WHEN GOVERNMENTS PROVIDE PUBLIC SERVICES TO THEIR CITIZENS, the question of who should handle service delivery—the government itself, or private contractors—often arises. A new working paper co-authored by Rema Hanna, the Jeffrey Cheah Professor of South-East Asia Studies at Harvard Kennedy School (HKS), examines the possible benefits of contracting out the delivery of government-subsidized rice to private citizens in Indonesia. The paper uses a randomized control trial, conducted in 572 locations across three Indonesian provinces, to investigate whether there would be a change in efficiency, price, and quality when rice delivery is outsourced to private firms.
Currently, “there is considerable room for program improvement” in the rice distribution program, the authors write. The monthly co-pay for each household is set at 1600 rupees per kilogram of rice, but the average buyer pays a mark-up of 658 additional rupees per kilo, and “substantial amounts of rice go missing.” Some rice is also diverted to households that are ineligible for the benefit. “Thus, on net, eligible households only receive about one-third of their monthly intended subsidy,” the authors explain. “Moreover, citizens often complain about the poor quality of the rice and distribution process (e.g. location, timing).” In short, the redistributive properties of the program are diminished due to the leakage in the system.
In some locations, the experiment introduced a bidding procedure, giving private citizens the chance to compete for the distribution job. In other locations, the normal distribution continued as always (thus serving as a placebo group). Allowing for government outsourcing led to a reduction in the price markup that citizens had to pay for the subsidized rice and reported quality improvements in the rice itself. Notably, the price cuts were paid for by efficacy gains (i.e. cheaper transportation costs, a lower wage bill for the distribution) rather than by cutting other aspects of the quality of the rice distribution (i.e. introducing more delays in the process, making people travel further to pick up the rice, etc.).
“Giving localities the option to contract out delivery of government services by increasing competition within the system improves service delivery,” the authors conclude. But, while the price markup declined and the quality improved in many locations, the overall gains were relatively modest, and the quantity of rice received did not increase. The authors surmise that corrupt local officials may place obstacles in the way of private citizens or companies who attempt to improve the delivery process and this limited potential gains in some areas. So while outsourcing can have an overall positive effect, the authors admit that strong vested interests from powerful local officials may complicate matters. “It is important to think about how we design these processes in [such] contexts,” the authors conclude.