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

Praja TrivediThe World Bank

Performance Contract (PC)

An Instrument for Creating Competition in Public Services

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

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

`

`

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

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

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

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)


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)

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

Holding Bureaucrats Accountable for Results

Trickle Down Approach

Direct Attack Approach

Performance Contracts Citizen’s Charter

E-Government

ISO 9000

E-Procurement

League Tables

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?

• 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

• 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

• Different names but similar concept

• Only two broad conceptual approaches

• First implemented in public enterprises

Types of Performance Contracts

French Approach Signaling System

France SenegalPakistan Korea Philippines

China

India Bolivia GambiaCote d’Ivoire Benin UnitedKingdom

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?

• First general point– The power of performance management is now

widely recognized.

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


• 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 Deficit Vs. Financial Deficit

Performance Deficit

Low Credibility

Lower FundingFinancial Deficit

Poor Performance


• Specifically, to Prevent– confusion due to multiplicity of objectives

• Number one cause of problems of government agencies

Problems of Public Enterprises - I

ADMINISTRATIVE MINISTRY EQUITY EFFICIENCY

MULTIPLE PRINCIPALS

MULTIPLE GOALS

FUZZY GOALS & OBJECTIVES

A SOLUTION


PLANNING MINISTRY

FINANCE MINISTRY

PARLIAMENT

POLITICAL NON-POLITICAL


• To Prevent– confusion due to multiplicity of objectives – vicious cycle of the “NOT ME” syndrome

Problem of Public Enterprises -II

“NOT ME”Syndrome

People

Public Enterprise

Government

Parliament

A SOLUTION



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


• 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?

• Ex-post versus Ex-ante Performance

• Managerial versus Agency Performance

• Partial versus Comprehensive Performance

Meaning of Performance inPerformance Contracts

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:


• 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:



• typically involves a formal agreement

• most common in professionally run organizations





Ex-ante Performance Evaluation is: Ex-post Performance Evaluation is:


• typically involves a formal agreement

• most common in professionally run organizations

Ex-ante Performance Evaluation is:





Ex-post Performance Evaluation is:

Managerial versus AgencyPerformance Evaluation

• based on observed performance of the agency

Agency Performance Evaluation is:


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

Managerial Performance Evaluation is:

AgencyPerformance =

Managerial Performance -+

ExogenousFactors


Change inAgencyPerformance

=Change inManagerial Performance -+

ExogenousFactors

- 100,000Hospital

Beds=

+75,000Hospital

Beds -+-175,000Hospital

Beds

Impact of Budgetary Cuts

An Heuristic Illustration

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 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

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

Best Practice Methodology

A SOLUTION!

Performance Information

System

Criteria(“How” to Evaluate)

Performance Evaluation

System

Institutional Arrangements(“Who” Should

Evaluate)

PERFORMANCE IMPROVEMENT SYSTEM

Performance

Incentive System

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:

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

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:

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

How to Calculate Composite Score

Criterion Values

Excell-ent

Very Good Good Fair Poor


.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


3. Project

Implementation


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


3. Project

Implementation

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

Potential for ranking public enterprises

RANK PUBLIC ENTERPRISE COMPOSITE INDEX

1 Public Enterprise 1 1.13










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?

• 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

• “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)


• 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)


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

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

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

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

http://www.worldbank.org/wbi/governance/govdata2002

• There are pitfalls of poor implementation– However, there are remedies for mitigation

• Examples– institutional arrangements

– Incentives

– Soft targets


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.


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.


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

For comments and questions please contact:

Prajapati TrivediThe World Bank

1818 H Street, NWWashington, DC. 20433

[email protected]

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