Contracting out: exporting lessons for Chinese governance

Abstract

Market-based reforms such as contracting out or public private partnerships are becoming more common in the public sector across the globe. In particular, reform-minded proposals like contracting out or public private partnerships are gaining momentum in Chinese governance. These reforms are intended to increase efficiency in government decisions, while dealing with scarce fiscal conditions. That said, other factors including democratic practices, political ideology, or the institutional features of government also shape and explain why certain reforms are adopted and practiced. To disentangle what drives government’s ‘make-or-buy’ decisions, we use local US government data to determine the extent to which efficiency concerns drove the adoption of contracting out, compared with other relevant factors. Our findings suggest that the adoption of contracting out is not consistently based on increasing the efficiency of government. A robust and competitive market does increase the use of contracting out, whereas political factors do not appear to be a driving concern. In addition, a local government’s financial well-being plays a critical role in determining the use of outsourcing. Generally speaking, local communities that face financial hardship tend to contract out more municipal services. Lastly, although the empirical study is based on the U.S. context, it sheds lights on a number of policy implications that are useful for Chinese governance.

Keywords:

• New public management
• contracting out
• public private partnership
• transaction cost economy
• revenue volatility

Notes

Disclosure statement

No potential conflict of interest was reported by the author.

Notes

1 Box, “Running Government Like a Business,”19–43; Peters and Pierre, “Governance Without Government,” 223–43; Kaboolian, “The New Public Management,” 189–93.

2 Denhardt and Denhardt, “The New Public Service,” 549–59.

3 Hodge and Greve, “Public–Private Partnerships,” 545–58.

4 Ho, “Development of Public Private Partnerships in China,” 1–5; Wang et al., “Commercial Investment in Public Private Partnership.”

5 Schafer and Zhang, “The Role of Stakeholders in Municipal Contracting Out,” 789

6 Lowery, “Consumer Sovereignty and Quasi-Market Failure,” 137–72; Brown and Potoski, “Managing Contract Performance,” 275–97; Hefetz et al., “Privatization and Intermunicipal Contracting,” 675–92; Fernandez et al., “Exploring Variations in Contracting for Services Among American Local Governments,” 439–62; Warner and Hebdon, “Local Government Restructuring,” 316–36; Warner and Hefetz, “Insourcing and Outsourcing The Dynamics of Privatization,” 313–27; Levin and Tadelis, “Contracting for Government Services,” 507–41.

7 Brown and Potoski, “Managing Contract Performance,” 275–97.

8 Osborne and Gaebler, Reinventing Government.

9 Gruening, “Origin and Theoretical Basis of New Public Management,” 1–25.

10 Meier and O'Toole , “The Proverbs of New Public Management,” 4–22.

11 Ferlie, The New Public Management in Action.

12 Hodge, Privatization.

13 Williamson, “The Economics of Organization,” 548–77; Williamson, “The Making of Economic Policy,” 1886–7; Williamson, “The Theory of the Firm as Governance Structure,” 171–95.

14 Ibid., 548–77; Ibid., 1886–7; Ibid., 171–95.

15 Klein and Roth, “Satisfaction With International Marketing Channels,“ 39–44; Rindfleisch and Heide, “Transaction Cost Analysis,” 30–54.

16 Brown et al., “Changing Modes of Service Delivery,” 127–43.

17 Hefetz and Warner, “Contracting or Public Delivery,” 289–317; Hefetz et al., “Privatization and Intermunicipal Contracting,” 675–92; Warner and Hefetz, “Insourcing and Outsourcing The Dynamics of Privatization Among US Municipalities,” 313–27.; Stein, Urban Alternatives; Eggleston and Zeckhauser, “Government Contracting For Health Care,” 29–65; Brown and Potoski, “Managing Contract Performance,” 275–97.

18 Klein and Roth, “Determinants of Export Channel Structure”.

19 Bel and Warner, Challenging Issues in Local Privatization.

20 Brown and Potoski, “Managing Contract Performance,” 275–97; Levin and Tadelis, “Contracting for Government Services,” 507–541; Hefetz and Warner, “Contracting or Public Delivery,” 289–317.

21 Hefetz and Warner, “Contracting or Public Delivery,” 289–317.

22 Denhardt and Denhardt, “The New Public Service,” 549–59.

23 Bel and Fageda, “Why do Local Governments Privatise Public Services,” 517–34; Bel and Fageda, “Reforming the Local Public Sector,” 45–65; Tavares, “Ten Years After,” 697–706; Boyne, “The Determinants of Variations in Local Service Contracting,” 150–63; Zhang and Gibson, “Determinants of Outsourcing in US Municipalities,” 253–69; Geys and Sørensen, “Revenue Scarcity and Government Outsourcing,” 769–88; Zhang et al., “Reexamining the Relationship Between Fiscal Stress and Outsourcing,” 22–46; Fernandez et al., “Exploring Variations in Contracting for Services Among American Local Governments,” 439–62.

24 Savas, Privatization and Public-Private Partnerships.

25 Poole and Rosenthal, “Patterns of Congressional Voting,” 228–278; Berry et al., “Measuring Citizen and Government Ideology in the American States,” 327–48.

26 Berry et al., “Measuring Citizen and Government Ideology in the American States,” 327–48.

27 Freeman, Strategic Management.

28 Bingham et al., “The New Governance,” 547–58.

29 Beierle and Konisky, “Values, Conflict, and Trust in Participatory Environmental Planning,” 587–602.

30 Smith and Greenblatt, Governing States and Localities.

31 Fernandez et al., “Exploring Variations in Contracting for Services Among American Local Governments,” 439–62.

32 Coate and Knight, “Government Form and Public Spending,” 82–112.

33 Bel and Fageda, “Why do Local Governments Privatise Public Services,” 517–34; Geys and Sørensen, “Revenue Scarcity and Government Outsourcing” 769–88.

34 Zhang et al., “Reexamining the Relationship Between Fiscal Stress and Outsourcing,” 22–46.

35 Warner and Hefetz, “Insourcing and Outsourcing,” 313–27.

36 Hefetz and Warner, “Contracting or Public Delivery,” 289–317.

37 Lamothe and Lamothe, “Competing for What,” 326–50.

38 Suppose that percentage of services outsourced is called p. The logit transformation is logit(p) = log(p/(1−p))

39 Hefetz and Warner, “Contracting or Public Delivery,” 289–317.

40 Ibid., 289–317.

41 Poole and Rosenthal, “Patterns of Congressional Voting,” 228–78; Berry et al., “Measuring Citizen and Government Ideology in the American States,” 327–48.

42 Fernandez et al., “Exploring Variations in Contracting for Services Among American Local Governments,” 439–62.

43 Morgan, “The Decision to Contract Out City Services,” 363–72; Morgan and England, “The Two Faces of Privatization,” 979–87.

44 Smith and Greenblatt, Governing States and Localities.

45 Ibid.; Morgan, “The Decision to Contract Out City Services,” 363–72.

46 Zhang et al., “Reexamining the Relationship Between Fiscal Stress and Outsourcing,” 22–46.

47 Hefetz and Warner, “Contracting or Public Delivery,” 289–317.

48 Bowman and Kearney, State and Local Government.

49 Krueger et al., “The Intergovernmental Context of Alternative Service Delivery Choices,” 686–708.

50 Ibid., 686–708.

51 Warner and Hefetz, “Insourcing and Outsourcing The Dynamics of Privatization Among US Municipalities,” 313–327; Brown and Potoski, “Managing Contract Performance,” 275–97.

52 Zhang et al., “Reexamining the Relationship Between Fiscal Stress and Outsourcing,” 1–25.

53 The coefficients reported in Table 3 are log odds change which cannot be meaningfully interpreted. Log odd ratio transfers the log odds change to actual percentage change.

54 Actual effects = log odd ratio − 1

55 Hefetz and Warner, “Contracting or Public Delivery,” 289–317.

56 The question asks local governments, “Who outside your local government organization was involved in evaluating the feasibility of private service delivery?” The list of potential responses include: (1) potential service deliverers, (2) professionals/consultants with expertise in particular service area, (3) service recipients/consumers, (4) managers/CAOs of other local governments who have experience using private service delivery, (5) citizen advisory committees, and (6) state agencies, leagues or associations. Based on the responses to the question I created an index variable ranging from 0 to 6.

57 Fernandez et al., “Exploring Variations in Contracting for Services Among American Local Governments,” 439–62; Hefetz and Warner, “Privatization and Its Reverse,” 171–90; Hefetz and Warner, “Beyond the Market Versus Planning Dichotomy,” 555–572; Hefetz and Warner, “Contracting or Public Delivery,” 289–317.

58 Zhang et al., “Reexamining the Relationship Between Fiscal Stress and Outsourcing,” 22–46.

59 Anderson and O'Conner, “System Change, Learning and Public Opinion About the Economy,” 147–72.

60 Hefetz and Warner, “Contracting or Public Delivery,” 289–317.

61 Wang et al., “Commercial Investment in Public Private Partnership.”

62 Ibid.

63 Ho, “Development of Public Private Partnerships in China,” 1–5.

64 Boyer et al., “An Empirical Examination of Public Involvement in Public-Private Partnerships,” 45–61; Wang et al., “Commercial Investment in Public Private Partnership.”; Greve and Ejersbo, “When Public-Private Partnerships Fail.”; Chen et al., “When Public–Private Partnerships Fail,” 839–57; Zhang and Gibson, “Determinants of Outsourcing in US Municipalities,” 253–69.; Zhang et al., “Reexamining the Relationship Between Fiscal Stress and Outsourcing,” 22–46.

65 Their sample size is the largest to date and addresses all three dimensions of TCE.

Additional information

Notes on contributors

Zhiwei Zhang

Zhiwei Zhang is an Assistant Professor of Political Science. He received his M.P.A. from Kansas State University (2009) and Ph.D. (2013) from University of Kentucky. His research interests focus on public finance and budgeting, public procurement and public private partnership, donors’ philanthropy behavior, and nonprofit finance and management.