Public organizations what makes them work how are

Public organizations: what makes them work? how are they changing? how can the Bank support reform? Flagship Course on Governance and Anticorruption World Bank December 1 -3, 2003 Geoffrey Shepherd Flagship Organizations 1

Outline of Presentation I. III. IV. V. VII. Introduction Organization theory Public organizations are different The new model of public administration Changes in public organizations Public organizations in developing countries The Bank and organizational reform Selected references Shepherd Flagship Organizations 2

I. Introduction: public organizations matter • Three management mechanisms for public administrations; – public finances: how the money is controlled; – civil service: how people are managed; – organization: how activities are coordinated. • Taking a deeper look at organizations: – Questioning the engineering view (“top-down”). – Questioning the economic view (“rational economic actors”). – Another view: institutions and politics matter. 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 branch of social science • Organization theory has blossomed since the 1930 s. – 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 1. 2. 3. 4. 5. 6. Organizations have the characteristics of living, evolving systems. There is a great variety of types of organization, responding to different and changing needs and environments. The external “authorizing environment” – i. e. who influences what the organization does and provides its resources – is important and complex. Rationality is bounded – progress is often by trial and error. Worker motivation is complex, extending beyond economic incentives into their social and personal 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, the sense of mission, and organizational effectiveness. Shepherd Flagship Organizations 7

III. Public organizations are different: a comparison A. Private organizations B. Public organizations 1. Organizational rationality is bounded, and progress is often by trial and error. Similar, but uncertainty may be less. 2. Worker motivation is complex, extending beyond economic incentives into social and personal needs. Similar: the people are no different. 3. Organizations have a non-formal organizational culture key to determining the actual tasks and the sense of mission. Similar. 4. Organizations have the characteristics of living, evolving systems. Much less so: they are born, allowed to change and allowed to die much less easily. 5. There is a great variety of types of organization, responding to different and changing needs and environments. There is a smaller variety. A ministerial hierarchy with large, wholly public sub-organizations is the dominant form. 6. The external “authorizing environment” – i. e. the external influences on what the organization does and how it does it – is important and complex. Centralized control of resources and regulation of personnel and procedures mean considerably less managerial autonomy from the external environment. Shepherd Flagship Organizations 8

IV. The new model of public administration: historical drivers • Emergence of the model in the North Atlantic and Japan in the 19 th Century based on fundamental social changes. • Revolutionary political demands for equality and probity to replace custom, privilege, and corruption. • The industrial revolution: economic demands for a stable regulatory framework. • Growth in the size of government. • Rationalism and science as new tools to manage. Shepherd Flagship Organizations 9

IV. The new model of public administration: characteristics • Limited government (checks and balances): – Constitutional separation of powers, coalition government. • Semi-autonomous public administrations: – Self-regulation within structural and procedural constraints. • Hierarchical organization of administrations (Max Weber): – meritocracy; – specialized agencies within a hierarchical command structure; – financial planning and control; – codified records. Shepherd Flagship Organizations 10

IV. The new model of public administration: intended outcomes (1) • The problems politicians have to solve: – authority, – delegation, – credibility. • Delegation to public administrations – the principle-agent problem: – Reducing the costs of administering patronage -employment systems (the US). – Encouraging efficiency and loyalty to the public interest by structuring careers. Shepherd Flagship Organizations 11

IV. The new model of public administration: intended outcomes (2) • Checks and balances tempered authority to govern with mechanisms for credible commitment: – Checks and balances impose structural and procedural constraints (red tape) on public organizations. • Increasing the credibility of politicians’ promises (achieving political legitimacy): – Semi-autonomous public administrations set limits to subsequent political interference. – Replacing patronage/privilege systems by merit systems. – Re-defining loyalty in merit terms. Shepherd Flagship Organizations 12

IV. The new model of public administration: unintended outcomes? • The greater the checks and balances, the greater the power of interest groups (and their influence over public organizations). • Creating autonomous public organizations also promoted public-sector corporatism. • Autonomy in public organizations, together with structural and procedural constraints do not, per se, encourage efficiency. Shepherd Flagship Organizations 13

IV. The new model of public administration: political variants in advanced countries • The parliamentary variant: the executive (and its nested public agencies) subordinate to the legislature: – Public agencies formally answer to one principal. – Decisiveness is favored at the expense of resoluteness. • The presidential variant: the executive and the legislature are independent (separation of powers): – Public agencies formally answer to up to two principals and informally to interest groups. – Resoluteness is favored at the expense of decisiveness. Shepherd Flagship Organizations 14

V. Changes in public organizations: older challenges • The growth of government and the growth of the bureaucratic machine – A dramatic increase in the scope and size of government since the early Nineteenth Century has progressively exacerbated the principal-agent problem. • The call for greater efficiency and flexibility: – The costs of hierarchical organization, perceived from the beginning of the Twentieth Century. • The growth of special interests: – Continued growth in the Twentieth Century has threatened the effectiveness of government. Shepherd Flagship Organizations 15

V. Changes in public organizations: newer challenges • The growth of citizen voice: – Progressively stronger electorates, in terms of their knowledge and ability to organize, have however made the control problem potentially more soluble. • A crisis of trust and the rise of accountability – An apparent erosion of trust in recent decades has led to demands for more formal forms of accountability, and it may have undermined “social capital” within the public administration. • Better management, better information: – Improved management technologies, including the falling cost of information, make the control problem potentially more soluble. Shepherd Flagship Organizations 16

V. Changes in public organizations: early responses • Problems of poor control and inflexibility have led to a constant experimentation with new organizational techniques, including those that use economic incentives. – Performance-related pay. – Special-purpose, quasi-independent agencies (“agencification”). – Decentralization. – Budget reform (e. g. program budgeting). • The dilemma of reform: – The dilemma: trading off control and flexibility. – The progress: slow. Shepherd Flagship Organizations 17

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 18

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 19

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 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 20

VI. Public organizations in developing countries: superficial similarities • 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. • But the similarities are often superficial: – Public organizations typically perform poorly in developing countries Shepherd Flagship Organizations 21

VI. Public organizations in developing countries: different politics • Proposition 1: the control (principal-agent) problem is more acute in developing countries: democratic control is often weak, even in many nominally democratic countries: – Patronage politics (and sometimes predatory-state politics) are more likely to prevail. – Kinship ties and other ties of mutual obligation tend to be stronger than professional ties. • Proposition 2: politics and ideology in today’ developing countries have led to over-sized, often corporatized public sectors, thus undermining organizational performance. – Origins of large public sectors in developmentalist ideologies. – Sustained in many regions by governments becoming employers -of-last-resort. Shepherd Flagship Organizations 22

VI. Public organizations in developing countries: different outcomes • These political 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 23

VI. Public organizations in developing countries: what makes for good performance? • Results from a study on building sustainable capacity in public organizations in developing countries show the importance of organizational culture and managerial autonomy in good performance: – A broadly shared sense of mission improves performance. – Management emphasizing performance, participation, flexibility, teamwork, problem solving, and equity improves performance. – Clear signals about performance expectations (work to be accomplished, rewards and sanctions) improve performance. – Organizations with some autonomy in personnel matters are more able to set and reward performance standards. Shepherd Flagship Organizations 24

VI. Public organizations in developing 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 25

VII. The Bank and organizational reform: comprehensive approaches • Comprehensive reform – functional analysis (strategic planning): – The technique: review agency mandates; discoverlaps 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 26

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 27

VII. The Bank and organizational reform: towards a better understanding • Learning from organization theory: – Bounded rationality. – Worker motivation. – Informal aspects of the organization. • Developing the political analysis: – Understanding how political institutions determine the structure and rules of public administrations. Shepherd Flagship Organizations 28

VII. The Bank and organizational reform: existing tools • Israel (1987): reforming public organizations in developing countries. • Wilson (1989): a framework for understanding public organizations (largely in the US). • Moore (1995): a framework for reforming public organizations (using US cases). • Wade (1997): a comparison of different Indian and Korean organizational approaches to irrigation administration. • Word Development Report 2004: a framework for assessing how product, client, and politics characteristics determine public service-delivery modes. Shepherd Flagship Organizations 29

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 30

Selected references (1) 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 31

Selected references (2) 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 32

Selected references (3) Moore, Mark H. (1995), Creating Public Value: Strategic Management in Government, Cambridge: Harvard University Press • This book 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? • The book 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. ” • The 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 33

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 34

Selected references (5) World Bank (2003), World Development Report 2004: Making Services Work for Poor People, Copublication of the World Bank and Oxford University Press • Public services in developing countries too frequently fail the poor: the rich gain an undue share of public services, there are financial leakages in services to the poor, and service quality is often poor. • But services to the poor can be made to work by ensuring that the key relationships between the triangle of policy makers, providers, and poor people (citizens) works. • Product characteristics (the degree of product homogeneity, the ease of monitoring, pro-poor nature of service) and the nature of local politics (whether clientelist or pro-poor) determine which of these key relationships are emphasized: whether government provides or finances (through contracts), whether central or local government is the more appropriate principal, the extent of client oversight. Shepherd Flagship Organizations 35

geoffreyshepherd@msn. com Shepherd Flagship Organizations 36