Government capacity to contract: health sector experience and lessons

Government capacity to contract:health sector experience and lessons

SARA BENNETT* and ANNE MILLS

Health Economics and Financing Programme, London School of Hygiene and Tropical Medicine, UK

SUMMARY

Using case-study material of contracting for clinical and ancillary services in the health caresector of developing countries, this article examines the capacities required for successfulcontracting and the main constraints which developing country governments face in develop-ing and implementing contractual arrangements. Required capacities di�er according to thetype of service being contracted and the nature of the contractor. Contracting for clinical asopposed to ancillary services poses considerably greater challenges in terms of the informationrequired for monitoring and contract design. Yet, in some of the case-studies examined,problems arose owing to government's limited capacity to perform even very basic functionssuch as paying contractors in a timely manner and keeping records of contracts negotiated.The external environment within which contracting takes place is also critical; in particular,the case-studies indicate that contracts embedded in slow-moving, rule-ridden bureaucracieswill face substantial constraints to successful implementation. The article suggests thatgovernments need to assess required capacities on a service-by-service basis. For any successfulcontracting, basic administrative systems must be functioning. In addition, there should bedevelopment of guidelines for contracting, clear lines of communication between all agentsinvolved in the contracting process, and regular evaluations of contractual arrangements.Finally, in cases where government has weak capacity, direct service provision may be a lower-risk delivery strategy. # 1998 John Wiley & Sons, Ltd.

INTRODUCTION

After a decade where there has been a focus on ways of reducing the role of govern-ment in the economy, there is now recognition that a smaller role for government inthe direct provision of services may mean a bigger role for government in policydevelopment, co-ordination and regulation. Attention has turned to the question ofhow to ensure a capable government able to perform these core roles. The 1997WorldDevelopment Report focuses upon these very issues: what role the state should playand what measures need to be taken to ensure that it performs these roles well (WorldBank, 1997).

One of the central strategies for removing government from the `coal-face' ofservice delivery has been the contracting-out of services. Contracting-out has been

CCC 0271±2075/98/040307±20$17.50# 1998 John Wiley & Sons, Ltd.

PUBLIC ADMINISTRATION AND DEVELOPMENT

Public Admin. Dev. 18, 307±326 (1998)

*Correspondence to: S. Bennett, 2316 39th Street NW, Washington, DC 20007, USA. e-mail:[email protected]

Contract grant sponsor: UK Department of International Development

used in both developed and developing countries as a means to enhance e�ciency andgenerate a clearer speci®cation of services whilst leaving ultimate control in the handsof government. Contracting-out has been used in sectors as diverse as social services,health care, housing and prisons. Contracting-out is not an entirely new pheno-menon. Most countries have central tender boards which have long been responsiblefor drawing up contracts with private sector suppliers, covering services such asconstruction, maintenance and equipment supply. However, new approaches topublic management are pushing contracting into areas where it was previously largelyunknown and also placing responsibilities for contracting upon agents who have hadvery little prior experience in this ®eld. The World Bank is doubtful about thecapacity of developing country governments to contract-out complex services such ashealth care:

Ìt takes considerable capability and commitment to write and enforcecontracts, especially for di�cult-to-specify outputs in the social services'(World Bank, 1997, p. 87).

This article integrates the literature on institutional capacity with a set of case-studies of health sector contracting to explore issues relating to government capacityto contract-out clinical and related ancillary services in developing countries. Thearticle has three main aims:

. to clarify what is meant by the term `capacity' and which sorts of capacity are key incontracting-out arrangements;

. to identify the main constraints on developing country government capacity withrespect to contracting-out of health care services;

. to consider which measures and strategies might help increase government capacityto contract-out successfully and whether circumstances exist where governmentcapacity is so limited that contracting-out is neither feasible nor desirable.

Contracting for health care services represents a particularly interesting case toexamine in relation to capacity because of the range of services included. In part-icular, within the health care sector there is substantial variation in three particularcharacteristics which are likely to a�ect the ease of contracting-out. These three keycharacteristics are (Williamson, 1987):

. the ease with which the service can be speci®ed in advanceÐfor many clinicalcontracts it is di�cult to specify fully exactly what services the contractor needprovide;

. the degree of asset speci®cityÐif there is no or limited asset speci®city, then even ifthe service required cannot be fully speci®ed in advance, the problems ofincomplete contract speci®cation may be alleviated, as contractors with guile maynot cut corners for fear of losing the contract next time around;

. the ease of gathering information about performance and hence monitoring con-tractor performanceÐfor some clinical services it is di�cult to judge the quality ofcontractor performance even retrospectively, so under such circumstances even thethreat of the contract being awarded to another contractor upon renewal is unlikelyto be e�ective.

Services exhibiting di�erent combinations of these characteristics will require di�erentapproaches to contracting. For example, where it is not possible to monitor provider

308 S. Bennett and A. Mills

# 1998 John Wiley & Sons, Ltd. Public Admin. Dev. 18, 307±326 (1998)

performance, government may need to use relational contracts (i.e. contracts whereongoing relations and discussions are maintained by the contractor and contractingagency to resolve problems as they arise) or alternatively contract with an actor who isnot likely to behave in an opportunist manner. Each di�erent contractual approach islikely to require a di�erent combination of capacities.

DEFINITIONS OF CAPACITY

`Capacity-building' has traditionally been associated with education and training,though recent writers on capacity have substantially enlarged the concept so as toencompass many of the varied factors which a�ect the success with which a task isperformed. Capacity is best viewed in a task-speci®c manner. In examining whethergovernment has su�cient capacity, it is thus necessary to specify capacity to do what.Thus Paul (1995) suggests that a good way to start is by

`dissecting each reform into distinct components . . . The kind of capacitythat needs to be developed for each component [should] then be identi®edand assessed'.

Di�erent levels or dimensions of capacity have been identi®ed. A distinction iscommonly made between capacities internal to an organization and capacitiesexternal to the principle organization (Batley, 1995). In terms of internal capacity thedimensions generally examined include human resources, management and informa-tion systems and ®nance. Hildebrand and Grindle (1994) contribute the notion of a`task network', i.e. a network of di�erent organizations which together are respon-sible for e�ecting a task. Often there is one particular organization which is central tothis network, but the capacities of each organization may be relevant to the overallperformance of the task.

Besides looking into the organizations responsible for tasks, recent writers oncapacity have drawn attention to the broader external factors. Hildebrand andGrindle (1994) emphasize the public sector institutional context, in particular thepresence of concurrent policies, management practices, rules and regulations,formal and informal power relationships, which may all in¯uence a particular task.Capacity will also be a�ected by the even broader àction environment' whichincludes economic factors (such as private sector development and structure of thelabour market), political factors (such as political stability and leadership support)and social factors (such as civil society and human resource development). Forcontracting, the ìnstitutional context' which includes laws and regulations may alsobe important.

In addition, considerable emphasis in the literature is given to `capacity to change'.This can be interpreted in two di�erent ways. First there is the highly politicalquestion of the ability of government to change the status quo. Government's abilityto change will depend upon factors such as the presence of strong leadership, politicalwindows of opportunity, etc. This aspect of capacity is not the prime concern of thisarticle. Second is the notion of capacity to adapt or learn from experience. Reform isnormally a dynamic process, not a once-and-for-all event; thus a key capacity is beingable to learn from successes and failures.

Government capacity to contract 309


REQUIRED CAPACITIES TO CONTRACT

If capacity is task-speci®c, then a logical starting point in analysing capacity tocontract is to break down the contracting process into its constituent parts. From thecase-studies, at least eight steps in (successful) contracting can be identi®ed:

1. Deciding whether to contract and which services to contractÐthis entails analysis ofwhat it is hoped to achieve through contracting, priority-setting between servicesto contract-out, de®ning a package of services where relevant, awareness of costsof in-house provision vis-aÁ -vis prices quoted by contractors.

2. Identi®cation of contractor and tendering processÐthis includes advertising thecontract, setting the rules of the game (how the winning contractor will beselected) and managing the tendering process. For non-competitive contracts thereare still issues concerning how the contractor is identi®ed.

3. Design of contractÐincluding factors such as the type of contract (lease, operatingcontract only, franchise), complete or incomplete contract, form of payment,quality speci®cation, length of contract, speci®cation of units of contractedservice.

4. Drafting of legal contract (may not always be a separate step).5. Implementing contractÐfacilitating any handover of service to the contractor,

making any necessary amendments to public sector service delivery, paying thecontractor in a timely manner.

6. Monitoring or auditing contractorsÐcollecting and analysing information on thequality of the service provided (particularly whether quality matches standardslaid down in the contract); to whom the service is provided (particularly a concernif there may be potential problems of cream skimming); and the costs of thecontract to government.

7. Implementing sanctions for non-performanceÐthe range of possible sanctions, andconditions under which they should be enforced, should be speci®ed in thecontract. The contracting agency must ensure that sanctions are implemented ifthe contractor fails to deliver services as speci®ed in the contract. Sanctions mayrange from verbal warnings, to reduction of payment or non-payment of con-tractor, to legal proceedings against the contractor. Often a chain of sanctions isnecessary from the most mild to the most severe.

8. Strategic functionÐconsidering implications of a speci®c contract for the broaderhealth care system. For example, if mental health care services are contracted-outto a private provider, then this may have signi®cant implications for other parts ofgovernment, such as that responsible for care in the community. Such `knock-on'e�ects need to be identi®ed and thought through.

The di�erent tasks outlined above may be divided between di�erent members of thetask network.

Appropriate contract design/implementation is highly speci®c to the service beingcontracted and the environment within which it is being contracted. It will depend onfactors such as:

. the technology of production (primary care or secondary care, high-technology orlow-technology services: the more complex the service being contracted, the moredi�cult it may be to specify in advance the exact requirements of the contract; more



complex services for which it is di�cult to specify contracts may be better handledby non-pro®t contractors; alternatively, sophisticated monitoring systems may berequired);

. the nature of the contractor (for example, not-for-pro®t providers may act with lessguile than for-pro®t providers);

. the relative risk aversion of contracting partners (this may change over time; forexample, central government because of its sheer size is likely to be better able tobear risk than smaller decentralized units of government);

. the number of providers in the market and hence the likely degree of competition;

. the ease with which the service can be de®ned and measured (and hence the ease ofmonitoring);

. the costs of di�erent sorts of information (for example, is it easier to detect lowservice quality through process measures or from outcomes?).

It is impossible, therefore, to develop a blueprint of `required capacities to con-tract'. Instead, we draw upon a series of country case-studies to identify instanceswhere shortcomings in capacity have negatively a�ected the success of contracting, oralternatively where successes in contracting can be traced back to the presence ofspeci®c capacities.

SUMMARY REVIEW OF COUNTRY CASE-STUDIES

Most of the empirical evidence presented in the article comes from a series of studies ofcontracting-out for clinical and non-clinical services in Bombay, Mexico, Papua NewGuinea, South Africa, Thailand and Zimbabwe. These studies were carried out as partof a Collaborative Research Network on the Public/Private Mix for Health Care.Country-speci®c ®ndings have been presented elsewhere (Bhatia and Mills, 1997;Alvarez et al., 1995; Beracochea, 1997; Broomberg et al., 1997; Tangcharoensathienet al., 1997; McPake and Hongoro, 1995). Table 1 summarizes the type of contractwhich the di�erent studies examined.

Table 1 demonstrates considerable variation in the types of services contracted andthe contracting-out process. Types of services contracted range from acute clinicalcare services contracted-out to the private sector in South Africa, to non-clinicalservices such as cleaning and security (in Bombay, Papua New Guinea and Thailand).All the contracts chosen for examination were examples of contracting-out to theprivate sector for services rather than performance contracts within the public sector.Whilst it is often standard practice to specify the required service and ask di�erentbidders to name their price, in two instances (catering in Bombay and cleaning inBangkok) the price was ®xed by the government unit. Three of the contracts (Mexico,South Africa and Zimbabwe) were awarded on a non-competitive basis.

The locus of decision-making about the contract also varies. For catering inBombay and high-technology equipment in Thailand, decisions to contract-out weremade and implemented by individual hospitals. In South Africa the contracts forclinical care reviewed were made by the provincial level of the Department of Health.In Papua New Guinea (PNG), most of the responsibility for contracting rested withthe central tender board within the Ministry of Finance.



The case-studies examined the reasons why it had been decided to contract-out theparticular service under consideration. In most instances the contract had arisenowing to a variety of particular local, historical circumstances rather than an explicitpolicy to promote the private sector or make greater use of contracting in order toimprove e�ciency. This factor is important to bear in mind when interpreting the®ndings: it may be inappropriate to judge governments' capacity to contract-out by

Table 1. Overview of contractual arrangements examined

Service Rationale forcontracting-out

Financing Managementresponsibility

Bombay Catering Reduce managementload. Improvee�ciency throughreducing waste andpilferage andalleviating impact ofpublic sector strikes

Hospitalbudget

HospitalÐthoughauthorized by thecentre

Mexico Specializedmedical andlab services;primary care

Provide services forinsured populationsin areas where socialinsurance facilities areinadequate

State socialsecuritybudgets

State (but authorizedby the centre)

Papua NewGuinea

Security andcleaning

Not speci®ed DOH budget Fragmented betweengovernmentdepartments; DOHand facility notinvolved; monitoringresponsibility unclear

South Africa In-patient andout-patienthospital care

Make use of privatesector capital forhospital construction.Reduce governmentadministrativeburden. Expandcoverage through newfacilities

Provincialbudget

Province

Thailand (a) High-technologymedicalequipment(b) Cleaning

(a) Obtain latestequipment, avoiddelays due todi�culties in gettinggovernment fundsand overcomemaintenanceproblems(b) Obtain cheaper,better-quality service

(a) User fees(b) Hospitalbudget

(a) Centralized exceptfor teaching hospitals(b) Hospital, withincentral regulations

Zimbabwe In-patient andout-patienthospital care

Lack of governmentfacilities in area andmine hospital withspare capacityavailable

Provincialbudget

MOH formally,province informally



the ®ndings of these case-studies, where contracts had often been negotiated sometime ago, without the bene®t of an organizing theoretical framework such as the NewPublic Management.

The researchers for each of the studies followed the same basic research protocol,although it was necessary to adapt this to local circumstances. This research protocolspeci®cally asked researchers to consider government capacity and the extent to whichthis helped or hindered contracting; however, di�erent dimensions of capacity werenot detailed in the protocol. This factor in combination with the caution discussed inthe previous paragraph suggests that the ®ndings presented here should not be seen asde®nitive. Nonetheless, discussion of ®ndings with policy-makers frommany di�erentdeveloping countries indicates that they are relatively representative of the types ofcapacity problems commonly encountered in contracting-out services in the healthsector.

INTERNAL FACTORS AFFECTING GOVERNMENTCAPACITY TO CONTRACT

Human resources

The country case-studies identi®ed numerous examples of instances where inappro-priate or insu�cient sta� or sta� skills had hindered the contracting process. Inparticular:

. Identi®cation of services to be contracted-out often appears to have been based on apartial (and generally inadequate) analysis. None of the studies found that aneconomic analysis of in-house costs had been undertaken prior to contracting.Often the rationale for contracting the particular service was rather unclear.Contracting arrangements had arisen as ad hoc solutions to various problems.

. Poor contract designÐpoorly speci®ed contracts, particularly with respect toquality, were found in virtually all cases analysed:

± Unfair distribution of risk was common, with government bearing all, or a sub-stantial amount, of the risk of the contract. This was especially the case in SouthAfrica, where government not only paid a handsome daily rate to contractorhospitals but also paid at a minimum of 90% occupancy1 even if actual occupancywent below this.

± Contracts generally contained very limited sanctions if the terms of the contractwere broken. In PNG, for example, there appeared to be no action governmentcould take against contractors who did not deliver adequate services other thansuspending their contract.

± Contracts often contained inappropriate incentives. In the contract with the minehospital in Zimbabwe a very high proportion of patients at the hospital wereprovided with free services (paid for by the MOH), despite the fact that it statedin the contract that the MOH would pay only for indigent patients. The mininghospital was responsible for deciding who was and was not indigent and it hadno incentive to undertake the costly task of screening. In contrast, in Thailand,

1Subsequently reduced to 75%.



incentives for contracted private providers of diagnostic services in Bangkok'stertiary hospitals appeared largely appropriate: as contractors received a propor-tion of fees paid by patients, they had every incentive to keep equipment wellmaintained and functional.

± Contracts were often very incomplete: in some cases, notably that of PNG,contracts failed to specify basic details such as who would monitor the contractand reporting requirements of the contractor.

. Lack of awareness of broader system-wide implicationsÐfor example, in severalcountries (South Africa and Thailand), contracts of an extremely long duration(10±25 years) were found. Such contracts are likely to place the incumbent in amonopoly position for future contracts.

Management and information systems

The di�erent case-studies demonstrate a range of capacities in management systems.In the cases where capacity was most limited, the problems observed by researchersstemmed from failure to implement the most basic administrative tasks such as ®lingdocuments relating to the contract. More common were problems relating to failureto pay contractors in a timely manner. This was a particular problem in PNG but hasalso been reported elsewhere (Bennett and Muraleedharan, 1998). Late payment maynot be solely a problem of weak ®nancial systems; clearly an absolute lack of ®nancemay also be an important explanation, but limited capacity in ®nancial systems doesseem to be a major element. Late payment is likely to have future repercussions;bidding companies may put up prices to counteract this problem and it is likely thatfewer bids will be received in the future.

Adequate information systems are key to successful contracting. They help thecontracting agency to decide which services to contract, ensure appropriate contractdesign (so as to incorporate suitable incentives) and aid proper monitoring ofcontracts. Information systems required include:

. Cost and quality information on public servicesÐin order to decide which (if any)services to contract and in order to negotiate e�ectively, government needsinformation on its own services. In none of the case-studies did decisions tocontract-out appear to have been based on this sort of information.

. Budgetary framework and ®nancial control mechanismsÐ®nancial systems need toprovide information on the total budget for contracting and on expendituresagainst the budget. For some forms of contract (such as the block contracts used inthe case-studies for cleaning services and security) this will be relatively straight-forward; for other types of contract (e.g. cost and volume contracts) the require-ments become more complex. In Mexico, contracting under the Social SecurityScheme was extremely problematic, because the person responsible for decidingwhether to contract-out a service had no information on the budgetary implica-tions, and indeed the payment came from a separate budget line held by anotherlevel of the organization.

. Performance indicators for monitoring qualityÐsuch indicators are a devicefor ensuring accountability to higher levels of the health care system and to thepublic. Appropriate indicators may be di�cult to devise, since indicators must be



simple and easy to compile and yet must not create perverse incentives forcontractors. The contract needs to specify quality, and means for monitoringquality adequately, without tying the hands of contractors and preventing themfrom making quality-neutral savings.

. Patient-related informationÐpatient records allow for in-depth investigation ofquality of care and help to ensure continuity of care. Contracting-out of clinicalservices may jeopardize the quality of this information, particularly where servicesare contracted for a relatively short period.

Virtually all case-studies noted that there was inadequate monitoring of quality,but the underlying reasons for this were not always clear. Whilst several of the case-studies stated that improved information systems were required, it was not clearly thecase that lack of information was the binding constraint. Problems commonlystemmed from quality speci®cations not being adequately written into contracts, sothere were neither clear quality standards which should be achieved nor obviousmeasures of quality to use in monitoring. Furthermore, there were frequently weakincentives to monitor or use information. This predicament is particularly clear in thePNG case-study. The national tender board had no involvement in (and presumablylittle knowledge about) the day-to-day delivery of health care services. No perform-ance indicators were built into the contract. Hospitals who were the recipients ofcontracted services were concerned about the quality of services provided and able tocite many examples of poor contractor service, but they had no in¯uence overcontractors. In this case the problem was not the availability of information but thelack of incentives for those responsible to collect and use information.

However, in some cases the success of contracting has clearly been jeopardizedbecause of the inadequacy of information systems. This was the case, between 1990and 1994, under the Social Security Scheme in Thailand. The scheme operates byrequiring insured persons to register with hospital-level providers. These providers arethen contracted under the Scheme and paid on a capitation basis. Weak informationsystems have plagued the Scheme in two important respects. First, the Scheme'smanagement information system was initially not capable of allowing each individualworker to choose a hospital; thus the decision was made by the employer on behalf ofall employees. This led to the situation where many workers were registered withfacilities far from their home and with providers which they did not necessarily like.During the early years this contributed to extremely low utilization rates under theScheme (Tangcharoensathien and Supachutikul, 1997). Secondly, all contractedhospitals were required to provide routine data on diagnosis, length of stay, mainprocedures, etc; however, there were long delays in implementation of this informa-tion system, during which time the Scheme was unable to undertake any monitoringof the process aspects of quality of care.

The signi®cance of information systems as a binding constraint on contracting inhealth care appears to vary in a predictable manner with the nature of the servicebeing contracted. For non-clinical services it is relatively easy to monitor servicequality without sophisticated information systems; in PNG, hospital sta� had nodoubt of the poor quality of cleaning and security services despite the lack ofmonitoring. However, for clinical services the ways in which contractors may attemptto save costs or compromise quality are often much more subtle and require moresophisticated information systems to detect. Even if it is possible to set up such



information systems, managers' capacity to process the information produced, andtheir incentives to use the information, need to be carefully considered.

Structure of incentives

Inappropriate incentives in the systems surrounding and supporting contracting oftenseems to lead to poor performance of contracts overall or of particular aspects:

. Mexico, unlike other countries studied, has very clear regulations for contracting-out clinical services under the various state-run health insurance schemes, butincentives in these systems were inappropriate; in particular, there was no clear®nancial penalty for health care units which contracted-out services. Payment forthe service came from a separate budget. It is not surprising, therefore, that therewas considerable over-expenditure against this vote: in 1993, expenditure on thisvote by SSPMEX, the state oil company scheme, was 107% over budget.

. In PNG, as already noted, those negotiating and drawing-up contracts bore noneof the consequences of the contract.

Financing

It is commonly observed that contracting ties up funds for a period of time (Mills,1995). If the contracted service is a priority one, then this e�ect may be desirable.However, often the contracted-out service is of lower priority. In PNG, for example,hospital budgets had been severely cut and the contracts meant that cleaning andsecurity services were protected and the hospital had no ¯exibility to transfer fundsfrom these services to other, higher-priority areas of expenditure.

As noted previously, ®nancial shortages may also be a contributing factor to latepayment of contractors, which has a number of undesirable e�ects.

Communications between task network

E�ective co-ordination requires clear speci®cation of responsibilities. The level towhich various responsibilities for contracting are assigned appears to be of consider-able importance.

In PNG, hospitals for which services were being contracted were not at all involvedin negotiations, which meant that contracts were weakly speci®ed and impossible toenforce at the local level. Contractors could defy hospital management knowing thatthey were acting with impunity. The level at which authority for monitoring thecontract existed was unclear.

The contract with the mine hospital in Zimbabwe also sheds light on the import-ance of e�ective communication between members of the task network. Peopleworking at the provincial level had identi®ed problems with the contract, butnegotiations surrounding the contract took place at the central level, and central levelo�cials had been oblivious to (or had ignored) these problems for many years. It took



the transfer of the provincial medical o�cer to headquarters to stimulate moredetailed investigation and renegotiation of the contract.

Some of the more successful examples of contracting-out were found for dietaryservices in Bombay hospitals and high-technology services in university hospitals inBangkok. Hospital administrators were responsible for virtually all the steps in thecontracting process identi®ed above. Contracts were generally found to be quitecomprehensive and well implemented, although they failed to set out explicit qualitystandards.

EXTERNAL FACTORS CONSTRAINING GOVERNMENT CAPACITYTO CONTRACT

Public sector institutional context

The New Public Management (Walsh, 1995) emphasizes small, lean governments withability to innovate and respond quickly to consumers. Although contracting is oftenassociated with the New Public Management, it is clear from the case-studies thatthe contracts examined were often embedded in very hierarchical, slow-moving andmonolithic bureaucracies and that this con¯ict in management styles was problematic.For example, in Mexico there were rigid and centralized regulations surroundingcontracting: services could only be contracted where the public institution could notprovide adequate services itself; di�erent services could only be requested by speci®clevels of the social security health hierarchy; where possible, social security sta� were tobe used even in a contractor facility. In Thailand the price paid for non-clinicalcontracted-out services was tightly regulated by the Ministry of Finance and set at avery low level, limiting competition for contracts and constraining the level ofperformance which could be expected from contractors.

Perhaps the most problematic aspect of this con¯ict in management styles concernssta�ng. The contracting-out of services should provide for the far greater ¯exibility inpersonnel management generally associated with the private sector, including abilityto hire and ®re rapidly and to employ temporary sta�. However, in many instances itappears that existing civil service regulations combined with labour opposition wereone of the main factors preventing further contracting-out of services. It is notablethat in a number of instances (including the studies of contracts in Bombay, SouthAfrica and Zimbabwe) the contracted services were essentially new services, meaningthat it was not necessary to re-deploy or make redundant existing public sector sta�.In both India and South Africa, labour opposition was seen as a strong brake uponfurther contracting. Unless governments are able to achieve greater ¯exibility in theirown personnel policies, contracting out will only be feasible for new services.

Economic factors

The level of private sector development is often cited as a potential barrier tocontracting in developing countries, but few of the case-studies identi®ed this to be aparticular problem. In South Africa the government contracting agency was found tobe fairly ignorant of the private sector and the availability of competition; as a



consequence, it underestimated the amount of power it possessed vis-aÁ -vis the con-tractor. In Bangkok the case-study found a very large number of potential contractorsfor cleaning services, although the number of bidders was low because of theunattractive price. In PNG there was also a large number of bidders for non-clinicalcontracts (although not all of them possessed the necessary sta� and equipment). Formany non-clinical services, even if the market is not competitive, it may becontestable. As the bids in PNG show, it is relatively easy for new entrants to themarket to submit a bid for a cleaning or security contract. The way the tender isspeci®ed can also a�ect the extent of competition. For example, in one large hospitalin Madras the government installed its own laundry equipment and asked for bidsfrom potential operators (Bennett and Muraleedharan, 1998). The market for such aservice is far more likely to be competitive than if the contractor is also expected toprovide the equipment.

Experience of clinical contracting in South Africa has also demonstrated that evenwhere the contractor has a degree of monopoly power, this may not be an insur-mountable barrier to contracting. In South Africa the incumbent contractor had farlower costs than any potential competitors as it was much more knowledgeable aboutthe business; yet, until recently, it reaped the entire bene®ts of this e�ciency in theform of higher pro®ts. The results of the study (Broomberg et al., 1997) providedconsiderable information about the contractor's operating costs and governmentcosts. The government has begun to use this information and its monopsony positionto negotiate contracts more in its favour.

However, despite this evidence that in the cases considered there was actual orpotential competition, it is clear that the level of development of the private sector isindeed likely to act as a constraint on greatly expanding contracting-out in the shortto medium term in the poorest countries, especially for services requiring greaterinvestment and expertise such as hospital-level clinical services (Mills, 1998).

Political and social factors

Transparent and accountable government is a key condition for e�ective contracting.If government is not accountable, then there is the possibility of both the tenderingprocess and contract enforcement being open to corrupt dealings. None of the casestudies was explicit about the presence of corruption, but the lack of documentaryevidence on contracting in PNG and the highly centralized contracting processsuggest that corruption was likely.

In other cases there may not be overt corruption but rather a degree of `regulatorycapture' whereby the monitoring agency becomes more sympathetic to the contractorthan to the service recipient. In New York, for example, government authorities werecriticized for not taking sanctions against privately contracted nursing homes whichdid not meet quality standards. If nursing homes were found to be below acceptedstandards, then they were o�ered advice, but no stronger sanctions were taken(quoted in Saltman, 1995). Although this may appear to be a form of regulatorycapture, it could also have been the most appropriate response: stronger sanctionsagainst the contractor (such as non-payment for care) may have jeopardized care forthe elderly people in the nursing home. The approach taken is very typical ofrelational contracting, but for a comprehensive contract dependent upon sanctions



rather than discussion, sanctions need to be credible. For this to be the case, a varietyof sanctions are required, with some less severe than others. In the non-clinicalcontracts in PNG, termination of the contract was the only sanction available and thiswas not very credible.

It has sometimes been argued that contracting promotes accountability by makingmore transparent the prices, quantities and qualities of services traded (Broomberg,1994). However, contracting-out also complicates lines of accountability. If con-tracting takes place in a society where political and social accountability is alreadyweak, then accountability may be further weakened rather than strengthened. Againthis point is evident in PNG: contracting served to weaken the accountability ofhospitals to the local community. The accountable agent was instead a distant andcertainly non-transparent one.

DISCUSSION: CRITICAL FACTORS IN GOVERNMENTCAPACITY TO CONTRACT

There is no single blueprint for improving government capacity to contract. Indi�erent situations, di�erent contracts will be appropriate. In turn, di�erent types ofcontract will require di�erent capacities to negotiate and enforce them. There is aneed, therefore, for situational assessments considering what the binding capacityconstraints on government are to perform di�erent sorts of contracting tasks. Suchcountry- and contract-speci®c analyses would help to focus capacity-building e�ortsand mould them to individual country needs. The framework set out here for thinkingabout the di�erent elements of both capacity and the contracting process is intendedto assist such analysis.

Capacity internal to the organization

The traditional approach to capacity-building has been to transfer skills. There areclearly cognitive skills (such as cost analysis and legal skills) whose acquisition wouldstrengthen government capacity to contract, but perhaps more important are theskills which are acquired principally through practice, e.g. bargaining and negotia-tion, design of new management systems.

It is also evident that basic administrative systems such as ®nancial, accounting and®ling systems need to be in place for contracting to stand a chance of success. In manydeveloping countries such systems exist and function reasonably well. In othercountries, including some which are considering quite radical health system reformsbased upon contracting for services, such systems are fragile.

Manuals and guidelines also form part of the `traditional' approach to capacity-strengthening. Guidelines would most likely assist the contracting process. Few of thecountry case-studies (with the exception of Mexico) identi®ed the existence of speci®cguidelines. In the UK the NHSManagement Executive has published two such sets ofguidelines to back up policies requiring introduction of contracting (NHSME 1989,1990). Guidelines must take account of the need to be ¯exible in order to respond todi�erent types of services and to change over time in market conditions.



The UK Department of Health (1990) also established minimum data sets forincorporation in contracts. A similar initiative might be appropriate for clinicalservices in developing countries. In particular, medical records are the basis ofmany quality assurance techniques and help ensure continuity of care. Minimum datarequirements could be used to ensure at least that adequate medical records aremaintained by the contractor. The government of South Africa is planning toincorporate minimum data sets into its new contracts with clinical providers. InTunisia the Ministry of Health refused to sign a contractual agreement with the SocialSecurity Scheme until the Scheme had put an adequate management and healthinformation system into place. The Social Security Scheme in Thailand requests basicpatient data from all contracted facilities.

Co-ordination between members of the task network

Problems arise when the responsibilities and authorities of di�erent members of thetask network are not clearly de®ned, particularly between di�erent levels of the healthcare system.

There are di�cult trade-o�s between a decentralized approach to contracts whichmay generate a better match to the needs of the service unit or local populationversus a more centralized approach. Information availability at the decentralizedlevel tends to be better, allowing the threat of removal of the contract next time roundto be more e�ective. In general, arguments against decentralization of contractingemphasize the lack of capacity (particularly skills and experience) to contract at thelocal level and also the dangers of corruption stemming from local-level awarding ofcontracts. Limited evidence exists to address the corruption issue: of the six case-studies reviewed here, there was only evidence in one (centrally awarded contract) ofcorruption. A priori analysis would suggest that it is not necessarily the case that thereis greater likelihood of corruption in decentralized contextsÐdecentralization maysimply move the location of corruption.

It is probable that greater skills to negotiate contracts exist at the central level;however, local-level actors can only develop these skills if given the opportunity to doso. In order to strengthen the contractual process and counter corruption, central-level skills are probably needed to complement local-level capacity by helping tode®ne the contracting process. Current plans in South Africa are to develop a centralgovernment contract negotiation unit which would assist provincial governmentsto contract; however, this is seen as a short- to medium-term solution. Eventually,capacity to contract would be established at the provincial level and the entireresponsibility for contracting could then be shifted to the provinces.

Importance of the broader environment

The country case-studies suggest that the systems within which contracts are designedand implemented are crucial to their success. In particular, it is essential to ensureappropriate incentives for the organization drawing up the contract and the organ-ization responsible for implementing and monitoring it. There are a number ofapproaches to doing this:

. Subjecting the purchasers to market forcesÐin the USA it is quite common for thepurchasing function itself to be contracted-out. South Africa is now trying a similar



approach, using a private company to undertake negotiations with a contractor.Such an approach of course still requires oversight from government; however,it may succeed in bringing private sector negotiating skills into the public sector.An alternative approach for clinical services is to use patient choice betweenpurchasers. This has occurred in the UK with fund-holding GPs. Patients vote`with their feet' between GP practices which in turn purchase care from hospitals.

. Regulating purchasersÐthe obvious alternative to the use of market forces todiscipline purchasers is the use of government regulation. In the early days of theUK reforms there was some debate about the need to regulate purchasers,particularly district health authorities which are not subject to patient choice(Propper, 1993). However, these discussions seem not to have led anywhere andpolicies (until the demise of the Conservative government in mid-1997) emphasizedrather the expansion of GP fund-holding to cover all the population, suggestingthat the power of consumer choice to discipline purchasers was the preferredapproach. On an a priori basis it would seem that regulating purchasers would bean extremely complex function which it would be di�cult to perform well.

. Encouraging broader accountability in the societyÐthis is a complementary strategyto the two identi®ed above. Through strengthening civil society, consumer organ-izations and the media, both purchasers and contracted providers may be mademore accountable in a broader sense. During the 1970s the media played a key rolein South Africa in bringing the dire state of care in contracted mental hospitals tothe public's attention. The establishment of hospital boards at contracted hospitals,which include representatives of the public, may also help strengthen account-ability. In South Africa it is proposed that the community members on hospitalboards help decide the appropriate performance indicators to be included in thecontract.

The move towards greater contracting-out is commonly taking place in the contextof health sector reform and the spread of New Public Management ideas. One of theconstraints upon successful contracting has been the mismatch in management styles.Ironically, the bureaucratic rigidities which compromised government provision ofservices are also responsible for compromising the success of contracting-out.Decentralization and a move towards more ¯exible, less bureaucratic managementmay increase the likelihood of successful contracting. However, there are alsodangers. The necessary administrative capabilities for contracting are less likely toexist at lower levels of the health care system. Furthermore, accountability may bethreatened by rapid decentralization and contracting. For example, in Venezuela,radical decentralization of the health care system led to the growth of autonomoushospitals and in turn to an increase in contracting (Werna, 1995). In such a situation,traditional lines of accountability are swept aside and replaced by complex reportingstructures.

The broad movement towards health sector reform may also help to improve thequality of contracted services. Governments increasingly recognize they have animportant role in developing an environment supportive of quality of care in public,private and contracted facilities. This role can be pursued through encouraging theadoption of voluntary quality assurance programmes and accreditation.

The dynamic context in which greater contracting is taking place highlights theimportance of adaptive capacity. Many of the solutions to contracting problems



discussed here will vary as the contracting environment changes. For example,decentralization may lead to greater degrees of risk aversion, as small decentralizedunits by virtue of their size will probably be more risk-averse than central govern-ment. Contracts and the contracting process need to be su�ciently ¯exible to respondto these changing conditions.

CONCLUSIONS: TOWARDS A CAPACITY-ENHANCING STRATEGY

This article has emphasized that there are no clear-cut solutions to capacity-buildingfor contracting. Yet it may be possible to outline a strategy as to how to approach thecapacity-building question.

First, a government which fails to deliver quality social services because of a lack ofbasic administrative capacity is unlikely to be able to contract either clinical or non-clinical services e�ectively. The ®rst step must be to improve basic administrativesystems. This includes ensuring that government has the ability to pay contractors in atimely manner and that there is an e�ective ®ling and retrieval mechanism for keydocuments.

Second, the case-studies discussed suggest a number of discrete measures whichgovernments could take (with or without donor support) to improve their capacity tocontract-out services. These measures are more or less e�ective (and more or lesscritical) depending upon the nature of the service being contracted-out and uponthe motivation of the contractor. Thus it is not possible to draw up a de®nitive listof preconditions for successful contracting-out, but governments concerned withimproving their capacity to contract-out should address the following points, inaddition to strengthening basic administrative systems:

. strengthen information systems to monitor contractor performance (particularlycritical for clinical services);

. ensure a clear de®nition of roles between various members of the task networkwhich is sensitive to capacity at di�erent levels of the health care system;

. ensure clear lines of communication between members of the task network;

. ensure that the organization receiving the service has direct in¯uence over thecontract during contract negotiation and throughout the life of the contract, even iffor capacity reasons it is unable to directly negotiate the contract itself;

. make available clear guidelines to guide the contracting process;

. ensure that the guidelines incorporate measures (such as clear criteria for selectingthe contract winner, requirements for numbers of bids sought) to help preventagainst corruption;

. build evaluations of previous contracts into the contracting process so that contractmanagers can learn from their own mistakes and successes;

. draw upon contracting experience and skills acquired in other sectors and othercountries;

. work with central ministries to remove rigid bureaucratic rules (such as prices ®xedby the central level) which threaten the e�ectiveness of contracting-out procedures.

Third, the diversity of services within the health care sector and the di�erentialdemands upon capacity to contract-out di�erent types of services need to be acknow-ledged: some services are easier to contract than others. Governments with only



limited capacity should concentrate on reaping e�ciency and quality bene®ts fromthose services which are easiest to contract-out. Theory predicts that there are threemain factors a�ecting the ease of contracting: the degree of asset speci®city, the easewith which the service can be speci®ed in advance and the ease with whichperformance can be measured. Table 2 illustrates how some of the di�erent servicesreviewed in this article can be characterized by degree of asset speci®city, ease ofspecifying service in advance and ease of measuring performance.

Most non-clinical services such as cleaning, security and laundry do not exhibitasset speci®city, can be speci®ed in advance and their performance can easily bemeasured. These services are relatively easy to contract-out. Of the case-studiesreviewed, the greatest successes seem to be for non-clinical services. Certain clinicalservices such as care of tuberculosis patients may also fall into this category, althoughthey are somewhat more complex to specify in advance and to monitor.

Several of the clinical services reviewed here (notably the in-patient and out-patientcare in South Africa and the high-technology medical equipment in Thailand)involved private sector investment in highly speci®c assets. Asset speci®city in thesecontracts is likely to result in limited competition upon renewal of the contract andhence weak incentives for e�cient behaviour by the contractor. In both of theinstances of contracts with asset speci®city identi®ed here, very-long-term contractswere in place, obviously limiting competition. It may be possible to get aroundproblems of asset speci®city by recon®guring the contract so as to exclude capitalinvestment. However, in both Thailand and South Africa the government organ-ization contracting-out the service was trying to secure private sector ®nance as it wasunable itself to organize funds for investment. Such contracts with the private sectorhave very clear dangers.

For many clinical services it is not possible to specify in advance the servicerequired, in which case the ease of monitoring performance is critical. If stronginformation systems exist so that the government organization can monitor perform-ance, and there is no asset speci®city, then contract renewal may be an adequate threatto ensure good performance by the contractor. In reality, however, for most clinicalservices in developing countries it would seem that adequate information systems tomonitor contractor performance do not exist. Without such information systems,contracting-out of clinical services may jeopardize the quality of care. If particularinstitutional circumstances mean that it is imperative that clinical services becontracted-out in instances where inadequate information exists to monitor perform-ance, then a contractor should be sought who will not act in an opportunist manner(e.g. a non-pro®t provider), or relational contracting approaches, whereby the con-tracting agency maintains a continuing dialogue with the contractor, may be pursued.Relational contracts imply that government involvement in service delivery isongoing.

Finally, transaction cost theory suggests that there are good reasons why non-contractual, governance relationships develop between service delivery agencies.Contracting for certain services imposes a burden on government capacity which islikely to be challenging to even the most capable government. The limits to successfulcontracting will be encountered sooner in countries where government capacity is less.If a government does have the capacity to contract for clinical services, it is likely thatit will also have the capacity to deliver those services directly itself. Given thesomewhat mixed evidence on the e�ectiveness of contracting in promoting greater



Table 2. Characteristics of di�erent types of services and ease of contracting

Type of service No assetspeci®city

Ease of specifying Can measureperformance

Implications for contracting-out service

Most non-clinical services (laundry,catering, security); some clinicalservices, e.g. TB care

X X X Relatively easy to contract-out

Many clinical services if stronginformation systems for monitoringperformance exist

X X Can contract-out: threat of contract renewalencourages e�cient and high-qualityperformance by contractor

Investment and operation of high-technology diagnostic services(e.g. Bangkok)

X High degree of asset speci®city means thatchange in contractor upon contract renewal isnot an e�ective threat. Only solution is torespecify contract so as to decrease assetspeci®city

Many clinical services if stronginformation systems for monitoringperformance do not exist

X Lack of ability to monitor performancecreates acute problems despite lack of assetspeci®city. Relational contracts or contractswith actors who are unlikely to behaveopportunistically advisable

324

S.Bennett

andA.Mills

#1998JohnWiley

&Sons,Ltd.

Public

Admin.Dev.

18,307±326(1998)

e�ciency or higher quality (Mills, 1997), developing country governments may bewell advised to restrict contracting-out to those services where it is clear that they havethe capacity to manage contracts and that contracting-out will be bene®cial. Mean-while, measures to strengthen traditional aspects of public sector management wouldbe useful regardless of whether services in the future are provided directly or undercontract.

ACKNOWLEDGEMENTS

The authors of the article have received funding for this work from two programmesfunded by the UK Department of International Development: the Health Economicsand Financing Programme (which supported the individual case-studies of con-tracting) and the Role of Government in Adjusting Economies Programme. Theauthors of the individual country case-studies played a large role in shaping thecontents of this article. In addition, extremely helpful comments were provided byJonathan Broomberg, Lucy Gilson and anonymous reviewers, as well as byparticipants in a World Bank training workshop in May 1996 on Contracting-OutHealth Services in Developing Countries.

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Government capacity to contract: health sector experience and lessons