Contracting out, using private companies for government services, can improve service quality and efficiency. It helps develop the private sector and make the public sector more effective. The report looks at how contracting out has worked in OECD countries and the challenges in transition economies. Tradeoffs exist in contracting out, like balancing quality, cost, and innovation. Factors like service characteristics, market conditions, and the institutional environment affect these tradeoffs. Practical issues in contracting out are discussed, along with ways the Bank can support it.