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Performance Contract (PC) An Instrument for Creating Competition in Public Services. Praja Trivedi The World Bank. Outline for this Presentation. Concept of a performance contract Types of performance contracts Origins of performance contracts Rationale for performance contracts

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performance contract pc an instrument for creating competition in public services
Performance Contract (PC)

An Instrument for Creating Competition in Public Services

Praja Trivedi

The World Bank

outline for this presentation
Outline for this Presentation
  • Concept of a performance contract
  • Types of performance contracts
  • Origins of performance contracts
  • Rationale for performance contracts
    • Including benchmark competition
  • Meaning of “performance” in performance contracts
  • Best Practice Performance Evaluation Methodology for performance contracts
  • Do Performance Contracts Work?
  • 10 Lessons of Experience
slide3

Perceptions aboutPerformance of Public Enterprises

Public Enterprises have delivered

what was expected from them

Reduce Quantity of

Government

Increase Quality of

Government

Performance Contracts

(PCs)

Privatization

slide4

Commercial Regulation

Social

Equity

Private Equity

Fixed Capital

Relevance of Performance Contracts

Working Capital

Management

Aid

slide6

Is it appropriate for government to do it?

Is the activity primarily about service delivery?

Is this activity still necessary?

No

No

YES

YES

Can the activity be performed under contract by private sector?

Yes

Yes

NO

NO

Abolish

Privatize

Contract

Executive Agency

Market Test

Performance Management of the Core Government

in search of better performance in the public sector
In Search of Better Performance in the Public Sector

Vision Statement (Option 1)

Create an Entrepreneural Public Sector that has

clarity of purpose and direction and is

accountable for its performance

in order to make U.K. a better place to live in,

and support its success in the world.

in search of better performance in the public sector1

Vision Statement (Option 2)

In Search of Better Performance in the Public Sector

Create an Entrepreneural Public Sector

that makes a distinction between Steering and Rowing

in order to make U.K. a better place to live in,

and support its success in the world.

slide10

Holding Bureaucrats Accountable for Results

Direct Attack Approach

Trickle Down Approach

Citizen’s Charter

Performance Contracts

E-Government

E-Procurement

ISO 9000

League Tables

what is a performance contract
What is a Performance Contract?
  • It is an agreement between two parties that clearly specifies their mutual performance obligations
who are the two parties to a performance contract
Who are the two parties to a Performance Contract?
  • PRINCIPAL:
    • superior entity in the government hierarchy
    • monitors and evaluates performance
    • responsible for public policy
  • AGENT:
    • a subordinate entity in the same hierarchy
    • its performance is evaluated by Principal
    • responsible for implementation of public policies
alternative names for a performance contract
Alternative names for a Performance Contract
  • Performance Agreement
  • Contratos de Rendimientos
  • Contrat du Plan
  • Contrats de Program
  • Framework Agreement
  • Memorandum of Understanding
  • Compromiso de Resultados
  • Purchase Agreement
  • Results Framenwork
types of performance contracts
Types of Performance Contracts
  • Different names but similar concept
  • Only two broad conceptual approaches
  • First implemented in public enterprises
types of performance contracts1
Types of Performance Contracts

French Approach

Signaling System

Pakistan

Philippines

Korea

France

China

Senegal

India

Gambia

Bolivia

United

Kingdom

Cote d’Ivoire

Benin

origins of performance contracts
Origins of Performance Contracts
  • First emerged in Europe in the 1960s and 1970s in the context of public enterprises
      • Nora Report proposed Contrats de Stabilite in 1967
      • National Economic Development Office proposed a Memorandum of Understanding in 1976
  • Performance Contracts in governments emerged in 1980s in UK and New Zealand
why performance contracts
Why Performance Contracts?
  • First general point
    • The power of performance management is now widely recognized.
the power of performance measurement
The Power of Performance Measurement
  • What Gets Measured Gets Done
  • If you Don’t Measure Results,You Can’t Tell Success from Failure
  • If You Can’t See Success, You Can’t Reward It
  • If You Can’t Reward Success, You are Probably Rewarding Failure
  • If You Can’t See Success, You Can’t Learn From It
  • If You Can’t Recognize Failure, You Can’t Correct It
  • If You Can Demonstrate Results, You Can Win Public Support
in search of better performance in the public sector2
In Search of Better Performance in the Public Sector
  • Second general point
    • Comparative Advantage depends on Resource Efficiency/Endowment
    • Competitve Advantage of Nations depends on Public Sector Performance
    • Public Sector Performance acts as a ceiling on Private Sector Performance
      • (Market failure vs. Government failure)
    • Financial Deficit is a Symptom of Performance Deficit
slide20

Performance Deficit Vs. Financial Deficit

Performance Deficit

Poor Performance

Low Credibility

Financial Deficit

Lower Funding

why performance contracts1
Why Performance Contracts?
  • Specifically, to Prevent
    • confusion due to multiplicity of objectives
      • Number one cause of problems of government agencies
problems of public enterprises i

PARLIAMENT

Problems of Public Enterprises - I

FINANCE MINISTRY

NON-POLITICAL

POLITICAL

PLANNING MINISTRY

ADMINISTRATIVE MINISTRY

EQUITY

EFFICIENCY

MULTIPLE GOALS

MULTIPLE

PRINCIPALS

FUZZY GOALS & OBJECTIVES

A SOLUTION

Performance Contract

why performance contracts2
Why Performance Contracts?
  • To Prevent
    • confusion due to multiplicity of objectives
    • vicious cycle of the “NOT ME” syndrome
problem of public enterprises ii

“NOT ME”

Problem of Public Enterprises -II

Syndrome

People

Parliament

Public Enterprise

Government

A SOLUTION

Performance Contract

why performance contracts3
Why Performance Contracts?
  • To Prevent
    • confusion due to multiplicity of objectives
    • vicious cycle of the “NOT ME” syndrome
  • To Improve
    • correlation between planning and implementation
    • coordination between various government agencies
why performance contracts4
Why Performance Contracts?
  • To create
    • benchmark competition among public agencies and enterprises
    • an enabling public policy environment for other downstream reforms
    • a “fair” and “accurate” impression about public enterprise performance
what is meant by the term performance of government agencies
What is meant by the term: PERFORMANCE OF GOVERNMENT AGENCIES?
  • Ex-post versus Ex-ante Performance
  • Managerial versus Agency Performance
  • Partial versus Comprehensive Performance
ex post versus ex ante performance evaluation
based on comparison of achievements against agreed targets

typically involves a formal agreement

most common in professionally run organizations

Ex-post versus Ex-antePerformance Evaluation

Ex-ante Performance Evaluation is:

ex post versus ex ante performance evaluation1
based on selection of criteria by the evaluator at the end of the year

typically undertaken by researchers

useful for future projects

more comprehensive

Ex-post versus Ex-antePerformance Evaluation

Ex-post Performance Evaluation is:

ex post versus ex ante performance evaluation2
based on comparison of achievements against agreed targets

typically involves a formal agreement

most common in professionally run organizations

based on selection of criteria by the evaluator at the end of the year

typically undertaken by researchers

useful for future projects

more comprehensive

Ex-post Performance Evaluation is:

Ex-ante Performance Evaluation is:

  • based on selection of criteria by the evaluator at the end of the year
  • typically undertaken by researchers
  • useful for future projects
  • more comprehensive
  • based on comparison of achievements against agreed targets
  • typically involves a formal agreement
  • most common in professionally run organizations
Ex-post versus Ex-antePerformance Evaluation

Ex-post Performance Evaluation is:

Ex-ante Performance Evaluation is:

managerial versus agency performance evaluation1
calculated by adjusting agency performance for factors beyond the control of the management (government officials):

+

-

Managerial versus AgencyPerformance Evaluation

Managerial Performance Evaluation is:

Exogenous

Factors

Agency

Performance

Managerial

Performance

=

managerial versus agency performance evaluation2

Change in

Agency

Performance

Change in

Managerial

Performance

Exogenous

Factors

+

-

=

- 100,000

Hospital

Beds

+75,000

Hospital

Beds

-175,000

Hospital

Beds

+

-

=

Impact of Budgetary Cuts

Managerial versus AgencyPerformance Evaluation

An Heuristic Illustration

what is meant by the term performance of government agencies1
What is meant by the term: PERFORMANCE OF GOVERNMENT AGENCIES?
  • Ex-post versus Ex-ante Performance
  • Managerial versus Agency Performance
  • Partial versus Comprehensive Performance
partial versus comprehensive performance evaluation
Partial Performance Evaluation is:

based on selected aspects (or activities) of the agency

Comprehensive Performance Evaluation is:

based on all activities of agency

Partial versus ComprehensivePerformance Evaluation
a taxonomy of performance evaluation approaches
A Taxonomy of Performance Evaluation Approaches

Managerial

Performance

Agency

Performance

Cell # 1

Ex-ante

Performance

Cell # 2

Performance

Contracts

Ex-post

Performance

Cell # 14

Cell # 3

a solution
A SOLUTION!

PERFORMANCE IMPROVEMENT SYSTEM

Performance Information System

Performance Evaluation System

Performance Incentive System

Institutional Arrangements(“Who” Should Evaluate)

Criteria(“How” to Evaluate)

a solution1
A SOLUTION!

PERFORMANCE IMPROVEMENT SYSTEM

Performance Information System

Performance Evaluation System

Performance Incentive System

Institutional Arrangements(“Who” Should Evaluate)

Criteria(“How” to Evaluate)

a solution2
A SOLUTION!

PERFORMANCE IMPROVEMENT SYSTEM

Performance Information System

Performance Evaluation System

Performance Incentive System

Institutional Arrangements(“Who” Should Evaluate)

Criteria(“How” to Evaluate)

slide42

Performance Contract:

PROPOSED PERFORMANCE EVALUATION SYSTEM

BEGINNING OF YEAR

END OF YEAR

Step 1 Criteria Selection

Step 2 Criteria Weight Selection

Step 3 Criteria Value Selection

Step 4 Performance Evaluation (Composite Score)

“FAIR” to Officials

“FAIR” to country

Negotiated “FREELY”

performance contract targets at the beginning of the year

PERFORMANCE CONTRACT TARGETS AT THE BEGINNING OF THE YEAR

Step 1

Step 3

Step 2

Criterion Values

Criterion

Units

Weight

1

2

3

4

5

Very Good

Good

Excellent

Fair

Poor

.50

400

385

350

300

250

1. Gross Margin

Thousand

2. Degree of customer satisfaction

.30

80

70

65

60

55

%

3. Project Implementation

.20

6

8

12

14

16

Months

slide44

Performance Contract:

PROPOSED PERFORMANCE EVALUATION SYSTEM

BEGINNING OF YEAR

END OF YEAR

Step 1 Criteria Selection

Step 2 Criteria Weight Selection

Step 3 Criteria Value Selection

Step 4 Performance Evaluation (Composite Score)

“FAIR” to Officials

“FAIR” to country

Negotiated “FREELY”

at the end of the year the achievements of this government agency were as follows

At the end of the year the achievements of this government agency were as follows:

i.) Gross Margin

385 Thousand

ii.) Degree of customer satisfaction

75%

iii.) Project Implementation

5 months

how to calculate composite score

How to Calculate Composite Score

Criterion Values

Weighted RawScore

1

5

2

4

3

Raw Score

Criterion

Weight

Achievement

Units

Excell-ent

Very Good

Good

Fair

Poor

385 Thousand

Thou-sand

.50

400

385

350

300

250

2

1.00

1. Gross Margin

2. Degree of customer satisfaction

75 %

.30

80

70

65

60

55

1.50

.45

%

3. Project

Implementation

.20

6

8

12

14

16

5 Months

1

.20

Months

calculation of composite score at end of year

Thou-sand

2

1.00

.50

385 Thousand

1.5

.45

75 %

.30

%

.20

1

.20

5 Months

Months

Calculation of Composite Score at End of Year

Weighted Raw Score

Raw Score

Criterion

Units

Weight

Achievement

1. Gross Margin

2. Degree of customer satisfaction

3. Project

Implementation

COMPOSITE SCORE

1.65

importance of composite score
Importance of Composite Score
  • It is a key concept:
    • Any evaluation system without it is incomplete
  • It allows a rigorous link between the evaluation system and an incentive system
  • It makes benchmark competition between government agencies possible
explicit versus implicit performance contracts
Explicit versus Implicit Performance Contracts
  • People will definitely form a judgment
  • Choice is only between the following:
    • Will it be “Explicit” or “Implicit” evaluation
    • Will it be based on a “fair and scientific” system or a “subjective and ad hoc” system
do performance contracts work
Do Performance Contracts Work?
  • Their use is pervasive in very diverse fields--prima facie case for their effectiveness
  • How should to measure performance of PCs
    • Like with any policy instrument, it should be measured against expectations from the instruments.
  • Therefore, correct questions to ask:
    • What is expected from PCs
      • Performance Improvement
    • How is performance improvement defined
      • As per the contract
  • If managers achieve contractual performance obligations, performance has improved
slide52

Do Performance Contracts Work?

  • “Bureaucrats in Business” found that when ratings (composite score) were assigned, all enterprises achieved at least a satisfactory rating.
  • Ten year retrospective of Indian MOUs by NCAER
    • Financial profitability increased (included in MOUs)
    • Productivity did not increase as much (not included in MOUs)
slide53

Do Performance Contracts Work?

  • EU Accession Treaties acted as de facto PCs (were very effective as shown in the figure)
  • Few systematic studies done:
    • Most focus on ex-post enterprise performance (results generally not good)
    • Few focus on ex-ante managerial performance evaluation (results generally good, Korea and OECD studies)
    • Small samples (12 qualitative and 8 quantitative PEs in Shirley and Xu)
      • Use profitability, labor productivity, TFP
        • No correlation with profitability
        • Lab Prod big gain (insignificant after counterfactual)
        • TFP Positive but insignificant (negative and significant after counterfactual)
slide55

KOREA:

Degree of Overall Management Improvement

Survey Results of 750 employees from 25 PEs

slide56

Results of Opinion Survey on

Improvement in Specific management Functions

slide57
On the growing gap between EU-accession countries and the rest of transition --Rule of Law Over Time, Selected Regions, 1996-2002

High

Low

Source for data: http://www.worldbank.org/wbi/governance/govdata2002.

Each region has the following number of countries: OECD: 28; East Asia (Developing): 35, East Asia (NIC): 4; Eastern Europe: 16; Former Soviet Union: 12; South Asia: 8; Sub-Saharan Africa: 47; Middle East North Africa: 21; Latin America and Caribbean: 38.

slide58

Do Performance Contracts Work?

  • There are pitfalls of poor implementation
    • However, there are remedies for mitigation
      • Examples
        • institutional arrangements
        • Incentives
        • Soft targets
10 lessons of experience
10 Lessons of Experience
  • The PC document should be freely negotiated. Otherwise, it will be accepted overtly but resisted covertly.
  • There must be a third party to ensure that PCs have been negotiated freely and that they are “fair” to both parties (as well as the nation).
  • The evaluation of the PC should be done by a third party to ensure fairness—clearly one party to the contract can not be the judge for that contract.
10 lessons of experience1
10 Lessons of Experience
  • The PC document must clearly specify success indicators and their relative priorities. The meaning of success should be clear ex-ante. Otherwise there will be unnecessary controversy ex-post.
  • Adherence to PC commitments should matter. That is there should be consequences for “good” and “bad” performance. Otherwise, PCs will simply remain as paper tigers. There must be an explicit incentive system to motivate people to take PCs seriously. However, this incentive system can be both pecuniary or non-pecuniary.
  • The method and modality for collecting and reporting information should be agreed at the time of signing PC. Ideally, it should be part of the PC.
10 lessons of experience2
10 Lessons of Experience
  • Correct evaluation methodology is at the heart of an effective design for PCs. Without a composite score, there is bound to be subjectivity.
  • Any evaluation methodology could and would work in the short run as a result of so called “Audit Effect.” But for long run sustainability, correct methodology is crucial.
  • In a world full of uncertainties, we know that “management” is an inexact science at best. Therefore, PCs must deal explicitly with known unknowns. It must specify contingencies ex-ante, to make ex-post evaluation of performance fair.
  • Learn from other and make your own mistakes and not those that have been made by others
slide62

For comments and questions please contact:

Prajapati Trivedi

The World Bank

1818 H Street, NW

Washington, DC. 20433

[email protected]

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