Local governments can provide services with their own employees or by contracting with

private or public sector providers. Contracting out is defined as the application of competition to a set
of economic activities which were previously immune to it (Domberger, 1998). Contracting is the
purchasing mechanism used to acquire a specified service, of a defined quantity and quality, at an
agreed-on price from a specific provider for a specified period while contracting out is the design and
implementation of a documented agreement by which the government who is the purchaser provides
compensation to the provider who is the another party outside of the government in exchange for a
definite set of services for a specific target population (Abramson, et al., 2009). Meanwhile, Menell
and Phelps (2001) said that contracting can be easily simplified as a process in which government
comprising city, state, federal or agencies purchase services from the private sector which either from
for-profit or not-for-profit organizations through a competitive bidding system designed to force down
costs. Domberge in his book entitled The Contracting Organization : A Strategic Guide to
Outsourcing stated that the distinctive feature of contracting out is what economists refer to as ex
ante competition which means competition for the market instead of competition in it. He also added
that it involves the selection of a contractor for the supply of goods or services to commence at
a future date which has been set. Contracting can also be explained as a binding agreement in which a
public institution pays a private firm or non-profit organization to provide a specific level and quality
of public service. Citizens as customers through their taxes or user fees pay the government, which in
turn pays the contractor. While Beata Mikusova Merickova, and Zuzana Vozarova in their study
entitled Efficiency of Contracting out Local Public Services state that contracting public services
with private for-profit and non-profit firms is one of the most prevalent types of privatization, mainly
at the local government level. Under this arrangement, the government retains responsibility for
provision of the service but hires private firms to produce the service (Nemec, 2002). Merickova.,
Nemec and Vozarova (2013) also said that under contracting arrangements, a government retains
responsibility for providing a service, but hires private firms to produce and deliver it. They added, the

theory of contracting suggests that, provided certain conditions are met, contracting out has the
potential to improve efficiency without sacrificing quality, compared to direct supply by public
organizations. In developed countries, contracting out can sometimes improve the performance of the
public sector.
There has been an increased number and focus on contracting initiatives at the state and local
level over the last three decades, mainly for support services (Menell and Phelps, 2001). Local
authorities have too much focus in discharging their responsibilities, therefore they need to give some
of their work to any external organization to maintain or increase the quality of the service delivery to
the citizen. Menell and Phelps (2001) also said that the cost for implementing all of the services are
very expensive and this lead the cities and states to rely on contracting in areas such as social services,
transportation, mental health care, corrections and prisons, health services, sanitation, street and
highway maintenance, and airport management.
The prime objectives of contracting out include cost reduction and efficiency enhancement,
quality improvement and also curbing the power of producer interests (Zinyama, 2014). Some
supporters of contracting out see it as a way to reduce costs. Zinyama (2014) also said that the
supporters also believe that private companies are more effective than government-more nimble
because they are not constrained by civil service rules and other legal restrictions that could disrupt
their flexibility.
Contracting out services improve the quality of service delivery in local area when the local
authority can come out with certain policy management to ensure the best service quality from the
service provider such as vendor, contractor and others to deliver the public services on the behalf of
the local government (Gaeble, Gaeble, & Gaeble, 1992). Government can also establish regulation,
ensuring equity, preventing discrimination and exploitation from the monopolistic service provider.
Contracting out services can also improve the quality of service delivery in local area when the local

authority can ensure the continuity and stability of service and also ensuring social cohesion in the
local area. For example, when the local authority chose the best service provider to collect or clean the
rubbish at residential area and at the citizens focus areas such as recreational parks, then the
cleanliness in the surrounding area and public health will be guaranteed, therefore, prosperity of the
citizen will be achieved when vector-borne diseases can be avoided.
Apart from that, contracting out services can also help to improve the quality of service
delivery in a local area by promoting competition among service providers and encouraging
governments to provide services in times of increasing demands and shrinking resources (Denhardt &
Hammond, 1992). When there is competition between for-profit firms and non-profit organizations,
the costs are lessened because there is less threat of opportunistic behavior on the part of the
contractor. Several studies demonstrate that cost saving from contracting with for-profit firms is
sometimes achieved by reducing the quality of service. Contracting is designed to reduce the
expensiveness and inefficiency of existing public vendors by slashing and balancing budgets, lowering
costs, cutting back on unnecessary personnel, hiring cheaper labor, and eliminating government
benefits packages (Fruchter, Fruchter, Frucher, & Berne, 1996). To avoid losing the service, the
service providers or the vendors continuously seek to improve their performance and quality of
service. Competition also motivates all participants to attempt achievement of minimized costs and
maximum efficiency and productivity for example among the waste collection and waste disposal
services providers.
Besides that, contracting out services also improve the quality of service delivery when the
government only will hired a specialized or professional organization or person to conduct a particular
services with a minimal cost through bidding process. Through a bidding process, even if the hired
service provider is the most affordable, the quality of service that will be given by the service provider
it is probably the best because the authorities will evaluate them according to certain criteria before
giving them the contracts. According to Rehfuss (1993), the government will monitor the service
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provider by requiring the contractor to presents periodic reports, review all the reports carefully for
adherence to the written contract compare wage rates and equipment charges for materials or rentals
with the contract, verify that all services, material, labour and equipment were actually received, used
or consumed ,initiate all change orders that affect the contract. Besides that, the government will also
make on-site inspections where the service provider are needed to give report on the results of those
inspections, comparing accomplishments to the prescribed specifications. Therefore, this will ensure
the best quality of service with minimal cost. Stein (1990) said that shifting service provision and
production to other institutions allows municipal governments to immediately reduce their labor costs,
which is the largest and fastest growing component of any local government budget. This mean,
instead of the government use a lot of money to do the service that they are not familiar of, it is better
to hire certain organisation with their own expertise to do the job efficiently in minimal cost.
Apart from the local government and the citizen gaining advantages from contracting out
services, the service provider also gaining as much benefits from it. Contracting out services can also
help the service provider to improve the quality of service delivery in a local area. Gaeble, Gaeble, &
Gaeble (1992) said that public sector in-house monopolies are inefficient bureaucracies as it satisfy
only the wishes of producer groups rather than consumers. So, contracting out is the best way to
prevent this from occurring. Service provider is preferred to do certain task when public sector
inefficiency is reflected in restrictive labour practices and low productivity with its effects on rates,
taxes, subsidies and government expenditures. By contracting out services to other agencies, it can
help to avoide those inefficiency by the public sector agency. A part from that, contracting out public
services also can promote accomplishment, between the service providers where it allows regular
recontracting by public procurement agents and can lead to new ideas, modern equipment and changes
in traditional methods of working. This will result in the increase of status in that area when the
service provider uses latest technology to perform the service to satisfy public need. Next is
contracting public services can ensure the best quality of services as the successful firms in the
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competition are subjected to the incentives and penalties of a fixed price contract. The service
providers can also be penalised for poor quality, delays and unreliability that will result in cost savings
and better value for money.
We can see more clearly on how contracting out services can help to improve the quality of
service delivery in health care services. Measurement of public health outcomes in area is very
complex. In addition, contracting out of health and human services is expected to be constrained by
many factors as we do not know to put a value in it. External providers may be reluctant to provide
human services under uncertain criteria for service output. Thus, a governmental unit or a non-profit
organisation may be more optimal providers than profit-seeking firms for services of this type.
According to an article written by Maureen Lewis entitled Contracting out Health Services:
Broadening Coverage, Raising Quality, Lowering Cost, she said that contracting out can be very
helpful in health care services as it is actually very effective to treat the high risk or hard to reach
populations in remote areas for example. She also added that the services usually is done by the
private groups as the government may not be able to focus entirely on this group due to certain
constraints. Contracting out allows governments to use public funding to pay non-state providers, such
as non-government organisations (NGOs) or for-profit groups, who have the capacity to deliver an
agreed set of health care services. As it offers greater flexibility than the public sector, it can deal with
the problem of low quality public services or unmotivated staff better. As the advantages of
contracting out include economic incentives it results in more measurable performance and increased
efficiency due to competition. NGOs are more flexible than governments where they can respond even
faster in changing circumstances and have more decentralised decision-making. They often have a
bond with local communities or experience of specific services, which enable them to scale up or
intensify their activities. NGOs can also more easily modify the type, location and staffing of services
they offer as needs and available resources change.

Maureen Lewis also said that contracting out has resulted in better provider performance,
lower costs, shorter waiting times and higher patient satisfaction. Some services are preferable to be
contract out, such as those reaching high risk groups affected by conflict or with little health system
contact. NGOs have the appropriate infrastructure and approach, and basically already serve those
particular groups, who are often physically or socially isolated. Contracting out services has worked
well in many settings. From the example in the article of Contracting out Health Services:
Broadening Coverage, Raising Quality, Lowering Cost, in post-conflict situations, such as
Afghanistan, hiring the NGOs become the only way to provide health services. Other than that, a
susuccessful HIV and AIDS programme in Brazil resulted in a fast prevalence reduction, when it was
relied on the contracted NGOs to provide prevention, treatment and counselling services to the high
risk groups. Many other programmes that contract out public health care services have also been
successful. Experiments in contracting out nutrition, hospital or public health care services across five
Central American countries also showed excellent outcomes. Besides that, programmes in Uganda,
Cambodia, Haiti and Madagascar have also resulted in combinations of better provider performance,
lower costs, shorter waiting times and higher patient satisfaction (Lewis, 2008).
As a conclusion, we can see from the example given which proved that contracting out
services do help in improving the quality of service delivery. It helps to save cost and to gain or to
improve the efficiency of service delivery, reduce expenditures for the local government, and
potentially improve the quality of services delivered.