"New Governance" in the Public Sector

Another interesting reading assigned for last class was “The New Governance” from Bingham, Nabatchy, and O’Leary.

New forms of citizen participation in the work of government are discussed in this paper.

Some quasi-legislative processes are the following:

First: Deliberative Democracy

It considers relevant facts from multiple points of view.

Second: E-Democracy

It broadens participation by the Internet, mobile communications, and other technologies.

Third: Public Conversations

It promotes constructive conversations and relationships among competitive values.

Fourth: Participatory Budget

It allows taxpayers decide how to allocate part of the public budget.

Fifth: Citizen Juries

It functions as a microcosm of the public by randomly selecting and demographically representing citizens that will carefully analyze an issue of public significance.

Sixth: Study Circles

It is made up with people who share common public interests.

Seventh: Focus Groups

It is a form of gathering qualitative data.

Eight: Roundtables

It is a meeting where peers exchange points of view on different issues at equal level.

The processes above not only increase citizen participation in public policy and decision making but also function as collaborative processes of policy making while reinforcing constitutional rights by allowing citizens decide how best achieve public goals.

Organizational Change in Public Organizations

Organizational change was last class topic.

It was quite interesting to learn the factors of change processes in public organizations.

Fernandez and Rainey in “Managing Successful Organizational Change in the Public Sector” highlights the following eight steps that public authorities are to be aware of before and while promoting comprehensive structural changes.

First: Ensure the Need

Creating a compelling vision to communicate the need of structural changes.

Second: Provide a Plan

Anticipating a road map to identify obstacles and anticipate difficulties.

Third: Build Internal Support

Encouraging widespread participation to generate psychological ownership and critical mass.

Fourth: Ensure Top-Management Support

Gaining the support of a respected person to coordinate disparate behavior, overcome obstacles by leveraging personal connections, and pursue different avenues of influence.

Fifth: Build External Support

Tapping into the connections of someone outside the organization to impose statutory changes and control the flow of vital resources.

Sixth: Provide Resources

Ensuring capital to promote change throughout the process: plan development, personnel training, innovation experiments.

Seventh: Institutionalize Change

Routinizing new behaviors and habits.

Eight: Pursue Comprehensive Change

Implementing systemic changes to subsystems.

It seems to me that these eight steps do not necessarily need to be implemented in this order to yield meaningful changes but all of them are certainly present in any change process within public organizations.

CBA for RET

Direct Reading – CBA for RET

Introduction

This brief paper is a result of directed readings done under the guidance of Christopher Grandy during the fall semester of 2010. Because of my interest in energy transition, Professor Grandy recommended the study of Cost-Benefit Analysis (CBA) and the application of it to Renewable Energy Technologies (RET).

The present work is divided into four parts. It starts by talking briefly about CBA components; then quickly elaborates on the opportunities of applying CBA in decision-making processes; followed by the description of some challenges to design dependable analyses, and finally a case study concerning solar panels in households.

1 CBA

CBA is usually used by investors to make informed-decisions during decision-making processes. The analysis of costs and benefits help investors whether to undertake a project and oftentimes predict the Return On Investment (ROI) of a venture.

CBA framework methodology is divided into three sets of data: basic input, basic control, and output data. (Ogundale, 2009)

Net Present Value (NPV), Benefit-Cost Ratio (BCR), and Internal Rate of Return (IRR) are three decision criteria defining CBA. NPV is the most common since it provides more reliable information than BCR and IRR. NPV formula consists of Present Value Benefits (PVB) subtracted by Present Value Costs (PVC).

Besides costs and benefits, time and discount rate are two other elements that make up a CBA.

CBA is more like a process than a sequence of events. A few steps should be considered in any analytical process: scope (identifying gainers and losers), constraints, alternatives (“do nothing” is an option), quantify costs and benefits utilizing discount rate (which helps decision-makers value the future versus present costs and benefits), NPV, sensitivity for uncertainty (project life span), consumer equity issues and intangibles, test for viability (comparison of total discount benefits with total discount cost), and report. (Ogundale, 2009)

As mentioned earlier, CBA relies on data. The sampling technique can be either random or planned, and data collection methods derive from primary or secondary sources. Observation questionnaire method is also applied.

2 Opportunities

The main opportunity of CBA in the implementation of RET is that RET has become price-competitive and, if used properly, set standards of codes and practices for investors in the industry.

Valuing costs and benefits of intangible goods are one of the greatest challenges of CBA, especially for RET. Contingent Valuation Method (CVM) is the formula that help translate perceptions into numbers. CVM estimates Willingness to Pay (WTP) and Willingness to Accept (WTA). WTP is the maximum amount of money which an individual is willing to pay for a higher level of utility. WTA is the minimum amount asked by an individual to accept a given reduction in utility.

The list below points out few intangible costs and benefits. (Important to note that the longer is the timeline for ROI, intangible costs tend to become higher whereas perceived benefits diminish.)

Intangible costs:
• cleaning panels,
• destination and recycling of panels and existing equipment of electricity systems,
• environmental externalities,
• façade changes and risks on house property value,
• safety risks,
• supplier may disappear,
• and new technologies.

Intangible benefits:
• satisfaction of using RET,
• (incremental) house property value,
• water heating process (time and quality),
• selling additional power to the grid,
• getting off the grid and becoming a powerhouse,
• environmental incentives,
• and supporting economic and production decentralization processes.

3 Challenges

Collecting data and assigning monetary value to intangible goods are the main CBA challenges. Data collection is addressed by working closely with statistical departments or conducting primary data surveys. Giving a monetary value to intangibles is carried out by using Cost-Effectiveness Analysis (CEA), which estimates the costs of doing a particular activity in alternative ways. However, quantifying the monetary value of intangibles as well as environmental externalities is not consensual and; therefore, becomes a relevant CBA limitation.

Another challenge is selecting an adequate discount rate (DR). DR brings to present values future costs, and so make possible to compare future and present costs and benefits. However, DR is many times arbitrary defined. If it turns out not being realistic it greatly affects the reliability of outcomes. For instance, a higher DR reduces future values (benefits or costs) below levels with lower DRs.

4 Case Study

Giant-Solar, a Hawaiian Energy Solar Company, provided some figures on the installation of solar panels in a household of monthly electricity bill of $138 and 511 KwH/month.

Considering that i) benefits are the capital no longer spent on electricity after the installation of solar panels and ii) the total cost the sum of equipment, labor, standard and electrical permitting, and design, and iii) investment payoff of 5 years.

Calculation below:

Costs:
Household: 511 KwH/month and $138 electricity bill.
Diamond Head average peak sun hours: 6.1 hours
511 : 30 (days) = 17,03 KwH/day
Considering 17,5 KwH/day as a small contingency added for higher user days and months.
17,5 KwH/day x 1000 = 17.500 watts hours/day
17.500 : 6.1 (peak sun hours in Diamond Head area) = 2868 watts
2868 watts is the power needed.
Size of solar panels: 3x5 foot. Average 220 watts per panel.
2868 watts : 220 = 13,03 panels (suitable size 14 panels)
$7,10 is the cost for watt for complicated installations.
14 panels x 240 (panel range) = array of 3360 watts
3360 watts x $7,10 (watt cost) = $23.850,00 dollars (This is the cost of Giant Solar to install 14 solar panels in a household of 511 KwH/month).

Benefits:
$138 monthly electricity x 12 (months) = $1.656,00 annually on electricity /
20 years (time scope)
Assuming that DR is 5%, total discounted benefit becomes $20.637,00 (Net Benefits = B (Benefits) – C (Costs)) ($20.637,00 - 23.850,00 = Costs of $3.213,00)
Assuming that DR is 2%, total discounted benefit turns out being $27.077,00 ($27.077,00 - 23.850,00 = Savings of $3.227,00)

Conclusion:

The investment in solar panels is cost-effective if DR is 2%. 5% DR within a timeline of 20 years makes the investment payoff not possible. This problem is addressed if investor agrees on a longer timeline. However, 20 years is already a considerable large period for a household single investment, even though Federal and State credits are available reducing RET costs. The longer is investment payoff, the higher become the risks of externalities to arise and lower the perception of existing benefits.

Reference:

Ogundale, Abimbola Adegoke. 2009. “Comparative Cost-Benefit Analysis of Renewable Energy Resources for Community Development in Nigeria”. Thesis: North West University. Potchefstroom Campus.

Social Cost and Public Administration

In the “The Problem of Social Cost” Ronald Coase presents an alternative solution to reduce expenses and achieve optimal outcomes.

Common sense argues that taxes and penalties are the most effective ways to address conflicts over resources. Putting it simple, the party that has caused harmful effects should pay for damage caused against another party.

Coase argues that solutions for conflicts must be figured out exclusively by players involved in the litigation and not by third parties, like the State while creating convoluted regulations in an attempt to determine appropriate behaviors, liabilities, and punishments.

Coases states that a more desirable solution derives from the elimination of externalities. To effectively allocate resources and guarantee the achievement of optimal results from contracts signed, litigants are encouraged to engage in negotiation processes regulated by price mechanisms.

In other words, a mutual satisfactory agreement tends to produce better results than externalities imposing and regulating procedures and behaviors.

Public administrators, in this context, ought to ask themselves when externalities actually counterbalance power between distinctive negotiators and when red tape prevents scarce resources from being allocated efficiently and optimal results achieved.

Answering correctly these questions can dramatically reduce costs related to social issues and, ultimately, improve overall welfare.

Collaboration and Networks in the Public Sector

Last night we had an interesting discussion over collaboration and networks in the public sector.

As more public services have been contracted out and more non-profit and private organizations have been responsible for delivering specific public services, the number of players acting in the public sector has rapidly expanded as well as the importance of managing networks.

The challenges faced by interdependent organizations are the willingness to renegotiate, identify alternatives, and measure outcomes. As interests usually diverge, resources are limited, and accountability oftentimes fuzzy, public administrators have to constantly tap into their negotiation, management, and statistics skills.

In this context where the public sector is no longer isolated from market forces and citizen pressure, public organizations not only collaborate with different players but periodically review command-and-control structures. As more organizations have been delegated power to accomplish assigned tasks and less clear have become to whom constituents should blame for when things go wrong, state agencies must centralize and tap into their authority position by creating call centers where complaints are received and ultimate decisions regarding network collaboration made.

Technology has allowed public organizations to effectively oversee decentralized systems. Contemporary challenge is the provision of training and conditions for personnel to further explore the possibilities of electronic systems to reduce monitoring and transparency costs deriving from information asymmetry.

As technology rapidly evolves, decision-making process in public organizations has become more similar to dynamic and existing structures found in the private sector. As long as public servants receive proper training and incentives, electronic systems unfold possibilities that substantially improve the quality of services provided to - and in collaboration with - taxpayers.

Public Organizations and Transaction Costs

Ronald Coase asks himself in "The Nature of the Firm" why firms emerge in specialized exchange economies.

The laureate of Nobel Prize in Economics in 1991 understands that companies are profitable because of temporary high costs related to open market price mechanisms.

Within their firms, entrepreneurs are able to reduce the costs of information organization, trade negotiation, and market uncertainty; and as a result, firms can grow as more transactions are controlled.

Transaction costs, however, mark also the limitation of indefinite growth. Costs to organize additional transactions rise and thus hectic entrepreneurs can no longer allocate resources as efficiently.

The break-even point happens when “costs of organizing extra transaction within the firm equal the costs of carrying out the same transactions in open market”.

This is the moment when entrepreneurs decide that firms should stop growing and the supply of products and services should derive from price mechanisms in open markets.

The point raised by Coase is also relevant for public sectors. Public administrators are expected to constantly ask themselves the following questions:

i) How can public organizations control more transaction costs and increase their size?

ii) How can public organizations reduce the costs of each transaction while increasing size and providing better services?

iii) When and how should public organizations start shrinking and contracting out?

Given the importance of providing collective essential services and the high costs involving the expansion of public organizations, Coase’s following-up questions greatly help public administrators reflect on how institutions operate and bureaucratic tasks performed in terms of resource allocation aiming size and efficiency.

Challenging Organization Culture

Yesterday we talked about organizational culture. The main pointed related to this interesting topic was that understanding organizations’ culture is crucial to navigate successfully within any institution.

I understand that grasping the meaning of rituals, values, norms, and symbols are important, especially for newcomers, to adapt to and be accepted into new work environments. However, public leaders are required to move beyond to the expectations of identifying and adapting to corporate culture. They have to challenge assumptions, create visions and convince complacent public servants that exist more effective forms for performing activities and serving the public.

Roosevelt has been considered one of the greatest American presidents in history. In the context of the Great Depression, a collapse situation prompted him to become a transformative leader and come up with innovative approaches to problems believed to be cyclical and systematic. Rather than monetary policy, Roosevelt focused on fiscal measures and created the New Deal to revive the economy. Besides being able to envision and implement a broad economic policy agenda, Roosevelt led the Allies to the victory during World War II. Had he not tapped into pragmatism and partnered with the Soviet dictator Stalin, the track of Western history would might have been quite different nowadays.

A contemporary example is the floods in Australia. Faced by large destruction and increasing costs, the Prime Minister announced that tax measures will be enforced. The opposition party rejected the creation of a national fee to increase public revenues and address Victoria and Queensland states calamity situation. Opposition claimed that more than a single charge tax it is necessary to reduce expenses and drop meaningless projects. Australian Prime Minister responded that she understands that fiscal equilibrium is vital but governments' bottom line is not guaranteeing primary surpluses and paying dividends to shareholders, but ensuring that in the short, mid, and long terms the people of Australia would be able to respond more quickly to natural disasters while also preventing new ones from happening. As the leader of the country, her mandate is to envision a nation where benefits and damages are shared so that every state is economically stable even at momentaneous tax burdens on other areas.

At national and macro levels, the examples above meant to illustrate that understanding the components of organizational culture is pivotal for public administrators routine work; however, challenging deeply rooted assumptions is what actually drives positive change in public organizations.

Decision-making and Power in Public Organizations

Your boss left for few days and now you run the show.

Some important decisions have to be made. What to do? During decision-making processes, what is the right measure of staff participation? Which issues require an autocratic or a democratic approach?

These were the questions that set the context of the exercise we played last night during the class about power and decision-making in public organizations.

Some issues highlighted were:

i) Allocation of desirable parking spaces
ii) Adoption of flexible hours
iii) Elimination of a program due to a budget shortfall
iv) Disciplining an employee
v) Establishing organization’s mission and vision

To make the best judgment regarding these issues, it is necessary to understand that the exercise is a role-playing activity on leadership, not on a group session that requires the analyses of staff’s wishes on how organizations should treat them. Having said that, it is important to keep in mind that the main goal of public organizations is fundamentally the solution of common problems efficiently and impersonally.

Considering these goals of efficiency and equality in public organization, let’s analyze the issues above:

i) Allocation of parking space has to do with the temporary ownership of public areas. As public organizations are not driven by the private motto of “the more you have, the more you can”, but by the equality of treatment, then it is reasonable to agree on an autocratic decision establishing the rotation of parking spaces.

ii) Fixed hours spent in the office does not mean efficiency. More important is clarifying goals, expectations, and deadlines from daily tasks. Once employees know where their responsibilities lie, they can figure out effective ways to hold accountable for self-controlling ad self-directing activities.

iii) Managers must listen to the head of each department before making a decision concerning the elimination a program because of a budget shortfall. Once aware of the risks, the solitary decision has to be based on the welfare of constituents rather than the preservation of human relations within the organization.

iv) Anyone is subject to making mistakes. In addition, not the individual but the group is to blame for whenever bad decisions are made. Before disciplining an employee, bosses are encouraged to reflect on the reasons why and what they should have done differently to avoid current problems. After reflection, problems are solved vis-à-vis.

v) Public leaders and political appointees are supposed to be driven by the mandate of their agencies whereas civil servants are widely known to be sensitive to hierarchical personal interests. It is not plausible, therefore, to expect that bureaucrats have a voice on what missions should be. They learn by watching the leader, who is expected to inspire them.

Efficiency in Public Organizations

I have heard recently that efficiency in public bureaucratic organizations means shortening the time of finding and retreating long-searched information from extensive archives. If this proposition is right it means that bureaucracy main role is to organize and to reduce the financial cost and time search range of updated figures and insightful analyses. However, the perception of citizens toward mammoth systems is exactly the opposite of Weber’s ideal model for public agencies. Governmental departments, for example, are largely recognized for taking a long time to solve citizens’ routine complaints.

So, what went wrong with Weber’s model for efficiency?

The motives are various but two internal reasons can be highlighted. First, capacity-building, public servants are generally poorly trained, lack motivation to come up with creative solutions, and do not receive constructive feedbacks from complacent managers. Second, procedures and technology, systems found in public offices are usually outdated as well as the information added from time to time to the hardware. These two issues prevent the Weberian model from witnessing the evolution of bureaucratic systems by optimizing time search and financial costs during planning and implementation of projects.

Another issue has to do with structure. Bureaucracies are mainly vertical and one-way organized. Information and decisions come from top to lower ranks. As the majority does not participate in hardly any relevant decisions, ownership and reward are concepts little known among bureaucrats.

Efficiency, thus, has more to do with the implementation of a two-way continuous exchange of information and the establishment of fluid horizontal boundaries from where information freely flow and quick decisions are made. An example is IT companies where employees are at the same time service providers and stakeholders of the success of the entire system. An employee reaches easily any other person in the hierarchy and is responsible for the consequences of the services provided to the general public.

If public organizations have something to learn from private companies is that efficiency in terms of costs of time and capital has more to do with decision-making, ownership, and competition rather than organizing heaps of information in archives that become outdated in an extreme short period of time.

The Benefits of High Turnover of Bureaucrats

Spring 2011 started and last night we talked about the role of organizations in the context of public administration.

There was a brief discussion on the reasons for organizations to exist followed by a presentation and a group activity concerning the boundaries of organizations.

Honestly, I paid less attention to the description of boundaries like mission, resources, capacity, responsibility, and accountability than to an observation made by a faculty who said that once Abraham Lincoln took office the elected president replaced over 90 per cent of public servants with political appointees.

This observation was made in the context of a discussion over bureaucracy as a pool of standardized procedures aiming the effective implementation of policies as well as the Weberian conflict between political appointees and bureaucrats.

At first, I thought that this high turnover may jeopardize the continuity of important policies. As many people leave office there would remain only few ones with enough expertise to carry on tasks that have proven to be successful for the common good.

After considering the risks, though, I began pondering on the possible advantages of a deliberate high turnover of personnel in public organizations.

Assuming that transparency is increasingly dominant in public arenas, that organizations’ structure and regulations facilitate the mechanisms of check and balance by constituents, and that key servants are maintained in their positions during transition periods, my understanding is that whenever an elected official takes office and decides to substitute a large number of senior staff and other lower ranks for newcomers, higher are the possibilities of bringing about benefits such as technological and procedural innovations, the reinforcement of democratic values, increasingly public participation in political processes, establishment of a healthy competitive environment, and the provision of more accountability to taxpayers.

In addition, assuming that principles, not rules, must drive public organizations and that objectives are permanent but means adaptable, and public representatives are committed to the common good not to procedures, staff high turnover becomes a positive change because it i) creates a productive sense of uncertainty in public arenas, thereby propelling public administrators to excel in daily activities iv) attracts new ideas to time-consuming and costly procedures v) accelerates policy-making processes vi) prevents the formation of “guerrillas employees” vii) strives to secure the clarity of existing procedural rules and appropriate behavior viii) challenges deep-rooted institutional beliefs and assumptions xix) facilitates the process of adaptation to contemporary issues x) expands the number of constituents interested in actively participate in policy and decision-making in public realms and finally xi) combats cronyism, patronage, corruption.

The average citizen today is more educated, information travels much faster, and rules and policies can be quickly understood and implemented by a larger number of people than in the 19th century. Considering the current scenario, the high turnover of public servants after elections does not necessarily mean discontinuity of successful policies or higher costs in training but continuation of constitutional principles as well as procedural innovation deriving from policies that allocate the best possible way scarce public resources.