praja trivedi the world bank performance contract (pc) an instrument for creating competition in...
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Praja TrivediThe World Bank
Performance Contract (PC)
An Instrument for Creating Competition in Public Services
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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
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Reduce Quantity of Government
Reduce Quantity of Government
Increase Quality of Government
Increase Quality of Government
Privatization Performance Contracts(PCs)
Perceptions aboutPerformance of Public Enterprises
Public Enterprises have delivered what was expected from them
Public Enterprises have delivered what was expected from them
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`
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Output-Based Aid
Performance Contract
Management
Contract
Lease BOT Sale of public goods
Sale of private goods
Degree of Privatization
Social Equity
Private Equity
Fixed Capital
Working Capital
Aid
Management
Rel
evan
ce o
f P
erfo
rman
ce C
ontr
acts
Commercial Regulation
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Saudi Arabia
New Zealand
France
United Kingdom
Canada, AustraliaSweden, Netherlands
United States Denmark
Finland
Administrator
Manager
Bureaucracy
Market-type Mechanisms
Trends in Public Management Reforms
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Is this activity still necessary? NoYes
Is it appropriate for government to do it?
NoYes
Can the activity be performed under contract by private sector?
YESNO
Is the activity primarily about service delivery?
YESNO
Abolish
Privatize
Contract
Executive Agency
Performance Management of the Core Government
Market Test
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In Search of Better Performance in the Public Sector
Create an Entrepreneural Public Sector that hasclarity of purpose and direction and is
accountable for its performancein order to make U.K. a better place to live in,
and support its success in the world.
Vision Statement (Option 1)
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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.
Vision Statement (Option 2)
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New Zealand
France
United Kingdom
United States
Denmark
Finland
Strategies for Implementing Public Management Reforms
Incrementalor ad hoc
Comprehensive
Bottom-up Top-down
Australia
Sweden CanadaNetherlands
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Holding Bureaucrats Accountable for Results
Trickle Down Approach
Direct Attack Approach
Performance Contracts Citizen’s Charter
E-Government
ISO 9000
E-Procurement
League Tables
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What is a Performance Contract?
• It is an agreement between two parties that clearly specifies their mutual performance obligations
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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
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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
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Types of Performance Contracts
• Different names but similar concept
• Only two broad conceptual approaches
• First implemented in public enterprises
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Types of Performance Contracts
French Approach Signaling System
France SenegalPakistan Korea Philippines
China
India Bolivia GambiaCote d’Ivoire Benin UnitedKingdom
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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
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Why Performance Contracts?
• First general point– The power of performance management is now
widely recognized.
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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
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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
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Performance Deficit Vs. Financial Deficit
Performance Deficit
Low Credibility
Lower FundingFinancial Deficit
Poor Performance
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Why Performance Contracts?
• Specifically, to Prevent– confusion due to multiplicity of objectives
• Number one cause of problems of government agencies
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Problems of Public Enterprises - I
ADMINISTRATIVE MINISTRY EQUITY EFFICIENCY
MULTIPLE PRINCIPALS
MULTIPLE GOALS
FUZZY GOALS & OBJECTIVES
A SOLUTION
Performance Contract
PLANNING MINISTRY
FINANCE MINISTRY
PARLIAMENT
POLITICAL NON-POLITICAL
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Why Performance Contracts?
• To Prevent– confusion due to multiplicity of objectives – vicious cycle of the “NOT ME” syndrome
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Problem of Public Enterprises -II
“NOT ME”Syndrome
People
Public Enterprise
Government
Parliament
A SOLUTION
Performance Contract
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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
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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
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What is meant by the term: PERFORMANCE OF GOVERNMENT AGENCIES?
• Ex-post versus Ex-ante Performance
• Managerial versus Agency Performance
• Partial versus Comprehensive Performance
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Meaning of Performance inPerformance Contracts
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Ex-post versus Ex-antePerformance Evaluation
• based on comparison of achievements against agreed targets
• typically involves a formal agreement• most common in professionally run organizations
Ex-ante Performance Evaluation is:
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Ex-post versus Ex-antePerformance Evaluation
• 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:
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Ex-post versus Ex-antePerformance Evaluation
• 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-ante Performance Evaluation is: Ex-post Performance Evaluation is:
• based on comparison of achievements against agreed targets
• typically involves a formal agreement
• most common in professionally run organizations
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
Ex-post Performance Evaluation is:
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Managerial versus AgencyPerformance Evaluation
• based on observed performance of the agency
Agency Performance Evaluation is:
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Managerial versus AgencyPerformance Evaluation
• calculated by adjusting agency performance for factors beyond the control of the management (government officials):
Managerial Performance Evaluation is:
AgencyPerformance =
Managerial Performance -+
ExogenousFactors
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Managerial versus AgencyPerformance Evaluation
Change inAgencyPerformance
=Change inManagerial Performance -+
ExogenousFactors
- 100,000Hospital
Beds=
+75,000Hospital
Beds -+-175,000Hospital
Beds
Impact of Budgetary Cuts
An Heuristic Illustration
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What is meant by the term: PERFORMANCE OF GOVERNMENT AGENCIES?
• Ex-post versus Ex-ante Performance
• Managerial versus Agency Performance
• Partial versus Comprehensive Performance
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Partial versus ComprehensivePerformance Evaluation
• Partial Performance Evaluation is:– based on selected aspects (or activities) of the agency
• Comprehensive Performance Evaluation is:– based on all activities of agency
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A Taxonomy of Performance Evaluation Approaches
ManagerialPerformance
AgencyPerformance
Ex-
ante
P
erfo
rman
ceE
x-po
st
Per
form
ance
Cell # 1Cell # 2
Cell # 3 Cell # 14
PerformanceContracts
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Best Practice Methodology
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A SOLUTION!
Performance Information
System
Criteria(“How” to Evaluate)
Performance Evaluation
System
Institutional Arrangements(“Who” Should
Evaluate)
PERFORMANCE IMPROVEMENT SYSTEM
Performance
Incentive System
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A SOLUTION!
Performance Information
System
Criteria(“How” to Evaluate)
Performance Evaluation
System
Institutional Arrangements(“Who” Should
Evaluate)
PERFORMANCE IMPROVEMENT SYSTEM
Performance
Incentive System
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A SOLUTION!
Performance Information
System
Criteria(“How” to Evaluate)
Performance Evaluation
System
Institutional Arrangements(“Who” Should
Evaluate)
PERFORMANCE IMPROVEMENT SYSTEM
Performance
Incentive System
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BEGINNING OF YEAR
Step 1 Criteria
Selection
“FAIR” to Officials
PROPOSED PERFORMANCE EVALUATION SYSTEM
END OF YEAR
Step 2 Criteria Weight
Selection
Step 3 Criteria Value
Selection
“FAIR” to country
Negotiated
“FREELY”
Step 4 Performan
ce Evaluation (Composite Score)
Performance Contract:
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PERFORMANCE CONTRACT TARGETS AT THE BEGINNING OF THE YEAR
Very Good Good Fair Poor
Units WeightCriterion
Thousand
%
Months
.50
.30
400
.20
80
385 350 300 250
606570
6 12
8
55
1614
1 2 3 4 5
Criterion Values
Excellent
Step 1 Step 2 Step 3
1. Gross Margin
2. Degree of customer satisfaction
3. Project Implementation
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BEGINNING OF YEAR
Step 1 Criteria
Selection
“FAIR” to Officials
PROPOSED PERFORMANCE EVALUATION SYSTEM
END OF YEAR
Step 2 Criteria Weight
Selection
Step 3 Criteria Value
Selection
“FAIR” to country
Negotiated
“FREELY”
Step 4 Performan
ce Evaluation (Composite Score)
Performance Contract:
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At the end of the year the achievements of this government agency were as
follows:
i.) Gross Margin
ii.) Degree of customer satisfaction
iii.) Project Implementation
385 Thousand
75%
5 months
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How to Calculate Composite Score
Criterion Values
Excell-ent
Very Good Good Fair Poor
Units WeightCriterion
.50
.30
400
.20
80
385 350 300 250
606570
6 128
55
1614
Achievement
Raw Scor
e
Weighted RawScore
385 Thousand
75 %
5 Months
2
1.50 .45
.201
1.00Thou-sand
%
Months
1 2 3 4 5
1. Gross Margin
2. Degree of customer satisfaction
3. Project
Implementation
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Units WeightCriterion
Calculation of Composite Score at End of Year
Achievement Raw Score
Weighted Raw
Score
Thou-sand
%
Months
.50
.30
.20
385 Thousand
75 %
5 Months
1
.451.5
1.00
2
.20
COMPOSITE SCORE 1.65
1. Gross Margin
2. Degree of customer satisfaction
3. Project
Implementation
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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
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Potential for ranking public enterprises
RANK PUBLIC ENTERPRISE COMPOSITE INDEX
1 Public Enterprise 1 1.13
2 Public Enterprise 1 1.21
3 Public Enterprise 1 1.55
4 Public Enterprise 1 1.76
5 Public Enterprise 1 1.80
6 Public Enterprise 1 1.99
7 Public Enterprise 1 2.01
8 Public Enterprise 1 2.11
9 Public Enterprise 1 2.56
10 Public Enterprise 1 3.02
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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
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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
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• “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)
Do Performance Contracts Work?
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• 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)
Do Performance Contracts Work?
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1980 1981 1082 1983 1984 1985 1986
Number of PEs
2 2 4 5 1 1 0
Deficit
(mil. Won)
3883 26507
35610
35911
530 560 0
Financial Performance of Korean PEs
PC introduced
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Executive
Directors
Directors Department
Heads (DH)
Assistant
DH
Others All
Significant
Improvement
41.4 23.9 19.8 16.5 15.3 19.0
Substantial
Improvement
51.7 40.3 44.3 47.4 44.7 45.4
So So 6.9 28.3 29.3 27.4 33.3 28.3
Few
Improvements
0 4.5 5.2 4.9 4.7 4.7
No
Improvement
0 3.0 1.4 3.8 2.0 2.6
TOTAL 100 100 100 100 100 100
KOREA:
Degree of Overall Management ImprovementSurvey Results of 750 employees from 25 PEs
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Improved
Significantly
No Improvement
Or became worse
So So
Positive change in
Top Management Behavior
79.1 6.5 14.4
Positive change in
general worker attitude
71.5 13.2 15.3
Improvement in
PE service quality
70.6 2.3 27.1
Improvement in R&D 61.4 5.9 32.7
Improvement in
Long-Term Planning
57.4 11.2 31.4
Improvement in budgeting
and procurement functions
55.3 6.3 38.4
Improvement in
Personnel Management
29.3 15.2 55.5
Results of Opinion Survey onImprovement in Specific management Functions
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On the growing gap between EU-accession countries and the rest of transition --Rule of Law Over Time, Selected Regions, 1996-2002
-1
0
1
2
1996 1998 2000 2002
Ru
le o
f L
aw
OECD
East Asia (NIC)
Transition EUAccession Countries
Sub-Saharan Africa
Other TransitionCountries
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.
High
Low
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• There are pitfalls of poor implementation– However, there are remedies for mitigation
• Examples– institutional arrangements
– Incentives
– Soft targets
Do Performance Contracts Work?
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10 Lessons of Experience
1. The PC document should be freely negotiated. Otherwise, it will be accepted overtly but resisted covertly.
2. 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).
3. 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.
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10 Lessons of Experience
4. 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.
5. 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.
6. 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.
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10 Lessons of Experience
7. Correct evaluation methodology is at the heart of an effective design for PCs. Without a composite score, there is bound to be subjectivity.
8. 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.
9. 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.
10. Learn from other and make your own mistakes and not those that have been made by others
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For comments and questions please contact:
Prajapati TrivediThe World Bank
1818 H Street, NWWashington, DC. 20433