Public organizations: what makes them work? how are they changing? how can the Bank support reform?

1. Public organizations: what makes them work? how are they changing? how can the Bank support reform? Flagship Course on Governance and Anticorruption Geoffrey Shepherd April 22, 2003 Shepherd Flagship Organizations

2. Outline of Presentation • I. Introduction • II. Organization theory • III. Public organizations are different • IV. Models and variants in public organizations • V. Changes in public organizations • VI. Public organizations in less advanced countries • VII. The Bank and organizational reform • Selected references Shepherd Flagship Organizations

3. I. Introduction: organizations and governance • An organization (“hierarchy”) is a “system of consciously coordinated activities or forces of two or more persons”. • Organizations are social systems, hence complex. • Public organizations (“bureaucracies”) are the state’s agents for public collective action. • Studying public organizations goes to the heart of governance and corruption issues: • public organizations deliver public services with more or less efficiency, equity, honesty, and accountability. Shepherd Flagship Organizations

4. I. Introduction: this presentation • We know: • more about private than public organizations, and • more about public organizations in developed than developing countries. • This presentation aims to provide: • a sense of how people think analytically about organizations, including what is more specific to the public sphere and to poorer countries, • a sense of how public organizations are changing, and • some ideas on how Bank staff can better contribute to organizational reform. Shepherd Flagship Organizations

5. II. Organization theory: a messy branch of social science • Organization theory has blossomed since the 1930s. • It primarily covers the private sphere and the North Atlantic. • Organization theory has many competing schools of thought. • There is not a dominant paradigm. • But there is a generally held view of organizations, in effect, as living, evolving social systems. • Sociology and politics, rather than engineering and economics, have driven OT. Shepherd Flagship Organizations

6. II. Organization theory: some common ground • There is a great variety of types of organization, responding to different and changing needs and environments. • Organizations can have shifting boundaries and shifting coalitions of interests. • Organizational rationality is bounded – progress is often by trial and error. • Worker motivation is complex, extending beyond economic incentives into social and self-actualizing needs. • The formal trappings of organizations – stated goals and rules – are only part of the story. Organizations also have a non-formal life –an organizational culture – which is vital in determining the actual tasks undertaken and the sense of mission. • The external “authorizing environment” – i.e. who tells the organization what to do and provides its resources – is important and complex. Shepherd Flagship Organizations

7. III. Public organizations are different: initial conditions • Public organizations are governed by politics, not markets. • Politics impose different – generally more difficult – “authorizing-environment” constraints on agencies than do markets. • The nature of the product: public organizations produce outputs typically more difficult to specify and measure than private outputs. • The problem of collective action: voters face a problem of collective action, the more so when there is information asymmetry and political parties are unrepresentative. • These constraints lead to a problem of control. Shepherd Flagship Organizations

8. III. Public organizations are different: poor control • Difficult-to-specify products and the problem of collective action lead to poor control of principals over agents: • Tenuous control by voters (as principals) over politicians and governments (as agents). • Tenuous control by governments (as principals) over public agencies (as agents). • Poor control encourages opportunistic behavior. • There is a greater propensity for political interference, interest-peddling, and private misuse of corporate/public money in the public than the private sector. • By the same token, public administrations have also traditionally been less directly responsive to the public than private firms. Shepherd Flagship Organizations

9. III. Public organizations are different: inflexibility • If initial conditions lead to poorer control in public than private organizations, the universal response has been to impose extra rules, many embedded in constitutions, that limit opportunism. • But these extra rules come at a cost. • Inflexible structures: public agencies mostly exist within rigid hierarchies which constrain their ability to evolve like private organizations • Inflexible rules:public-administration arrangements typically emphasize norm-compliance, at the expense of flexibility and efficiency. • Lack of continuity in management: there is often less continuity (longevity) in the principals (politicians and politically appointed managers) of public agencies than in their agents (civil-service employees). Shepherd Flagship Organizations

10. IV. Models and variants in public organizations: hierarchy • The “hierarchical” model of public administration emerged in the Nineteenth century in the democratizing, industrializing states of Europe and North America. • The hierarchical model: two “techniques” for efficient and honest government: • Political control: constitutional checks and balances. • Administrative control through hierarchical, centralized, rules-based organization of the public agencies in the executive branch. • Max Weber’s ideal-type bureaucracy: • specialized agencies within a hierarchical command structure; • Meritocracy; • financial planning and control; • codified records. Shepherd Flagship Organizations

11. IV. Models and variants in public organizations: political variants • The parliamentary variant: the executive (and its nested public agencies) subordinate to the legislature: • public agencies formally answer to one principal. • The U.S. variant: the executive and the legislature are independent: • public agencies formally answer to up to two principals. • Unitary versus federal states. • Developing countries: a range of constitutional arrangements closely akin to advanced-country arrangements. • De facto, dominance of executive-led governments. • Consolidation of the hierarchical model, with its variants, in the more advanced countries by the first half of the Twentieth Century. Shepherd Flagship Organizations

12. V. Changes in public organizations: the new challenges (1) • A progressive and dramatic increase in the scope and size of government since the early Nineteenth Century. • This has exacerbated the control (principal-agent) problem. • The need for greater efficiency and flexibility (from at least the middle of the Twentieth Century). • This has led to a constant experimentation with new organizational techniques, including those that use economic incentives. • Progressively stronger electorates, in terms of their knowledge and ability to organize. • This has made the principal-agent problem potentially more soluble. Shepherd Flagship Organizations

13. V. Changes in public organizations: the new challenges (2) • An apparent erosion of trust in recent decades. • This has led to demands for more formal forms of accountability, and it seems to have undermined “social capital” within the public administration. • Improvements in the technology of information, including the recent dramatic fall in the cost of information. • This has also made the principal-agent problem potentially more soluble through competition and accountable mechanisms. Shepherd Flagship Organizations

14. V. Changes in public organizations: early responses • Secular changes in public organizations, especially in the second half of the Twentieth Century. • Performance-related pay. • Special-purpose, quasi-independent agencies (“agencification”). • Decentralization. • Budget reform (e.g. program budgeting). Shepherd Flagship Organizations

15. V. Changes in public organizations: the New Public Management • Recent, more systematic efforts to make public administrations more accountable, efficient, and responsive. • The core techniques borrow from the managerial methods of the private sector. Shepherd Flagship Organizations

16. V. Changes in public organizations: core techniques of the NPM • Privatization. • Quasi-market competition (and contractualization). • Management, relational, and personnel contracts; competition between public agencies; inter-agency fee charging; out-sourcing. • Performance orientation: changing the accountability relationship from an emphasis on inputs and legal compliance to one on outputs. • Results-oriented budgeting, full-costing of products. • Devolution of discretion. Devolution of decision making: reducing the burden of hierarchical rules and fostering greater discretion at lower points in the hierarchy. • Agencification, decentralization of personnel-management. • Specialization by splitting policy making and policy implementation, service financing and service delivery. • Executive agencies, hospital trusts. • Client-focus: reporting to and "listening" to the clients of the public sector. • Citizen’s Charter; e-government, participative budgeting. Shepherd Flagship Organizations

17. V. Changes in public organizations: a NPM revolution? • Not yet: • We are still in an experimental stage, and the jury is still out. • The successes: • The public face of organizations has changed most in New Zealand and the UK. • The challenges: • Contracting and accountability mechanisms are difficult to apply where products are difficult to specify. • NPM techniques often have high transactions costs. • Some believe that NPM undermines trust. Shepherd Flagship Organizations

18. VI. Public organizations in less advanced countries: some similar challenges • Superficially, the issues look similar for more advanced and less advanced countries. • Less advanced countries have pursued similar formal arrangements: a legally-determined hierarchy of agencies, with even tighter procedural rules. • There is a similar debate on the tensions between hierarchy and efficiency (and the merits of NPM) , with similar efforts to modify rules to encourage more efficiency. Shepherd Flagship Organizations

19. VI. Public organizations in less advanced countries: politics • Political and social conditions tend to be systematically different in less advanced countries. • Tendency to weak democratic control, patronage politics, in some cases predatory-state politics. • Tendency for kinship ties and other ties of mutual obligation to be stronger than professional ties. • These conditions often lead to a conflict between announced and effective rules: • Announced rules favor a hierarchical ordering of public agencies and their rules-base operation. • Effective rules may favor quite different objectives such as bureaucratic survival, patronage, or corruption. • This “organizational informality” makes it more difficult for public organizations to function effectively in the public interest. • By the same token, these conflicts make “island” solutions attractive – for instance autonomous agencies that heads of states are better able to protect from political interference. Shepherd Flagship Organizations

20. VI. Public organizations in less advanced countries: NPM to the rescue? • We are not sure. • We should be careful not to make facile assumptions. • Implementing NPM solutions in less advanced countries will face the same challenges as in the more advanced countries. • The NPM is, a priori, no more effective against organizational informality than the hierarchical model. • Indeed, based on historical antecedent, rules may need to precede discretion. Shepherd Flagship Organizations

21. VII. The Bank and organizational reform: comprehensive approaches • Comprehensive reform – functional analysis (strategic planning): • The technique: review agency mandates; discover overlaps and redundant and unjustified missions; redefine mandates, visions, missions; implement the new scheme. • Comprehensive reform – promoting performance orientation: • Performance pay, results budgeting, etc. • Outcomes: I am not aware that the engineering approach (“fix the formal goals and the formal command structure”) and the economic approach have, in isolation from other OT approaches, produced good results. Shepherd Flagship Organizations

22. VII. The Bank and organizational reform: selective approaches • Selective reform I: agency graduation (new, universal rules applied to selected “graduating” agencies) • Agencies “graduate” to better availability of resources when they demonstrate that they can manage them properly. • This approach has some historical antecedents (e.g. the UK and US), but Bank-supported reform efforts have often been frustrated by politics. • Selective reform II: enclaved (or autonomous) agencies (new, non-universal rules in selected agencies). • Agencies are re-organized (e.g. tax authorities) or created (e.g. Project Implementation Units) partly outside of the hierarchical and normative structure. • This reform is controversial. It has proven the most practicable and effective option because the organizational approach has been a broad one. But such reforms may not prove durable and can balkanize the state. Shepherd Flagship Organizations

23. VII. The Bank and organizational reform: towards a better understanding • The need for a better understanding of public agencies: missions, organizational culture, authorizing environment, and so on. • Existing “bottom up” approaches to the study of public organizations can help on methodology: • Wilson (1989): a framework for understanding public organizations (largely in the US). • Moore (1995): a framework for reforming public organizations (using US cases). • Israel (1987): reforming public organizations in developing countries. • Wade (1997): a comparison of different Indian and Korean organizational approaches to irrigation administration. Shepherd Flagship Organizations

24. VII. The Bank and organizational reform: managing the process • A comprehensive approach to reform is unlikely to work because of the bounded rationality of reform designers. • The reform of complex social systems requires a more incremental and flexible approach. • In practice, the incremental approach might mean the following approaches to projects and policy advice: • Create the right scale of action for reforms and establish mechanisms for consequent adjustment of project design: start small; use pilots; go agency by agency; build on what exists, rather than invent new things; do not expect progress on all fronts at the same time. • Incorporate local expertise in reform design and implementation; understand that problems are institutional before they are technical. • Emphasize implementation: empower local project management; put enough resources into supervision and supervise locally. Shepherd Flagship Organizations

25. Selected references (1) Wilson, James Q. (1989), Bureaucracy: What Government Agencies Do and Why They Do It, New York: Basic Books • Reviewing a sizeable literature on public agencies in the US, this book suggests that to understand agency performance, one needs to ask: • 1. How each organization performs its critical tasks, i.e. provides the solution to the key problem (rather than what are its goals); • 2. How the organization gets widespread endorsement of how the critical task is defined – its sense of mission; • 3. How the organization acquires sufficient freedom of action and external political support to do its work. Shepherd Flagship Organizations

26. Selected references (2) Moore, Mark H. (1995), Creating Public Value: Strategic Management in Government, Cambridge: Harvard University Press • Moore addresses four questions that have long bedeviled public administration: What should citizens and their representatives expect and demand from public executives? What sources can public managers consult to learn what is valuable for them to produce? How should public managers cope with inconsistent and fickle political mandates? How can public managers find room to innovate? • Moore recommends specific, concrete changes in the practices of individual public managers: how they envision what is valuable to produce, how they engage their political overseers, and how they deliver services and fulfill obligations to clients.” • Moore’s framework for strategic analysis of organizational problems emphasizes: • public value: why people will be better off with reform; • authorization: legitimacy, support from the external authorizing environment; • feasibility: operational capacity, technology, resources, organization (incentives). Shepherd Flagship Organizations

27. Selected references (3) Israel, Arturo (1987), Institutional Development: Incentives to Performance, Baltimore: John Hopkins University Press • Past attempts at institutional reform in World Bank projects have proved systematically more successful in certain sectors rather than others. • This is because organizations differ by: • specificity of product; and • degree of contestability in production. • Low-specificity-low-competition activities operate under enormous disadvantages. • The specificity of a public organization’s objectives and the competition it faces are not immutable. • Surrogates for specificity can be introduced through personnel incentives and training, professionalization of staff at all levels, and changing the role of managers. • Similarly, competition surrogates (“contestability”, in current terminology) can be created. • The training and visit system of agricultural extension provides an example of a successful application of these principles. Shepherd Flagship Organizations

28. Selected references (4) Wade, Robert (1997), "How Infrastructure Agencies Motivate Staff: Canal Irrigation in India and the Republic of Korea", in Ashoka Mody, ed., Infrastructure Strategies in East Asia: the Untold Story, EDI Learning Resource Series, Washington, D.C.: the World Bank • This paper seeks to explain the different performance of two public agencies, in India and Korea, in administering technologically-similar irrigation systems by comparing the incentives to which principals and agents respond and the compatibility of these incentives with organizational objectives. • The paper uses Herbert Simon’s (1991) framework postulating four main sources of motivation: • authority; • rewards (which works to the extent that performance can be measured and relates to the individual rather than the group); • organizational identification [esprit de corps]; and • peer pressure (which depends on how much individual rely on group performance and on the ease of monitoring). • India’s irrigation agency performs worse than Korea’s because, comparatively, it fails along all these lines and Korea’s succeeds. Shepherd Flagship Organizations