CONTRACTING OUT BY THE PUBLIC-SECTOR - THEORY, EVIDENCE, PROSPECTS

Unlike privatization, contracting out (or simply 'contracting') does n ot generally involve the sale of publicly owned assets. Yet it has bee n widely used as a mechanism for reform of public-sector service provi sion. Contracting introduces ex-ante competition-competition for the m arket through competitive tendering. This article examines both the th eory and evidence of contracting by the public sector. It considers th e theoretical conditions, such as contractual incompleteness and the o wnership of physical assets, which may impede efficient contracting. I t also reviews the international evidence which suggests that savings in the order of 20 per cent are achievable, without sacrificing the qu ality of service provided In the UK, savings of between pound 240m and pound 280m have been estimated for contracts let at the central gover nment level. Substantial savings have also been generated by contracti ng at the local government level.