Incomplete contracts

Once the state chooses to outsource public services, the outsourcing instrument – usually a public or concession contract – becomes the key mechanism for the extension of public control over their private delivery. The success of outsourcing then ‘hinges on the viability of the outsourcing contract as a fully effective junction of instruction’ between public authority and private provider. But given the complexity of many public services, the contractual governance mechanism has some inevitable limitations. Bar perhaps in the simplest procurement of public goods, it is quite impossible or impossibly costly to anticipate all contingencies and service obligations in detail in the contracting instrument.

Certain contingencies are unpredictable (such as a natural disaster or economic crisis), and others are difficult to foresee (such as unexpected or unaccounted needs). Yet other elements are ambiguous precisely because they relate to quality-related service standards that are non-contractible, as is often the case in relation to personalized services – as in the care sector, where services rely heavily on qualities such as maintaining a sense of patients’ personal dignity, trust between patients and carers, and continuity of care. These often depend on standards that relate to organizational values as much as the more tangible conditions of their delivery, such as the employment conditions of carers. While the latter can at least potentially be specified in a public contract to some extent, the former are harder to define and enforce contractually. This poses a double challenge of predicting both contingencies and how a specific provider might react to them.

Given the incomplete nature of complex public contracts, the need for adaptation will arise as gaps and ambiguities in the contract emerge. Ideally, the contracting parties will fill these out by informally renegotiating their relationship without negatively impacting the quality of service delivery. But an important factor to consider in this context is that successful adaptation can be considerably more difficult in the case of public contracts compared to private contracts. The reason lies not in any distinction related to scale or complexity, nor in how much uncertainty there is to tackle, or in what form. On these issues, private and public contracts give rise to broadly similar difficulties. What is different is the typical incentive structures in the contracting relationship.