ABSTRACT
This chapter develops a practical guide for public-sector managers who need to decide whether to contract out a government activity or service. The guide consists of a series of five questions. These questions are based on traditional transaction cost economics and reflect the realities of contracting out in the public sector. The contracting-out decision should be based on total (social) costs including production costs, transaction costs and externality costs. Transaction costs are determined by the levels of ex ante competition, asset specificity, complexity/ uncertainty and public-sector contract management effectiveness (both contracting expertise and subject matter expertise). To illustrate the guide, it was applied to the decision to contract out orderly services at Sir Charles Gairdner Hospital in Western Australia. Values of the key variables were determined through in-depth interviews and an extensive review of documents. The guide indicates that the service should not have been contracted out, but it was contracted out and the result was poor in terms of cost, quality and externalities. Application of the guide to public-sector contracting out could save significant government expenditures and improve service quality.
