Privatization of Welfare Services: A Review of the Literature. Recent Interest in Privatization


Private provision of publicly funded services, including social services, is not new. Before the New Deal era, most social services were delivered by private religious or secular organizations that sometimes received public subsidies to pay for the care of needy people, though the level of public funding varied widely (Smith and Lipsky 1993). After the Great Depression, the government's role in funding private social services began to increase, though it remained fairly limited. During the 1960s and 1970s, however, federal expenditures for social welfare services escalated, and a large proportion of this growth was due to spending on services provided by private agencies. State spending increased as well  one study found that in 1971, 25 percent of state spending on social services was for "purchased services." By 1976, the percentage had risen to 49 percent (Smith and Lipsky 1993). A national 1993 study by the Council of State Governments found that almost 80 percent of the states surveyed reported that in the previous five years they had increased their use of privatized social services (GAO 1997b).

In recent years, both the scale and the nature of the relationship between the government and the private sector have changed. The government is contracting for a wider variety of services, and government contracts are purchasing whole programs, rather than simply limited services (Smith and Lipsky 1993). Interest has grown in bringing for-profit companies into new areas, such as welfare services. In addition, as we discuss in the next chapter, the number of social service agencies who contract out services has increased.

Increased interest in contracting out welfare services in recent years has occurred for several reasons: frustration with the welfare system under Aid to Families with Dependent Children (AFDC), the passage of PRWORA, skepticism about the ability of government to provide services effectively, and a growth in the desire for performance-based management.

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