The Nordic Model - Embracing globalization and sharing risks

objective, egalitarian criteria when it selects suppliers. Equal access
to services is often imposed as well. This means that the cost of
government services will be higher than in the private sector even
when the government employs private vendors. 14
There are four main ways in which the government can use
the private sector: (a) Outsourcing, (b) Private-Public Partnerships
(PPPs), (c) Privatization (with regulation) and (d) Vouchers. The
categories overlap somewhat. For instance, PPPs are a variant of
outsourcing and may simply be classified as such. The order in
the classification above reflects roughly decreasing government
control. In outsourcing the government retains the most control,
while privatization and voucher systems give private enterprises
significantly more freedom.
We will not take up regulation here. It is a large subject in its
own right and leads to somewhat different considerations, since it
usually deals with monopoly problems. Instead, we want to make
some observations about the three other forms of private sector
engagement, where the idea is to make use of competition.
Outsourcing of government
services is
important and increasing
fast
a. Outsourcing
In outsourcing, one or more service suppliers are selected through
competitive bidding, which is repeated when the contract comes
to an end. Bidding is essential, because of the special demands for
government accountability. For the same reason, the bid price is
almost exclusively used to choose the winner – concerns about
service quality and other requirements have to be dealt with
through detailed contract terms. Subjective information regarding
vendor performance cannot be used much, which reduces the
vendor’s incentive to invest in reputation and further increases the
need for explicit requirements. Contract terms often spell out not
just what should be produced, but also how it should be produced.
The bureaucratic hand of government is very much present even
when a service is outsourced.
Outsourcing has been the fastest growing category for government
spending on private goods and services. A very rough estimate
of the size of central government outsourcing can be obtained by
reducing the numbers in figure 8.1, by 10–15 percentage points.
Outsourcing is clearly the largest private expenditure category.
The proper scope of the public sector · 147