The article deals with the contradictions of socially oriented activities of NGOs as service provides in two Russian regions (St. Petersburg and Sverdlovsk oblast). In the mixed system of social welfare, the importance of the non-profit sector is increasing, but the processes taking place due to the diverse regional practices are ambiguous. We focus on the issues of interaction of the non-profit sector with the state, reasons for strengthening the commercial interests of NGOs, interaction with regional authorities and the risks of the social service system at the regional level. The theoretical framework of the study is the transformation of welfare state into welfare-service state. The study used empirical data obtained by street and telephone surveys of population, interviews with representatives of NGOs, state service institutions and regional government. The analysis demonstrates that the key constraining factors for the development of NGOs as service providers are administrative barriers to access state fonds, inappropriate ways of government’s interaction with private services providers in a changing environment, the continued lack of confidence to NGO’ activities among the majority of the population. NGOs are limitedly represented in the social service provider registries for a number of reasons: high bureaucratic requirements; difficultly implemented requirements for reporting for cost recovery; strong control on NGO’s activities by the authorities; untimely informing concerning grant competitions; non-transparency of competitive procedures. The formal approach of authorities indicates that the institutional advantages of NGOs, their ability to social innovations are not considered. Overcoming the barriers for NGOs as social service providers should be also considered as a resource for increasing the public trust in private sector.