Public sector inefficiency

Public sector reform targets public institutions. ^{Footnote 6} In policy, the government has recognised the role of social organisations in the provision of social services as ‘beneficial for the acceleration of the transformation of government functions, innovation of public service delivery modes, increasing the efficiency and quality of the provision of public service’ (MoCA and MoF, 2014, emphasis added). This is explicitly achieved through applying the principles of the market economy, as the Communist Party of China (CPC) decided to ‘promote market-oriented reform in width and in depth, greatly reducing the government’s role in the direct allocation of resources, and promote resources allocation according to market rules, market prices and market competition, so as to maximize the benefits and optimize the efficiency’ (CCCP, 2014: Chapter 1, Section 3, emphasis added). Both policy and the emerging scholarly literature build on the premise that contracting addresses the said inefficiencies of the public sector and the consequent lack of quality of services (Chan, Reference Chan, Lei and Chan2018).

In the literature we encounter the assertion that, due to overly bureaucratic and burgeoning size, public institutions displayed numerous inefficiencies and an inability to adapt to changing interests and needs. As Zhao et al. (Reference Zhao, Wu and Tao2016: 2231) stated, the public unit was not ‘cost-efficient (n)or able to meet increasing service needs’. This narrative is put forward by authors (Zhao et al., Reference Zhao, Wu and Tao2016; Chan and Lei, Reference Chan and Lei2017; Qi and Guo, Reference Qi and Guo2017; Shi, Reference Shi2017; Wen, Reference Wen2017; Jing, Reference Jing2018; Ke, Reference Ke, Lei and Chan2018) without the necessary evidence to confirm that, in fact, during state socialism or even after the introduction of market reforms in 1978, public institutions were inefficient, and in what ways they were so. The most common assertion is that public institutions were populated by unmotivated civil servants lacking incentives, rendering the public welfare system inefficient (Chan and Lei, Reference Chan and Lei2017). Apart from these claims, there is a surprising absence of evidence of how the public sector was inefficient and more importantly, of how contracting has made it more efficient. Also missing from the literature is a consideration of if and how contracting changes the ownership structure of services that would lead to increased efficiency, an otherwise well-established discussion in the literature (Petersen and Hjelmar, Reference Petersen and Hjelmar2014). This is a relevant question given the Party-state-control over the market economy.

Meanwhile, a few studies have illustrated the benefits of public institutions as service suppliers compared to for-profit and non-for-profit non-state actors. These authors argue that, given their close and relatively equal relationships with government and structural similarity (Dong, Reference Dong2016), public institutions were more stable, capable and better equipped to ensure equality and justice in welfare provision (Ning, Reference Ning2017). These claims, in conjunction with the lack of empirical evidence, puts the narrative that contracting transforms the public sector into question.

Competition

Contracting, in theory, improves public sector efficiency by introducing market principles such as competition (Dunleavy and Hood, Reference Dunleavy and Hood1994). This is also a stated policy aim in China (NPC, 2011: Chapter 8; CCCP, 2014: Chapter 9, Section 15). The emerging literature asserts that the introduction of competition with non-state actors provided a way of pushing state reform (Wang, Reference Wang2015; Liu et al., Reference Liu, Dong and Kong2017). Empirical evidence has shown how local governments pursue competitive practices in a variety of ways. Research has yielded descriptions of contracting arrangements such as competitive bidding and venture philanthropy (Li and Lin, Reference Li, Lin, Lei and Chan2018); oriented purchasing and open-for-application purchasing (Ke, Reference Ke, Lei and Chan2018); position or project contracting (Fang and Tang, Reference Fang and Tang2014; Sun, Reference Sun2016; Cho, Reference Cho2017; Wen, Reference Wen2017; Cortis et al., Reference Cortis, Fang and Dou2018; Li and Lin, Reference Li, Lin, Lei and Chan2018); and the hub system (Zhao et al., Reference Zhao, Wu and Tao2016; Shi, Reference Shi2017). This evidence indicates that contracting is practised through a mixture of non-competitive and competitive arrangements.

Competition in practice has been found to be symbolic at best. Pre-established connections with the government are a well-known pre-requisite to participate in contracting. Research has found that higher-level governments pressure lower-level governments to adopt competitive contracting, but lower-level governments maintain informal contracting practices with organisations with which they have close connections (Jing, Reference Jing2012; Jing and Chen, Reference Jing and Chen2012; Guan, Reference Guan2015). Chan (Reference Chan, Lei and Chan2018) argues that China cannot yet reap the benefits of contracting because it does not have a developed sector of service-delivery social organisations to compete in the market. Moreover, contracting has exacerbated inequalities in the distribution of resources among social organisations (Cortis et al., Reference Cortis, Fang and Dou2018), demonstrating that the market is not a level playing field. This literature review suggests that the competitive feature of contracting has not been fully demonstrated at the local level; on the contrary, local governments maintained informal contracting practices to the detriment of competitive contracting. Therefore, empirical evidence confirms that competition does not yet characterise contracting in China. This challenges the theoretical premise that contracting improves the efficiency of government’s service provision.

The literature also refers to the premise that marketisation was the necessary and best way to address the claimed inefficiencies of public institutions. In fact, to the best of our knowledge, there is a lack of studies showing that contracting has enabled cost reduction, and most importantly, that has considered the transaction costs derived from contracting. Only a handful of studies have drawn attention to concerns around the transactional costs involved in stimulating an underdeveloped NGO sector (Chen, Reference Chen2014; Li and Yu, Reference Li and Yu2016), or increased costs in contracting via hub organisations when compared with direct contracting (Li and Yu, Reference Li and Yu2016). Moreover, the claims of enhanced efficiency have not taken into account the government’s lack of requisite skills and new managerial tasks that have to be acquired (Jing and Savas, Reference Jing and Savas2009; Ju and Zhang, Reference Ju and Zhang2017). To the best of our knowledge, no research has addressed the issue of the proven adverse effects of cost savings on service quality (Hart et al., Reference Hart, Shleifer and Vishny1997: 1129). These issues should be tackled in future research. Thus, narratives redolent in the literature have not questioned the premise of the necessity and direction of the reform, which we suggest derives from the penetration of the ideas of NPM.

Reforming government functions

At the 18^th Party Congress the CPC acknowledged contracting as part of the strategic aim to transform government functions (CCCP, 2014: Chapter 9), as it ‘accelerates the construction of a service-oriented government’ (State Council, 2013). Similarly, authors argue that contracting redefines the core functions of the government, transferring non-essential ones to social actors, thus creating a ‘leaner’ government (Liu, Reference Liu2018). Scholars argue that contracting transforms government’s role from direct provider to regulator (Lin, Reference Lin2017). In this scenario the government retains roles such as boundary-setting, determining contracting forms and procedures, monitoring and evaluation (Wang et al., Reference Wang, Liu and Li2015; Liu et al., Reference Liu, Dong and Kong2017).

Contracting is expected to reduce the functions and responsibilities of the public sector. However, contracting requires new roles for the government, such as contract management, audit capabilities, and numerous other skills (Van Slyke, Reference Van Slyke2003). Jing and Savas (Reference Jing and Savas2009) identified four generic capacities governments need to effectively deliver services collaboratively with either the private sector or civil society: contract management, market/civil society empowerment, social balancing, and legitimisation. They found that governments in China lacked all four categories. Local governments not only lacked the skills, staff and experience to deliver services, but also the necessary skills to design, implement and manage contracting (Zhao et al., Reference Zhao, Wu and Tao2016; Wen, Reference Wen2017). This suggests that contracting, in fact, has created additional functions for governments, and defies the narrative that contracting has improved public sector capacity and efficiency. If these new functions and risks were taken into account in future research, a more valid assessment of the effects of contracting on public sector efficiency would be produced.

In theory, one benefit for government is that transferring roles to the non-public sector also transfers risks (Lipsky and Smith, Reference Lipsky and Smith1989). However, this transfer of statutory responsibilities is itself not void of risks. For example, the government may face a legitimacy challenge because of having to reconcile two conflicting mandates: to develop the market economy through deregulation, decentralisation, and diversification, and maintain the political regime (Jing and Savas, Reference Jing and Savas2009). There is an absence of research on the concrete risks involved in contracting (Cortis et al., Reference Cortis, Fang and Dou2018). Future research on this issue would contribute to assessing the narrative that contracting transforms the public sector and improves its efficiency.

Social need

Social organisations are recognised in Chinese policy as a key player in service provision, given their ‘positive role (…) in discovering new public service demand and promoting supply-demand convergence’ (MoCA, 2016). In theory there is general agreement that not-for-profit are better positioned to identify and target social need (Salamon, Reference Salamon1995), and that contracting allows for the expansion of welfare services (Lipsky and Smith, Reference Lipsky and Smith1989). The emerging literature mirrors the arguments that contracting enables addressing unmet social need. It suggests that the welfare system inherited from the socialist period was unable to meet social need, and that its dismantling after 1978 created a gap in welfare provision. Rapid economic growth, urbanisation, and changes in the social structure sprouted new welfare needs and interests. Demographically, a large aging population, the one-child family structure, and labour shortages put severe pressure on the welfare system and local governments were not able to provide relevant services (Zhao et al., Reference Zhao, Wu and Tao2016; Cortis et al., Reference Cortis, Fang and Dou2018). Hence, contracting was introduced as an innovative solution to meet these old and new types of needs.

It is claimed that contracting allows for the pluralisation of supply, enhancing customer choice and citizen engagement (Jing, Reference Jing2012). It creates a multiple participation structure in which provision can be extended and improved (Chen, Reference Chen2014) given that social organisations can better identify the demands of citizens (Cai, Reference Cai2018) and reach high-risk populations. Scholars have therefore celebrated contracting because, in theory, it better meets social need. However, there is an overwhelming absence of empirical evidence that proves that this social need is now met as a consequence of contracting. Shang et al. (Reference Shang, Wu and Wu2005), who analyse how non-profits address the needs of vulnerable children, are among the few exceptions, together with Teets (Reference Teets2012), who demonstrates some changes in the demographic data on ageing which implicitly suggests an increase in service demand.

Surprisingly too, questions around how social need is defined, assessed, and translated into services are absent from published research. This empirical gap undermines the narrative that contracting expands service capacity and meets social need. There is also a lack of consideration of how the complexity and diversity of social needs drive the high asset specificity of the service sector, which in turn determines its high transaction costs (Petersen and Hjelmar, Reference Petersen and Hjelmar2014: 6). Additionally, the fact that there is hardly any research on the impact on service users confirms that researchers derive that need is being met from the finding of diversification of providers. This, however, does not directly imply that need is covered. A top research priority therefore is to interrogate how need is defined by services users in contrast to the service provided by contracted social organisations.

Service capacity

As mentioned above, contracting is adopted because government lacks capacity to deliver quality services. In China, researchers have argued that contracting has expanded government capacity by cultivating the social work profession and a market of service providers (Chan and Lei, Reference Chan and Lei2017; Wen, Reference Wen2017; Cortis et al., Reference Cortis, Fang and Dou2018). Some authors even claim that social work entirely derives from contracting (Wang, Reference Wang2014), given that ‘more than 90 per cent of total funding of most social work agencies’ (Lin, Reference Lin2017: 1614) comes from contracting. However, some authors have shown that contracted social workers are situated in a marginalised, instrumentalised position (Wang, Reference Wang2014), having to take on administrative work even though this affects service delivery (Zhu and Chen, Reference Zhu and Chen2013; Sun, Reference Sun2016; Wen and Wu, Reference Wen and Wu2016) or diverts them from rights-based activities (Huang and Xiong, Reference Huang and Xiong2018). Cho (Reference Cho2017) found that contracting creates precarious labour conditions and reproduces social inequalities, as it prioritises market principles of efficiency over social work principles of social inclusion and alleviation. Service capacity therefore might be related to quantity of services provided instead of quality.

Contracting has stimulated the proliferation of service-delivery social organisations; however, authors have found that contracting poses significant challenges for their operations and capacity: social organisations may lack the professional expertise and necessary staff to deliver specialised services (Ke, Reference Ke, Lei and Chan2018) and the managerial capacities necessary to engage in services contracting (Wen, Reference Wen2017). They also face several financial constraints that affect the sustainability of their provision, such as detrimental payment arrangements or limitations in the use of contracting funds (Li, Reference Li, Lei and Chan2018). This undermines the stability, capacity and development of social organisations (Ni, Reference Ni2018), making them reliant on maintaining the flow of government funding. This evidence challenges the narrative that contracting improves service capacity. If labour conditions and the challenges faced by social workers and social organisations were taken into account in future research, the claimed improvements in service capacity and quality could be reassessed.

Service quality

In theory, contracting enhances the quality of services (Domberger and Jensen, Reference Domberger and Jensen1997; Jensen and Stonecash, Reference Jensen and Stonecash2005). In China, authors implicitly adopt this narrative (Zhao et al., Reference Zhao, Yan and Xu2014; Jing, Reference Jing2018), yet, as elsewhere (Petersen and Hjelmar, Reference Petersen and Hjelmar2014; Petersen et al., Reference Petersen, Hjelmar and Vranbaek2018), there is limited primary evidence to support it. On the contrary, the empirical evidence questions the quality improvements derived from contracting. For example, Wang (Reference Wang2016) found that service users were not satisfied with the services delivered via contracting; and Zhu and Chen (Reference Zhu and Chen2013) found that complaints were made about social workers and doubts expressed on their professionalism. This limited empirical evidence suggests that the narrative that contracting improves service quality is yet to be proven.

Moreover, the literature suggests that contracting lacks valid and standardised monitoring and evaluation measurements (M&E), with quantitative measurements predominating and with a focus on cost efficiency (Jing, Reference Jing2012; Ke, Reference Ke, Lei and Chan2018; Wang and Snape, Reference Wang and Snape2018), instead of service quality. This lack of evidence calls for comparative research of service delivery through contracting and government direct provision, whether contemporarily, or during state socialism. The only exceptions found in the literature are implicit comparative work such as that done by Lin (Reference Lin2017) on community services pre- and post-contracting.

There are various reasons for this gap in research, such as the actual lack of official data to compare service provision before and after contracting, inconsistent M&E criteria, a general lack of assessments of service quality (let along including service users), or the fact that many purchased services are actually new. Indeed, if no service was provided prior to contracting because there was no need for it, it would defeat the causal claim that service efficiency and quality have improved as a result of contracting, although it would support the claim that new needs are being addressed. Surprisingly, very few researchers have attempted to address this absence of evaluation data, rendering it difficult to uphold the claim that contracting improves service quality. This mirrors shortcomings found in international research related to a scarcity of generalisable data and insufficient methodological designs to prove that contracting improves cost effectiveness or enhances the quality of welfare services (Petersen and Hjelmar, Reference Petersen and Hjelmar2014). We argue that the service quality element of this narrative has largely been based on improvements in the supply structure through diversification of service providers and contracting, rather than the demand side.

In sum, there is empirical confirmation that contracting has diversified the supply structure of the Chinese welfare system, with the development of the social work profession and the proliferation of service provider social organisations. Chan and Lei (Reference Chan and Lei2017: 1345) assert that contracting ‘has become [China’s] main welfare strategy’. Yet, there is no concrete empirical evidence of the prevalence of contracting compared to other forms of government service provision, nor of how contracting has really expanded welfare service capacity. Moreover, the enhanced capacity of social organisations and social workers to meet social need and provide high-quality services remains to be demonstrated. By and large, there is lack of empirical evidence that supports the narrative that contracting improves service quality. We conclude that these narratives persist in the literature due to a lack of interrogation of the theoretical premises of contracting of services, such as NPM, which have informed the design and implementation of the policy at the start. Future research could investigate the variety of theoretical frameworks that have informed, penetrated and even dominated policy and academic debates around contracting of services in China.

Stimulating the expansion of social agents

Contracting has been seen to create an opportunity for the separation of purchaser and provider and the consequent emergence and proliferation of civic actors that compete in the market to deliver services (Bovaird, Reference Bovaird2007). As mentioned above, scholars view the expansion of non-governmental service providers (Jing and Savas, Reference Jing and Savas2009) as a benefit of contracting, as it develops service capacity (Cortis et al., Reference Cortis, Fang and Dou2018). Some scholars argue that social organisations were undeveloped, with weak institutional structures and lack of credibility (Liao et al., Reference Liao, Zeng and Zhang2015). Contracting supports social organisations in various ways such as through access to policymaking (Shen and Yu, Reference Shen and Yu2017), and to funding, reputation and branding (Jing, Reference Jing2018). Contracting has therefore afforded significant benefits to organisations that stimulate their development.

Contracting has also given rise to other social agents. Research has provided detail on hub organisations and third-party evaluation agencies. Among others, CPC-affiliated or government-organised non-governmental organisations (GONGOs) such as the Disabled People’s Federation (Ke, Reference Ke, Lei and Chan2018) or community service centres (Shi, Reference Shi2017) have been identified as functioning as hub organisations (shunju zuzhi). Hubs manage, supervise and evaluate the contracting process on behalf of the government. Hub organisations, however, can also bid for service contracts, competing with social organisations. This suggests that the market is not a level playing field, and that in China as elsewhere, economies of scale have been given priority (Bovaird, Reference Bovaird2014).

Hubs have constituted one of the most common contracting arrangements in China, and perhaps unique to China. It has been argued that the government uses the hubs to reform the management of social organisations (Yu and Liu, Reference Yu and Liu2014) on the one hand, and incubate the development of social organisations (Xu and Zhang, Reference Xu and Zhang2014; Shi, Reference Shi2017; Ke, Reference Ke, Lei and Chan2018) and provide a bridge with government (Fang, Reference Fang2018), on the other. Scholars seem to accept the newness of hub organisations, whereas the fact these organisations are mainly GONGOs could be interpreted rather as an expansion of existing institutional structures instead of an innovation. Only a few studies have recognised hub organisations’ dependency on government and their bureaucratic pattern as weaknesses (Xu and Zhang, Reference Xu and Zhang2014). There is therefore scope to further interrogate if and how hub organisations transform state-society relations. There is also little evidence to show how the hub arrangement improves service capacity and efficiency (especially if considering transaction costs).

Third-party evaluation agencies are another type of non-public actor that derives from contracting. They are considered crucial in monitoring performance and ensuring accountability, substituting government’s lack of monitoring capacity. They also support the development of social organisations (Cui and Gong, Reference Cui and Gong2017). In theory, their value resides in ensuring transparency and accountability of service provision. Hence, professionalism and independence of evaluators are crucial (Zhao et al., Reference Zhao, Xu and Yang2015). Both characteristics, however, have been questioned because of their lack of standardised evaluation criteria and procedures, neglect of service users’ perspectives (Jin, Reference Jin2015), and an over-emphasis on quantitative M&E criteria (Yao and Cui, Reference Yao and Cui2015). Evaluation agencies should include independent experts, professional companies, social representatives, and ordinary citizens (Xu, Reference Xu2011). However, only experts from academia (universities, research institutions, and CPC schools), the government and experienced service providers are commonly involved (Gu, Reference Gu2017).

Thus, evidence in the literature supports the narrative that contracting has driven the development of social organisations and new social agents. Some authors see these developments as mutually beneficial for government and social organisations, and as steppingstones towards collaborative governance (Jing and Hu, Reference Jing and Hu2017). However, even with new types of service providers sprouting, evidence of their interdependence with government raises the question whether contracting has transformed state-society relations. In fact, a number of authors assert that contracting has tightened government control over social organisations, reproducing or extending pre-existing state-society dynamics.

Social control

There are critical views of the effects of contracting on state-society relations asserted in the literature. Some authors contest the mainstream theoretical narrative that contracting develops social sector organisations and partnerships (Brinkerhoff, Reference Brinkerhoff2002). For example, Howell (Reference Howell2019: 78) relates contracting in China to the state’s strategy of ‘welfarist incorporation’ by which service-oriented organisations are used ‘instrumentally for welfare and stability purposes’. She argues that contracting allows for service-oriented organisations and simultaneously clamps down on rights-based organisations (Howell, Reference Howell2015, Reference Howell2019). Equally, Zhao and others (Reference Zhao, Wu and Tao2016: 2246) suggest the Chinese government is ‘actively encouraging NPO’s service provision role and suppressing the civil society role through the services contracting process’. Therefore, contracting is seen to be deliberately used to control civic organisations (Chen et al., Reference Chen, Zheng and Jia2017).

‘Welfarist incorporation’ first occurs as the government defines the range of services that can be contracted. Studies suggest that contracting focuses on community services rather than public services such as health and education, and on urban citizens rather than on vulnerable people like migrant workers (Li et al., Reference Li, Jin and Wu2015). Consequently, this delimits which organisations can partake in service delivery, and are more likely to be GONGOs (Guan, Reference Guan2015), formally registered organisations and social work agencies with qualified social workers (Xu and Li, Reference Xu and Li2018). Excluded are not only organisations working outside the designated service areas, but also rights-based organisations that address needs of marginal groups (Howell, Reference Howell2015). This process of exclusion challenges the mainstream claim that contracting facilitates partnerships and civic participation.

Second, government incorporates organisations through contracting using strict, regular monitoring, or increased administrative work (Wen, Reference Wen2017; Xu and Li, Reference Xu and Li2018). Also, government controls social organisations more directly through resource dependency (Jing and Savas, Reference Jing and Savas2009). He and Liu (Reference He and Liu2017) showed that because of government’s control of all resources and contracting authority, social organisations rarely challenge the government and enter a bureaucratic relation, becoming ‘foot-soldiers’ of local governments (Zhu and Chen, Reference Zhu and Chen2013; Huang and Xiong, Reference Huang and Xiong2018). The incorporation of social organisations into welfare provision poses challenges to their autonomy, being co-opted ‘into taking responsibility for meeting welfare targets over which they have scant influence’ (Shi, Reference Shi2017: 475). Moreover, organisations have little autonomy or legal protection over their contractual rights (Chan and Lei, Reference Chan and Lei2017), risking sacrificing rights-based agendas to meet governments’ political preferences (Cortis et al., Reference Cortis, Fang and Dou2018). Contracting therefore poses potential risks of mission drift as organisations prioritise the goals of the government, rather than those of users (Wang, Reference Wang2015).

The literature review also suggests that contracting has not necessarily brought about the revolutionary changes to China’s welfare model as was claimed (Chan, Reference Chan, Lei and Chan2018; Lei and Cai, Reference Lei, Cai, Lei and Chan2018), and as observed elsewhere (Considine, Reference Considine2003), at least regarding its restructuring of state-society relations. Empirical evidence presented here provides the most critical view in scholarly work of services contracting, challenging established narratives that contracting separates state and society, enhances partnerships (Brinkerhoff, Reference Brinkerhoff2002) and civic engagement (Bovaird, Reference Bovaird2007). Some research suggests that contracting is an extension of pre-existing modes of social control. In fact, contracting has introduced new and sophisticated mechanisms through which the state exercises power over social organisations, which are characteristic of neoliberalism. Very few authors have framed contracting as part of a broader ideological change in the Communist Party-state, whereas in the international literature there is some acceptance that ideology is a key driver in contracting of social services (Petersen et al., Reference Petersen, Houlberg and Christensen2015). In the literature on China’s contracting, there is scarce research that questions the ideological underpinnings of government contracting and that systematically interrogates the ideological changes in Party-state discourse regarding welfare provision (Teets, Reference Teets2012; Cho, Reference Cho2017; Chan, Reference Chan, Lei and Chan2018; Lei and Cai, Reference Lei, Cai, Lei and Chan2018; Howell, Reference Howell2019). Chan (Reference Chan, Lei and Chan2018) and Lei and Cai (Reference Lei, Cai, Lei and Chan2018) recognise there is a ‘new ideology’ behind this welfare model, cautiously suggesting linkages with neoliberal drivers.

Only Cho (Reference Cho2017) and Teets (Reference Teets2012) have identified a neoliberal ideological underpinning to government contracting. Cho (Reference Cho2017) argues that government contracting of services is part of China’s neoliberalisation project to ‘re-establish the conditions for capital accumulation and to restore the power of economic elites’ (Harvey, Reference Harvey2005: 19; cited in Cho, Reference Cho2017: 271). Furthermore, the general take on contracting has been from the ‘developmentalist and modernist approaches that overshadow criticisms about retrenchment and privatization of welfare functions’ (ibid: 273). Teets (Reference Teets2012) similarly argues that neoliberal reforms in China reduced the state’s role in the economy and in welfare. The positive aspect, she argues, is a more pluralistic political environment in which social organisations would deliver social services and participate in policy processes. A significant gap in research, therefore, is a systematic study of ideological drivers, rationales, or ‘state intentions’ (Lei and Cai, Reference Lei, Cai, Lei and Chan2018: 158) for contracting. This would allow for reflection on the future direction of welfare and public sector reform, on the penetration of theoretical frameworks and ideologies in Chinese social policy and academic circles.