1. Public sector productivity programmes and performance indicatorsCase Finland

EFFICIENCY OF SUB-CENTRAL PUBLIC SPENDING – WORKSHOP 19.05.2006 FRENCH BUDGET DIRECTORATE MINISTRY OF ECONOMY AND FINANCE Antti Moisio Principal economist Government Institute for Economic Research Helsinki, Finland

2. Organisation of the presentation

Finnish local government – a short introduction Pressures to improve productivity in the Finnish public sector Public sector productivity programmes in Finland An attempt to create indicators: research project on education services

5. Centralized tasks

Taxation and transfers to communities (but communal tax also) Employment policy Industrial policy Regional policy Higher education (but polythechics are municipal) Infrastructure, roads and railways (but streets, harbours and some roads are communal) Normative legal basis for health, education and social services (welfare state) State provision, but municipal production Financing: state, municipalities, employers, clients; varies between systems and tasks

6. Finland has a complicated municipal structure

432 municipalities 231 joint municipal authorities The sizes of municipalities vary from 233 inhabitants to more than 560 000

7. Finnish labour force by sector in 2004

8. Finnish public sector performs well in international comparisons

SCP (2004)

9. An example from education

10. Why, then, should Finland worry about productivity in public sector?

Ageing population, growth of service needs Diminishing labour force, increasing age dependency ratio Tax competition Diminishing public sector productivity The share of public services in the economy is large - productivity in public sector can have an impact on the private sector as well

11. The age dependency ratio changes fast…

Demographic dependency ratio 1950-2050 Elderly people and children per working age population Under 15 years of age Over 65 years of age Source: Statistics Finland

12. … and in international comparison especially the old-age dependency ratio change is large …(over 65-year of age population as percent of working age population (20-64 years) in some EU member states)

14. …and in the future public sector may hire even 70 percent of the new labour force…

Source: OECD

15. … and the productivity in public administration and services is in decline...(1995=100)

Source: Statistics Finland, OECD

17. Proposed measures to ensure fiscal stability in the future

Budget discipline Central government, municipalities Improving productivity Productivity programmes Reforming municipal structure and municipal service duties By preparing the systems for the ageing Reform of pension systems Reducing central government debt

18. Productivity Action Programme – the central government

Each ministry has prepared a “productivity plan” to be included in their financial and operative plans The main aim is to cut staff and spending Especially the better use of IT is in focus IT can replace work in accounting, administration functions The aim is to fill only 50 percent of vacancies opened due to retirement – at the moment it seems that less than half of this target will be met First phase 2003-2004, second phase 2005-2006

19. Productivity Action Programme – the Municipal Sector

Grant system reform: new criterias for education services, reassessing the system of discretionary grants Need to utilise the scale economies better by: Supporting the mergers of municipalities Enhancing cooperation between municipalities, possibly by compulsory cooperation (minimum service areas or population served)? A new level of government?

20. Public sector productivity indicators in Finland –an overview

Government Institute for Economic Research (VATT) provides productivity indicators based on research results for several public services (some of these are described in the next slides) The National Research and Development Centre for Welfare and Health (STAKES) provides productivity indicators for special health care (hospitals) and long term care Statistics Finland provides more general productivity indicators (indices based on National Accounts data) In addition to the above, many municipalities have created their own indicators, but these are seldomly usable for general benchmarking purposes

22. The aims of the research project on education service productivity:

To define the productivity and efficiency differentials between oprganising units (municipalities, other organising bodies) To explain the efficiency differentials To provide information for benchmarking purposes and to spread information on the best practices in research reports, seminars, workshops, through internet pages etc.

23. An example: a Data Envelopment Analysis model recently used to analyse Finnish comprehensive schools

Outputs: The number of pupils in classes 1-6 The number of pupils in classes 7-8 The number of passed pupils on the 9. year ? average matriculation score The number of pupils who moved on to further education Inputs: Teaching expenditures euro/pupil Other expenditures (meals+other services to pupils) euro/pupil

24. The development of inputs and outputs

25. The range of DEA-efficiency scores in 1998–2004, - the average unit could have produced the output with 20 percent lover expenditures…

26. … however, much of the efficiency differentials seem to be due to environmental factors

Two thirds of the efficiency differentials could be explained using pupil characteristics, and other environmental factors After explanatory model, the average efficiency increases and the efficiency differentials are reduced dramatically But still, some ”underachievers” and ”overachievers” can be identified

27. The econometric model used to explain the DEA-efficiencies

Explanatory variables: Population (and population squared) Taxable incomes per capita Urbanisation rate Level of education for population aged 35-59 v. Unemployment rate Share of pupils given special assistance The share of pupils at classes 1-6 The share of non-Finnish speaking pupils Average school size in the municipality (Pupils/schools) The share of left wing parties of the municipal council seats

28. Municipal size and efficiency(other factors controlled for)

29. Increasing the school size has a positive impact on efficiency

The effect applies for all school sizes (the estimated optimal size is larger than the present schools) The effect diminishes as the school size increases, though

30. The environmental factors need to be controlled for

31. Productivity change based on Malmquist index in comprehensive schooling in 1998–2003

32. Summary

Research can – and should - be used to produce indicators for efficiency and productivity of the public sector units Productivity and efficiency indicators based on research, where a number of environmental factors have been controlled for, are more useful and reliable that just simple ”per capita” -indicators Much depends of the quality of the data though In Finland, the research projects have just started a year ago – the aim is to provide information for benchmarking (between municipalities) and for monitoring purposes (CG on municipalities) No plans in Finland, however, to use this information for sanctioning or for rewarding purposes

33. Contact info:

Antti Moisio Government Institute for Economic Research PL 1279, 00101 HELSINKI, FINLAND E-mail: antti.moisio@vatt.fi WWW: www.vatt.fi Tel: +358 9 703 2947 +358 50 328 6731