Contracting for Services in a Decentralized System

Public management is changing rapidly due to the extensive privatization of public services through government contracting wvith private organizations and the devolution of the funding and administration of government programs to states and localities. These trends are spurred by a belief in the salutary effects of market competition and local decision making on public services. This article presents research on contracting for substance abuse services in North Carolina that indicates that privatization and devolution may not create competitive markets without substantial public intervention. Services in this state are very decentralized with a prominent administrative role for county authorities. Little formal competition exists for contracts. Government purchasing officials-contrary to the competitive market model-rely heavily on trust and long-standing relationships with private service agencies to guide contracting decisions. Public purchasing officials generally lack an adequate number of local agencies due to low funding and localized markets. Program innovation tends to occur through external public and private grants, and the ongoing evaluation of programs and their outcomes is often quite difficult. The article concludes with policy recommendations to improve the effectiveness and competitiveness of contracted services. The devolution of government programs to state and local communities and the privatization of public services, especially through contracting out services to private service organizations, are central issues of contemporary public management. Proponents of devolution argue that local decision making will allow public services to be more responsive to community needs and thus provide more efficient, cost-effective services. Advocates of privatization contend that contracting will lower the cost of public services through competition. Both devolution and privatization tap into the widespread disaffection with government programs among the American citizenry. 277/Journal of Public Administration Research and Theory Financial support from the Arts and Sciences Research Council and the Center for the Study of Philanthropy and Voluntarism at Duke University is gratefully acknowledged. The authors are indebted to Brint Milward and Anthony Mulvihill for comments on earlier drafts of this article. J-PART 6(1996):2:277-296 This content downloaded from 157.55. 39.4 on Sat, 10 Sep 2016 05:09:17 UTC All use subject to http://about.jstor. org/terms Symposium on the Hollow State Given the importance of these two major trends, an analysis of contracting in North Carolina is particularly timely. Contracting for social and health services in North Carolina occurs within a decentralized structure lacking strong centralized control at the state level. Forty-one area authorities have jurisdiction over service procurement and delivery; the geographic boundaries of these areas tend to create localized contracting markets that vary considerably. The basic argument we make in this article runs counter to the prevailing wisdom about devolution and privatization. In decentralized service systems with local contracting markets government officials rely heavily on trust and long-standing ties and relationships to guide contracting decisions. Little formal competition exists, in part due to serious obstacles to the development of a competitive market on the supply side. Faced with financial and political obstacles to change, innovation in services tends to occur as a result of federal, state, or foundation grants. In this article we focus on the procurement of substance abuse services in North Carolina by local area authorities. After describing the history of the evolution of substance abuse services, we examine key aspects of the purchaser-supplier relationship and its effect on the configuration of local services. In subsequent section we discuss the absence of competition in contracted services and the implications of important trends in health and social policy on contracted services in North Carolina.