The Factors of Public Authority to Contract Out an Activity - Coursework Example

What are the factors that a public ity should consider in deciding whether to contract out an activity or undertake it in-house Introduction Within the international community the role of states has been alternated in accordance with the needs of people and development of technology. Within this framework, states around the world have been called in order to develop their cooperation with the private sector in order for their services to be more effective and for their projects to have more chances to be completed successfully. Blankart (1987) examined the above issue referring especially to the case of European Union, a Union of interests and common targets, which has been extensively used as a ‘vehicle’ for the achievement of specific targets of its member states. The views of Blankart can be used equally for all states around the world when having to evaluate the criteria under which the development of specific contractual agreements with the private sector will take place. Of course the fact that the European Union is an area in which specific principles are applied commonly on all its member states may lead to the assumption that countries around the world may follow different strategic plan (when contracting out). However, there are always the principles of the international law which have to be respected by all states internationally. The power of states to proceed to specific decisions when having to contract out cannot be controlled; only if there is any threat for the safety of the public (referring to the various aspects of daily social, cultural and financial activities) or the state then it is possible that a state’s decision to contract out is rejected as inappropriate and opposite with the common interest. The above fact can be considered as the main differentiation between the public and the private authority (as of the extension of the rights of leaders in the organizations belonging to each one of the above categories). Regarding this issue, it is noticed by Klein (2006, online article) that ‘the basic unit of political authority is the nation state, which is defined in terms of its territory; this territorial limitation fragments political authority; private authority can operate globally in a way that public authority cannot; not being territorially defined, private authority can more easily span the globe to perform global governance’. In accordance with the above, states have to take into consideration a series of issues when having to decide to contract out. Most commonly, governments around the world have to prefer primarily the public services when a specific task is to be completed; however in case that the necessary infrastructure does not exist in public organizations then contracting out is the only solution. In fact, it has been found that ‘Energy, water, telecommunications services, postal services, and railways services, are increasingly provided by private providers that operate on a more or less liberalised market; in contrast, the introduction of consumer rights in this field has only begun’ (European Review of Contract Law, 2005, 323). In other words, contracting out is related mostly with the completion of specific projects in which the machinery or the knowledge required cannot be found in the public sector - where the volume of work is a constraint for the employees to deal with the completion of demanding projects. Current paper examines the factors that can influence a public authority when having to decide whether a specific project will be completed by a public or a private organization, i.e. whether the specific task will be completed in-house or whether the specific authority will contract out. The identification of the main aspects of the issue under examination will be achieved mainly through the work of the following three researchers/ theorists: Blankart (1987), Shleifer (1992) and Hart (1996). The studies of other theorists will be also presented at the level that they can be characterized as quite relevant with the paper’s main issue. 2. Public authority and contracting out – presentation of the factors that influence the relevant decision In the literature and the empirical research there are many factors that have been found to be related with a public authority’s decision to contract out. Regarding this issue, it is noticed by Dovalina (2006, online article) that ‘the data indicates that the ethical dilemmas identified in the literature are considered to be important concerns at most of the contracting out process steps; the ethical dilemmas of Integrity and Accountability were found to be of most importance during the seven different steps of contracting out’. In other words, the decision of a public authority to contract out is primarily based on the ethical principles of a particular society. In the long term, the relevant decision of the public authority is usually examined as of its appropriateness; most commonly the result of the relevant effort (i.e. the effectiveness of the private organization involved in the particular project) or else the achievement of the target set are decisive criteria when evaluating the decision of a public authority to contract out. It should be noticed that contracting out is in many cases strongly criticized as being an inappropriate method to complete specific projects related with the public sector. The above assumption could be possibly justified by the fact that no personal interests could be developed within projects that are related solely with the public sector. On the other hand, it could be stated that since the completion of projects that belong to the public sector by private organizations has more chances to be achieved, the choice of individuals or firms - that work within the private sector – when a public project has to be completed, should be considered as absolutely justified. In the theory and the empirical research many different views have been developed regarding the decision of public authorities to contract out under specific circumstances. In accordance with Freedland et al. (2003, 465) in UK a series of ‘ostensibly contractual or contract-like arrangements between public authorities and members of society whose behaviour it is judged necessary to manage and control’ can be observed across the country. All these arrangements are characterized by the above researchers as offering ‘amount to instruments of illiberal policy, both in procedure and implementation’ (Freedland et al., 2003, 465). In other words, there can be no specific criteria applied when the evaluation of a public authority’s decision to contract out is attempted. Apart from the general principles of law and the ethics as recognized by the local and the international authorities, a series of other elements can be used as criteria for evaluation of the above described decisions (demands of the project under completion, availability and appropriateness of the public organizations to execute the relevant project, skills of employees of the public sector to respond to the needs of the above project and so on). It should be noticed that there are specific sectors, like the information technology, where contracting out is almost ‘obligatory’ – public organizations do not have the necessary infrastructure in order to complete the relevant projects. The specific issue has been examined by Ya et al. (2007, 531) who noticed that ‘important factors affecting the state-level contracting decision are population size, market size, the competitiveness of the bidding process, the professional management of contracts, the partisan composition of legislatures, and political competition’. The above researchers refer specifically to the information technology sector and more specifically to the decisions taken by public authorities in the USA to contract out in case that the completion of specific projects related with IT systems or networks is required. A characteristic example of the conditions under which a public authority decides to contract out is that of the National Health Service (NHS) in Britain. After examining the criteria used by the above public authority when deciding to contract out, Allen (2002, 255) found that ‘classical contracting is an inappropriate model for NHS contracts, but relational contracting is not an entirely appropriate model either; contracting was found to have increased the accountability of providers in respect of some financial matters, but not in respect of the quality of district nursing services’. The decision of a public authority to contract out has been criticized by theorists and researchers using different criteria. In most cases it is supported that such a decision should be carefully reviewed in advance as of its consequences to the public financials (i.e. if there is any chance that the initial cost will be increased unexpectedly – without the consent of the public authority – or if the contractor will abandon the project before its completion). The above issue has been examined by Blankart (1987). The specific researcher (as already noticed before) supports the public organizations compared to the private ones when the completion of a public sector is required. However, the basis for his assumptions is the European Union and the political and legal conditions applied on the specific area; for this reason his views should be examined as of their applicability especially in modern era where the completion of specific tasks (like the implementation and monitoring of complex IT systems or the construction of buildings of specific size) cannot be achieved by the public organizations (there is no appropriate infrastructure for the completion of the relevant project). On the other hand, it is noticed by Blankart that the practices followed by European Union (where public organizations are preferred from the private ones when the completion of a specific public project is needed) can be used in other areas worldwide but only under the terms that the public organizations can respond to the needs of the particular project. Otherwise, private organizations should be preferred (as in the case of European Union). On the other hand, despite the fact that contracting out is necessary in some cases because of the circumstances (lack of appropriate infrastructure in the public sector or lack of knowledge for the realization of the relevant project by civil servants) there is no appropriate design and development of the particular initiatives (efforts to contract out). The behaviour of officials within the public sector should be regarded as being the main reason for the potential failure of the above initiatives. For this reason, it is suggested by Tirole (2994, 2) that ‘the officials can manipulate information to favor specific interest groups; the civil service and the regulatory structure are then partly designed to limit such manipulations’. However, it is not sure that this behaviour can be controlled by the state. On the contrary, in most cases the supervision over the procedure followed for the realization of the relevant projects (contracting out) is limited because politicians at all level of hierarchy focus on the enforcement of their career. Indeed, Tirole (1994, 7) notices that ‘the main drive for civil servants and politicians is career concerns’. The specific target, which is a priority for the people belonging to the above categories (referring to the view of Tirole) can lead to severe delays the realization of any project that refers to the cooperation between the state and the private sector for the completion of a specific task. The views of the above researcher are in accordance with those of Shleifer (1998). However, Shleifer supports that ‘private ownership should generally be preferred to public ownership when the incentives to innovate and to contain costs must be strong; in essence, this is the case for capitalism over socialism, explaining the dynamic vitality of free enterprise’ (Shleifer, 1998, 133). The explanation of the importance of private organizations versus the public ones is based on the fact that the former are necessary in order for the local economy to be improved (funds available in the private sector are much higher than those in the public sector). The above view can be justified if taking into account the role of commercial activity of private organizations to the improvement of a country’s financial position. From a different point of view, if political decisions are taken on the basis of achievement of specific targets (related with particular political interests) then it is very likely that the choices made when contracting for a specific project will be inappropriate. In this case, the opposition between the ‘socialism’ and the ‘capitalism’ seems to be made stronger; however it is mainly the second that is usually served through the various decisions of public authorities – referring to all countries internationally – to contract out. Regarding this issue it is noticed by Shleifer (1998, 133) that ‘the case for private provision only becomes stronger when competition between suppliers, reputational mechanisms, the possibility of provision by private not-for-profit firms, as well as political patronage and corruption, are brought into play’. In other words, the decision of a public authority to contract out can be influenced by many factors; most commonly the effectiveness of a private organization regarding the completion of projects of a specific type is the criterion for the assignment of a specific project to the relevant organization. It should be noticed that political conditions and facts have always their role in the development of such a decision by the public authorities of a specific state; the level of ‘binding’ of the state from the relevant agreements is also reviewed carefully in advance in order to avoid any unexpected negative outcome (Stewart, 1993, Osborne et al., 1993). In other words, a public authority should not decide to proceed to the assignment of a project of the private sector to a contractor of the private sector when the terms and conditions of the particular agreement can be characterized as extremely ‘binding’ for the state; there is also another risk; it is possible that the conditions for the realization of such a project are appropriate but there is no sufficient time for an appropriate preparation of the relevant proposal. From a different point of view it is noticed by Freedland et al. (2003) that the intentions of a public authority in order to contract out can be related with the achievement of specific targets; in other words, it is quite possible that there is no appropriate monitoring of the organizations operating in the public sector and for this reason, private organizations are chosen as the most appropriate for the completion of a specific project. The above assumption is based on the examination of the activities of a series of public agencies; it is proved that the various aspects of the operational activities of these agencies are not effectively controlled; therefore, there could be no guarantee that the tasks assigned to these agencies could be completed successfully. In this case, private organizations that work in the particular industry should be preferred instead. In the above case, a specific issue is mentioned: this of the responsibility of the government to control all activities of the organizations operating in the public sector. The particular issue has been highlighted by Hart et al. (1996). In accordance with the views of these researchers the development of the intervention of private organizations within the public sector (through the completion by these organizations of specific projects that are of ‘public interest’) is depended on the effectiveness of the state to ensure the quality of the services provided by the public sector; under these terms, the assignment of any public project to a private organization shows that there are no appropriate measures taken by the particular state in order to keep the quality of the services of public sector at high quality; from another point of view, it could be assumed that a country’s government does not have the funds required in order to proceed to the update of the machinery/ material used by its organizations (referring to the public sector). In this context, contracting out is proved to be the only available solution for the public authorities of the specific state. 3. Conclusion One of the major priorities for governments around the world should be the development of the various aspects of the public sector in terms that the services provided to the public to be of the highest possible quality; however in practice the achievement of the above target is rather impossible. Because of the rapid development of technology, the update of the infrastructure of the public sector and the provision of training to employees are rather limited. Under these terms, contracting out seems to be the only available solution for public authorities around the world. On the other hand, it has been proved that there are sectors, like the information technology, where contracting out is the most common practice followed by public authorities in all states around the world; the reason for that is clear; in public sector where bureaucracy causes severe delays to the realization of various projects (even to the completion of simple tasks) the rapid and continuous update of IT systems cannot be achieved without the intervention of a private organization. In other words, contracting out cannot be criticized as being necessarily a negative aspect of administration (referring to the public authorities around the world); on the contrary, it could be characterized as a necessity especially in cases where the relevant organizations of the public sector do not have the resources and the infrastructure in order to complete a particular project. References Allen, P. (2002) A socio-legal and economic analysis of contracting in the NHS internal market using a case study of contracting for district nursing Social Science and Medicine 54(2): 255-266 Blankart C (1987) Limits to Privatization European Economic Review, 31: 346-351 Dovalina, J. (2006) Assessing the Ethical Issues Found in the Contracting Out Process. Department of Political Science, Texas State University, online available at http://allacademic.com/one/www/research/index.php?cmd=www_search&offset=0&limit=5&multi_search_search_mode=publication&multi_search_publication_fulltext_mod=fulltext&textfield_submit=true&search_module=multi_search&search=Search&search_field=title_idx&fulltext_search=carri&PHPSESSID=d640def87d1fd1e0c5d770d735b9bc16 European Review of Contract Law (2005), 1(3):323-345, available at http://www.atypon-link.com/WDG/doi/abs/10.1515/ercl.2005.1.3.323?cookieSet=1&journalCode=ercl Freedland, M., King, D. (2003) Contractual governance and illiberal contracts: some problems of contractualism as an instrument of behaviour management by agencies of government. Cambridge Journal of Economics, 27: 465-477 Hart O, A Shleifer and R Vishny (1996) The Proper Scope of Government: Theory and an Application to Prisons NBER Working Paper No 5744 Klein, H. K. (2006) "Cross-Border Private Law or Global Public Regulation? Using Contracts to Construct a Global System of Internet Regulation" Paper presented at the annual meeting of the International Studies Association, Town & Country Resort and Convention Center, San Diego, California, http://www.allacademic.com/meta/p100627_index.html Osborne, D., Gaebler, T. (1993) Reinventing Government (Reading, Massachusetts: Addison Wesley). Shleifer, A. (1998) State versus Private Ownership. Journal of Economic Perspectives, 12(4): 133-150 Stewart, J. (1993) The limitations of government by contract Public Money and Management July-September pp.7-12. Tirole J (1994) The Internal Organization of Government Oxford Economic Papers, 46: 1-29 Ya Ni, A., Bretschneider, S.(2007) The Decision to Contract Out: A Study of Contracting for E-Government Services in State Governments. Public Administration Review, 67(3): 531-544 Webster E and G Harding (2001) Outsourcing Public Employment Services: The Australian Experience Australian Economic Review, 34(2): 231-42 Read More