Government capacity to contract: health sector experience and lessons SARA BENNETT* and ANNE MILLS Health Economics and Financing Programme, London School of Hygiene and Tropical Medicine, UK SUMMARY Using case-study material of contracting for clinical and ancillary services in the health care sector of developing countries, this article examines the capacities required for successful contracting and the main constraints which developing country governments face in develop- ing and implementing contractual arrangements. Required capacities dier according to the type of service being contracted and the nature of the contractor. Contracting for clinical as opposed to ancillary services poses considerably greater challenges in terms of the information required for monitoring and contract design. Yet, in some of the case-studies examined, problems arose owing to government's limited capacity to perform even very basic functions such as paying contractors in a timely manner and keeping records of contracts negotiated. The external environment within which contracting takes place is also critical; in particular, the case-studies indicate that contracts embedded in slow-moving, rule-ridden bureaucracies will face substantial constraints to successful implementation. The article suggests that governments need to assess required capacities on a service-by-service basis. For any successful contracting, basic administrative systems must be functioning. In addition, there should be development of guidelines for contracting, clear lines of communication between all agents involved in the contracting process, and regular evaluations of contractual arrangements. Finally, in cases where government has weak capacity, direct service provision may be a lower- risk delivery strategy. # 1998 John Wiley & Sons, Ltd. INTRODUCTION After a decade where there has been a focus on ways of reducing the role of govern- ment in the economy, there is now recognition that a smaller role for government in the direct provision of services may mean a bigger role for government in policy development, co-ordination and regulation. Attention has turned to the question of how to ensure a capable government able to perform these core roles. The 1997 World Development Report focuses upon these very issues: what role the state should play and what measures need to be taken to ensure that it performs these roles well (World Bank, 1997). One of the central strategies for removing government from the `coal-face' of service delivery has been the contracting-out of services. Contracting-out has been CCC 0271±2075/98/040307±20$17.50 # 1998 John Wiley & Sons, Ltd. PUBLIC ADMINISTRATION AND DEVELOPMENT Public Admin. Dev. 18, 307±326 (1998) *Correspondence to: S. Bennett, 2316 39th Street NW, Washington, DC 20007, USA. e-mail: sara_bennett@abtassoc.com Contract grant sponsor: UK Department of International Development