Over­com­ing the pub­lic-sec­tor co­or­di­na­tion prob­lem

Financial Mirror (Cyprus) - - FRONT PAGE -

Pub­lic-pri­vate co­op­er­a­tion or co­or­di­na­tion is re­ceiv­ing con­sid­er­able at­ten­tion nowa­days. A plethora of cen­tres for the study of busi­ness and govern­ment re­la­tions have been cre­ated, and re­searchers have pro­duced a large lit­er­a­ture on the de­sign, anal­y­sis, and eval­u­a­tion of pub­lic-pri­vate part­ner­ships. Even the World Eco­nomic Fo­rum has been trans­formed into “an in­ter­na­tional or­gan­i­sa­tion for pub­licpri­vate co­op­er­a­tion.”

Of course, pri­vate-pri­vate co­or­di­na­tion has been the essence of eco­nomics for the past 250 years. While Adam Smith started us on the op­ti­mistic be­lief that an in­vis­i­ble hand would take care of most co­or­di­na­tion is­sues, in the in­ter­ven­ing pe­riod economists dis­cov­ered all sorts of mar­ket fail­ures, in­for­ma­tional im­per­fec­tions, and in­cen­tive prob­lems, which have given rise to rules, reg­u­la­tions, and other forms of govern­ment and so­ci­etal in­ter­ven­tion. This year’s No­bel Prize in Eco­nomic Sci­ences was granted to Oliver Hart and Bengt Holm­ström for their con­tri­bu­tion to un­der­stand­ing con­tracts, a fun­da­men­tal de­vice for pri­vatepri­vate co­or­di­na­tion.

But much less at­ten­tion has been de­voted to pub­lic-pub­lic co­or­di­na­tion. This is sur­pris­ing, be­cause any­one who has worked in govern­ment knows that co­or­di­nat­ing the pub­lic and pri­vate sec­tors to ad­dress a par­tic­u­lar is­sue, while of­ten com­pli­cated, is a cake­walk com­pared to the prob­lem of herd­ing the cats that con­sti­tute the panoply of govern­ment agen­cies.

The rea­son for this dif­fi­culty is the other side of Smith’s in­vis­i­ble hand. In the pri­vate sec­tor, the mar­ket mech­a­nism pro­vides the el­e­ments of a self-or­gan­is­ing sys­tem, thanks to three in­ter­con­nected struc­tures: the price sys­tem, the profit mo­tive, and cap­i­tal mar­kets. In the pub­lic sec­tor, this mech­a­nism is ei­ther non-ex­is­tent or sig­nif­i­cantly dif­fer­ent and less ef­fi­cient.

The price sys­tem is a de­cen­tralised in­for­ma­tion sys­tem that re­veals peo­ple’s will­ing­ness to buy or sell and the wis­dom of buy­ing some in­puts in or­der to pro­duce a cer­tain out­put at the go­ing mar­ket price. The profit mo­tive pro­vides an in­cen­tive sys­tem to re­spond to the in­for­ma­tion that prices con­tain. And cap­i­tal mar­kets mo­bi­lize re­sources for ac­tiv­i­ties that are ex­pected to be prof­itable; those that ad­e­quately re­spond to prices.

By con­trast, most pub­lic ser­vices have no prices, there is not sup­posed to be a profit mo­tive in their pro­vi­sion, and cap­i­tal mar­kets are not sup­posed to choose what to fund: the money funds what­ever is in the bud­get.

In the bud­get process, the fi­nance min­istry es­ti­mates rev­enues, tar­gets a cer­tain fis­cal deficit, and de­duces the over­all spend­ing level con­sis­tent with th­ese num­bers. It then pro­ceeds to al­lo­cate funds to all ex­ist­ing com­mit­ments and en­ti­tle­ment pro­grammes. The re­main­der is as­signed for dis­cre­tionary spend­ing across var­i­ous min­istries in pro­por­tions of­ten re­lated to past bud­gets. Typ­i­cally, min­is­ters fight jeal­ously over th­ese spoils, as their abil­ity to leave a mark in their re­spec­tive fields of­ten de­pends on it. Un­der this sys­tem, why would a min­is­ter spend money on an­other min­is­ter’s pri­or­i­ties?

But ad­dress­ing most prob­lems in govern­ment in­volves mul­ti­ple agen­cies. For ex­am­ple, bot­tle­necks in the tourism in­dus­try may in­volve air­ports, tourist visa re­quire­ments, or ho­tel con­struc­tion per­mits, none of which falls un­der the tourism min­istry. Or­gan­is­ing the pub­lic-pri­vate di­a­logue to iden­tify prob­lems and pro­pose so­lu­tions is em­i­nently doable, as Piero Ghezzi, Peru’s for­mer min­is­ter of pro­duc­tion has shown. But or­ga­niz­ing the pub­lic agen­cies to re­spond in a co­or­di­nated man­ner, given ex­ist­ing bud­getary pro­ce­dures, is a dif­fer­ent mat­ter: the min­istry of for­eign af­fairs may not give much i mpor­tance to tourist visas. With sep­a­rate and rel­a­tively in­de­pen­dent bud­gets, co­or­di­na­tion be­comes very dif­fi­cult.

One so­lu­tion is to cre­ate a mar­ket-like mech­a­nism within the govern­ment. The idea is to as­sign a por­tion of the bud­get, say 3-5%, to a cen­tral pool of funds to be re­quested by one min­istry but to be ex­e­cuted by an­other, as if one was buy­ing ser­vices from the other. Th­ese re­sources would al­low the de­mand for pub­lic goods to per­me­ate the al­lo­ca­tion of bud­getary re­sources across min­istries.

Two metaphors may help clar­ify the idea. Uni­ver­sal banks of­fer de­posit ac­counts, credit cards, mort­gages, busi­ness loans, and other prod­ucts. At the front end, an ac­count ex­ec­u­tive man­ages the re­la­tion­ship with the client. At the back end, a dif­fer­ent depart­ment pro­duces each ser­vice. The amount of re­sources that the back end gets de­pends on the de­mand for ser­vices iden­ti­fied at the front end.

A sim­i­lar sit­u­a­tion arises in in­ter­na­tional fi­nan­cial in­sti­tu­tions like the World Bank. At the front end, coun­try di­rec­tors man­age the re­la­tion­ship with the “client,” mean­ing the coun­try govern­ment. At the back end, ex­perts in ed­u­ca­tion, roads, elec­tric­ity, wa­ter, and health care de­sign and an­a­lyse project loans. The bud­get is given to the front end and the back end must “sell” their ser­vices to the front end, thus cre­at­ing an in­ter­nal mar­ket, so that re­sources are al­lo­cated based on client needs.

While all min­istries have their ex­ter­nal con­stituen­cies, some min­istries have more of a front-end, “ac­count ex­ec­u­tive” na­ture: their core mis­sion in­volves co­or­di­nat­ing the pro­vi­sion of pub­lic goods to dif­fer­ent parts of the econ­omy. Min­istries of agri­cul­ture, in­dus­try, tourism, and ur­ban de­vel­op­ment, are some ex­am­ples. By con­trast, fi­nance and in­fra­struc­ture min­istries of have more of a back-end char­ac­ter. The cen­tral pool of re­sources is de­signed to in­crease the re­spon­sive­ness of one min­istry’s back end to the de­mands of so­ci­ety as iden­ti­fied by an­other min­istry’s front end, with­out th­ese re­sources com­pet­ing with the pri­or­i­ties that each min­istry has for its “own” bud­get.

By al­lo­cat­ing a small pro­por­tion of each year’s bud­get to pri­or­i­ties iden­ti­fied in this way, we may find that, over time, bud­gets be­come more re­spon­sive and bet­ter re­flect so­ci­ety’s evolv­ing needs. And pub­lic-pri­vate co­or­di­na­tion may flour­ish once the pub­lic-pub­lic bot­tle­necks are re­moved.

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