Contract management of municipal public services: the Slovak experience

Public organizations choose between in-house and external production of public and ancillary services. While theory often posits competition-driven efficiency gains from contracting out, evidence frequently fails to confirm such gains. The paper shifts focus from the choice of provider to the management of the contracting process, grounded in principal–agent theory and acknowledging risks of moral hazard and adverse selection. The research question asks: What is the quality of contracting-out management in the Slovak municipal sector? The study’s purpose is to analyze contract management quality in Slovak municipalities across key risk dimensions to understand why efficiency gains often do not materialize and to inform improvements in practice.

The contracting-out literature highlights principal–agent dynamics, competition, and procurement practices as critical to outcomes. Commonly examined determinants include: degree of competition (Savas; Kettl; Hodge; Greene; Racca; Glas & Essig), ex-ante bidder evaluation (Romzek & Johnston; Amirkhanyan; Bertelli & Smith), clear definition of the procurement subject (Maurya & Ramesh; Petersen et al.; Rodionova et al.), monitoring intensity (Prager; Seidenstat; Brown & Potoski; Hefetz & Warner; Keller et al.), penalties (DeHoog; Petersen & Ostergaard), contract management capacity (DeHoog; Romzek & Johnston; Van der Valk), and technical expertise (Kettl; Chan & Rosenbloom; Fine et al.). Studies frequently report limitations in post-award monitoring, reliance on trust-based controls, weak mitigation of opportunism, misaligned payment methods, and trade-offs skewed toward lowest price at the expense of quality. Evidence from various contexts (e.g., Sweden, India, Netherlands) indicates that contract-management capacity and incentives strongly shape outcomes, with many governments underinvesting in necessary capacities. Regional work in Slovakia and the Czech Republic documents widespread externalization but mixed efficiency results and procurement system weaknesses.

The study assesses the quality of contract management for Slovak municipal public and ancillary services using a multi-criteria evaluation approach with weights elicited via Saaty’s Analytic Hierarchy Process (AHP). Seven criteria (X1–X7) map to principal–agent risks: non-transparency (X1: degree of competition/procedure type; X2: selection criterion MEAT vs. lowest price), hidden information (X3: municipal staff technical expertise), and hidden activity/moral hazard (X4: frequency of monitoring; X5: penalties for non-compliance; X6: contract duration; X7: payment method). Each criterion is operationalized on a 0–100 scale per Table 1 (e.g., public tender=100, direct award=0; MEAT=100, lowest price=50; regular monitoring=100, none=0; termination=100 vs. soft remedies; shorter contracts score higher; payment for performance=100, fixed fee=0). Expert weights were obtained from a panel selected for professionalism, education, and experience. Data: Three cross-sectional samples (2010, 2020, 2021) were collected via questionnaires (2010 physical; 2020 and 2021 online), covering 3,416 evaluated contracts. Service scope: local public services (municipal solid waste, local roads, green spaces, public lighting, cemetery) and ancillary services (cleaning, building management/maintenance, catering and transport for employees, IT administration, security). For local public services, X3 (staff technical expertise) and X6 (contract length) were excluded due to data unavailability; for ancillary services, all seven criteria were applied. Background data on externalization intensity and cost comparisons were compiled from long-term research (2001–2021). For linkage to efficiency outcomes, Spearman correlations between efficiency (dependent variable) and quality determinants (independent variables) were computed for subsamples of 115 municipalities (2020) and 54 municipalities (2021).

• Across 3,416 contracts (2010, 2020, 2021), contract management quality is low, with notably high risks of non-transparency, hidden information, and moral hazard.
• Quality did not improve over time; in many determinants 2020/2021 scores are lower than 2010 despite greater experience with contracting out.
• Procurement-phase issues: frequent use of non-competitive or suboptimal procedures (price bids, direct awards), insufficient ex-ante evaluation, and dominant lowest-price selection rather than MEAT, often due to limited technical expertise and capacity.
• Post-award issues: irregular or insufficient monitoring of contractor performance; penalties tend to be soft; contract lengths can limit switching; payment structures are often not performance-based.
• Background efficiency comparison indicates mixed results: in some services externalization is cheaper, in others costlier; on average, contracting out tended to be slightly more expensive than in-house provision, with transaction and true cost allocation often not fully captured.
• Correlation analysis (Spearman) for 2020 (n=115) and 2021 (n=54) suggests that degree of competition, monitoring intensity, and payment method are significantly associated with efficiency outcomes for several services, underscoring the role of managing moral hazard and information asymmetry, as well as addressing non-transparency risk.

The findings answer the research question by showing that the quality of contract management in Slovak municipalities is insufficient and has not improved over a decade, contributing to the lack of consistent efficiency gains from contracting out. The results emphasize three main gaps: non-transparent or weakly competitive procurement processes, limited ex-ante technical capacity to define and evaluate service quality, and inadequate post-award monitoring and enforcement. These exacerbate principal–agent risks (moral hazard and information asymmetry) and introduce a salient additional risk—non-transparency of procurement—that is underemphasized in standard contracting-out theory. While Slovakia’s highly fragmented municipal landscape and capacity constraints limit generalizability, similar patterns (e.g., weak post-contract oversight, lowest-price dominance) are reported in other contexts, indicating broader relevance. Region-specific issues include occasional law avoidance in supplier selection, low bid competition, and persistent focus on price over value, which further reduce potential efficiency gains. The significant associations between competition, monitoring, and payment method with efficiency highlight the mechanisms through which better contract management can improve outcomes. Overall, effective contracting out requires end-to-end management—from thorough market testing and precise specification to competitive tendering based on MEAT and robust post-award governance.

The paper contributes an operational framework to assess contract management quality across key principal–agent risks and applies it to extensive municipal contracting samples over multiple years. It shows that low-quality contract management—particularly in procurement procedure choice, monitoring practices, and payment design—constrains efficiency gains from contracting out, and that quality has not improved over time. Policy implications include: implementing systematic service testing (compare in-house vs. external provision with full cost allocation and transaction costs), precisely defining contract scope and value, ensuring open and effective competition with MEAT as the primary selection criterion, and strengthening post-award monitoring, penalties, and collaborative vendor relationships to mitigate moral hazard. Future research could extend the methodology to other countries and service domains, incorporate detailed transaction cost measurement and cost-center data to refine efficiency estimates, and employ longitudinal/causal designs to identify which contract-management levers most improve performance.

• Generalizability: Findings stem from Slovakia’s small, highly fragmented municipal system; contextual factors (capacity constraints, legal compliance issues) may limit external validity.
• Data constraints: For local public services, two determinants (X3 technical expertise and X6 contract length) were not tracked due to data unavailability. Cost comparisons suffered from incomplete cost-center data (especially earlier years) and omission of transaction costs by municipalities.
• Procurement environment: Instances of non-compliance or avoidance of competitive procedures and low bid competition may bias observed relationships and reflect context-specific procurement system weaknesses.
• Cross-sectional assessment of quality (2010, 2020, 2021) limits causal inference; correlation analyses do not establish causality.