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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


Performance contract pc an instrument for creating competition in public services

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


Performance contract pc an instrument for creating competition in public services

Commercial Regulation

Social

Equity

Private Equity

Fixed Capital

Relevance of Performance Contracts

Working Capital

Management

Aid


Performance contract pc an instrument for creating competition in public services

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.


Performance contract pc an instrument for creating competition in public services

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


    Performance contract pc an instrument for creating competition in public services

    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


    Meaning of performance in performance contracts

    Meaning of Performance inPerformance Contracts


    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 of the year

    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 evaluation

    based on observed performance of the agency of the year

    Managerial versus AgencyPerformance Evaluation

    Agency 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 beyond the control of the management (government officials):

    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: beyond the control of the management (government officials):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: beyond the control of the management (government officials):

    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 beyond the control of the management (government officials):Performance Evaluation Approaches

    Managerial

    Performance

    Agency

    Performance

    Cell # 1

    Ex-ante

    Performance

    Cell # 2

    Performance

    Contracts

    Ex-post

    Performance

    Cell # 14

    Cell # 3


    Best practice methodology

    Best Practice Methodology beyond the control of the management (government officials):


    A solution
    A SOLUTION! beyond the control of the management (government officials):

    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! beyond the control of the management (government officials):

    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! beyond the control of the management (government officials):

    PERFORMANCE IMPROVEMENT SYSTEM

    Performance Information System

    Performance Evaluation System

    Performance Incentive System

    Institutional Arrangements(“Who” Should Evaluate)

    Criteria(“How” to Evaluate)


    Performance contract pc an instrument for creating competition in public services

    Performance Contract: beyond the control of the management (government officials):

    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 beyond the control of the management (government officials):

    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


    Performance contract pc an instrument for creating competition in public services

    Performance Contract: beyond the control of the management (government officials):

    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 agency were as follows:

    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- agency were as follows: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 agency were as follows:

    • 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 agency were as follows:

    • 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? agency were as follows:

    • 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


    Performance contract pc an instrument for creating competition in public services

    Do Performance Contracts Work? agency were as follows:

    • “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)


    Performance contract pc an instrument for creating competition in public services

    Do Performance Contracts Work? agency were as follows:

    • 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)


    Performance contract pc an instrument for creating competition in public services

    Financial Performance of Korean PEs agency were as follows:

    PC introduced


    Performance contract pc an instrument for creating competition in public services

    KOREA: agency were as follows:

    Degree of Overall Management Improvement

    Survey Results of 750 employees from 25 PEs


    Performance contract pc an instrument for creating competition in public services

    Results of Opinion Survey on agency were as follows:

    Improvement in Specific management Functions


    Performance contract pc an instrument for creating competition in public services
    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.


    Performance contract pc an instrument for creating competition in public services

    Do Performance Contracts Work? rest of transition --Rule of Law Over Time, Selected Regions, 1996-2002

    • 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 rest of transition --Rule of Law Over Time, Selected Regions, 1996-2002

    • 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 rest of transition --Rule of Law Over Time, Selected Regions, 1996-2002

    • 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 rest of transition --Rule of Law Over Time, Selected Regions, 1996-2002

    • 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


    Performance contract pc an instrument for creating competition in public services

    For comments and questions please contact: rest of transition --Rule of Law Over Time, Selected Regions, 1996-2002

    Prajapati Trivedi

    The World Bank

    1818 H Street, NW

    Washington, DC. 20433

    Ptrivedi3@worldbank.org