Performance Contract
(PC)
Praja Trivedi
An Instrument for Creating
Competition in Public
The World Bank
Services
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
Perceptions about
Performance of Public Enterprises
Public Enterprises have delivered
what was expected from them
Reduce Quantity of
Government
Privatization
Increase Quality of
Government
Performance Contracts
(PCs)
`
Commercial Regulation
Social
Equity
`
Private Equity
Fixed Capital
Working Capital
Management
Aid
OutputBased Aid
Performance
Contract
Management
Contract
Lease
BOT
Degree of Privatization
Sale of
public goods
Sale of
private goods
Trends in Public Management Reforms
Bureaucracy
Saudi Arabia
France
Administrator
Manager
Canada, Australia
Sweden, Netherlands
United States
Denmark
Finland
United Kingdom
Market-type Mechanisms
New Zealand
Market Test
Yes
No
Is this activity still necessary?
Abolish
Yes
No
Is it appropriate for government to
do it?
Privatize
NO
Can the activity be performed
under contract by private sector?
YES
Contract
NO
Is the activity primarily about
service delivery?
YES
Executive Agency
Performance Management of the Core Government
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.
In Search of Better Performance
in the Public Sector
Vision Statement (Option 2)
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.
Strategies for Implementing Public
Management Reforms
Bottom-up
Top-down
Incremental
or ad hoc
Finland
France
Denmark
Sweden
Canada
United States
Netherlands
United Kingdom
Australia
Comprehensive
New Zealand
Holding Bureaucrats Accountable for Results
Trickle Down
Approach
Direct Attack
Approach
Performance Contracts
Citizen’s Charter
E-Government
E-Procurement
ISO 9000
League Tables
What is a Performance Contract?
• It is an agreement between two parties that
clearly specifies their mutual performance
obligations
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
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
Types of Performance Contracts
• Different names but similar concept
• Only two broad conceptual approaches
• First implemented in public enterprises
Types of Performance Contracts
French Approach
France
Cote d’Ivoire
Senegal
Benin
China
United
Kingdom
Signaling System
Pakistan
India
Korea
Bolivia
Philippines
Gambia
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
Why Performance Contracts?
• First general point
– The power of performance management is now
widely recognized.
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
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
Performance Deficit Vs. Financial Deficit
Performance Deficit
Poor Performance
Low Credibility
Financial Deficit
Lower Funding
Why Performance Contracts?
• Specifically, to Prevent
– confusion due to multiplicity of objectives
• Number one cause of problems of government
agencies
Problems of Public Enterprises - I
PARLIAMENT
FINANCE MINISTRY
NON-POLITICAL
POLITICAL
PLANNING MINISTRY
ADMINISTRATIVE MINISTRY
EQUITY
MULTIPLE
PRINCIPALS
EFFICIENCY
MULTIPLE
GOALS
FUZZY GOALS &
OBJECTIVES
A SOLUTION
Performance Contract
Why Performance Contracts?
• To Prevent
– confusion due to multiplicity of objectives
– vicious cycle of the “NOT ME” syndrome
Problem of Public Enterprises -II
“NOT ME” Syndrome
People
Public Enterprise
Parliament
Government
A SOLUTION
Performance Contract
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
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
What is meant by the term:
PERFORMANCE OF GOVERNMENT AGENCIES?
• Ex-post versus Ex-ante Performance
• Managerial versus Agency Performance
• Partial versus Comprehensive Performance
Meaning of Performance in
Performance Contracts
Ex-post versus Ex-ante
Performance 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
Ex-post versus Ex-ante
Performance 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
Ex-post versus Ex-ante
Performance Evaluation
Ex-ante Performance Evaluation is: Ex-post Performance Evaluation is:
• based on comparison
of achievements
against agreed targets
• typically involves a
formal agreement
• most common in
professionally run
organizations
• based on selection of
criteria
criteria by
by the
the
evaluator
evaluator at
at the
the end
end of
of
the
the year
year
• typically undertaken
• typically
undertaken
by researchers
by researchers
• useful for future
• useful
projectsfor future
• projects
more comprehensive
• more comprehensive
Managerial versus Agency
Performance Evaluation
Agency Performance Evaluation is:
• based on observed performance of the agency
Managerial versus Agency
Performance Evaluation
Managerial Performance Evaluation is:
• calculated by adjusting agency performance for
factors beyond the control of the management
(government officials):
Agency
Performance
=
Managerial
Performance
+
-
Exogenous
Factors
Managerial versus Agency
Performance Evaluation
An Heuristic Illustration
Change in
Agency
Performance
=
- 100,000
Hospital
Beds
Change in
Managerial
Performance
+75,000
=
Hospital
Beds
+
-
+
-
Exogenous
Factors
-175,000
Hospital
Beds
Impact of Budgetary Cuts
What is meant by the term:
PERFORMANCE OF GOVERNMENT AGENCIES?
• Ex-post versus Ex-ante Performance
• Managerial versus Agency Performance
• Partial versus Comprehensive Performance
Partial versus Comprehensive
Performance Evaluation
• Partial Performance Evaluation is:
– based on selected aspects (or activities) of the agency
• Comprehensive Performance Evaluation is:
– based on all activities of agency
Ex-post
Performance
Ex-ante
Performance
A Taxonomy of
Performance Evaluation Approaches
Managerial
Performance
Agency
Performance
Cell # 1
Performance
Contracts
Cell # 3
Cell # 2
Cell # 14
Best Practice Methodology
A SOLUTION!
PERFORMANCE IMPROVEMENT SYSTEM
Performance
Information
System
Performance
Evaluation
System
Criteria
(“How” to
Evaluate)
Performance
Incentive
System
Institutional
Arrangements
(“Who” Should
Evaluate)
A SOLUTION!
PERFORMANCE IMPROVEMENT SYSTEM
Performance
Information
System
Performance
Evaluation
System
Criteria
(“How” to
Evaluate)
Performance
Incentive
System
Institutional
Arrangements
(“Who” Should
Evaluate)
A SOLUTION!
PERFORMANCE IMPROVEMENT SYSTEM
Performance
Information
System
Performance
Evaluation
System
Criteria
(“How” to
Evaluate)
Performance
Incentive
System
Institutional
Arrangements
(“Who” Should
Evaluate)
Performance Contract:
PROPOSED PERFORMANCE EVALUATION SYSTEM
BEGINNING OF
YEAR
Step 1
Criteria
Selection
“FAIR” to
Officials
Step 2
Criteria
Weight
Selection
“FAIR” to
country
END OF
YEAR
Step 3
Criteria
Value
Selection
Negotiated
“FREELY”
Step 4
Performance
Evaluation
(Composite
Score)
PERFORMANCE CONTRACT TARGETS AT THE
BEGINNING OF THE YEAR
Step 1
Step 3
Step 2
Criterion Values
Criterion
1. Gross Margin
2. Degree of
customer
satisfaction
Units Weight
Thousand
%
3. Project
Implementation Months
1
2
3
Excellent
Very
Good
Good
.50
400
385
.30
80
.20
6
4
5
Fair
Poor
350
300
250
70
65
60
55
8
12
14
16
Performance Contract:
PROPOSED PERFORMANCE EVALUATION SYSTEM
BEGINNING OF
YEAR
Step 1
Criteria
Selection
“FAIR” to
Officials
Step 2
Criteria
Weight
Selection
“FAIR” to
country
END OF
YEAR
Step 3
Criteria
Value
Selection
Negotiated
“FREELY”
Step 4
Performance
Evaluation
(Composite
Score)
At the end of the year the achievements of this
government agency were as follows:
i.)
Gross Margin
ii.)
Degree of customer
satisfaction
iii.)
Project Implementation
385
Thousand
75%
5
months
How to Calculate Composite Score
Criterion Values
Criterion
Units
Weight
1
Excellent
1. Gross Margin
2. Degree of
customer
satisfaction
2
3
Very
Good Good
4
5
Fair
Poor
Achievement
Raw
Score
Weighted
Raw
Score
Thou
-sand
.50
400
385
350
300
250
385
Thousand
2
%
.30
80
70
65
60
55
75 %
1.50
.45
.20
6
8
12
14
16
5 Months
1
.20
3. Project
ImplementationMonths
1.00
Calculation of Composite Score at End of
Year
Criterion
Units
Weight
1. Gross Margin
Thousand
.50
%
.30
75 %
Months
.20
5 Months
2. Degree of
customer
satisfaction
Achievement
385 Thousand
Raw
Score
Weighted
Raw
Score
2
1.00
1.5
.45
1
.20
3. Project
Implementation
COMPOSITE SCORE
1.65
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
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
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
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
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)
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)
Financial Performance of Korean PEs
1980 1981
Number of
PEs
Deficit
(mil. Won)
2
2
1082
4
1983 1984 1985 1986
5
1
3883 26507 35610 35911 530
1
0
560
0
PC introduced
KOREA:
Degree of Overall Management Improvement
Survey Results of 750 employees from 25 PEs
Executive Directors Department Assistant Others All
Directors
Heads (DH) DH
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
0
Few
Improvements
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
Results of Opinion Survey on
Improvement in Specific management Functions
Improved
No Improvement So So
Significantly Or became worse
Positive change in
79.1
Top Management Behavior
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 R&D
61.4
5.9
32.7
Improvement in
Long-Term Planning
57.4
11.2
31.4
Improvement in budgeting 55.3
and procurement functions
6.3
38.4
Improvement in
Personnel Management
15.2
55.5
29.3
On the growing gap between EU-accession countries and the rest of
transition --Rule of Law Over Time, Selected Regions, 1996-2002
High 2
OECD
East Asia (NIC)
Rule of Law
1
Transition EU
Accession Countries
0
Sub-Saharan Africa
Other Transition
Countries
Low
-1
1996
1998
2000
2002
Source for data: http://www.worldbank.org/wbi/governance/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.
Do Performance Contracts Work?
• There are pitfalls of poor implementation
– However, there are remedies for mitigation
• Examples
– institutional arrangements
– Incentives
– Soft targets
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 fairness—clearly one party to the contract can not be
the judge for that contract.
10 Lessons of Experience
4.
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.
5.
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.
6.
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.
10 Lessons of Experience
7.
Correct evaluation methodology is at the heart of an effective design for
PCs. Without a composite score, there is bound to be subjectivity.
8.
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.
9.
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.
10.
Learn from other and make your own mistakes and not those that have
been made by others
For comments and questions please contact:
Prajapati Trivedi
The World Bank
1818 H Street, NW
Washington, DC. 20433
Ptrivedi3@worldbank.org