Introduction
While there is considerable agreement that during last decades government has been expanding its sphere of action not everyone agrees that its efficiency is sufficient. Discussion on the efficiency of public bureaucracy almost inevitably involves comparing it with private sector management.
A superficial comparison of these two areas would reveal that usually it is private sector that is more efficient and more accurately responds to the needs of individual clients. However, if we look not only at the satisfaction of individuals but also at that of the society, this comparison becomes more complicated as the term “efficiency” gets vague.
This essay will first deal with the reasons for this vagueness and then will try to explain the impact it makes on public bureaucracy when compared with private companies. The discussion on the differences between public and private sectors will be divided into two parts. The first will examine these differences in the macro level placing emphasis on the agency and its situation and the second will briefly look at the incentives and constraints guiding individual operators.
1. The Problem of Efficiency
Efficiency (or the measurement of efficiency) is one of the essential differences between public and private agencies. While efficiency in the case of private firm can usually be measured by comparing the amount of resources used for production and the amount of outcome produced (the more is produced with the same amount of resources, the more efficient is the company), it is not the same with public agencies.
James Q. Wilson notes that for public agencies, efficiency means not only one output considered. While there may be one major goal according to which we can measure the performance of public agency there always are some contextual goals that public bureaucracy must try to attain. Even if we considered only major goals, we would find that often they are difficult to measure as some public agencies exist to supply services that are immeasurable in economic terms (hence they are not supplied by the market). Outcome of the attainment of contextual goals such as equality of treatment and adequate representation, accountability (in this essay, the issue of the control of bureaucracy is not treated at full length, rather, the intention that bureaucracy should be subject to public control is considered as one of contextual goals), responsibility, integration of the minorities, hiring on the basis of merit, reputation of integrity, confidence of people is even less measurable. Furthermore, there is little agreement on the relative importance of each contextual goal and some of them are even incompatible, for example equal treatment and treatment according to the merits, therefore the consideration of the trade-offs is inevitable.
Public agency by its definition must serve these “public” goals even at the cost of decreasing narrowly defined efficiency. The attainment of these goals decreases efficiency in that it produces additional set of rules and standard operating procedures which public agency must follow to reduce costs, establish hierarchy, treat equals equally, etc.
Private firms to some extent are also tied by laws and widely accepted norms to attain social goals but they enjoy significant freedom of action because there are no clearly expressed additional rules (though some of them, such as reducing costs, are inherent in the idea of private business itself). This distinction will be guiding for the next part of this essay.
2. Public and Private Agencies: The Rules
While the attainment and the number of goals differ significantly in the amount of the discretion public agencies and private companies posses it is important to note that public agencies and their officers cannot choose their goals themselves as their private counterparts do. If private firms have one chief obligation to operate according to the laws, public agencies are much more tied by various regulations and subject to the observance by special bodies. This leads Wilson to say that government management tends to be driven by the constraints on the organization, not its tasks. Agencies are more than private enterprises constrained to formulate necessary policies and have fewer resources to implement them. Furthermore, these constraints originate not in the bureaucracy but in the democratic political system.
Public agencies only have the amount of discretion that is passed to them by the external organizations while private companies set their objectives themselves. In democratic political systems, this means that public agencies are subject to the control of democratically elected politicians. This also means that while we may not demand equality from private firms as wealth is not distributed equally, we may demand that public services should treat everyone equally as every citizen has one vote.
The inescapable discussion on the relative importance of various contextual goals and the necessity to reach a consensus on agency’s main tasks makes them less defined. It affects the agreement on and the shaping and implementation of the efficient policy.
Most widely discussed examples of the constraints on public bureaucracies are constraints on financing and personnel management. Private companies can raise capital in many ways but public agencies usually have only one source of income — the state budget. Any attempt to remunerate public agencies according to any indicators of their efficiency would raise debates if such course of action is permissible. (Even if public agencies would succeed in convincing the public that it is nothing wrong to profit on public service, outcomes of some public agencies still will not be easily measurable as some of them are organizations serving unwilling customers or hold monopoly of service. And even if the outcomes of the organization will be clearly measurable, it will be difficult to evaluate the merit of each bureaucrat — the ease of evaluation would decrease when going to upper levels of management. Nevertheless, as B. Guy Peters claims, during the last two decades merit pay systems were widely elaborated.)
Private firms can allocate financial resources in the most efficient way while the allocation of resources in public agencies is determined by the rules taking into account some of the contextual goals. While private firm can retain earnings and use them to pay bonuses or to invest into the development of its facilities, public agency must return all unused funds to the state budget. Moreover, public agencies are not encouraged to save their funds as they may be accused of underfinancing their programs. From Lithuanian point of view, however, situation when public agency has any unused funds seems extraordinary as most agencies receive only a fraction of funds that were put down during the process of budget adoption. (This process itself may be an important factor as it shows that public bureaucracies, differently from private ones, may be constrained not only by laws and regulations but also by personal attitudes of the politicians who are adopting the budget.)
Private company has only a few limits to set the salary of its workers while public agency’s discretion is limited by the clear rules set by legislative or executive bodies of the state. Therefore the situation when salaries in public agencies are higher (or lower) than in private ones is not surprising, especially when it is considered that it is not always possible to evaluate the outcome of public agency therefore we lack effective means to determine the actual costs of labour (nevertheless, in some countries public service wages are determined according to private sector ones). Not only salaries of the private executives are more clearly defined — employees in private firm, as it was mentioned, have more possibilities to benefit from good market performance of their company.
Public agency’s recruitment pattern is also subject to strict rules. In some countries, all bureaucrats are even recruited by a single body while private firms retain considerable freedom of hiring and firing their workers. The number of workers in private firms depends upon production requirements while public agencies have their number of bureaucrats determined by state regulation. Usually the number of bureaucrats doing the same kind of work in public agency is larger than in private one as public bureaucracy must ensure not only the attainment of its major goal but also of contextual goals and follow strict rules of operation that should be overseen by greater number of persons.
On the other hand, because of the rules, public bureaucrats sometimes enjoy lesser responsibility than private managers. As it was mentioned, constraints matter more than goals. Public officer is usually protected from firing even if the agency does not perform well but he may be dismissed for not complying with the single regulation. Therefore it is compliance with the rules and not initiative that is encouraged. Conversely, private companies, especially at the higher levels of management, encourage private initiative and remunerate it accordingly.
This may explain why market firms show greater capacity to react to external challenges (bureaucracies also can react promptly but usually when private, not public, interests are at stake). Private agencies have strong incentives to increase the efficiency of their management as they face market competition where immobility often means bankruptcy. To survive, private firms must constantly improve their services or products while public agencies hold monopoly position which together with long procedures of approving any major improvement in their services discourages any new initiative. Public agencies do not struggle in the sense that private companies do, and they also do not go bankrupt.
Generally, it is argued that the efficiency (in its narrow definition) of private companies is greater than of public ones because of three main reasons: (1) lower labour costs, (2) more effective management, and (3) greater competition. However, precise measurement of public agencies’ performance is not always available as they supply commonly consumed products or are monopolists in their own sphere thus giving no idea of basic point for measurement.
3. Public and Private Managers: The Incentives
Not all the differences between public and private agencies can be explained in terms of the company and its position. Some differences between the two types of agencies originate in the incentives of their employees. It was noted in the previous part of this essay that there are some differences in the remuneration procedures and the value of the private initiative; however, now they will be briefly considered from somewhat different angle of view.
One of the most important, though not the only, incentive of public officer as well as private manager is payment for his or her job. It was mentioned that although it is difficult to compare all private and public sector jobs, sometimes public bureaucrats are better paid than private managers. Peters expands this argument pointing out that unskilled or semiskilled workers in public agencies usually receive more than they would in private ones. However, in most of the developed countries, bureaucrats with higher responsibilities are paid less than their private counterparts. Therefore the incentives to take greater responsibility may be stronger in private than in public sector management. (Still, in Lithuania such conclusion would be questionable because street level public officers are paid significantly less than private line managers while the salaries of the top officials may well reach the level of those received by private executives.)
Material incentives are not the only ones, especially for those occupying higher echelon positions — as Wilson claims, if the importance of material incentives is decreased by political decisions, relative importance of other would increase. Among such incentives he mentions struggle for successful appearance of the agency, not necessarily for its success, which is essential for private businesses. Other incentives for public officers include purposive and solidary ones. While these incentives are observed not only in public bureaucracy but also in private sector, they are much more relevant in the former than in the latter. Public service usually provides bureaucrat with greater influence on the implementation (and to some extent on the formation) of policy than the same position in private firm. Also, especially in the developed countries, public officers enjoy considerable prestige.
Summary
This essay did not examine all possible aspects of both private and public agencies where differences between the two may be observed. Also, some of its claims are only conjectures, not facts. However, it was shown that public agencies have major difference from private firms in that the former are pursuing not only attainment of efficiency, or, rather, that the term “efficiency” when applied to public bureaucracies means not only economic efficiency, that is, maximum outcome for given level of resources, but also the enforcement of some other factors, defined as contextual goals. These factors derive from democratic assumptions.
Public agency, which has to pursue additional goals, is almost inescapably less efficient than private one in that it cannot choose its own goals; its freedom of recruitment, remuneration, fund raising and resource allocation is much more constrained than in private firm. Attainment of these contextual goals produces a set of additional regulations which slow down the work and might reduce the responsibility and block the initiative.
In addition, public and private services differ in the incentives that guide individuals. Public agencies do not provide material incentives for accepting responsibility but material incentives are complemented by some other incentives such as purposive and solidary ones and these incentives matter more in public service than in private business.
References
1. Peters, B. Guy. The Politics of Bureaucracy.— Fourth edition.— New York: Longman Publishers, 1995.— VIII, 360 p.
2. Wilson, James Q. Bureaucracy: What Government Agencies Do and Why They Do It.— New York: Basic Books, 1989.— XIV, 433 p.