmonitoring an be an ongoing process(Kavanagh nd Parker1999;
Sclar
2000).
Monitoring
s
costly
in
terms
of time and nformation.Casestudieshave found
the cost of
monitoring
o
average
nearly
20
percent
of contract osts
(Pack
1989;
Prager
1994).
Paroushand
Prager
1999)
suggest public managers
decide whether o
contract
subject
o
the costs of
in-house
production
ersus
contracting
nd
monitoring
osts
given
the
possibility
the
contractor
may
deceive.
The
monitoringprocess
startswith service
specification
ndcontinues
with
government
versight
andassessment
f
service
delivery.
Weak
monitoring
ontrolwill
yield
lower
han
expected avings
Sclar
2000;
Siegal
1999).
We
hypothesize
hat
the
levels
of new
contracting
ut and
contracting
ack-inwill
be affected
by
a combinationof
principal-agent
roblems,
governmentmanagement,
economic and marketconsiderations, nd monitoringand citizen concerns.Typically
studies
of
the decisionto
make or
buy
look at a
single
point
in
time decision
(Coles
and
Hesterly
1998;
Nelson
1997).
We believe that
contracting
s an
ongoingprocess
and that
monitoring
s a
key
feedbackmechanism.
By
looking
over
two time
periods,
we
capture
some
of those
dynamics.
DATA
AND METHODS
Longitudinal
Construction of the Data
Set
This researchcomparesnew contractingout with contractingback-in on managerial,
political,
and economic
grounds.
Data for
this
study
are drawn romthe
ICMA 1992 and
1997
Surveys
of
Alternative
Service
Delivery
Approaches,
he
Census
of
Government
finance iles for
1992,
and he
Census
of
Population
nd
Housing
or 1990.
Every
ive
years
175
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7/21
176 Journalof
Public
Administration
Researchand
Theory
since
1982,
ICMAhas
surveyed
all
counties
with
morethan
25,000
population
roughly
1,600
out of
3,100
total)
and
cities over
10,000
population
roughly
3,300).
Roughly
a
third
of
all
governments
ontacted
respond
(31
percent
for
1992
and 32
percent
for
1997),
yieldingasampleof roughly1,400governmentsachyear.TheICMAdatacover64public
services
and
six
alternative ervice
delivery
approaches:
ontracting
o
for-profit
irms,
nonprofit
irms,
or to
another
government
or
public
authority;
elling
franchises,
using
volunteers,
and
providing
subsidies for
the
service.
In this
study
any
alternative
o
delivering
ervices
entirelyby government
mployees
s
considered case of
contracting
out.
The
main
alternatives o
internal
government
rovision
are
contracts
o
private
or-
profit
firms and
intergovernmental
ontracting.
Although
ocal
governments
have
used
contracting
or
a
long
time,
on
average
the
majority
of
services
(58
percent)
are
still
provided
directly
by
in-house
provision
in
1997.
The
surveys
also
ask
managers
68
questions
about factors
that are
motivators,
obstacles,
or
important
n
implementing
alternative
ervice
delivery.
We
paired
esponses
rom
he
1992
and 1997
surveys
o
create
a
longitudinal
ata
set
with
628
responding
municipalities.
Problems
with
changes
n
survey
design
in
1988
do
not
allow
further
ongitudinal
ombination.
Places
responding
o the
survey
n
both
1992
and
1997
exhibit
higher
management
apacity
and
higher
evels
of
contracting.2
The
ICMA
surveys
ask
only
how
the
service
s
provided
urrently,
ot
whether
his is
a
new
contract
or
longstanding rocedure.
To
determine
how
much
new
contracting
was
actually
occurring,
we
neededa
method
o track
changes
n
formsof
service
delivery
for
every
service
for each
government.
We
coded
the data
nto
four
exclusive
categories.
Our
method
distinguished
whether
a
service s
provided
ntirelyby government
mployees,
by
mixed
publicprovision
and
privatecontracts,by
contract
xclusively,
or
not
provided
at
all. We
combined
hese
exclusive
alternatives
ver time
to
createa
transition
matrix
hat
allows us
to
track
changes
n
service
delivery
methods.
See
figure
1.
This
matrix
method
enablesus
to
compare
tability
n
formof
service
delivery
and
to
assess
shifts in
the
direction of
provision-towards
direct
public
delivery
or
towards
contracts.
One
challenge
with
this
pairingapproach
s
that
respondents
may
not
classify
their
service
provision
n the
same
manner n
each
survey
year.
In
order o
increase
he
reliability
of
the
analysis,
we
combined
he two
contracting
lternatives,
mixed
public/
private
and
totally
contracted ut
into
contracting
ut.
We
excluded
he
not
provided
option
from
our
analysis
because
such
events
are not
relevant
o our
analysis.
The
reduced
matrix
has nine
possible
combinations
ver
the two
time
periods
which
we
group
nto four
categories:
table
public
delivery,
table
contracts,
ew
contracting
ut,
and
contracting
ack-in.
Stable
public
delivery
is
found in
section 1
where
government
delivers
he
service
via its
own
employees
n
both
ime
periods.
Stable
contracting
s
found
in
section
2
where
he
government
s
either
contracting
he
service
n
part
or
completely
o
an
alternative
service
provider
in
both
time
periods.
Although
this
option
contains
movements
rom
mixed
public
and
private
delivery
o
totally
contracted ut
and
vice
versa,
we
decided
o
include hese
movements n
the
stable
contracting ategory
ince
contracting
continued.
This
minimizes
chancesof
recall
error
rom
survey
respondents
ho
may
report
2
In the pairedsurveys,the numberof places with a council
manager
orm of
government
s
significantlygreater
(72
percent)
han n
either
of the full
surveys
1992
(62
percent)
or
1997
(64
percent)
X2
=
20.5,p
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