"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.