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Risks of Outsourcing in Slovakia
by Juraj Nemee

Outsourcing is one of the tools of public sector reform; however, because of a number of problems, it is not proving wholly successful in the industrial countries, and its impact on transition countries in Central and Eastern Europe (CEE) might be limited.

The market supply of effective bids is limited in transition countries, and the argument of possible unit costs savings is far more controversial than in the industrial countries. Private producers in monopoly industries will not behave as suggested by standard theories of competitive markets, but will instead focus on realizing large profits in the short term.

The public administration systems in CEE are still in the early stages of development. The most important problems in working out successful outsourcing strategies are as follows:

  • Old-fashioned auditing. Current systems for public sector control and auditing in most, if not all, the CEE countries rely on an old-fashioned, administrative type of control. Effective mechanisms to assess the efficiency and effectiveness of public sector institutions and processes are lacking.

  • Lack of professionalism. Those responsible for public sector control and auditing are not always professionals in the field and often cannot tackle all the issues involved.

  • Lack of modern financial management. The financial management schemes of most public sector organizations are based on antiquated budgetary rules that create incentives to spend and not to save. Modern cost-centered, outcomes-based financial management is rare or nonexistent, as are capital budgeting and accrual accounting methods. Without calculating depreciation, as is the case in most CEE state administration systems, calculating the real costs of the provision of any service is impossible.

  • Lack of motivation. The dominant values in CEE public administration systems are bureaucrats’ security and individual benefits. This explains the lack of incentives to seek new management solutions, and in some cases motivates the channeling of public resources.

  • Limited role of the media. Citizens are either unable or unwilling to control their country’s political processes. The media and the nonprofit sector have just started to exercise their crucial role in supporting democratic processes in transition countries. Compared with Western countries, their current role is extremely limited.

The development of outsourcing should be based on high-quality legislation and regulations, which are currently not available in the transition countries. The only legislation related to outsourcing is public procurement laws, which simply define the procedure for awarding contracts. No special legislation defines the other steps involved in outsourcing. Under these circumstances, public sector institutions have to rely on limited individual knowledge and experience. The legal aspect of the business environment is also weak, and attempts to enforce the law face significant problems, for example, the average length of litigation of a business-related case in the Slovak courts is almost two years.

The impact on local governments of outsourcing may best be illustrated by taking two randomly selected Slovak cities, Čadca and Turzovka, as examples, and focusing on major community services, such as maintaining local roads, public lighting, and public parks and managing cemeteries and waste collection and disposal. In both cities the municipality does not carry out these services in the traditional way. The variety of solutions ranges from municipal enterprises not directly connected to the municipal budget (these are, in principle, independent institutions that bill the municipality for services rendered) to fully private, outsourcing solutions. Outsourcing at the municipal level is frequently used in Slovakia.

The outsourcing of selected public services to private sector firms in both cities provides examples of the low quality of implementation. The following are the main problems:

  • Selection of private service delivery firm. The principles of public procurement are murky, and the best bid is not the main selection criterion.

  • Quality of contract preparation. Contracts do not include basic data about volume, periodicity, quality, supervision, and so on.

  • Quality of contract management. No effective institutional arrangements are in place to assure good-quality contract management.

  • Outcomes ofoutsourcing. Expected outcomes are not defined, no indicators of success or failure are in place, and as a result the real outcomes of contracts are not regularly evaluated. The result is that citizens receive lower quality, but more expensive services than under prior arrangements.

The current situation does not mean that CEE countries should not use outsourcing. These findings are simply a call for more transparency, better quality contract management, and high-quality guidelines for evaluating possibilities for outsourcing and preparing tender documents.

The author is Vice-dean, Faculty of Economics, Matej Bel University Banska Bystrica, Slovakia, Website: www.econ.umb.sk. He can be reached by email at nemec @ef.umb.sk.

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