Performance Contract (PC) An Instrument for Creating Competition in Public Services

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

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. 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

4. Commercial Regulation Social Equity Private Equity Fixed Capital Relevance of Performance Contracts Working Capital Management Aid

6. 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

7. 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.

8. 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.

10. Holding Bureaucrats Accountable for Results Direct Attack Approach Trickle Down Approach Citizen’s Charter Performance Contracts E-Government E-Procurement ISO 9000 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 Approach Signaling System Pakistan Philippines Korea France China Senegal India Gambia Bolivia United Kingdom Cote d’Ivoire Benin

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 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

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 Poor Performance Low Credibility Financial Deficit Lower Funding

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

22. 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

23. Why Performance Contracts? • To Prevent • confusion due to multiplicity of objectives • vicious cycle of the “NOT ME” syndrome

24. “NOT ME” Problem of Public Enterprises -II Syndrome People Parliament Public Enterprise Government 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 inPerformance Contracts

29. 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:

30. 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:

31. 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-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:

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

33. 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 =

34. Change in 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

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 Performance Evaluation is: based on selected aspects (or activities) of the agency Comprehensive Performance Evaluation is: based on all activities of agency Partial versus ComprehensivePerformance Evaluation

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

38. Best Practice Methodology

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

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

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

42. Performance Contract: 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”

43. PERFORMANCE CONTRACT TARGETS AT THE BEGINNING OF THE YEAR 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

44. Performance Contract: 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”

45. 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

46. How to Calculate Composite Score 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

47. Thou-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

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

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