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Praja Trivedi The World Bank Performance Contract (PC) An Instrument for Creating Competition in Public Services.

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Presentation on theme: "Praja Trivedi The World Bank Performance Contract (PC) An Instrument for Creating Competition in Public Services."— Presentation transcript:

1 Praja Trivedi The World Bank Performance Contract (PC) An Instrument for Creating Competition in Public Services

2 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

3 Reduce Quantity of Government Reduce Quantity of Government Increase Quality of Government Increase Quality of Government Privatization Performance Contracts (PCs) Perceptions about Performance of Public Enterprises Public Enterprises have delivered what was expected from them Public Enterprises have delivered what was expected from them

4 ` ` Output- Based Aid Performance Contract Management Contract LeaseBOTSale of public goods Sale of private goods Degree of Privatization Social Equity Private Equity Fixed Capital Working Capital Aid Management Relevance of Performance Contracts Commercial Regulation

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6 Is this activity still necessary? No Yes Is it appropriate for government to do it? No Yes Can the activity be performed under contract by private sector? YES NO Is the activity primarily about service delivery? YES NO Abolish Privatize Contract Executive Agency Performance Management of the Core Government Market Test

7 In Search of Better Performance in the Public Sector 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. Vision Statement (Option 1)

8 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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10 Holding Bureaucrats Accountable for Results Trickle Down Approach Direct Attack Approach Performance Contracts Citizens Charter E-Government ISO 9000 E-Procurement League Tables

11 What is a Performance Contract? It is an agreement between two parties that clearly specifies their mutual performance obligations

12 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

13 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

14 Types of Performance Contracts Different names but similar concept Only two broad conceptual approaches First implemented in public enterprises

15 Types of Performance Contracts French ApproachSignaling System France Senegal Pakistan Korea Philippines China India Bolivia Gambia Cote dIvoire Benin United Kingdom

16 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

17 Why Performance Contracts? First general point –The power of performance management is now widely recognized.

18 The Power of Performance Measurement What Gets Measured Gets Done If you Dont Measure Results,You Cant Tell Success from Failure If You Cant See Success, You Cant Reward It If You Cant Reward Success, You are Probably Rewarding Failure If You Cant See Success, You Cant Learn From It If You Cant Recognize Failure, You Cant Correct It If You Can Demonstrate Results, You Can Win Public Support

19 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

20 Performance Deficit Vs. Financial Deficit Performance Deficit Low Credibility Lower Funding Financial Deficit Poor Performance

21 Why Performance Contracts? Specifically, to Prevent –confusion due to multiplicity of objectives Number one cause of problems of government agencies

22 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

23 Why Performance Contracts? To Prevent –confusion due to multiplicity of objectives –vicious cycle of the NOT ME syndrome

24 Problem of Public Enterprises -II NOT ME Syndrome People Public Enterprise Government Parliament A SOLUTION Performance Contract

25 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

26 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

27 What is meant by the term: PERFORMANCE OF GOVERNMENT AGENCIES? Ex-post versus Ex-ante Performance Managerial versus Agency Performance Partial versus Comprehensive Performance

28 Meaning of Performance in Performance Contracts

29 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-ante Performance Evaluation is:

30 Ex-post versus Ex-ante Performance 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:

31 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 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:

32 Managerial versus Agency Performance Evaluation based on observed performance of the agency Agency Performance Evaluation is:

33 Managerial versus Agency Performance Evaluation calculated by adjusting agency performance for factors beyond the control of the management (government officials): Managerial Performance Evaluation is: Agency Performance = Managerial Performance - + Exogenous Factors

34 Managerial versus Agency Performance Evaluation Change in Agency Performance = Change in Managerial Performance - + Exogenous Factors - 100,000 Hospital Beds = +75,000 Hospital Beds ,000 Hospital Beds Impact of Budgetary Cuts An Heuristic Illustration

35 What is meant by the term: PERFORMANCE OF GOVERNMENT AGENCIES? Ex-post versus Ex-ante Performance Managerial versus Agency Performance Partial versus Comprehensive Performance

36 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

37 A Taxonomy of Performance Evaluation Approaches Managerial Performance Agency Performance Ex-ante Performance Ex-post Performance Cell # 1 Cell # 2 Cell # 3 Cell # 14 Performance Contracts

38 Best Practice Methodology

39 A SOLUTION! Performance Information System Criteria ( How to Evaluate) Performance Evaluation System Institutional Arrangements ( Who Should Evaluate) PERFORMANCE IMPROVEMENT SYSTEM Performance Incentive System

40 A SOLUTION! Performance Information System Criteria ( How to Evaluate) Performance Evaluation System Institutional Arrangements ( Who Should Evaluate) PERFORMANCE IMPROVEMENT SYSTEM Performance Incentive System

41 A SOLUTION! Performance Information System Criteria ( How to Evaluate) Performance Evaluation System Institutional Arrangements ( Who Should Evaluate) PERFORMANCE IMPROVEMENT SYSTEM Performance Incentive System

42 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 Performance Evaluation (Composite Score) Performance Contract:

43 PERFORMANCE CONTRACT TARGETS AT THE BEGINNING OF THE YEAR Very Good Good FairPoor UnitsWeightCriterion Thousand % Months Criterion Values Excellent Step 1 Step 2 Step 3 1. Gross Margin 2. Degree of customer satisfaction 3. Project Implementation

44 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 Performance Evaluation (Composite Score) Performance Contract:

45 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

46 How to Calculate Composite Score Criterion Values Excell- ent Very Good GoodFairPoor Units WeightCriterion Achievement Raw Score Weighted Raw Score 385 Thousand 75 % 5 Months Thou -sand % Months Gross Margin 2. Degree of customer satisfaction 3. Project Implementation

47 UnitsWeightCriterion Calculation of Composite Score at End of Year Achievement Raw Score Weighted Raw Score Thou- sand % Months Thousand 75 % 5 Months COMPOSITE SCORE Gross Margin 2. Degree of customer satisfaction 3. Project Implementation

48 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

49 Potential for ranking public enterprises RANKPUBLIC ENTERPRISECOMPOSITE INDEX 1 Public Enterprise Public Enterprise Public Enterprise Public Enterprise Public Enterprise Public Enterprise Public Enterprise Public Enterprise Public Enterprise Public Enterprise 13.02

50 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

51 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

52 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?

53 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?

54 Number of PEs Deficit (mil. Won) Financial Performance of Korean PEs PC introduced

55 Executive Directors Department Heads (DH) Assistant DH OthersAll Significant Improvement Substantial Improvement So Few Improvements No Improvement TOTAL 100 KOREA: Degree of Overall Management Improvement Survey Results of 750 employees from 25 PEs

56 Improved Significantly No Improvement Or became worse So Positive change in Top Management Behavior Positive change in general worker attitude Improvement in PE service quality Improvement in R&D Improvement in Long-Term Planning Improvement in budgeting and procurement functions Improvement in Personnel Management Results of Opinion Survey on Improvement in Specific management Functions

57 On the growing gap between EU-accession countries and the rest of transition --Rule of Law Over Time, Selected Regions, Source for data: 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

58 There are pitfalls of poor implementation –However, there are remedies for mitigation Examples –institutional arrangements –Incentives –Soft targets Do Performance Contracts Work?

59 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 fairnessclearly one party to the contract can not be the judge for that contract.

60 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.

61 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

62 For comments and questions please contact: Prajapati Trivedi The World Bank 1818 H Street, NW Washington, DC


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