Performance Contract (PC)

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

Praja Trivedi The World Bank
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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

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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
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Output-Based Aid Performance Contract Management Contract Lease BOT Sale of public goods Sale of private goods
Degree of Privatization Degree of Privatization Degree of Privatization Degree of Privatization Degree of Privatization Degree of Privatization Degree of Privatization
Commercial Regulation
Social Equity
Private Equity
Fixed Capital
Relevance of Performance Contracts
Working Capital
Management
Aid
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Market Test
Performance Management of the Core Government
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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.
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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.
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Holding Bureaucrats Accountable for Results
Direct Attack Approach
Trickle Down Approach
Citizens Charter
Performance Contracts
E-Government
E-Procurement
ISO 9000
League Tables
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What is a Performance Contract?

• It is an agreement between two parties that
  clearly specifies their mutual performance
  obligations

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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

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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

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Types of Performance Contracts

• Different names but similar concept
• Only two broad conceptual approaches
• First implemented in public enterprises

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Types of Performance Contracts
French Approach
Signaling System
Pakistan
Philippines
Korea
France
Senegal
China
India
Gambia
Bolivia
United Kingdom
Cote dIvoire
Benin
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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

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Why Performance Contracts?

• First general point
• The power of performance management is now widely
  recognized.

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The Power of Performance Measurement

• What Gets Measured Gets Done
• If you Dont Measure Results,You Cant Tell
  Success from Failure
• If You Cant See Success, You Cant Reward It
• If You Cant Reward Success, You are Probably
  Rewarding Failure
• If You Cant See Success, You Cant Learn From It
• If You Cant Recognize Failure, You Cant Correct
  It
• If You Can Demonstrate Results, You Can Win
  Public Support

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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

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Performance Deficit Vs. Financial Deficit
Performance Deficit
Poor Performance
Low Credibility
Financial Deficit
Lower Funding
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Why Performance Contracts?

• Specifically, to Prevent
• confusion due to multiplicity of objectives
• Number one cause of problems of government
  agencies

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Problems of Public Enterprises - I
PARLIAMENT
FINANCE MINISTRY
NON-POLITICAL
POLITICAL
PLANNING MINISTRY
ADMINISTRATIVE MINISTRY
EQUITY
EFFICIENCY
MULTIPLE GOALS
MULTIPLE PRINCIPALS
FUZZY GOALS OBJECTIVES
A SOLUTION
Performance Contract
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Why Performance Contracts?

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

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Problem of Public Enterprises -II
NOT ME
Syndrome
People
Parliament
Public Enterprise
Government
A SOLUTION
Performance Contract
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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

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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

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What is meant by the term PERFORMANCE OF
GOVERNMENT AGENCIES?

• Ex-post versus Ex-ante Performance
• Managerial versus Agency Performance
• Partial versus Comprehensive Performance

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Meaning of Performance inPerformance Contracts
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Ex-post versus Ex-antePerformance Evaluation
Ex-ante Performance Evaluation is

• based on comparison of achievements against
  agreed targets
• typically involves a formal agreement
• most common in professionally run organizations

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Ex-post versus Ex-antePerformance Evaluation
Ex-post 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

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Ex-post versus Ex-antePerformance Evaluation
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

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Managerial versus AgencyPerformance Evaluation
Agency Performance Evaluation is

• based on observed performance of the agency

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Managerial versus AgencyPerformance Evaluation
Managerial Performance Evaluation is

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

Exogenous Factors
Agency Performance
Managerial Performance

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Managerial versus AgencyPerformance Evaluation
An Heuristic Illustration
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What is meant by the term PERFORMANCE OF
GOVERNMENT AGENCIES?

• Ex-post versus Ex-ante Performance
• Managerial versus Agency Performance
• Partial versus Comprehensive Performance

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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

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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
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Best Practice Methodology
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A SOLUTION!
PERFORMANCE IMPROVEMENT SYSTEM
Performance Information System
Performance Evaluation System
Performance Incentive System
Institutional Arrangements(Who Should Evaluate)
Criteria(How to Evaluate)
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A SOLUTION!
PERFORMANCE IMPROVEMENT SYSTEM
Performance Information System
Performance Evaluation System
Performance Incentive System
Institutional Arrangements(Who Should Evaluate)
Criteria(How to Evaluate)
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A SOLUTION!
PERFORMANCE IMPROVEMENT SYSTEM
Performance Information System
Performance Evaluation System
Performance Incentive System
Institutional Arrangements(Who Should Evaluate)
Criteria(How to Evaluate)
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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
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PERFORMANCE CONTRACT TARGETS AT THE BEGINNING OF
THE YEAR
Step 1
Step 3
Step 2
Criterion Values
Units
Weight
Criterion
1
2
3
4
5
Very Good
Good
Fair
Poor
Excellent
.50
400
385
350
300
250
1. Gross Margin
Thousand
2. Degree of customer satisfaction
.30
80
60
65
70
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3. Project Implementation
.20
6
12
8
16
14
Months
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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
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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
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How to Calculate Composite Score
Criterion Values
Weighted RawScore
1
5
2
4
3
Raw Score
Weight
Criterion
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
60
65
70
55
1.50
.45

3. Project Implementation
.20
6
12
8
16
14
5 Months
.20
1
Months
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Calculation of Composite Score at End of Year
Weighted Raw Score
Raw Score
Units
Weight
Criterion
Achievement
1. Gross Margin
2. Degree of customer satisfaction
3. Project Implementation
COMPOSITE SCORE
1.65
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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

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Potential for ranking public enterprises
RANK PUBLIC ENTERPRISE COMPOSITE INDEX
1 Public Enterprise 1 1.13
2 Public Enterprise 1 1.21
3 Public Enterprise 1 1.55
4 Public Enterprise 1 1.76
5 Public Enterprise 1 1.80
6 Public Enterprise 1 1.99
7 Public Enterprise 1 2.01
8 Public Enterprise 1 2.11
9 Public Enterprise 1 2.56
10 Public Enterprise 1 3.02
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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

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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

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Do Performance Contracts Work?

• 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)

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Do Performance Contracts Work?

• 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)

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Financial Performance of Korean PEs
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
PC introduced
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KOREA Degree of Overall Management Improvement
Survey Results of 750 employees from 25 PEs
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
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Results of Opinion Survey on Improvement in
Specific management Functions
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 RD 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
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On the growing gap between EU-accession countries
and the rest of transition --Rule of Law Over
Time, Selected Regions, 1996-2002
High
Low
Source for data http//www.worldbank.org/wbi/gove
rnance/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.
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Do Performance Contracts Work?

• There are pitfalls of poor implementation
• However, there are remedies for mitigation
• Examples
• institutional arrangements
• Incentives
• Soft targets

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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 fairnessclearly one party
   to the contract can not be the judge for that
   contract.

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10 Lessons of Experience

• 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.
• 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.
• 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.

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10 Lessons of Experience

1. Correct evaluation methodology is at the heart of
   an effective design for PCs. Without a composite
   score, there is bound to be subjectivity.
2. 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.
3. 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.
4. Learn from other and make your own mistakes and
   not those that have been made by others

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For comments and questions please
contact Prajapati Trivedi The World Bank 1818 H
Street, NW Washington, DC. 20433 Ptrivedi3_at_worldba
nk.org