Dilemmas Faced When Contracting Out Public Services

The views expressed are those of the author and do not necessarily reflect the views of ASPA as an organization.

By Andrea Headley
September 12, 2014

“Today’s problems are yesterdays solutions.” In 1999, Frederickson predicted that there would be a realization that the solutions of the time (e.g., deregulation, privatization, downsizing and market competition) would result in the ethical problems of the year 2008. Six years after 2008, this prediction has not ceased to be more than true. Privatization refers to government outsourcing of ownership, functions or services by the public sector to the private sector. While many arguments for privatization are centered on quality of service and cost-effectiveness (both looking at outcomes), much of the implementation process has been forgotten, as well as the ethical values and morals that fuel behavior in privatized contexts and the increased chance of opportunities for maladministration.

In a 1998 book titled Public Administration Balancing Power and Accountability, McKinney and Howard stated that “the goal of public service” is about utilizing “government resources to achieve publicly determined ends.” Thus, it is not about profit-maximization, seeing as that is a predominately private sector goal. Each sector, public and private alike, is characterized by a set of ethical standards that define appropriate behavior and guide decisions, albeit there are different standards of ethics for the respective sectors. In a 2004 Journal of Public Administration Research and Theory article titled “Privatization and its Reverse: Examining the Dynamics of the Government Contracting Process,” Amir Hefetz and Mildred Warner noted that when privatizing services the ethical values that are inherent to the public sector such as public service, fairness and equality, are compromised to values of efficiency and profit-maximization.

According to the principle-agent theory agents are self-interested and seek to maximize their own benefit, rather than the benefit of their principal. In the public realm, the government, also known as the agent, is to act on behalf of the citizens, who are the principals. On the other hand, according to Ann Florini in a 2002 International Journal on World Peace article titled “Increasing Transparency in Government,” in the private realm, managers are agents and the principals are the corporate stockholders. So, when contracts and partnerships come into play between the public and private spheres, there are two incompatible and often competing goals: to act on behalf of the citizenry and to act on behalf of stakeholders. When the latter wins, private agencies seek to increase profit even if it means risking the government’s goals and forfeiting the public good, as alluded to in a 2009 The Public Sector Innovation Journal article titled “Information Asymmetry and the Contracting Out Process.” When public services become privately operated, actors are no longer subject to the same laws and regulations that govern public employees and that benefit the public at large. Specifically, private companies facilitating public services are not subject to transparency and accountability standards as public organizations and employees are.

Moreover, private companies providing public services are obliged to operate within two distinct environments: the public and the private sector. Hefetz and Warner also noted that an institutional environment governs the public sector, whereas the private sector operates by the economic/market environment. Both environments have different principles, values, beliefs and operating procedures, which can conflict with each other. If companies conform to the institutional environment alone then they suffer financially, if they conform to the economic market-based environment they suffer socially, legally and politically. Thus, they cannot conform to one without sacrificing the other. On the other hand, publicly governed organizations do not have to conform to the economic environment of the market, so they are able to maximize their opportunity within the institutional environment.

Even when the government chooses to contract certain services out to private companies, there are still obligations that the government has to the general public to be accountable and operate accordingly. However, where there is this lack of accountability and transparency due to contracting out, and the goal is money, then there is an open door to maladministration, which can include corruption, manipulation, bribery, scandals and maltreatment.

Furthermore, it is important for public servants to emphasize service above all else, thus by valuing public service this would serve as a driving and guiding force of all behavior. Conversely, if a private company is seeking to maximize profits, ultimately the firm will consider options that minimize costs, potentially at the risk of public service.

In a 2004 Public Integrity article titled “Professional Ethics in a Postmodern Society,” David Schultz mentioned the call for the ethical values and morals of the public sector to be transferred to the private sector as well, thus suggesting that the constitutional limits that apply to the public sector should also apply to those performing governmental functions. Despite this need, there is a more impressing need for the realization that values still conflict, leaving higher-order values to take precedence. So, even if the ethical and moral values of the public sector are instilled in private companies, these companies can never escape the need to maximize profits and to answer to their shareholders.

Overall, it matters who provides the service when the goals change and the behaviors of the employees change accordingly. It matters who provides services when the public is impacted negatively, yet restricted from acting, such as in the case of private prisons. Private prisons function by maximizing profits at the expense of inmates and the greater society, due to the sensitive environment of prisons. Any minute factor can either hinder or facilitate rehabilitative aims. Also, the pursuit of profit can impede correctional goals of safety and protection.

When the pursuit of justice crosses paths with the pursuit of profit, there are conflicting interests. What is just is not always profitable and what is profitable is not always just. Therefore, there must be some restrictions on which services are outsourced, specifically as it relates to services that touch the very nature and being of humanity such as the administration of justice from courts, sentencing, policing, all the way to corrections.

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Author: Andrea Headley is a doctoral student at Florida International University in the Department of Public Administration, with a major in Criminal Justice. Her interests relate broadly to the intersection of justice and administration and its impact on disadvantaged and marginalized communities. She can be contacted via email at [email protected].

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