Journal of Public Administration Research and Theory, Inc.

Public Management Research Association

Privatization and Its Reverse: Explaining the Dynamics of the Government Contracting Process
Author(s): Amir Hefetz and Mildred Warner
Source: Journal of Public Administration Research and Theory: J-PART, Vol. 14, No. 2 (Apr.,
2004), pp. 171-190
Published by: Oxford University Press on behalf of the Public Management Research Association
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Privatization

the

Dynamics
Contracting

and

Its

of

the

Reverse:

Explaining

Government

Process

Amir Hefetz
Technion,IsraelInstituteof Technology
Mildred Warner
CornellUniversity

ABSTRACT
evidenceshowslocalgovernment
is a dynamicprocessthatincludes
Empirical
contracting
movementsfrompublicdeliveryto marketsand frommarketcontractsbackto in-house
This"reverse
ina world
reflectsthecomplexity
of publicserviceprovision
delivery.
contracting"
wheremarketalternatives
areusedalongwithpublicdelivery.
Wedevelopa methodology
to
linkresponsesto nationalsurveysand createa longitudinal
data set that capturesthe
thatincorporates
dynamicsof the contracting
process.We presenta framework
principal
and citizenconcerns,and market
agentproblems,governmentmanagement,monitoring
structure.
Ourstatistical
and principal
analysisfindsgovernmentmanagement,
monitoring,
inexplaining
bothnewcontracting
outandcontracting
agentproblemsto be mostimportant
back-in.Professional
of monitoring
andthe need for
managersrecognizethe importance
in
the
service
The
results
the
new
publicengagement
delivery
process.
support
publicservice
thatarguespublicmanagersdo morethansteera marketprocess;they balancetechnical
andpolitical
concernsto securepublicvalue.

INTRODUCTION

The new publicmanagementencouragesgovernmentsto be moreefficientandresponsive

by employingmarketapproachesto public service delivery(Eggersand O'Leary 1995;
Hood 2002; Kettl 1997; Osbore and Gaebler1992). Recent critiquesof the new public
managementchallengethe notionthatmarketbasedapproachesareadequateto capturethe
full set of politicalconsiderationsthatarepartof local governmentservicedelivery(Box
1999;DenhardtandDenhardt2003; Kaboolian1998;Kelly 1998;Moore1995;O'Looney
1993; Stark2002). Privatizationandmarkettheoriesof publicmanagementare drivenby
Fundingfor this researchwas providedby the U.S. Departmentof AgricultureNational ResearchInitiative,Affinito
StewartGrantsProgram,Corell University;the U.S. Departmentof AgricultureHatch Program;and the Economic
Policy Institute.Amir Hefetz was a PrivatizationFellow with EPI, based at Cornell University. He is now a Ph.D.
studentat Technion in Haifa, Israel.MildredWarneris an Associate Professorof City & Regional Planningat Cornell
University.
DOI:10.1093/jopart/muh012
Journal of PublicAdministrationResearch and Theory,Vol. 14, no. 2, pp. 171-190
? 2004 Journalof Public AdministrationResearch and Theory,Inc.;all rights reserved.

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172

Journalof PublicAdministrationResearchand 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 Denhardt2000; 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 transaction 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 professional 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 (Mirandaand Lerner 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 reinterpretedas 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 oneway 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 contractedback-in at least one service. Almost three-quartersof governments
engaged in both new contracting out and contracting back-in. These findings challenge the
adequacy of a singular focus on contracting out. 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 providedby governmentare included in our definitionof contractingback-in.
This could include contractingback-in from nonprofit,for profit,or other governmentproviders.In their definitionof
contracting-in,Welch and Bretschneider(1999) include new contractingout such as intermunicipalcooperationand
governmentalentrepreneurship.Our study distinguishesnew contractingout from contractingback-in.

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Hefetzand Warner Privatizationand Its Reverse

What is Contracting Back-in?

The debate over privatizationis shifting from an ideological debate (Savas 2000) to
a properdiscussion of the political, economic, and communityfactors that determine
choice of marketor governmentdelivery(FeigenbaumandHenig 1994;Kirkpatrick1999;
Lowery1999;Sclar2000). The sameconcernswith efficiency,quality,andinnovationthat
motivate privatization,may promote contractingback-in (Henig 1990; Warnerand
Hebdon2001).
Contractingback-incan be severalthings.Typicallyit is assumedto be competitive
bidding,wherelocal employeescontractto bringthe workback (Martin1999). However,
in an analysis of twenty-six case studies of reverse contracting,competitivebidding
explained less than half of the cases (Ballardand Warner2000). In all of the cases,
disappointmentwith service quality or difficulties with contract specification and
monitoringwere factorsdrivingthe decisionto bringthe contractback in-house.In most
of the cases, internal process improvementby labor managementcooperationwas
associatedwith contractingback-in.
Contractingback-in may reflect market success where competition increases
efficiency (Lavery 1999). In other cases it reflects failure of marketsto meet desired
outcomes or failureof governmentto adequatelymanageand monitorcontracts(Sclar
2000). It also may representa new formof partnershipbetweenpublicandprivateactors
(Freeman2000; Rhodes 1996) whereboth cooperatein serviceprovision.
The debateon privatizationhas been highly ideological,relying primarilyon case
studieswhereproponentsfind cost saving efficiencies(Eggersand O'Leary1995; Savas
2000) and detractorsfind cost overruns,corruption,and erosionin wages and in citizen
voice (Hebdon 1995; Sclar 2000; Starr 1988). Althoughempiricalanalyses find only
limited supportfor marketadvantages(Boyne 1998; Ferris 1986; Hirsch 1995; Milne
1997),the debateremainsdominatedby publicchoice theoryandhas rarelyaddressedthe
dynamic and mixed (public and private) natureof local governmentservice delivery
(Boyne 2002). Local governmentcontractinghas been treatedas a one way processtowardmarkets-and moststudieshaveonly lookedat contractingout(Boyne 1998;Ferris
1986; Hirsch 1995). Those studies that have acknowledgedthe possibility of reverse
privatizationor contractsbeingbroughtbackin-house(Kodryzcki1998;Lopezde Silanes,
Shleifer,andVishny 1997)havenot given it detailedattention.WarnerandHebdon(2001)
are the only ones to empiricallymeasurecontractingback-indirectly,as anotherformof
serviceprovision,but theiranalysisis limitedto New Yorkstate.
Reverse contractingdemonstratesthe complexity of service provision in a world
where marketalternativesare used along with public delivery. It may involve market
failure, governmentfailure, or both. To gain a betterunderstandingof the contracting
processrequiresan analysisof both contractingout and contractingback-in,which gives
attentionto economic,managerial,andpoliticalperspectives.
A Frameworkfor Understandingthe Complexityof GovernmentServiceDelivery
Both theoriesof governmentfailureand marketfailurerely on the marketparadigmto
definethe necessarylevel of governmentintervention.Publicchoice theoryarguesliberal
policies that allow market-likesolutionsmay replacecentralplanningand improvethe
efficiency of the political process (Buchananand Tullock 1974). Throughprivatization,
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173

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Journalof PublicAdministrationResearchand Theory

privatefirmscompetefor public service deliverywhich may lead to cost savings,higher

efficiency,and less governmentinvolvement(Dombergerand Jensen 1997; Savas2000).
Critics of public choice challenge the separationof provision from production,the
methodologicalindividualismof aggregatingindividualconsumerpreferencesto achieve
the collective public good, and competitionas a substitutefor planningin local public
servicemarkets(Lowery 1998, 1999; Starr1988).
The social values inherentin publicservicesmay not be adequatelyaddressedby the
economicefficiencycalculusof markets(Kelly 1998;Starr1988).Theconsumernotionof
citizenshipdoes not adequatelyaddressthe broadersocial concernsof the citizen(deLeon
and Denhardt2000). Likewise, governmentsare more than a business; they reflect
collective identity,respondto diversity,andpromotesocial equity(Box 1999).Increasing
attention is being given to the intrinsic value of interactionbetween citizens and
governmentin the public service delivery process to promotedemocracy,community
building,and a more socially equitablesystem of urbanserviceprovision(Denhardtand
Denhardt2000; Frug 1998;Marmolo1998;Potapchuck,Crocker,and Schechter1998).
To provide a betterunderstandingof the dynamicprocess of governmentservice
delivery restructuring,we present a framework that includes attention to both
organizationalbehaviorandmarketstructure.
Principal Agent Problems

Transaction cost theory in public organizations combines both individual and

organizationalbehaviorto addressprincipalagentproblemsin governmentorganization
(Williamson1996). Goal incongruencebetweengovernmentsand their contractorsmay
reduceprivatizationor increasecontractingback-in.Politicalpressurefrom government
employees,unions, and budget-maximizingbureaucratsalso may limit privatecontracts
(Savas2000; Siegel 1999).However,empiricalstudieshave foundconflictingevidenceof
the impactof laboropposition.In some cases it is shownto reduceprivatization(Chandler
and Feuille 1991; Ferris1986; Hirschand Osbore 2000); in othersit has limitedor no
effect (O'Brien1994;WarnerandHebdon2001). Recentstudiesof publicmanagershave
challengedthe self-interestclaims of public choice theoryand emphasizedprofessional
motivationfor public service (DiIulio 1994;Francois2000; Moore 1995).
Management

Moreprofessionalcity management,as foundin the councilmanagerformof government,

may minimize the effect of politics on local decisions and lead to a higher level of
privatization(Feiockand Kim 2000; Moon and deLeon2001). The governmentmanager
mustdecidewhetherto "makeorbuy"a servicesubjectto marketconditions,internalpressure,and staterestrictionson debt limit andtaxes (Hirsch1995, 1970;Lopez-de-Silanes,
Shleifer, and Vishny 1997; Nelson 1997). Political climate also may affect managers'
decisions(Savas2001).Politicsis partof publicmanagement,andgoodmanagersdonotjust
make technicaldecisions. They interactin the political process (Nalbandian1999) and
facilitatepublicengagement(FeldmanandKhademian2001; Svara1998).
Market Structure

Theoreticallycompetitionis the key to ensuringsavingsfromprivatization(Boyne 1998;

Savas2000). Publicchoicetheoryimpliescompetitionwill be greatestin fragmentedlocal
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Hefetzand Warner Privatizationand Its Reverse

governmentsettings(Tiebout1956). Lack of alternativesuppliershas been shownto be

a barrierto privatizationin bothinnercities (Hirsch1995)andruralareas(Kodrzycki1994;
Warnerand Hefetz 2003). In orderto create competition,local governmentsengage in
mixedpublicandprivatedeliveryin the sameservicearea(MirandaandLerner1995)and
competitivebidding(Martin1999). These movementsfrom public deliveryto contracts
andfromcontractsbackto publicdeliveryillustratethe dynamicnatureof servicedelivery
and the pragmatismof local governmentmanagers.
Monitoring and Citizen Engagement

Contractingrequiresclearspecificationof all the attributesof a good or service(evenlatent

ones associatedwith citizen voice). In addition,it requiresclear criteriafor evaluating
performance(Eggers 1997;Poisterand Strieb1999).Performancemeasurementdemands
a professionalmonitoringsystem (Perrin1998) to enhancethe likelihoodof successful
contracting.In contrast,the absenceof a good monitoringsystemmay leadto higherlevels
of contractingback-in.However,performancemeasurementhas been criticizedfor failing
to measuresome of the most importantaspects of citizen voice and engagementthat
are core to the governanceprocess (Sanderson1998). A recentstudy measuringcitizen
voice and privatizationfound that governmentsengaging in higher levels of privatization gave moreattentionto technicalefficiencymeasuresbut not to citizenvoice (Warner
and Hefetz 2002).
Studies of contractingshow that when contractspecificationand monitoringare
difficult,servicesaremorelikely to be providedin-house(Nelson 1997).Thecomplexand
changingnatureof many public services requiresgovernmentsto engage in relational
contractingso that monitoringcan be an ongoing process (Kavanaghand Parker1999;
Sclar2000). Monitoringis costly in termsof timeandinformation.Casestudieshavefound
the cost of monitoringto averagenearly20 percentof contractcosts (Pack 1989;Prager
1994). Paroushand Prager(1999) suggest public managersdecide whetherto contract
subjectto the costs of in-houseproductionversuscontractingandmonitoringcosts given
the possibility the contractormay deceive. The monitoringprocess startswith service
specificationandcontinueswith governmentoversightandassessmentof servicedelivery.
Weakmonitoringcontrolwill yield lowerthanexpectedsavings(Sclar2000; Siegal 1999).
We hypothesizethat the levels of new contractingout and contractingback-inwill
be affected by a combinationof principal-agentproblems,governmentmanagement,
economic and marketconsiderations,and monitoringand citizen concerns. Typically
studiesof the decisionto make or buy look at a single point in time decision(Coles and
Hesterly1998;Nelson 1997). We believe thatcontractingis an ongoingprocessand that
monitoringis a key feedbackmechanism.By lookingover two time periods,we capture
some of those dynamics.

DATAAND METHODS
Longitudinal Construction of the Data Set

This researchcomparesnew contractingout with contractingback-in on managerial,

political,and economicgrounds.Data for this studyare drawnfromthe ICMA 1992 and
1997 Surveysof AlternativeService Delivery Approaches,the Census of Government
financefiles for 1992,andthe Censusof PopulationandHousingfor 1990.Everyfive years
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175

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Journalof PublicAdministrationResearchand Theory

since 1982, ICMAhas surveyedall countieswith morethan25,000 population(roughly

1,600out of 3,100 total)andcities over 10,000population(roughly3,300). Roughlya third
of all governmentscontactedrespond(31 percentfor 1992 and 32 percentfor 1997),
yieldinga sampleof roughly1,400governmentseachyear.TheICMAdatacover64 public
services and six alternativeservice delivery approaches:contractingto for-profitfirms,
nonprofitfirms, or to anothergovernmentor public authority;selling franchises,using
volunteers, and providing subsidies for the service. In this study any alternativeto
deliveringservicesentirelyby governmentemployeesis considereda case of contracting
out. The main alternativesto internalgovernmentprovisionare contractsto privateforprofitfirms and intergovernmental
contracting.Althoughlocal governmentshave used
contractingfor a long time, on averagethe majorityof services (58 percent)are still
provided directly by in-house provision in 1997. The surveys also ask managers68
questions about factors that are motivators,obstacles, or importantin implementing
alternativeservicedelivery.
We pairedresponsesfromthe 1992 and 1997 surveysto createa longitudinaldataset
with 628 respondingmunicipalities.Problemswith changesin surveydesign in 1988 do
not allow furtherlongitudinalcombination.Placesrespondingto the surveyin both 1992
and 1997 exhibithighermanagementcapacityand higherlevels of contracting.2
The ICMAsurveysask only how the serviceis providedcurrently,not whetherthis is
a new contractor longstandingprocedure.To determinehow muchnew contractingwas
actuallyoccurring,we neededa methodto trackchangesin formsof servicedeliveryfor
every servicefor each government.We codedthe datainto fourexclusivecategories.Our
methoddistinguishedwhethera serviceis providedentirelyby governmentemployees,by
mixed publicprovisionand privatecontracts,by contractexclusively,or not providedat
all. We combinedthese exclusive alternativesover time to createa transitionmatrixthat
allows us to trackchangesin servicedeliverymethods.See figure 1.
Thismatrixmethodenablesus to comparestabilityin formof servicedeliveryandto
assess shifts in the directionof provision-towards direct public delivery or towards
contracts.One challengewith this pairingapproachis that respondentsmay not classify
their service provisionin the same mannerin each surveyyear. In orderto increasethe
reliabilityof the analysis,we combinedthe two contractingalternatives,mixed public/
privateand totally contractedout into contractingout. We excludedthe "not provided"
optionfromour analysisbecausesuch events are not relevantto our analysis.
The reducedmatrixhas nine possiblecombinationsover the two time periodswhich
we groupintofourcategories:stablepublicdelivery,stablecontracts,new contractingout,
and contractingback-in.Stablepublic delivery is found in section 1 where government
deliversthe servicevia its own employeesin bothtimeperiods.Stablecontractingis found
in section2 wherethe governmentis eithercontractingthe servicein partor completelyto
an alternativeservice provider in both time periods. Although this option contains
movementsfrommixedpublicandprivatedeliveryto totallycontractedoutandvice versa,
we decidedto includethesemovementsin the stablecontractingcategorysincecontracting
continued.Thisminimizeschancesof recallerrorfromsurveyrespondentswho mayreport
In the paired surveys, the numberof places with a council managerform of governmentis significantlygreater
(72 percent)than in eitherof the full surveys 1992 (62 percent)or 1997 (64 percent)(X2 = 20.5,p < .05). Similarly,the
level of contractingout is higher in the paired surveys: in 1992, 17 percent in the paired survey comparedto 15
percentin the full survey (t = 5.05,p < .05) and in 1997, 20 percentin the pairedsurveycomparedto 19 percentin full
survey (t = 1.93, p < .05).
2

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Hefetzand Warner Privatizationand Its Reverse

Figure1
MatrixforTracking
Stabilityand MovementsoverTime.N = 628 municipalities
respondingto both
1992 and 1997 ICMA
surveys.Source:International
City/County
ManagementAssociation,Profile
of Alternative
ServiceDeliveryApproaches,SurveyData,1992, 1997, Washington,DC.

Current Survey
1. Public Employee
Entirely

3. Totally Contract

2. Mix Public/
Contract

4. Not Provided

Towards Contracting Out -Shedding Service

Not
Publ
...
Piovided

1. Stable Public
i. Public
Emiuployee
Pi ublic - Public
Entirely

Former

2. Mix
Public/
Contract

4 :Coitet
I
^ x

Survey

3. Totally
Contract

4. Not
Provided

2. Stable Contract

2. Stable Contract

Mix -+ Mix

Mix -4Contract

Stabontract22. Stable Contract

2. Stable Contract
I a

Shedding Service
Mix -->Not
Provided

n:
Contract-- Mix

ContractContract

New Service

New Service

Not Provided-4
Mix

Not Provided->
Contract

:Cohtac-t
- :b -':b c
New Service
Not ProvidedPublic

<-- Towards

Shedding Service
Contract-->Not
Provided
Service Not
Provided

Public Provision

Percentages (on Average per Government) for Boxes 1 -4

Stable Public
Stable Contract
27%
44%
,' .'
,',',~:;:;:::::;:;:;:;:;:;:;:;:;
;:^
:
I

New Contract
18%
::i
-i::
:'-11%

Contracting
Back-in

.1

such partial contracting differently in the two survey years.3 New contracting out is found
in section 3 (shaded darker) where services previously delivered entirely by government
employees now are delivered by contracts (either by mixed public/private or totally by
contracts). Contracting back-in is found in section 4 (shaded lighter) where previously
contracted services are brought back-in for entirely public delivery. Averaging across all
628 governments we find 44 percent of services are stable public provision, 27 percent are
stable contracts, 18 percent are new contracts, and 11 percent are contracted back-in. See
figure 1.

3 ICMA gives six differentcontractingoptions and allows respondentsto check more than one method of
delivery. Our interestis not in the differencesbetween how governmentscontractbut whetherthey contractor not. By
combining categories we reduce the decision options to use of any contractingor none. Thus recall errorwith
respect to type of contractingis not a problem for our analysis.

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177

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Journalof PublicAdministrationResearchand Theory

Table 1
IndicesComponentsand Means,U.S.Citiesand Counties
Oppositionand Monitoring
Oppositionindex
Has your local governmentencounteredany obstacle in adopting
private service delivery?
Oppositionfrom elected officials
Oppositionfrom local governmentline employees
Oppositionfrom departmentheads
Restrictive labor contracts/agreements
Monitoringindex
Does your local governmentuse any techniquesto systematically
evaluate its private service delivery?
Citizen satisfaction
Cost
Compliancewith delivery standards
Conductingcitizen surveys
Monitoringcitizen complaints
Conductingfield observations
Analyzing data and records

Mean 1992

Mean 1997

.21

.22

.21
.31
.17
.14
.34

.22
.34
.16
.17
.34

.33
.48
.39
.10
.36
.38
.36

.32
.45
.43
.15
.35
.35
.36

Profileof Alternative
ServiceDeliveryApproaches,
Source:International
Association,
SurveyData,1992,
City/County
Management
DC.
1997,Washington,
to both1992and1997ICMAsurveys.Sevencasesweredroppeddueto
Note:N = 621, numberof municipalities
responding
missingvalues.

Model and Independent Variable Definition

This study measures the impact of principal agent problems, government management,
market structure and monitoring on the level of new contracting out, and the level of
contracting back-in across all surveyed services. In addition, control variables for
population, fiscal stress, and government type are included.
Principal Agent Problems
Goal incongruence between government principals and their agents may lead to lower
levels of new contracting out and higher levels of contracting back-in. We include both
internal and external measures of principal agent problems. We create an opposition index
that includes managers' answers to ICMA questions on opposition from government
officials, employees, department heads, and the presence of restrictive labor agreements.
The index is the proportion of positive answers to these four questions.4 See table 1. Most
managers report opposition from one or less of these sources as reflected in an average
opposition level of just over 20 percent. Opposition is highest from line employees,
reported by one third of municipal managers, and next highest from elected officials.
Opposition from politicians and employees may reflect governmental resistance to change
or dissatisfaction with prior contracting experience. We distinguish former (1992) and
This index and the other indices used in this article are createdby summingpositive responses to component
questions and dividing by the total numberof questions in the index. 1/Q E=l fi wheref = 1 if checked "yes" to
question and 0 if not, and i = 1,2, ... N, questions.

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Hefetzand Warner Privatizationand Its Reverse

Table2
ModelVariables-Descriptive
Statistics,U.S.Citiesand Counties
Mean
Variable
Number of services newly contractedout
Number of services contractedback-in
Number of services provided, 1992 and 1997
Number of movements (in and out)
Percent new contractingout, 1992 to 1997
Percent contractingback-in, 1992 to 1997
Opposition index, 1992
Opposition index, 1997
Percent employed in public admin., 1989a
Percent for profit contracting,1992

SD

6.3
3.7
35
10
18
11
.21
.22
4.6
.17

6.0
3.7
9
5.6
16
11
.29
.28
3.0
.12

Council manager dummy, 1990b,c

.72

.45

Attempt to decrease costs, 1992 or 1997c

Political climate, 1992 or 1997c
Competitive bidding, 1992 or 1997c
Insufficientnumberof suppliers, 1992 or 1997c
Monitoringindex, 1992
Monitoringindex, 1997
Kept complaintmechanism in-house, 1992 or 1997c
Population, 1990a
Externalfiscal pressure, 1992 or 1997c
Per capita expenditure($), 1992d
County

.83
.30
.26
.24
.34
.34
.23

.38
.46
.44
.43
.36
.37
.42
139,734
.49
.61
.38

64,365
.59
.88
.17

Source. InternationalCity/CountyManagementAssociation, Profile of AlternativeService Delivery Approaches,Survey Data,

1992, 1997, Washington,DC.
Note: N = 621, numberof places respondingto both 1992 and 1997 ICMA surveys. Seven cases were droppeddue to missing values.
aU.S. Bureauof the Census. 1990. Population and housing. Washington,DC: U.S. Departmentof Commerce.
bU.S. Bureauof the Census. 1992. Census of government:Organizationfile. Washington,DC: U.S. Departmentof Commerce.
CDummyvariable = 1 if governmentchecked yes to question in 1992, 1997, or both, otherwise = 0.
dU.S. Bureauof the Census. 1992. Census of government:Governmentfinances.Washington,DC: U.S. Departmentof Commerce.

current (1997) levels of opposition to determine if they make a difference in contracting

direction. We include an interaction term of council manager and opposition level as we
expect professional managers may be more effective in managing internal opposition.
There also may be higher opposition in places where a higher percentage of the
local labor force is employed by the public sector. We include the percentage of the
labor force in public administration from the 1990 Census of Population and Housing.
See table 2.
Principal agent problems also are found in external relations particularly between
a government and its contractors. We expect principal agent problems to be greatest with
for profit contractors (as compared to nonprofit and inter-municipal contracting) as found
by Brown and Potoski (2003). If principal agent problems are a concern, places with higher
prior levels of for-profit contracting may have less new contracting out and more
contracting back-in. We also include a political climate variable (described under
management below) to capture external support for privatization.

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179

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Journalof PublicAdministrationResearchand Theory

Management

Professionalmanagementis a crucial determinantof local governmentperformance

(Kearey and Scavo 2001). The new public managementsuggests entrepreneurial
managers will both experiment with contractingout and employ internal process
improvementswhich could result in higherlevels of contractingback-in (Osborneand
Gaebler1992). Thus, municipalitieswith the council-managerform of governmentare
expectedto both contractout more and contractback-inmorethanothermunicipalities.
Contractinglevels may be affected by managerialattitudes.We create dummy
variablesbasedon ICMAmanagers'responsesto the followingquestionsof whichfactors
encouragedthe explorationof alternativeservice delivery:"internalattemptsto decrease
costs" and "changein politicalclimate emphasizinga decreasedrole for government."
We hypothesizethatmanagerswho give positiveresponsesto eitherof thesequestionsare
likely to engagein morecontractingoutandless contractingback-in.However,if contracts
fail to provide significantcost savings, managersmay decide to contractback-in.The
majorityof governmentmanagers(83 percent)in the ICMAsurveysreportedattemptsto
decreasecosts in either1992or 1997 or both.A muchsmallerpercentageof managers(30
percent)reportedchangein politicalclimateas an importantmotivator.See table 2.
Market Structure

Marketcompetitionis criticalto ensuregains from contracting,but competitivemarkets

for publicservicesmay not exist for all servicesor everylocale. Whencontractingmerely
replacesa governmentmonopolywith a privateone, gains will be limited. The ICMA
surveys ask if governmentmanagersface an "insufficientsupply of alternativeprivate
deliverers,"and almostone quarterof respondingmanagersreportthey do. Competitive
biddingbetweenthe publicandthe privatesectorscanbe usedto createcompetitionwhen
none exists. A quarterof respondentsreportthey "allowedgovernmentdepartmentsto
compete with the private sector in the bidding process." See table 2. We expect an
insufficientsupply of private suppliersto reducethe level of new contractingout and
increase the level of contractingback-in. Competitivebidding should have a negative
relationshipwith new contractingout. However,we would expect a positive relationship
with contractingback-inif it is primarilya resultof competitivebidding.
Monitoring and Citizen Concerns

Contractingrequiresa good monitoringsystem. The ICMA surveys ask about several

monitoringaspects including costs, citizen satisfaction,and compliancewith delivery
standardsand techniquessuch as surveys, field observation,data analysis, and citizen
complaints.Ourmonitoringindex is the proportionof monitoringactivitiesreportedby
each manager.See table 1. Less than half of our sample reportsany monitoring,but
monitoringcosts is the most common.Averagemonitoringlevels arestablebetween1992
and 1997, but the percentageof governmentsmonitoringcompliance with delivery
standardsand conductingcitizen surveysincreasesbetween 1992 to 1997. The level of
monitoringis higher than the level of opposition, suggesting governmentmanagers
considermonitoringto be a moreimportantfactorin theircontractingdecisions.We expect
governmentsthat exhibit higher levels of monitoringwill engage in higher levels of
contractingout and contractingback-in.
Case studyevidencefromBallardandWarner(2000) suggestsreversecontractingis
often a substitutefor monitoringor a responseto monitoringfailure.In such cases we
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Hefetzand Warner Privatizationand Its Reverse

Figure2
Back-Inby Place.N = 621 placesrespondingto
Outand Contracting
Frequencyof New Contracting
Source:
International
1992
and
1997
ICMA
both
surveys.
City/CountyManagementAssociation,
ServiceDeliveryApproaches,SurveyData,1992, 1997, Washington,DC.
Profileof Alternative

125

r~~,

100 o

75-

50-

New Contracting Out.

1
- - - Contracting Back-In

25 -

co =6.33

BI =3

10

15

20

25

30

35

# of Services Contracted
would expect a negative association between monitoring and contracting back-in. To
distinguish the effects of monitoring in those governments that monitor contracts from
those that don't, we create interaction terms of monitoring and council manager form of
government. A chi-square analysis of the interaction between council manager and
monitoring showed governments with council managers were more likely to report
medium or high levels of monitoring, while over 50 percent of places without professional
managers had no monitoring at all. Higher monitoring for the council managers may lead
to more contracting back-in. In contrast, for governments without council managers, who
do less monitoring, contracting back-in may serve as a substitute for monitoring. The
interaction terms allow us to differentiate these effects.
Citizen voice is also importantin managers' decisions to contract out or back-in. The
most direct measure of citizen voice in service delivery is whether the local government
"kept the citizen complaint mechanism in house." We expect governments that keep the
complaint mechanism in-house are less likely to newly contract out and more likely to
contract back-in.
Control Variables
Larger municipalities may have more opportunity for contracting due to the wider variety
of services provided and the more heterogeneous nature of citizen demand. They also may
have greater monitoring and management capacity. We use the log of population from the
1990 Census of Population and Housing to control for government size. We expect both
more contracting out and more contracting back-in among larger governments.
Fiscal stress also may encourage governments to explore alternative service delivery
arrangements. In many states, local governments' revenue raising capacity is limited
by state policy caps on the property tax. Fifty nine percent of municipalities reported
"external fiscal pressures, including restrictions placed on raising taxes, e.g. Proposition

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181

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Journalof PublicAdministrationResearchand Theory

Table3
Inor Out
Serviceswith HighestLevelsof Contracting
High ContractingBack-In

High New ContractingOut

Utility billing
Building maintenance
Heavy equipmentand emergency vehicles
Street repair
Traffic signs
Recreationfacilities
Tree trimming
Legal services
Street cleaning
Sanitaryinspection

Building maintenance
Recreationfacilities
Parklandscaping
Heavy equipmentand emergency vehicles
Data processing
Streetrepair
Public relations
Tree trimming
Crime prevention
Legal services

Source. InternationalCity/CountyManagementAssociation, Profile of AlternativeService Delivery Approaches,Survey Data,

1992, 1997, Washington,DC.
Note: N = 621, numberof places respondingto both 1992 and 1997 ICMA surveys.

13." Places with higher average expenditures may be more motivated to consider new
contracting out. Average per capita government expenditure from the 1992 Census of
Government is included as a control variable.
Counties have lower levels of council manager form of government, and this lower
managerial capacity may result in more instability in contracting.5We include a dummy
variable for county and expect it to be positively associated with both contracting out and
contracting back-in.
Dependent Variables
Our dependent variables are the level of new contracting out and contracting back-in as
a proportionof total service provision (including stable provision). We also runa thirdmodel
on the level of contracting back-in as a proportion of movements only (sections 3 and 4 of
figure 1) to capturethe interactioneffect between new contractingout and contractingbackin. We constructthese variables as an average across all services because we are interested in
what factors affect the level of new contracting out and contracting back-in by place. The
distributionof new contracting out and contractingback-in shows that more places contract
out and at higher levels (6.3 services on average) than contract back-in (3.7 services on
average). See figure 2. Many services have both high levels of new contractingout and high
levels of contracting back-in (building maintenance, heavy equipment and emergency
vehicle, street repair, recreation facilities, tree trimming, and legal services). See table 3.
We do not control for service type. Theoretically services which are more complex,
hard to specify, and which have high asset specificity are generally not considered good
candidates for contracting. Previous studies have attempted to classify the ICMA services
by these criteria (Stein 1990, 1993; Miranda 1994). However, we analyzed the ratio of
places contracting back-in to places newly contracting out for each of the 64 services in the
ICMA survey. The in/out ratio averaged 0.52 for most services, meaning half as many
governments contract back-in as contract out. See figure 3. This ratio by service is
comparable to the levels of contracting back-in and new contracting out by place as shown
in figure 2. Only ten services had in/out ratios greater than one. See table 4. Interestingly,
5 Council managerform of governmentis 37 percent among counties and 79 percent among cities (X2 = 77.5,
p < .000).

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Hefetz and Warner Privatization and Its Reverse

Figure 3
Ratio of ContractingBack-Into New ContractingOut By Service. N = 621 places responding to
both 1992 and 1997 ICMAsurveys. Source: InternationalCity/ County Management Association,
Profile of AlternativeService DeliveryApproaches, Survey Data, 1992, 1997, Washington, DC.
12-

9-

~>
6-

r,t

01,

In/Out Ratio, mean=0.52

\
~~--

JIU

Contracting Back-In/New Contracting Out Ratio

these servicesincludedboththose which would seem easy to contractout (such as utility
billing, vehicle towing, and commercialwaste collection) and those which are more
complex (prisons, elderly, and arts programs).This suggests that, as government
managersfactorin the uniqueaspects of local alternativesuppliermarkets,government
capacity,andcitizenpreference,the decisionto contractoutmaybe morespecificto place
thanto type of service.
We used the probitregressiontechniqueto transformthe actualproportionof new
contractingout to total provisionand contractingback-into total provisionfrom a 0-1
scale into full scale variablesfollowingthe cumulativestandardnormaldistribution.6
The
first two models present the standardnormal transformation(probit units) of the
probabilityto move betweenpublicandprivatedeliveryovertime as a functionof a set of
indicators.The thirdmodel uses the proportionof contractingback-inas a proportionof
all movements(stableservicesfor which mode of deliverydid not changeare excluded).
We use the probit transformationto expand the range of our data beyond the 0-1 constraintsof a proportionto
enhance compatibilitybetween the actual dependentvariableand the regressors.A proportioncannot be used as
a dependentvariable in an OLS because its scale is limited to 0-1, but the OLS predictionis unlimited.The
untransformedlevels of contractingexhibit a Poisson distribution,but the advantageof Probitover Poisson is its ability
to control for level of provision or level of movements(the controlbases in our Probitmodels). However,we also ran
a Poisson model (controllingfor provision level as an independentvariable),and it producedsimilarresults. We also
ran an OLS model with the ratio of contractingback-in to contractingout as the dependentvariable.While not as
consistent as the Poisson and Probitresults, this model also confirmedthe most importantfindings regarding
monitoring,management,and principalagent problems.As in the reportedmodel, the OLS results showed lower
monitoringwas associated with higher levels of contractingback-in, but governmentswith professionalmanagersor
managerswho monitor had lower levels of contractingback-in. Similarly,governmentsfacing opposition or using
higher levels of for-profitcontractingwere more likely to contractback-in. Lack of competition,which was only
significantin the contractingout model (both probitand poisson formulations),was not significantin the OLS version.
6

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183

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Journalof PublicAdministrationResearchand Theory

Table4
Back-Into New Contracting
Out
Serviceswith Highestand LowestRatiosof Contracting
Service with Highest Ratio
(More Likely to ContractBack)

Service with Lowest Ratio (More

Likely to ContractOut)

Daycare facilities
Utilities and gas
Utility billing
Vehicle towing
Homeless shelters
Commercialwaste collection
Prisons
Elderly programs
Arts programs

Hospitals
Payroll
Personnel services
Crime prevention
Museum
Building security
Sludge disposal
Trafficcontrol
Secretarialservices

Source: InternationalCity/CountyManagementAssociation, Profile of AlternativeService Delivery Approaches,Survey Data, 1992,

1997, Washington,DC.
Note: N = 621, numberof places respondingto both 1992 and 1997 ICMA surveys.

Probit analysis uses the maximum likelihood technique to fit the best coefficients for the
predictors (Norusis 1994).
RESULTS
Our analysis confirms our hypotheses about the complexity of the government contracting
process. Government managers consider a broad range of factors in the contracting
decision: monitoring and principal agent problems are most important,but market structure
also affects the contracting direction. Professional managers play a critical role in
managing these factors. See table 5.
Our results support the importance of monitoring and citizen concerns as raised by
critics of the new public management. Higher levels of monitoring are associated with
higher levels of new contracting out and lower levels of contracting back-in. Similarly,
governments with council managers are more likely to have higher levels of contracting
out and lower levels of contracting back-in. Government managers who are successful
users of contracts for service delivery understand the importance of monitoring systems
that assess cost, quality, and citizen satisfaction. Governments with lower levels of
monitoring are more likely to bring services back in-house. For these governments,
contracting back-in appears to be a substitute for monitoring. This may reflect limited
governmental capacity to monitor in general or selection of services for contracting that
were inappropriate candidates for market delivery in that locale. For example, counties
exhibited higher levels of contracting out and contracting back-in. This instability was
predicted and likely reflects the lower levels of professional management found in
counties.
There is a strong connection between professional management and monitoring. In
contrast to the overall monitoring effects, we find lower levels of new contracting out and
higher levels of contracting back-in among professional managers who monitor. These
professional managers recognize the need for monitoring to determine if contracting backin is required. Similarly, places which kept the citizen complaint mechanism in-house were
less likely to contract out and more likely to contract back-in. Professional managers
recognize the need to monitor and balance citizen concerns in the contracting process.
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Hefetz and Warner Privatization and Its Reverse

Table 5
Probit Results of ContractingOut and ContractingBack-In,U.S. Cities and Counties
Coefficients
Overall Servicesa
Overall Movementsa
New Out,
1992 to 1997

Back-In,
1992 to 1997

Principal-agent
Opposition, 1992
Opposition, 1997
Manager*Opposition, 1992
Manager*Opposition, 1997
Percent in public administration,1989
Percentprior for profitprivatization,1992

-.233***
.105
.143
-.011
-.014***
-.958*

.194**
.062
-.092
-.153
-.006*
.969

.368***
.019
-.214
-.178
.004
1.881*

Management
Council manager
Attemptto decrease costs
Political climate

.065*
-.084**
.019

-.056
-.029
.060**

-.135**
.037
.068*

-.007
-.104**

.002
.012

-.001
.109*

Monitoringand citizen concerns

Monitoring, 1992
Monitoring, 1997
Manager*Monitoring, 1992
Manager*Monitoring, 1997
Kept complaintmechanism in-house

-.055
.432
.047
-.154**
-.050

-.117
-.435***
.147*
.162*
.069*

Controls
Census population, 1990
Externalfiscal pressure
Priorper capita expenditure,1992
County
Constant

-.029**
.013
.005
.066*
.451

.063*
.007
-.009
.067*
-1.95**

.095*
.009
-.012
.0004
-1.49**

Model reliability
Pearson goodness of fit chi-square

p = .000

p = .000

p = .000

Back-In,
1992 to 1997

Marketstructure
Competitive bidding
Insufficientnumberof private suppliers

-.073
-.887
.116
.349***
.135**

Source: InternationalCity/CountyManagementAssociation, Profile of Alternative Service Delivery Approaches,Survey Data,

,
1992, 1997, Washington,DC.
Note. N = 621, numberof places respondingto both 1992 and 1997 ICMA surveys. Seven cases were droppeddue to missing values.
IanModels 1 and 2 the proportionis based on all services. In Model 3 the proportionis based on all movements (in and out) with
stable services excluded.
**
< .05; **p < .01.
*p < .10;

Principal agent problems, both internal and external, show the expected effects on both
contracting directions. External principal-agent problems, as reflected in the prior level of
for-profit contracting, have a larger effect than internal opposition in reducing the level of
contracting out and increasing the level of contracting back-in. Internal opposition exhibits
the same directionality but as a lagged effect on the direction of contracting. A higher
percentage of the labor force in public administration also leads to lower levels of new
contracting out but has no effect on contracting back-in. Unlike monitoring where there was
a significant managerial effect, we do not find an effect of managers on opposition.

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Journalof PublicAdministrationResearchand Theory

Marketstructurewas less importantthanmonitoringor principalagentproblemsin

explainingthe level of contractingin andout. Lackof competition(an insufficientsupply
of alternativeserviceproviders)led to less new contractingandmorecontractingback-in
as expected.In Model 2 therewas no effect on contractingback-inbecausein situations
with inadequatecompetition,servicesare less likely to be contractedout in the firstplace.
Howeverin Model 3, where only those services that changedform of serviceprovision
(movementsin or out) were used as the base, an insufficientnumberof privatesuppliers
was positively associated with contractingback-in. Competitive bidding was not
significantin any of the models.
Managersappearto be aware of problemswith markets.For example, managers
who are attemptingto decreasecosts are less likely to contractout, and those who face
a political climateemphasizinga decreasedrole for governmentexhibithigherlevels of
contractingback-in. These results were contraryto our expectations,but they lend
supportto case study and other empirical evidence that governmentmanagers are
pragmaticand recognize that contractingout does not always result in cost savings
(Ballard and Warner 2000; Boyne 1998; Sclar 2000; Warner and Hebdon 2001).
Similarly,we expectedfiscal pressuremight motivategovernmentmanagersto contract
out services to get arounddebt limits and tax ceilings set by the state. However,these
fiscal constraintsshow no significanteffect on contractinglevel or direction.We also
controlledfor priorper capitaexpenditureand foundno significantrelationshipbetween
governmentexpenditureand contractingbehavior.These results lend supportto other
studies that show limited cost savings from privatization(Boyne 1998; Ferris 1986;
Hirsch 1995; Milne 1997).
We hadhypothesizedthatmunicipalitieswithlargerpopulationsmightbe morelikely
to contractout andless likely to contractback-in.The controlvariableshowsthe opposite
result. This might be explained by market structure,political opposition, or citizen
concerns.Largemunicipalitiesare more likely to enjoy internaleconomiesof scale, but
they also may face more rigid bureaucraticstructuresand a more heavily unionized
workforce.In addition,the more heterogeneouspopulationsin largercities may make
servicedeliverymorecomplexandharderto monitor.Governmental
productionmaymeet
these challengesbetterthanprivatecontracts.
DISCUSSION

Our results show managersare pragmaticprofessionalswho balance monitoringand

citizen concerns,principalagent problems,and marketstructurein determininghow to
providepublicservices.Managementandmonitoringareimportantin ensuringcontracting
success, but our results show monitoringis critical. Cost savings are not implicit in
privatization.They can only be assuredthroughmonitoringor competition.Howeverour
results give more weight to monitoring.Many public services are hard to monitor
effectively. For some services in some localities, market solutions are not optimal.
Contractingback-inenablesgovernmentsto reversepoor contractingchoices.
Principalagentproblemsdo leadto morecontractingback-in,butexternalchallenges
of for-profitcontractingare more importantthan internalopposition.When services are
provideddirectlyby the publicsector,internalaccountabilitysystemsare in effect. These
include civil service rules; the experience, longevity, and political insulation of
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Hefetzand Warner Privatizationand Its Reverse

government employees; and the political power of citizens, elected officials, and special
interests (Hirsch and Osborne 2000). Under contracting, new formal systems of monitoring
must be created. Without them, quality performance cannot be secured. Our results confirm
the importance of public management and monitoring in the contracting process.
CONCLUSION
Previous theoretical and empirical analyses, which view the government contracting
process as a dichotomy between public and private provision and government and market
failure, have failed to notice the phenomena of contracting back-in. We have explored why
governments that contract out service delivery also contract back-in. We argue it is time to
move beyond simple market failure and government failure frameworks and instead look at
the full arrayof factors that influence government contracting behavior. Privatization is not
a one way street. Government managers contract out and back-in as they seek to balance
efficiency and voice within the constraints of local market contexts.
Local government service delivery is a complex process. Even when formal
monitoring systems do exist, it can be difficult to specify the full range of service attributes
or allow for sufficient flexibility to be responsive to a changing environment (Kavanagh
and Parker 1999; Sclar 2000). Our results supportcritiques of the new public management
by showing how government managers balance contract monitoring and citizen voice with
principal agent problems and market structureto decide whether to contract out or back-in.
Contracting back-in should be seen as another service delivery alternative in the array of
alternative delivery choices (Warer and Hebdon 2001). It reflects governments' role in
structuring markets for public goods and governments' primary responsibility to ensure
quality and citizen voice in service delivery.
The new public management has been challenged for eroding the "publicness of
public service" (Christensen and Laegried 2002, 291). Public choice theory offers markets
as a mechanism to improve public service delivery, but we have shown that even under
contracting, market solutions are not a substitute for government planning and
management. The complexity of public service delivery, the limits of market approaches,
and the need to engage citizens in the provision of public goods require governments to
manage markets by contracting out and contracting back-in. Our analysis provides
empirical support for the new public service that argues public managers do more than
steer a marketprocess; they balance technical and political concerns to secure public value.
This emphasizes the importance of planning over markets.
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