Victoria: The Contract State

The Contract State: Public Management and the Kennett Government was recommended as the most comprehensive critique to date of the reform process under the Kennett Government in Victoria. It is worth study, because those reforms have attempted to change the nature of government, and are influencing thinking elsewhere in Australia.

The goal of the authors of The Contract State was to question Victoria's reforms presumably because of the implications of contracts as an alternative to traditional means for industrial relations. Thus the book emphasised defects more than advantages.

None-the-less the book was a considered account which outlined the facts of what had occurred by 1994, and identified at least one supportive version of the theory of Victoria's various reforms on the basis of documented sources.

Themes of The Contract State (in Appendix A) suggest that the overall benefits of reform are not clear cut.

A detailed outline of key points in The Contract State is also available.

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Other Speculation

Victoria's reforms have sought desirable goals, but may to have only re-shuffled, rather than resolving, many traditional dilemmas in public administration. For example:

· the traditional tension between political accountability and the autonomy needed for efficiency, has been resolved by minimising political accountability, thus giving rise to greater non-economic concerns. Efficiency defects of administration probably arise largely because of inconsistency between political requirements (to achieve non-economic goals), and customer / best practice requirements.

· efficiency in existing tasks may have increased at the expense of the ability to develop new directions

The experience of Victoria's Cain Government, whose strong political 'push' for apparently sound economic goals resulted in unforseen problems, can also be considered, as can the considerable delay before those consequences became publicly obvious. .

The Kennett Government's reform's may well prove insufficient, as they were directed mainly at the public sector which was only (say) 30% of the problem. For example:

· financial difficulties were blamed on defects in the public sector. However many of Victoria's financial problems resulted from unwise attempts to deal with economic change, and from damage to public sector competence through administrative reforms in the 1980s theoretically to address those defects.

· financial difficulties had emerged elsewhere because of economic problems (ie slowdown in productivity growth, so that public spending became an increased percentage of GDP whilst little changed in government). Administrative defects were not the only cause of the problem, or the only goal for reform.

· economic obstacles were seen as lack of incentive or government action. Limited community economic capability (knowledge, skills, organisation) and the intensity of international competition are probably more important economic obstacles, but these were neglected.

Victoria's reforms were inspired by UK precedents, whose effects have been dubious.

'the main parties seem less aware than ever of ... the extent of popular disillusion with the way things are ... Gallup reported in April that 49% of its respondents would leave Britain 'if they could'.... ... The good citizen is sick of politics as public relations ... the public is more focused on ethical than economic issues ... and more worried about lost civic identity and our lost sense of national direction .... Nor should anyone mistake the sense of suppressed anger at the way the social fabric has been torn apart in the past dozen and more years.... Good citizens ... are under great pressure. They were once tolerant of many things, but are now increasingly worried' (Selbourne D. 'Let's not abandon civil society', Australian, 17/9/96)

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Appendix A: Themes of The Contract State

(Alford J and O'Neill D (eds) - 1994)

Victoria's reforms constitute a new style of public administration (based on contracts), whose causes, antecedents and ideological foundations were:

· Victoria's financial problems

· national pressure for micro-economic reform - seen as requiring freer markets

· managerialism which focused on: outputs; program based organisations; performance measurement; and generalist managers. It was based on ideas which inform private sector management thinking, such as: systems theory; contingency theory; and limits to rationality.

· Reinventing Government which proposed that governments separate 'steering' from 'rowing'

· public choice theory which deals with failures in non-market decision making processes

· agency theory which stresses differences between the goals of principals and their agents

· UK, Canadian and NZ precedents

Legislative and organisational changes were designed to make government leaner and more businesslike, but have attracted criticism for secretiveness and politicisation

Power has been redistributed - mainly towards the Executive, the Premier and the SES, and away from Parliament, other Ministers, other staff and customers

Employment contracts have been seen as a means to improve efficiency and effectiveness. However their effect is problematical because:

· there are often difficulties in specifying the work required, because much public sector work is complex, with outcomes which are unpredictable and not linked solely to efforts, and only well known by those involved. These problems are well recognised in relevant theory, but were overlooked in Victoria

· factors other than pay (eg recognition) are more important to many public sector staff

· numerical flexibility is enhanced by employment contracts, but functional flexibility is inhibited

Service delivery agreements are intended to produce better targeted measurable outputs. These have been used to reduce costs in areas such as health and education. However:

· there is no simple answer. There are many different options (eg differing in terms of the extent of internal / external service production), which have quite different consequences

· such agreements result in quasi (internal) markets, where service providers tend to compete for government funds by reducing (unmeasurable) service quality; rather than competing to attract customers by increasing quality, which would occur in a real (external) market

· central government, rather than customers, has gained power at the expense of service providers

· key aspects of government services are qualitative (which are unmeasurable) and political (eg equity). [Functions have typically been accumulated by governments precisely because they involve complex qualitative judgments, which can not easily be reflected in a market arrangement].

· measurements under such agreements are usually made only of outputs (what government does) not outcomes (what the effect on community is) or equity

· cost saved in government services have been offset by increased direct costs to the community (with no overall accounting), and by reduced (unmeasured) quality

Real competition, rather than the more usual rhetoric about competition, has been created in the electricity industry, but this has required some distortions:

· large groupings of enterprises were created prior to privatisation, to create economies of scale. A judgement was needed that competition by existing enterprises was inadequate

· electricity prices were increased before privatisation, thus increasing revenue from asset sale

· UK evidence suggests that electricity price gains to large users have been offset by greater costs to small business and households; and that it has been impossible for regulator to deal with apparent price fixing by participants in the power pool.

· it was so difficult to devise a competitive regime for electricity that the regulatory regime was neglected

· social implications seem likely to be ignored

Competitive tendering has been taken up with enthusiasm by local government. Elected councils were replaced by appointed administrators at the same time.

Savings from competitive tendering are real, but can be difficult to capture for complex or non-routine functions, due to monitoring / enforcement costs. Monitoring and enforcement tend to be lax in practice.

While government may need to disengage from some service delivery, this can not be left to competition alone if substantial social / environmental issues are involved, but requires new strategic policy and public regulation. Thus while contractualism was supposed to reduce the scope of government, it does not necessarily do so in practice.

Contracts promote economic values, but have serious limits in dealing with non-economic issues which are central to the role of government. Contracts also tend to inhibit efforts to address integrated and longer term goals

Treating employee motivations as mainly self interest leads to 'gaming' the system, and treating citizens as 'customers' denies their constructive contribution to public affairs

Separation of purchasers and providers shifts the 'capture' of the policy agenda which public choice theorists fear, from self interested service providers to other equally self interested groups

Treating government actions as outputs, does not capture what citizens need from government.

The equity consequences of privatisation have been negative elsewhere, but this issue has not been considered

Accountability to customers may well decline under contractualism

Contractualism may be useful in overcoming a financial crisis, but may be the wrong tool to sponsor new initiatives when that problem is overcome.

The Contract State: Public Management and the Kennett Government

Key points from a book by Alford J. and O'Neill D. (eds) - 1994

1. The Contract State

Major changes in Victoria under the Kennett Government involved greater use of contracts as a mechanism for governance, rather than traditional organisational hierarchy. Most comments on these changes have dealt with their distributional effects. But the goal was not just to reduce the size of the public sector, but to change the way it works.

Evolution of the contract state

This is the third stage in the post war period. Until the early 1980s, conventional models of bureaucracy applied - with direct production of public services, organisation through hierarchy, and control through standardised work processes. The second stage (under Cain Government) involved Managerialism. It sought to change control from standardisation, onto emphasis on outputs or outcomes - from following rules onto delivering results. Corporate planning, objective setting, program budgeting and performance monitoring were emphasised. Senior core staff were appraised annually against targets; and non core functions were corporatised. However, performance reporting was between subordinates and superiors.

Kennett Government's contract state

This is implicit in many sources - policy papers, legislation (Public Sector Management Act, State Owned Enterprises Act, Employee Relations Act), Victorian Commission of Audit (May 1993); and Management Improvement Initiative (MII).

Contractualism built on Managerialism, and also: (a) involved reducing size of state (by contracting certain functions); (b) reduced size of public service by focusing departments on core functions (policy, resource allocation, specifying services / standards; monitoring; regulations) (c) and hived off service delivery to separate public agencies (d) established contractual relationships between departments and service providers and (e) subjected service providers to competition.

Most comprehensive statement is MII, which had five principles for public service reform: clear responsibility and accountability for results; empowering consumers (by resourcing consumers not suppliers); minimising bureaucracy (by core function emphasis); preference for market mechanism; and business-like management of agencies (including devolution of authority / responsibility; risk management, performance incentives, and improved financial management / reporting).

MII was based on Victorian Commission of Audit (VCA) which reported on Victoria's finances, and recommended a future basis for public sector management. Three principles were: department responsible for providing services should be separate from producer ('separating steering from rowing'); government should purchase outcomes or outputs rather than inputs; and suppliers should compete.

The Contractual model involves four different types of contracts (a) employment contracts (b) intra public service contracts (c) public - private contracts (d) contracts between consumer and firm which arises from privatisation.

The Contractual model originated in: Victoria's budgetary problems; national micro economic reform pressures nationally; overseas precedents; and ideology.

Victoria's economic problems

Victoria was seen (in Independent Review of Victoria's Public Sector Finances - Nicholls) as suffering a financial crisis, due to level of debt and to expenditures which exceeded revenue growth.

This was confirmed by VCA in 1992. Causes were partly beyond state control: recession; limited Commonwealth funds; and state bank collapse due to private fraud. VCA concluded that factors under state control were: excessive spending relative to other states - so that either Victoria's standards were excessive or money was spend inefficiently (where restrictive work practices / featherbedding were seen as major problems); and inadequate taxation. Kennett government saw its major goal as reducing debt, and sought this by: increased taxes and charges; expenditure cuts; out-sourcing; and asset sales.

Economic statements in 1992 - 1993: increased taxes and charges, required special dividends from state enterprises; made 2% across the board cuts in public sector; achieved voluntary departure of 20,000 employees; and large cuts in health, welfare and education by rationalisation. At the same time savings came from contracting out (especially of cleaning, catering and information technology in health and education areas).

However more than savings are involved, as VCA saw structural changes as needed to avoid capture of government decision making by beneficiary groups (client or producer interests). Thus structures were designed to avoid these pressures (eg by policy delivery separation, output focus, competition). There would have been other possible solutions to budget problems. The ones adopted resulted from public choice and agency theory, overseas precedents, and national pressure for micro-economic reform.

The push for micro-economic reform

Micro-economic reform has been centre stage since Paul Keating's 'banana republic' speech, and involves seeking freer operation of market forces in finance, industry and the public sector. Most of the issues arise in areas of state responsibility. Special Premier's Conference in July 1990 accepted the need for micro-economic reform (especially of rail freight, electricity grid, and ports) . A Steering Committee on National Performance Monitoring of Government Trading Enterprises was set up in 1991. This created pressure for reform, but not the methods to achieve it.

International antecedents

Managerialism had arisen in Australia as a result of international precedents (which Hood described as 'New Public Management'). Examples include the UK's Financial Management Initiative and Canada's Increased Ministerial Authority and Accountability Measure. These were analogous to Financial Management Improvement Program in Australian Public Service. Essential elements were: focus on outputs; program based organisations; performance control; and generalist management expertise. The Commonwealth continued with program structures, and concentrated on budgetary reforms, whereas others went further ('Next steps' and 'Citizens charter' in UK; and corporatisation in NZ). Under UK 'Next Steps' program (which resulted from 1987 PM's Efficiency Unit) there was separation between policy and execution. By 1992, 76 executive agencies had been established. In 1991, a Citizens' Charter required agencies to specify and publicise service standards. NZ tried many elements of the contractual model through: corporatisation; separation of policy advice, service delivery and regulation; performance based limited term contracts for CEOs; and the adoption of accrual accounting.

Ideological antecedents

The foundations of Managerialism were: systems theory (which conceives of organisations as production processes which turn inputs into outputs - thus leading to concern for outputs); contingency theory (which calls for organisations to be structured to suit tasks, and legitimises the idea of organisations shaped to suit goals); and Simon's theories of bounded rationality (which supports idea of dividing organisations into autonomous components). This also supported: US idea of multi-divisional corporation (Drucker; Chandler); US idea of Programming, Planning and Budgeting in the early 1960s; and Drucker's 'Management by Objectives'. Thus Managerialism emerged from ideas which inspired private sector management.

Victoria also relied on Re-inventing Government (Osbourne and Gaebler), which was quoted by VCA as the basis for its three principles (and was Clinton's reform 'Bible'). Its concept is that government focus on 'steering' not 'rowing' (ie involving catalysing and facilitating, not provision). It identifies 36 alternatives to standard government service delivery (including licensing, contracting, regulation, franchising, public-private partnerships, volunteers, co-production and quid pro quos). It recommends separating 'steering' and 'rowing' to allow policy to be separate from sectional interest groups (public sector employees); and uses competition to overcome resistance to change. Positive aspects include: focus on clients; and responsiveness. However: it reduces government activity to the delivery of goods and services; and it tends to use only market mechanisms.

This has been the means for transmitting 'public choice' theory (the study of 'non-market' decision making) to Australia. That theory sees human behaviour as dominated by individual self interest, and sees bureaucrats' utility as determined by the size of their agencies - which leads to excessive growth of agencies. Separating advice from delivery is intended to produce more objective advice, and avoid interest group capture. A related idea is 'agency theory' which sees separation between principals and agents. Principals say what is wanted, and pay agents. It is assumed that: people maximise self interest; principals and agents have conflicting interests; and that agents have information advantages over principals (eg knowing how good a job they can do).

Victorian contractual model is similar to NZ's but less concerned by those aspects of agency theory and transaction cost theory which highlight the difficulties of arm's length contractual relationships (and which favours in-house production of services). In agency theory this arises from the problems of adverse selection (where information about agent is unknown to principal) and moral hazard (where it is hard to check agent's work). In transaction cost analysis (Williamson), contractual relations are seen as beset by; uncertainty; long term skills development by contractors which 'locks them in'; and bounded rationality / opportunism (similar to agency theory) . Victoria's reforms ignored these difficulties.

Issues in examining the contractual model

The simple idea of free individuals agreeing to mutual exchange through contract encounters problems in government. In particular (a) is it correct to assume that people are self interested utility maximisers, with a primary economic focus (b) questions arise about idea of separating purchasers and providers to avoid interest group capture (ie has capture occurred, and will separation avoid it - or shift it to another arena or to another set of interests) (c) can policy makers learn about requirements for service delivery - also is it practical to specify and monitor performance, for reasons arising from agency theory, and transaction cost analysis (d) Is the contractual model the best way in the 1990s. This question is subjective - thus the Contractual model does not avoid or even minimise the effect of politics.

2 The New Legislative Order

Until the 1980s, changes in government had little effect on administration, and on services. This was consistent with career service concept, and with Westminster model of independent, non political public service. Now new governments make structural and staffing changes. The Kennett government went well beyond this, using a 'blitzkrieg of guillotined legislation'.

Background

The Coalition based its 1992 campaign on the state of Victoria's economy, and its relationship to the management of public sector assets - alleging mismanagement and systemic faults. Changes were made very quickly - with opposition complains about quantity and complexity of legislation. The Employment Relations Act abolished state awards and replaced this with employment agreements; banned compulsory unionism; limited the Supreme Court; and established an Employee Relations Commission.

Legislation

Public Sector Management Act 1992 had key provisions of: reducing number of departments (22 to13); abolishing Public Service Board; contract employment for chief and senior executives; removal of 'golden parachutes' from contracts; transparency of employment costs; and extension of coverage to all of public sector.

State Owned Enterprises Act 1992 allowed existing management structures to be replaced (to bring about desired cultural change); transferred regulatory and CSO functions to other agencies; and created distinctions between state business corporations, state owned companies and state bodies. Accountability to the state will be provided by an approved corporate plan, and requirement for CSOs. The opposition objected to: power to sell statutory authorities without reference to parliament; ability to sack without compensation in 're-organising bodies'; exempt from FOI; exemption from Ombudsman Act; and exemption from Subordinate Legislation Act.

Freedom of Information (Amendment) Act: applied FOI to local government; curbed demands on resources; dovetailed FOI into system of responsible government; sought administrative efficiencies; and amended fees.

Amalgamations

Major changes were made, and confirmed in PSM Act (reducing 40 administrative units to 13 departments). Super-ministries have been said to have benefits: reducing territorial disputes; coherence in policy advice; scope for delegation; and reduced volume of material to cabinet.

Impact of legislative changes:

(A) Formal distribution of power: The Premier gained power. Parliament, the public and non-executive public service staff lost power. Previously Premier (as minister responsible for Public Service Act) was only titular head, with real power held by Public Service Board. The new Act gave Premier extensive powers over public service. Premier can now place Auditor General, Ombudsman and statutory offices responsible to Parliament on employment contracts. These powers are subject to constraints. However these powers will make CEOs take account of Premier's wishes. Department heads now meet with Premier as State Coordination and Management Council - paralleling Cabinet.

Department heads have more power over personnel, but less security. They may classify positions, dismiss senior executive staff. Political influence is confined by PSM Act to matters of ends, rather than means. CEOs are constrained by Public Service commissioner who reviews performance of each department head, and reports to Ministers. This gives the Commissioner power.

Ministers lose formal powers, though they gain informal power through ability to recommend termination of a CEO to Premier. Losses in power occur to premier, and through having to share authority with other Ministers (a situation which allows CEOs to play 'Yes Minister' games).

The central personnel agency lost power. Where Public Service Board was powerful, many of its roles vanished. Public Service Commissioner has a role which is largely advisory - though he has influence through reviewing and reporting on CEOs.

Power was transferred from Parliament to the executive. Parliament lost information gathering, reviewing and decision making powers to cabinet (especially under State Owned Enterprises Act). Substantial areas of public sector allow very little outside information or redress. Parliamentarians must pay for FOI information. Parliamentary officers can be placed on employment contracts by Premier.

SES staff have more personnel power but less security (as for CEOs). Non executive staff have less power and security.

(B) Impact of Boundaries: Boundaries within and around public sector were blurred by legislation. (i) between public service (which was clearly defined) and rest of public sector (which are also subject to Public Service Commissioner) (ii) between public and private sectors - where resources can now be transferred without Parliamentary approval.

(C) Impact on public service conventions: Career service concepts melded central ideas of Northcote-Trevallyn report with principles of Weber, producing values like independent non-political control, regulations discouraging recruitment of strangers, legislated protection against arbitrary dismissal, and a regular system of classifications. Labor had changed some of these (eg with contract system). New model now has: public sector wide focus (not just public service); elimination of centralised public service management; open competition for all public service jobs; comparability with private sector termination and redundancy standards; and flexibility of position classification.

Conclusion

New model is leaner than its predecessor, with new shape. Contract employment results in radical re-appraisal of relationships. Government is confident of 'professional business-like' management of public agencies. Others are concerned about secrecy, loss of permanency and politicisation.

3 Public Sector Employment Contracts

Five year contracts set out performance requirements, and criteria for measuring performance. Employment can be terminated after 4 weeks without compensation. Critics have focused on implications for unions and employment rights, but have not addressed its effects on the effectiveness of public management. Advocates see advantages in terms of transparency, relief from malingering, assurance of government goals predominating, and increased efficiency. However assumptions underpinning the contract model are of limited relevance to much public sector work.

The evolution of employment relations

Conventional model involved career service. The Managerialist model under the Labor Government had some conventional elements but: created SES; made major changes to employment of CEOs; and introduced performance payment elements for SES.

The new regime

The PSM Act establishes a floor of employment conditions. Above this different levels of staff are treated differently (with CEOs and SES under PSM Act, and others under ER Act). The ER Act allows four alternatives: employee / employer agreement to create an award; employees 'roll over' existing terms and conditions; and either collective or individual employment agreements. By the end of 1993, 70-80% of executives had signed employment contracts, but non executives had little incentive to do so. The patchy take up reflects difficulties in applying the contractual form in the public sector.

Proposed benefits of contracts

Advantages are similar to those in private sector. The central argument is that contracts improve efficiency and effectiveness. Firstly they sharpen accountability (eliminating feeling of not being responsible for outcomes). Secondly they increase incentives (avoiding paying people no matter what their performance). Thirdly they improve flexibility - based on the view that each department has a distinctive task, requiring particular skills. Finally they are expected to improve working relationships - through spirit of cooperation / commitment from forming agreements at local level. Proponents of this argument rely on prototype contract: for purchase of commodities in spot market. It has limited application to the labour market.

Accountability: the specification and monitoring problem

The argument that contracts improve accountability depends on assumptions that: it is possible to specify goods and service in output terms when the contract is made; contract is between independent parties who deal at arm's length; and that employees' dominant motive is material self interest.

Specification of requirements runs into problem of: uncertainty about actual work (requiring employer to either anticipate this in detail, allow re-negotiation, or enter employment relationship); information asymmetry (where buyer can not tell whether goods and services are good or as agreed; or where workers suffer information deficiency); and complexity (because some goods require both specialisation and cooperation in production, and are thus team - rather than individual - goods. This potentially allows some to engage in 'social loafing' - leaving work to others).

The greater the uncertainty, information asymmetry and complexity, the greater the cost of using price mechanisms (ie the cost of organising through price is that of discovering what the relevant prices may be). The employment contract has a different logic to the spot purchase contract, and involves agreement to enter hierarchical relationship. This poses ongoing issue for employers about how to get maximum work - which traditionally involves both direction / monitoring by supervisors and sanctions.

Though employment contract deals with uncertainty, it does nothing about the problem of asymmetry and complexity. Employers use two methods to deal with this: casting work in output like terms; and provides variable material incentives (tying remuneration to productive targets of organisation - to align organisations goals with individuals). Underpinning this is view that labour provider is motivated by material self interest. However self interest can undermine performance incentives - whether for piece work or for 'management by objectives' (ie by deliberately deceiving those who fix performance measures about what is achievable). If high standards are set, then risk for employee of failure increases, and high salary is needed to compensate. Something but self interest must motivate employees to get maximum performance.

The problem of specifying work, and relating incentives to performance is much harder in the public sector, where necessary conditions are often absent. Outcomes are often hard to measure, unpredictable and interdependent. Many public sector outcomes can only be measured by abstracting from reality (eg policy advice) - and can only be assessed qualitatively. Also outcomes are often dependent on actions of other people, or natural forces (ie influence can only be indirect). And information asymmetry is very high in dealing with policy analysis, research, professional work. Some have to make intangible judgements on behalf of society as a whole. Many jobs are interdependent - it being particularly hard to separate a manager's performance from the efforts of others. After 10 years of management reform in Commonwealth, many were concerned about the effect on teamwork, equity and morale. Performance measures can be counter-productive if this encourages employees to 'game' the system.

Incentives: the motivation problem

People are motivated by more than money. Hilmer studied this in depth. Many who become public servants do so because of commitment to public service, or to a particular program area. Many who move from private to public sector do so because of 'scope of position'. Recognition for doing job is seen as more important than pay.

Flexibility

Do employment contracts improve flexibility over previous arrangements? They do so in numerical terms, but 'managed decentralism' may be more effective in terms of functional flexibility (adapting labour to a broader range of tasks), because functional flexibility requires job security, training , career paths and industrial harmony. Broad based training tends to be a public good, and organisations are most likely to invest in this if collective institutional framework requires / assists it to do so. A limited perspective on flexibility may create long term problems (employers see solution in staff turnover; staff favour short term tasks - with the result that organisational memory is lost). Employers may have no motivation to invest in staff development, and thus have no means to alter the capabilities of their own staff (thus having to accept whatever is available in labour market).

Working relationships

Contracts are seen to enhance cooperation, which is critical in order to deal with the problem of uncertainty, information asymmetry and complexity. Much research shows commitment is fostered by reciprocity in employment relationship, where employer demonstrates the same concern for employee as is expected from them for organisation (this requires both financial and other needs). Closely related to reciprocity is trust - for which many factors are important - all of which are undermined by new employment arrangements eg (a) fairness - which might be eroded under contracts if managers play favourites. Due process has been reduced under new PSM Act. Fear of arbitrary action leads staff to 'gaming' tactics, to extreme caution for personal survival rather than advancing organisational purposes (b) job security - which is overwhelmingly seen to be important in literature for employee commitment - but is weakened by redundancy arrangements (c) increased level of 'calculation' in relationship (closely monitoring work) reduces commitment (d) teamwork and group participation - which can be undermined by individual incentives which increase intra-group competition (e) real influence of employees on forming contract (which is eroded by imbalance of power, a situation exacerbated by new legislative regime). The new employment arrangements may intimidate public servants not to provide 'free and frank' advice which is unpalatable to minister or superior officer - because power of dismissal exists. This is a formula for a Public Service of 'yes men'.

Conclusion

Contracts are based on the logic of making each side's obligations clear, and providing financial incentives. This works for some public service work, but not for others. In the latter cases, contracts have to be supplemented by employee commitment - which the new employment arrangements tend to undermine. A more productive alternative would be one which recognises the difficulty of specifying and monitoring work, which taps motivations other than self interest, which acknowledges that much work is done by groups, and which provides confidence in due process and job security.

4 Service Delivery Agreements: 'Casemix' funding and 'schools of the Future'

The 1990s challenge for public and the private sector's is to improve productivity and service quality (to compete internationally, and to reduce government debt levels). The public sector can no longer solve resources problem with queuing, but is being asked for more client oriented public service. While this is worldwide, it is nowhere more than in Victoria since 1992, especially in schools and hospitals. New budget formulas, and use of service agreements are significant difference to previous programs - and reflect 'contract based budget sector management' for better targeting of resources for measurable outputs. Savings have been achieved. Waiting times for acute hospital patients was cut by 'casemix' funding. Education savings resulted from closing schools, and reducing teacher numbers. Focus on outputs has been central to public sector reforms everywhere, as has doing more with less. Victoria's approach has been similar to that used elsewhere, and has changed not only the basis of funding, but the relationship with central agencies.

Reforming service delivery: international trends

Three different delivery structures are: direct provision; service agreements (contracts) between funding authorities and separate agencies; competition and competitive tendering (contracting out). The differences relate to: separation of policy formation and delivery; use of program budgeting or contracts; and extent of competition. NZ and UK used market competition, while Canada and Commonwealth relied on corporate management, program budgeting and performance evaluation. NZ abolished many agencies, commercialised many others, and used output focused management to assess performance. Delivery is mainly outside public sector in NZ. UK retains most delivery inside the public sector, and uses more contacting out and market testing of service delivery. UK White Paper on Caring for Patients and more generally Next Steps separated service delivery from policy forming. Canada is seeking corporate management within the public sector. Goal is to make service costs transparent. Departments are required to develop service standards with clients. As the Commonwealth is responsible for funding, rather than providing services, reforms focused on financial management rather than service delivery mechanisms. The FMIP is a corporate management reform strategy, requiring program objectives and performance indicators - to which funding is tied.

Comparing the reform strategies

Unlike NZ and UK, there has been no change to the size of government in Commonwealth / Canada. Both corporate management and service agreements require quality standards and performance indicators. The differences are in control of delivery, and public accountability. Under FMIP departments must set objective and measures, but model suffers from lack of devolution of control, and inadequate performance indicators. NZ and UK use contracts which allow CEOs greater control over resource allocation, and introduces competition. However in UK and NZ, schools and hospitals compete against one another for funding, not for customers. Accountability is shifted from politics, to the terms specified in contracts. Corporate management by Commonwealth and Canada shifts the basis of accountability from expenditure to outputs. Victoria's MII is closer to the UK contracting approach than to the Commonwealth's corporate management.

Reforming service delivery in Victoria

Government promised to revive enterprise culture, and the way Victoria does business. Three objectives were identified: efficiency in using resources; empowering consumers; and reduction in state debt. Reduced transport, education and health spending required rationalisation, not cutting services. The benchmark for quality service was other state's average (where VCA showed spending was above national average). Government's objective of efficiency was achieved by increased productivity - by cutting unit costs. Casemix shifts health funding from actual costs, to average costs of patients treated. Educational productivity was increased by fewer teachers, and larger class sizes. However more than efficiency was wanted - also intent on changing public service culture, by contracts, performance measures, and competition between providers. MII uses the language of TQM, longer term planning, measurable outputs, stringent accountability, and transparent funding. The model involves: policy / delivery separation; contract based public sector management; and competition. Creating markets is also to empower consumers. Effectiveness is also to be improved by targeted spending, and measuring outcomes. Baxter (Premier's Dept) expressed surprise at lack of orientation to customers in Victoria, and identified need to change from serving government, to serving people outside. Cultural change to result from: fewer in head offices; more in face to face service delivery; corporate plans; contracts for CEOs and SES; and funder-provider split.

The argument that competition improves effectiveness and service quality needs analysis. Service quality has technical (output), process (outcome) and political (access and equity) dimensions. It is necessary to improve internal efficiency without sacrificing quality, and to manage access to scare public resources - rather than to compete for customers on the basis of quality. Competition between service providers is for funds not for customers. However reform was based on the view that competition will increase efficiency and thus effectiveness (eg by privatisation, corporatisation, competitive tendering, quasi markets internally).

Advantages / disadvantages of service agreements

Contract-based management makes funding transparent; and makes evaluation easier. Also separation of political process of specifying objectives from delivery will make professionals more responsive to customers. Public choice and principal-agent theory are basis for these arguments (ie that private competitive markets are better than political markets in supplying goods and services; and that contracts are better than internal organisation based on budgets). Service delivery contracts involve a purchaser (responsible for needs assessment - a political decision); and provider (seen as a managerial task). This separation creates exchanges amongst agencies, through service agreements (which specify outputs or outcomes that are measurable). This depends on assuming that: political and managerial tasks can be separated; public services can be separated into discrete programs; and that obligations and rights can be clearly specified and enforced.

While service agreements are likely to specify outcome objectives, indicators will usually be defined as outputs. However there are conflicting dimensions to public service accountability - to clients, and to Parliament (for resource use). Service delivery contracts seek to separate political accountability to elected representatives from managerial accountability to those who appoint them. Contracts require clear specification. However it is easier to specify efficiency gains than service quality. Many service measures relate to outputs, rather than to effectiveness of results. Also there is no way to specify requirements for long term outcomes (eg of a preventative health care program). Thus short term performance is emphasised. Where customers do not directly pay, a formula determines priorities.

In competitive markets, service quality is aimed at increasing demand by attracting customers, but for public services the problem is to restrain demand. Risk in making this competitive is that efficiency gains, and demand management are achieved by reducing service quality. Efficiency gains may not reflect priorities for equity and access. Corporate planning strategies experience the same problem. Also different groups will have different priorities, and there is no single basis (like profitability) for assessing performance. Value for money, raises question of value for whom? Service agreements between agencies create quasi markets dominated by professional suppliers, rather than by consumers. Such internal markets are also characterised by excess demand, requiring rationing, rather than competition for consumers on the basis of quality. Thus they are not more responsive to users. Central agencies still determine priorities, and efficiency measures are easier to identify than effectiveness. Structured or managed competition does not overcome the problem of monitoring. Quality is hardest to define for services, and in the public sector (eg in health and education, where specification of performance indicators is very hard). Consumers perceptions are based more on how service is delivered, than on what is provided. And those services provide public as well as private benefits. How are public interest objectives included in service agreements?

It is assumed that the choice between competing providers is the best spur to quality improvement. However NZ / UK evidence suggests that contract management and competition between providers has not improved quality of education and health.

Health care service agreements: Casemix funding

Casemix funding is designed to fund services, not institutions. Health budgets came under pressure from costs due to technology / community demand. Health Service agreements started in 1986 under Cain. Shift from cost reimbursement to global budget limits - contained costs but hospitals responded with reduced services. Waiting lists expanded. Casemix was introduced as a form of performance based (output by number and type) funding. This was seen to introduce an element of managed competition. At the same time budgets were cut, and ongoing allowance has been made for 1.5%pa productivity gain. Hospitals increased patient turnover as a result, and cut waiting lists. US introduced similar method in 1983, and cut hospital costs from Medicare from 21%pa to 2%pa (now 10%pa). Early savings were from reducing patients length of stay - this cut growth in hospital costs, but outpatient and reimbursements to doctors rose rapidly. One problem is the limits to accuracy of DRG (diagnostic related groups) which can take no account of the duration / severity of illness. Hospitals limit patient stay - and thus transfer costs to the community. Local councils then limit access to Maternal and Child Health Service. In the US doctors report the effect of Casemix as being asked to: increase admissions; reduce use of testing services; reduce patients length of stay; and to justify treatment decisions financially. Victoria will monitor quality by monitoring DRGs, surveying patient satisfaction, and reporting readmission rates. Casemix improves focus on services and patients treated. Hospitals shift from providing nursing to only medical services. Patient discharge does not respond to customer preferences. Hospitals transfer costs to community. Country hospitals failed to meet performance targets and risk closure, thus reducing access to services on efficiency grounds. DRGs are clinical definition, which measure hospital outputs, not health care outcomes. Victoria's system differs to that in UK / NZ because hospitals compete for volume of customers at a government fixed price; rather than for contracts / tenders for service delivery. In Victoria the control of the health system is moving from hospitals to government, ie consumers are not being empowered.

Education service agreements: Schools of the Future

Schools were to be given freedom from centralised bureaucracy to make decisions which affect themselves. Cuts were made in 1992-93 by closing schools, and reducing teacher numbers. At the same time a quality provision framework was established, under which community based task forces were set up to review services (To implement expenditure cuts?). 70% of schools cut programs as a result of funding / staffing cuts. Control was transferred to schools within state-wide accountability framework. Global budgets were the responsibility of principals - with parent / community council. Accountability is to be achieved through School Charter. Schools have to prepare annual reports, financial / educational audits reviewing progress against those charters. Principals are to have considerable flexibility on use of resources within global budgets. School budgets will be based on common component, and equity component. Four different models for school funding were developed, with schools given a choice about which to pilot. A Student Resource Index (equivalent to DRGs) is being proposed, but delayed due to disagreement over its composition. Principals are now on contract. Schools have Charters which are contracts with Directorate of Education. Charters specify goals and priorities, as well as implementation strategies and performance measures. This process is intended to decentralise school management, but Spaull's analysis of restructuring under Labor showed that power had been re-centralised - 'Schools of the Future' merely changed the basis, not the source, of funding. Real devolution of power requires local funding and teacher employment.

Opposition to 'Schools of the Future' is based on its impact on educational quality. Problem of defining / measuring quality is similar to Casemix. Education, like health, is a professional service, so measuring quality is a complex contentious issue. There is wide view that cost savings are being achieved by reducing quality. In NZ similar approach was taken. Few schools volunteered to be bulk funded. There has also been constant opposition to savings by increasing class sizes, teaching hours, and recruiting less experienced teachers. In NZ many provision in school charter were mandatory - so that, as in Victoria, there has been little real devolution of power.

Conclusion

Changing from funding inputs to outputs is achieving efficiency, but implementation is proving painful. Communities have resisted school / hospital closures. The impact on quality is hard to assess - because hospital and schools are clear examples of the difficulty in evaluating the quality of public services - yet such definitions are essential if service agreements are to improve quality as well as efficiency. User pays has not been introduced. Thus institutions compete for scare budget dollars, not by consumers. Markets are still characterised by excess demand, and are internal / producer markets, not consumer markets. Decisions are made by providers, not by consumers. Thus these programs are only a partial move to contractualism. Needs assessment (and thus strategic control) clearly remains with government. Problems are typical of those for contract based management - development of suitable performance indicators. Both measure only efficiency rather than effectiveness (outcomes for community). Similar problems were found in the UK. Changing from hierarchical control to contract management does not solve this problem. Defining effectiveness is inherently a political process. Efficiency is essential, but performance also needs to take account of the public interest. Service contracts make costs of services transparent, but do not solve problem of service quality. Victoria has cut its deficits, but complaints have arisen about the lack of consultation in this process

5 Privatisation, Competition and Contracts

Government was committed to privatisation - by sale of assets and contracting out. But little was achieved by May 1994, though this is deceptive because it overlooks complexity and time needed for privatisation. This has also been slowed by ambiguous tax treatment for privatised entities. Foundations which have been laid include: State Owned Enterprises Act; substantial industry reviews; restructuring involving separation of competitive from non-competitive elements; and improved commercial viability through removal of cross subsidies. Preparations have also been made through contracting out.

Restructuring and privatisation of electricity

This was the last and most difficult of privatisations in UK, because it sought to match the rhetoric of competition with reality - which has been the basis of many problems. This has helped others with lessons, positive and negative. Electricity reform has been part of national microeconomic reform agenda since 1989, to improve competitiveness of industry. In 1993, vertically integrated structure of SECV was broken into three services: generation; high voltage transmission; distribution and supply. A blueprint was prepared for the next stage, which involved horizontal separation and creation of a wholesale electricity market. These were based on UK precedents (ie creation of electricity spot market (power pool), splitting generation assets to allow upstream competition, breaking horizontally integrated units into geographic monopolies, retail competition, regulatory price capping). However it differed in: holding public ownership of grid; creating greater competition in wholesale market; and avoidance of UK regulations (especially social regulation). The integration of municipal electricity undertakings into distribution business flies in the face of competition objective, but was justified as necessary for efficiency, financial viability and business value / saleability. Competitive elements are to be privatised. A competitive wholesale market in electricity was established, which will be national in 1995. Retail markets will become competitive by 2000. More attention has been given so far to the competition regime, than to the regulatory regime - the latter is still unclear.

Speed of change has been seen as necessary to avoid opposition being mobilised. Government's approach was elitist and exclusive (in senior government). Local electricity industry was excluded. No outsiders had access to information.

A recent World Bank study showed that governments typically use privatisation for revenue raising, not for true microeconomic reform purposes. This was said not to be the case in Victoria's electricity industry. Goal has been consumer power, which required only light legislation. Privatisation has significant distributional consequences - public assets can be transferred to a select group - sometimes for less than their value. Victoria has risked a lot on the power of competition to increase efficiency. No other state has yet moved down the competitive path Victoria has chosen. NSW rejected splitting Pacific Power, because of loss of economies of scale. Queensland is seen as best practice by Victoria, suggesting that neither competition nor private ownership were necessary. This has been supported by recent studies of privatised and public enterprises in UK. Gains will result for larger users from reform. However in UK there is evidence that this resulted not from productivity, but at expense of increased costs for residential and small business users. All should gain from upstream competition amongst generators. But in UK, regulator has not been able to deal with evidence of collusion and price fixing amongst participants in the power pool.

Victoria has not revealed its regulatory regime, but it appears weaker than that accompanying privatisation in UK. Main regulatory feature is price cap regime similar to UK, which requires: determining appropriate rate of return on investment; estimating future efficiency and technological gains; and allocating benefits and costs amongst industry stakeholders (ie shareholders, taxpayers, management and various types of consumers). UK shows that governments can err of the side of some types of stakeholders. UK decisions produced windfall profits for shareholders, which damaged privatisation concept. Victoria said that it wanted equitable distribution. However as in UK, period before privatisation saw large tariff increases, which improved government revenues, and increased sale price. Government promised 2% pa tariff reduction, after re-organisation, which was the same as was being produced beforehand. In UK regulations have become much stronger in recent years in areas of natural monopoly. No matter how much competition is sought it does not address pricing / quality issues for supply to households / small business. In UK it has been realised that can not consider price separately from service quality, as lower quality is equivalent to a price increase. Consumers can do nothing individually about quality, which has worsened over time. Thus price formula in UK has been inter-woven with performance targets. To date price alone has been considered in Australia.

There is a danger in Australia, with regulation spilt between different areas, that social regulation will be ignored. Victoria's regulator was established with only economic objectives. US and UK experience show the importance of keeping economic and social regulatory issues in one agency - because economic regulation gives social leverage. Yet in Victoria basic consumer issues have been separated from commercial aspects of the industry - probably unique in the world. Government has sponsored industry operated service guarantees. Victoria's legislation contains little reference to social regulation issues (eg performance standards in key areas, quality, reliability, information provision, payments system, complaints handling, grievances, debt handling, disconnections). Ultimate test is how well the interests of the most disadvantaged are protected. Social justice concerns in Victoria, previously high, have been reversed. There is no requirement for consumer representation and advocacy - which is inconsistent with claims about consumer empowerment.

Compulsory competitive tendering

Tendering and contracting are traditional in Local Government, but have been substantially expanded. Current approaches are distinctive because: they apply across whole government; central governments are applying it as major microeconomic reform initiative at local level; and there is a theory behind it (compared with previous pragmatic approach). The theory has three strands: political (to shift local government from delivery role to more strategic role of strategic planning and regulation in terms of Reinventing Government); economic (competition is seen as a way to inculcate efficiency and cultural change - but because most services are natural monopolies, the test is contestability - or Benchmarking); and organisational / management theory (principal / agent ideas which are best achieved with clear separation between principals and agents).

Government has two ways to introduce competition in local government: to encourage local authorities to do so to their own timetable (as in NZ); or to require competition to a prescriptive formula and timetable (as in UK). Compulsory competitive tendering was only one of many initiatives by Kennett Government to inculcate efficiency, competition and accountability in local government. It was seen that these changes had to be forced (eg requiring 50% of work to be contracted out, establishing self checking procedures). However local government has taken up competitive tendering with enthusiasm. However scope is wider in Victoria than in UK (ie it applies not only to physical services, but to social services). As 50% of total operating budget must be contracted (which includes debt service) much more than 50% of actual operations must be contracted. And other changes were made to local government (eg the replacement of elected councillors with centrally appointed administrators accompanied compulsory tendering).

Most of the data about the effectiveness of competitive tendering comes from overseas studies on physical services. The motive for this is cost savings, for which evidence exists. However questions have been raised about these estimates are exaggerated, and about dynamics of cost outcomes (were they achieved from productivity, reduced standards, or reduced labour costs?). About 7% cost savings is average for competitive tendering. Programs which are complex or non-routine may have trouble capturing savings due to monitoring and enforcement costs. However evidence for lower costs, is offset by evidence for lower service standards. Competition generally reduces the return to labour. The structural separation of purchaser and provider could compound the problem of information for purchasers - contractors will withhold information strategically from purchasers - thus requiring more elaborate monitoring and administrative machinery. This arrangement also seriously weakens local democracy. Studies show that in practice monitoring and contract compliance are deficient in most cases - thus requiring performance indicators, though these were almost universally not used.

Conclusion

Privatisation raises significant regulatory and accountability issues. Quality of service issues, and reinforcement of inequalities are of concern. This need not be so, but is a problem because quality issues are subordinated to profitability and reducing costs. Staking all on competition where there are substantial social and environmental issues involved is misguided. Good governance may demand that governments disengage from particular areas of production, but this requires major new functions in strategic policy and public regulation - a lesson not yet learned in Victoria.

6 Contracts, Politics and Society

Agency theory starts from the notion that social and political life can be understood as a series of contracts. This assumes that contract is only legitimate connection between principal / purchaser and agent / provider (whether they be in the same or different organisations). Contracts have an effect on relationships eg: (a) making parties increasingly distinct / independent (shift from shared values to incentives; and from generalised long term common interests to immediate benefits) (b) things exchanged become more tangible; and shift from focus on outcomes to focus on outputs; and from public goods to private goods (because collective goods are harder to specify) (c) evaluation and assessment criteria become more specific and measurable (d) good performance is judged in terms of outputs, not inputs or processes.

Three key assumptions of agency theory also apply to the contract state model, ie that: individuals are rational, self interested utility maximisers; agents will be in conflict with principals; and information is distributed asymmetrically. For the Kennett government, contracts are more than a practical technique, they are a social ideal.

The contract state and public sector management

Contracts are intended to: clarify responsibility and accountability, make incentives / subsidies / featherbedding visible; increase motivation; and so lead to efficiency. This requires that: parties be distinct; there are no aspects of relationships which can not be seen; all are motivated by self interest; there is no system which is more than sum of its parts; and there is no role for social relationships. These assumptions are misplaced and give rise to problems when contractualism is implemented (eg conflicting lines of responsibility and interests facing senior managers, and doubt that Ministers get good advice; lack of motivating ownership of change by staff; lack of evidence that policy coordination and learning capacity have improved; and pressure for new regulation to plug gaps left by previous deregulation). Boston (NZ) suggested that these difficulties could lead a future government to abandon the whole idea of performance agreements.

The contract state, politics and society

Contractual model favours separation of exchanging parties, increased specificity of what is exchanged, and more task orientation. This is associated with valuing individuals rather than groups, and valuing specific rather than generalised exchanges. Neo-liberal social theory lies behind this, which sees society as atomised individuals.

Theories of exchange and theories of politics and society

Assumptions about political groupings can not be separated from assumptions about who active participants in society are. In anthropological exchange theory, all interactions are exchanges in which parties gain benefits (in broadest terms). Exchange theory recognises two types: economic exchanges where relationships are untouched; and 'giving' transactions where relationships are affected. For the former it is possible to keep accounts; for the latter calculation is impossible. Reciprocity may be immediate or deferred. The legitimacy of politics depends on the accounts which are kept in society. There are areas where it is difficult to do so.

The change towards economic and individual interests (rather than non economic and group interests) is not inevitable, but is affected by Kennett reforms, through altering what is seen as legitimate politics. The contract state contributes to the view that people owe one another nothing but what is material and immediate. It takes legitimacy from other sorts of politics.

Markets and accountability

In a market, accountability is immediate, and involves no concern with broader outcomes - it being assumed that the 'hidden hand' solves other problems. Applied to public administration and governance, the result is complex and anti-democratic. The contract state does not involve state withering away. Rather it involves concentration of strategic controls in the hands of a governing core. It is about strong intervention, not liberalism. Yet because accountability has been redefined, government does not feel it is accountable for the exercise of executive power. The more that market and market like process are introduced to administration, politics and social life, the more established political and social accountability is put at risk.

The market model and the public sphere

Markets assume that participants are rational, self interested and informed. However in public sector, there is no measure of 'value' (such as money is), so quality can only be assessed by imprecise performance indicators - which are tainted by the way organisations are arranged. In 'quasi-markets' the efficiency maximising effects of real markets will not emerge. However there are more profound problems because: participants do not approach government motivated only by self interest (ie public service is essentially non-private); secondly markets are not natural - but are 'constructed' in some way through public action - which sets the rules etc. Those who recognise the possibility of market failure, but for whom market reflects an ideal form of arrangement, often do not recognise that a market is simply one aspect of a complex of activities which make up public sector. All markets exist only in the framework of public regulation (as demonstrated by attempts to create new markets for natural monopolies where none existed). Who is advantaged / disadvantaged is determined by those regulations. Markets are based on rational action, but all rationality is bounded. Markets are bounded by their assumptions - that value can be reduced to price - and it is false to pretend that they are universal. Economic rationality is only one form of rationality, with political / social rationality as others. An important example is the effect of cost displacement from public sector cost cutting (ie from hospitals). The apparent efficiency of competitive market is achieved only by ignoring displaced costs. The public sector always structures markets for the benefit of some rather than others. This raises the issue of politics.

The role of politics in the contract state

The Kennett Government denies politics in several ways: purchaser provider split (to avoid interest group capture); through interstate cost comparisons by VCA; and through marketisation of purchaser-provider relations. The interests who can capture the process are broader than clients; and include: departments; providers of inputs; lobby groups; and lobbyists. Use of CSOs is designed to make funding transparent, and eliminate cross subsidies. The assumption is that such costs distort market efficiency, rather than that they reflect society's striving for the public good. The purchaser-provider split reflects concern about the effect of politically driven governance, consequently it leads to a focus on private, rather than public, interest.

Conclusion

Market / contract theories appeal to values of individual autonomy and rights. They hold out offer of rational approach which is at the expense of other understandings of how people act, and how society is ordered. Any idea diverts attention away from other ideas.

7 Reflections on the Contract State

A contract state implies deliberateness. This is true in one sense, because Kennett Government's approach has been amongst most systematic and strategic in Australia. Major changes have been made. But this conceals complex realities. No one pretends that implementing Contractualism is simple - there is gap between ideal and reality. And what appears as simple relationship between parties agreeing on a bargain, is complex (and there are many different types of contracts). Six conclusions can be drawn.

Motivation

People have broader motivations than the self interest which underlies the contractual model (though material self interest is very important). To define material self interest as dominant invites 'gaming' - an is inconsistent with 'creating a climate of trust, cooperation and teamwork'. Similarly recasting citizens as customers discourages involving them in achieving valuable outcomes (eg citizens participation in inhibiting criminality in community)

Separation

Contractual model is based on public choice and agency theory, in particular in a belief in 'capture' by self interested service providers. There is however no evidence that separation will prevent capture, by other groups. The expectation of a purer form of policy development may be misplaced

Specification and monitoring

It is difficult to specify outputs and measure them in the public sector context, as contracts require. Complexities of measurement, process interdependence and information asymmetry make this difficult - more so for some functions than others. But it is not only feasibility which is questionable, but also desirability. Casting government actions as outputs does not capture what citizens want government to do - key parts of which are lost in treating this as goods and services. Politics is supposed to make these hard choices, but it is difficult to do so when separated from service delivery agencies (which means that politics lacks information about service delivery). Successful businesses usually combine environmental knowledge, with knowledge of their own competencies.

The public sector's role and scope

Contractualism is supposed to reduce the scope of government, but reductions in one area result in new requirements in others. The basic necessity of ensuring that individuals conform to social requirements does not disappear - it merely changes form. With service agreements and contracting out, in-house production declines and is replaced by increased costs in contract administration, and in continually increasingly detailed contract specification and monitoring. Even where privatisation is applied, this problem arises - because this tends to affect 'sensitive' areas where continuing government involvement (strategic policy and regulation) is essential - and this goes well beyond simple market competition and regulation.

Distributional equity

Distributional effects of privatisation have been negative elsewhere. Governments can affect the distributional consequences of privatisation, but the Kennett Government has not apparently considered this.

Accountability

Accountability is supposed to be improved under accountability compared with conventional model. But this is problematic. For employment contracts assumptions of: ease of specification / monitoring; competitive markets and material self interest are all weak in public sector. They thus may not produce more accountability than traditional system. There are real concerns that accountability to customers will decline under the new approach. In education and health, Contractualism appears to increase central control, rather than customer accountability. Effect of legislation generally has been to reduce executive accountability to Parliament.

Conclusion - a model for its times?

It is not clear that there is a best way to manage a diverse / complex organisation like the public sector. Contractualism may be useful in agencies where objectives are readily specified and easily monitored, where a high level of trust exits, and where there is equity in bargaining power between parties. Also it is not clear what it is supposed to be best at. It was justified partly to restore state government's finances, but it is also being claimed that this method has wider value. However it is doubtful that Contractualism can have value in more than promoting economic efficiency. It suffers problems, and may be less effective in delivering quality services and required outcomes. When financial problems have been overcome, government may find that Contractualism is the wrong tool to sponsor new policy initiatives.

John Craig

23/9/96