This thesis examines the prospects for market type reforms within the public health systems of developing countries, through a study of the impact of contracting out of the provision of rural district hospital services in South Africa. The research objectives were to assess the impact of these contracts on hospital and local health system efficiency, to analyse the determinants of efficiency, and to determine the necessary conditions for efficiency gains from contracting out. Three contracted out hospitals, under contract to a single for-profit contractor, were each matched with a public and a private for-profit hospital, and the relative efficiency of these hospitals was assessed using step down unit cost analysis, data envelopment analysis, and a multi-dimensional assessment of quality of care. The structure of the contracts and the contracting process, organisational management structures and systems, and the extent of competition for the contracts, were also evaluated. These analyses demonstrate that the contracted out hospitals are able to produce most outputs of comparable quality at lower cost, primarily due to more efficient utilisation of staff resources, and to superior management structures and systems. However, when the government’s total costs are taken into account, including contract prices and transactions costs, contracted out services appear more costly than those produced in public hospitals, indicating that the contractor is able to capture most of its superior production efficiency in profits, and that these contracts result in some efficiency losses. Poor contract design is also shown to result in some systemic efficiency problems. These results are shown to be attributable to the government’s poor ability to design, negotiate and monitor contracts, as well as to the absence of competition or contestability. These findings suggest that contracting out has the potential to generate significant efficiency gains, but only where certain critical conditions are in place, including government capacity to design, negotiate and monitor contracts, and some level of contestability or competition for the contracts. Where these conditions are absent, contracting out of hospital services is unlikely to generate efficiency gains, and may result in efficiency losses.