This report explains how welfare reform in New Jersey has served as an occasion for attempts to restructure the relations between public agencies and private service providers, and that these attempts raise important questions about who will and ought to play a part in the state's welfare programs. The historical context for privatization has changed: federal and state welfare reforms have brought new expectations and demands. Reliance on private agencies for welfare-related services began in the early 1970s when the major problem was spending federal money quickly. The private sector was more adept than government agencies at rapidly expanding their service capacity to meet new needs and use new resources. Later reforms of the contracting process sought to rein in this system and increase its financial accountability. Uncertainties of the state budget process strongly encouraged reliance on stable relationships between contractors and public agencies and on informal understandings to ensure continuity in service provision. Counties did not develop staff and administrative capacity to conduct extensive oversight of contractors' performance. The Whitman Administration's predisposition to privatization increased after enactment of Work First New Jersey, the state's new welfare program. The Administration sought to establish a system that was more accountable for performance, less fragmented or specialized, and offered greater diversity in agencies receiving grants. These objectives were not easy to implement because accountability demands considerable data collection and management capability despite expansion of the system's diversity and new capacities must be built within governments. (YLB)