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Revisited draft 15 November 2010

Basic Considerations regarding the Provision of Public Services, Public Service System Reform and Fiscal Reform to finance Public Services: An Overview with some reflections on the case of China1. Roberto Villarreal and Xinxin Cai2 Abstract This paper focuses on the importance of public services for economic and social development and analyses a variety of challenges faced by the public administration to foster their delivery. The notion of public services is discussed in non-technical terms and three broad categories of public services are discussed: State or government services, social services and infrastructure services. While there is some overlapping among said broad categories, these prove useful to highlight fundamental differences in the nature and characteristics of the specific services typically comprised in each one. The paper presents the most common challenges for public policy regarding each category, in connection with: coverage, quality, costs, social equity and inclusion, financing and delivery either directly by the public sector or through some sorts of partnerships with the private sector or civil society organizations. While the discussion applies in general to all countries, many particular bibliographic references to the case of China are included about every aspect of public service delivery. At the end, some considerations are made about an overall strategy for the People’s Republic of China to improve the delivery of public services, within the XII five-year national development plan.

Introduction The People’s Republic of China has undertaken large reforms over the last decades, mainly about its economy. In a gradual and ordered manner, the Chinese government has followed strategies for opening up, which are progressively transforming the completely State lead and operated economic system of the third quarter of the twentieth century, into a different one in which markets and the private sector play increasingly important roles in determined productive sectors and geographical regions, while the public sector continues to 1

Paper submitted to the conference “Transformation of Development Models and China’s Reform in the 12th Five-Year Plan Period: A New Starting Point, New Situations and New Challenges”, Haikou, Hainan Province, People’s Republic of China, 30-31 October 2010. The conference was coorganized by the China Institute for Reform and Development (CIRD) and the German Technical Cooperation Entity (Deutsche Gesellschaft fur Technische Zusammenarbeit, GTZ).

2

The authors work in the Division for Public Administration and Development Management (DPADM), in the United Nations Department of Economic and Social Affairs (UNDESA). All contents of this paper are their sole responsibility and do not necessarily reflect the official views or position of the secretariat and governing bodies of the United Nations. The authors are grateful to Anni Hataja for preparing summaries of relevant case studies from the United Nations Public Service Awards Database (www.unpan.org), Yang Yang for her bibliographic and statistical research, as well as Haiyan Qian, Director of DPADM, for her support about the preparation of this paper. Useful comments on earlier drafts of the paper were received from all of them and from Keping Yao, for which the authors are indebted. However, the authors assume total responsibility for the views expressed in the paper and for any remaining errors. 1


exert fundamental functions and controls the overall transformation process3. Besides attaining high growth rates with relatively low inflation4, China has succeeded in lowering poverty (as measured by the number of people with daily income lower than 1.25 dollars)5. Yet, Chinese and international analysts agree that much remains to be done and, at the same time that many ongoing public policies need to be continued to maintain these economic trends, additional ones are called for to address growing economic inequalities observable in the personal and regional distribution of income6, and to meet the growing demands of

3

The economic reforms and main strategies for development in China have been widely studied and documented. For example, see: Chen, Shaohua, et. al. (2001); Dollar, David (2008); Kuijs, Louis, et. al. (2005); Lin, Yifu, et. al. (2008); Lin, Justin Yifu (2010); Lindbeck, Assar (2006); Luo, Xubei, et. al. (2008); Qian, Yingyi (1999); Ravallion, Martin (2009); Stern, Nicholas (2001a, 2001b); World Bank (1999, 2008); Yusuf, Shahid, et. al. (2006); and Zafar, Ali (2010). 4

Real GDP growth was 14.2%, 9.6% and 9.1 % in 2007, 2008 and 2009, respectively. Consumer price growth was 4.8%, 5.9% and -0.7% in the same years. The global economic and financial crisis experienced in the past three years affected China less than other countries largely due to effective domestic stimulus policies. Early in 2010 growth had recovered, close to a 13.5% annual rate, which has slightly lowered in the following quarters. Latest estimates from the World Bank forecast a real GDP growth of 9.5% in China for 2010, the highest among East Asia countries. Consumer price inflation observed in July was 3.3% on an annual base. Real wages have grown at very high annual rates: 13.1% in 2007, 10.4% in 2008 and 12.4% in 2009. For the rest of 2010 they are expected to increase between 10% and 12%. See World Bank (2010).

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Measured by the new international poverty standard of $1.25 per person per day (using 2005 Purchasing Power Parity for China), the levels of poverty declined from 85% of the total population in 1981 to 27% in 2004. “The most recent official estimate of rural poverty in China for 2007 puts the number of poor at 14.79 million, or less than 2% of the rural population (NBS, 2008). While there is no official urban poverty line, estimates by others have found poverty levels in urban areas to be negligible using an urban poverty line that is comparable to the official poverty line for rural areas. These estimates thus suggest that only about 1% of China’s population is currently in extreme poverty. In other words, extreme poverty, in the sense of not being able to meet the most elementary food and clothing needs, has almost been eliminated in China. (…) Vulnerability to poverty because of a variety of income shocks remains widespread. For instance, using the World Bank poverty line, nearly a third of China’s rural population was consumption poor at least once between 2001 and 2004. (…) As the poverty rate has fallen, it has become harder to eliminate the remaining poverty because the remaining poor are more dispersed. While the incidence and severity of poverty is the highest in western provinces, nearly half the poor are dispersed in the rest of China, and likewise, while poverty is the most severe in mountainous and minority areas, more than half the poor are in non-mountainous non-minority areas. And as poverty levels are reduced, the village-level concentration of poverty tends to decline. This carries the important implication that as China makes further progress in alleviating poverty, the remaining poverty could be expected to be more dispersed thus eroding some of the potential benefits from area based targeting relative to household-based targeting approaches.” See World bank (2009). 6

Over the two decades 1981-2001, income inequality in rural areas, as measured by the Gini coefficient, increased from 0.25 to approximately 0.37. At the same time, in urban areas, income inequality also grew and the Gini coefficient rose from close to 0.19 to approximately 0.32. These figures reflect not only the growth of income inequality both in rural and urban areas, but also the fact that income inequality has persistently been larger in rural areas compared to urban ones. At the aggregate national level, however, these increases in inequality have been magnified due to the even more noticeable widening income differences between rural and urban areas. See World Bank (2009). 2


diverse population groups for further improvement in the living conditions, as well as for social and political change. This is well recognized by the Chinese authorities and the National development strategies in place seek to address the existing challenges in a proactive way. The Chinese Premier, Wen Jiabao, in a widely diffused interview recently granted to a global news network7, summarized the principal development aspirations of the country as follows: “To let everyone live a happy life with dignity. To let everyone feel safe and secure. To let the society be one with equity and justice. And to let everyone have confidence in the future.” It is expected that leadership from the Communist Party will continue to pursue the necessary policies to these aims, and that institutional and political changes will be prudently followed. One of the many areas about which Chinese government officials, researchers and practitioners are actively exploring further possibilities for reform and improvement, is that of public services. The reasons are more than a few. In the first place, still large percentages of the population lack access to basic public services, and considerable proportions of the population perceive that the quality of public services is unsatisfactory. This negatively affects not only their living conditions, but also their trust and support for government. In addition, deficiencies in the provision of public services negatively affect mid- and long-term development opportunities, for the individuals and households, communities, regions and the country as a whole: competitiveness is constrained, as well as the possibilities for human and social development. Finally, improvements in public services seem unlikely to be attained by the mere extension of pro-market or privatization policies, or by the internal reform of Public Service Units8, but rather appeal to a complex combination of regulatory, public administration and organizational changes, including the growing participation of citizens and the private sector, in ways and to extents which are not always clear. While numerous and good quality studies have been conducted in this regard by qualified individuals and research institutions9, the intellectual debate and the policy making process continue to demand additional analyses at the theoretical and empirical levels, including consideration of experiences and practices from other counties. Proof of this is the inclusion of the section on “Provision of Public Goods, Public Service System Reform and the Public Fiscal Reform”, as part of the conference “Transformation of Development Models and China’s Reform in the 12th Five-Year Plan Period: A New Starting Point, New Situations and New Challenges”, co-organized by the China Institute for Reform and Development (CIRD) and the German Agency for Technical Cooperation (Deutsche Gesellschaft fur Technische Zusammenarbeit, GTZ), to which this paper is submitted. 7

CNN, interview to Wen Jiabao by Fareed Zakaria, 3 October 2010. See: http://transcripts.cnn.com/TRANSCRIPTS/1010/03/fzgps.01.html

8

Public Service Units is the term often used in the literature to designate the State owned, managed and operating entities that deliver public services of different types (in Chinese, shiye danwei). See, for example: Schick, Allen (2004). According to the report World Bank(2005), China has more than one million public service units with a total labour force of around 30 million. Nearly half of their funding is raised through service fees charged to users. Yet, this avenue to increase financial autonomy of public service units does not always result in productivity and quality increases. The report calls for more accountability combined with flexibility, keeping into consideration regional and local conditions. It suggests further decentralization and greater empowerment of service users.

9

For instance, see: United Nations Development Program (UNDP) and Chinese Institute for Reform and Development (CIRD) (2008). 3


The objective of this paper is to present a number of considerations deemed of fundamental importance for designing and implementing adequate public policies to enhance the provision of public services in a variety of countries, including China. In particular, the paper distinguishes three broad classes of services: State or government services, social services and infrastructure services. For each class, the nature of the respective services is discussed and comments are made on how these classes of services have been approached in diverse ways over history from the public policy perspective. The typical challenges or problems faced in respect of each of these classes are discussed and public policies generally adopted to overcome those problems are summarized, including basic considerations on related fiscal issues. The paper also sheds some light on the involvement of non-government actors (the private sector, citizens and civil society organizations) in the provision of public services, and highlights that neither privatization nor citizens’ engagement are a panacea to solve at once all types of problems usually observed about the three classes of services mentioned above. Rather, it is recommended that public-private partnerships and citizens’ engagement be included to address well targeted specific challenges about the provision of public services, under the overall strategies determined by the public administration. Along the paper, conceptual arguments are presented and references are made to available literature on public services in China. In an appendix, some related case studies from diverse countries are briefly revisited. The paper is aimed at practitioners and public policy makers involved in the field of public service provision. Essentially, it revisits a wide number of related issues that should be taken into consideration when designing reforms. It is expected that this paper will complement those from other participants in the conference just mentioned and, possibly, will contribute with some additional insights to the vast knowledge on the matter already held by Chinese policy makers and researchers. The organization of the paper is as follows. Section 1 elaborates on the importance of services, in general, to the macro economy and, over the mid- and long-runs, to economic and social development. Section 2 contrasts the category of services which are expected to be available (that is, physically accessible and economically affordable) to all individuals in similar or identical conditions, against another category of services about which that expectation does not hold. Using these two categories of services as a background, three different families of services are analyzed from the perspectives of economic analysis and public management: State or government services, social services and infrastructure services. Finally, Section 3 contains some general conclusions and presents some ideas on how several elements of public policy could be coherently integrated into China’s national development strategy. In the Appendix, interesting case studies on innovative practices for public service delivery are presented.

1. The importance of services Services consist of activities, which directly satisfy a variety of needs of people and businesses. Their nature is quite diverse. To mention only a few examples: haircuts, preparation of meals, teaching, child and health care, accounting, technological or scientific research, construction, cleaning, waste collection and processing, transportation of people or products, storage, marketing, financial asset management, transmission of wave or electronic signals, statistics record keeping, regional planning, water treatment, customs and taxes 4


administration, law making, provision of justice, police and defense, protection of the natural environment, etc. Because of their multiplicity, it is impossible to list or enumerate all services. These activities are important in many ways. First, some services have big impacts in the quality of life of people, and for this reason individuals and households allocate to them a considerable amount of their budget. As it can be seen in Table 1, as a proportion of consumers’ expenditures, consumers in China spent on a few key services a large percentage of their income: 12.6% on transportation and communications, 12.1% on education and recreation, and 7% on healthcare. The sum of these three represented close to one third of consumers’ expenditures. Moreover, expenditure on these services has increased very markedly, as it is normally the case in all countries as income growths: the proportion of the consumers’ budget allocated to transportation and communication augmented by 7.4 percent points, and in the cases of healthcare and education the increases were 3.9 and 2.7 percent points, respectively. TABLE 1 CONSUMER EXPENDITURES ON SERVICES IN CHINA, 1995-2008 Absolute Variation (1995-2008)

Expenditure on Services as Proportion of Private Consumption in China (%)

1995

Transportation and Communication

5.18

8.54

13.58

12.60

7.42

Education and Recreation

9.36

13.40

13.29

12.08

2.72

Household Facilities and Utilities

7.44

7.49

6.02

6.15

-1.29

Health

3.11

6.36

6.99

6.99

3.88

Other

3.25

3.44

3.58

3.72

0.47

2000

2007

2008

Percent Points

Source: China Statistical Yearbook (2008, 2009), compiled by National Bureau of Statistics of China, China Statistics Press.

In particular, certain services are absolutely essential for human functionings, like improved water and sanitation. In developed countries, practically the entire population accesses these services. Unfortunately, in developing countries, not all people do. Table 2 shows that, as of 2008, in Germany the totality of the population had access to improved water and sanitation, regardless of whether they live in urban or in rural areas. In Canada, the same was also observed, with only a negligible lower access to improved water in rural areas (99%). In Turkey and Mexico, access rates ranged between 87% and 100%. In Brazil and South Africa, these access ratios were noticeably lower, but still reasonably high. Yet, in China, access to 5


improved water in rural areas was only 82% and access to improved sanitation in urban areas was just 58%. TABLE 2 SOME INDICATORS ON WATER AND SANITATION SERVICES IN CHINA AND OTHER COUNTRIES, 2008 Water & Sanitation

China Brazil Canada Germany India Mexico

South Turkey Africa

Improved sanitation facilities, urban (% of urban population with access) (2008)

58

87

100

100

54

90

84

97

Improved water source, rural (% of rural population with access) (2008)

82

84

99

100

84

87

78

96

Improved water source, urban (% of urban population with access) (2008)

98

99

100

100

96

96

99

100

Sources: Infrastructure, World Bank, http://data.worldbank.org/topic/infrastructure; Urban Development, World Bank, http://data.worldbank.org/topic/urban-development.

Besides, services are also economically important for employment and income generation for the population. Due to their large diversity, services comprise activities of varied technological complexity, which employ workers of many different skill levels. Thus, some services are intensive in the use of low-skilled labor and create low-productivity jobs for people with limited education, while other services demand highly skilled and educated workers to perform high-productivity jobs (see Table 3). Thus, the broad family of services creates employment for the entire spectrum of the labor force. And, in some types of services, women are more frequently employed than men, providing an interesting opportunity to expand job creation for females. In Germany and Canada, in 2006, services like transportation, storage, communications and finance provided 9% and 11% of total employment, respectively. Social services, like education and healthcare, represented altogether 17% and 18% of total employment, in the same order. And government services, close to 8% and 5%. In both countries, these services constitute more than one third of total employment. In Mexico, the same indicators registered 5.6%, 8.1% and 4.8%, respectively, for an aggregate 19.5%; and in Turkey, 6.3%, 6.7% and

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5.5%, in the same order, adding to 18.5%. In China, the same figures recorded 8.4%, 17.2% and 10.7%, a sum of 36.3%, higher than in any of the preceding examples10. TABLE 3 EMPLOYMENT IN SERVICES IN CHINA AND OTHER COUNTRIES, 2006 Employment by sectors as South proportion of China China Brazil Canada Germany India Mexico Turkey Africa (Millions) (%) (%) (%) (%) (%) (%) (%) total (%) employment (2006) Electricity (ISIC E)

3.03

2.52

0.44

0.74

0.85

NA

0.44

0.93

0.42

Transport, storage and communication (ISIC I)

6.13

5.18

4.55

6.32

5.53

NA

4.74

4.77

5.21

Financial (ISIC J)

3.67

3.24

1.20

4.52

3.53

NA

0.86

10.23

1.07

Government (ISIC L)

12.66

10.74 4.98

5.06

7.70

NA

4.82

18.12

5.49

Education (ISIC M)

15.04

12.65 5.44

7.03

5.85

NA

5.34

NA

4.06

Health (ISIC N)

5.25

4.51

3.54

10.83

11.31

NA

2.75

NA

2.65

Sanitation and sewage (ISIC O)

1.22

1.04

4.25

4.96

5.70

NA

3.25

NA

4.22

Source: International Labour Office http://kilm.ilo.org/KILMnetBeta/default2.asp. Note: NA means data are not available.

Addendum*

Employees, services, female

China Brazil Canada Germany India Mexico South Turkey Africa NA

72

88

82

NA

76

78

37

10

In the European Union, more than 500 000 enterprises ‐ private, public, mixed‐owned enterprises ‐ provide public services. Altogether they employ more than 64 million people, providing services to about 500 million Europeans. See CEEP (2010a, 2010b, 2010c). 7


(% of female employment) (2006) Employees, services, male (% of male employment) (2006)

NA

50

64

56

NA

49

56

51

Source: Labour &Social Protection, World Bank, http://data.worldbank.org/topic/labor-and-socialprotection. Note: NA means data are not available.

Moreover, services generate considerable labor income for the workers employed, and capital income for the investors who own the respective production facilities or the owners of the intellectual property rights on some of the technologies utilized. Services also provide significant public income for the public treasury, from the taxes levied on their production and delivery. Table 4 presents some figures about the aggregate income generated in several services, as a percentage of total national income (Gross National Product, GNP). As it can be seen, in most countries included in the table, government services range between 14% and 21%, and compare to the sum of other services typically provided by the private sector, as transportation, storage, communication and finance11. TABLE 4 INCOME GENERATED IN SERVICES IN CHINA AND OTHER COUNTRIES, 2006 Sectoral value-added as proportion China* Canada Germany Mexico of total GDP, 2006 (%)

Brazil

Turkey

Transport, storage and communication (ISIC I)

5.89

7.15

5.73

9.17

8.63

15.58

Financial (ISIC G-H)

8.89

14.42

12.17

18.49

19.09

16.74

Government (pub.adm.)

14.21

20.68

20.32

10.76

23.33

13.99

Education

2.92

1.60

NA

NA

NA

NA

Health

1.52

2.10

NA

NA

NA

NA

Water and environment

0.45

0.22

NA

NA

NA

NA

11

In the European Union, public services providers contribute directly to more than 26% of the EU 27 GDP. See CEEP (2010a, 2010b, 2010c). 8


Sources: National Accounts Main Aggregates Database http://unstats.un.org/unsd/snaama/resCountry.asp; Statistics Canada: http://www.statcan.gc.ca; * For the China’s education, health and water &environment data source is the 2008 China Statistical Yearbook. NA means data are not available

Nevertheless, beyond these immediate economic effects on employment and income, certain services have profound impacts on social and economic development over the mid- and longruns. Among these, Table 5 summarizes some of the impacts on development stemming from the following specific services: electricity, transportation, telecommunications, government and public administration, finance, water, health care and education. TABLE 5 IMPACTS ON SOCIAL AND ECONOMIC DEVELOPMENT FROM SEVERAL SERVICES SERVICES

EFFECTS • Physical power

Electricity • Mechanization

• Territorial mobilization of goods and people Transportation

• Geographical interconnection of territory

• Access to information • Social relations Telecommunications

Government and public administration

• Economic transactions • Coordination among development stakeholders • Public governance • Provision of public goods (peace, security, Rule of Law, public regulation, protection of human rights, consumers’ and environmental protection, macroeconomic stability,

IMPACTS ON DEVELOPMENT • People’s gradual liberation from physical work (intellectual, cultural and recreational alternatives) • Higher capital/labor ratios • Productivity increases • Rebalancing of local political and domination structures, greater political freedom • More exchange of knowledge • Cross-cultural influences (between different territories) • Extension of markets and more efficient utilization of economic resources (procurement, marketing) • Productivity increases • More effective and fair use of public force (defense, enforcement of National law and consolidation of the Nation State) • Expansion of social capital • More exchange of knowledge • Acceleration and multiplication of crosscultural influences (between different territories) • Multiplication of transactions • Extension of markets • Productivity increases • Enabling conditions (Rule of Law, administration of Justice, enforcement of private contracts, protection of people’s rights, macroeconomic stability, etc.) • Enhanced regulation of diverse activities to attain the public good (abuses of market power, consumers’ protection 9


etc.) • Delivery of public services (tax administration, administration of justice, etc.) • Matching of diverse needs from savers and investors, including resources and distribution of risks

Financial

• Easier access to resources available for investment • Relative standardization of financial contracts and convenient institutionalization of financial transactions

• Better hygenic conditions • Better control over infectious and transmittable diseases Safe water, sewage and treatment • Convenient access to nearby facilities • Protection of the natural environment

• Reduced and more controlled incidence of threats to public health Health care

• More effective prevention measures against diseases • More effective clinical and therapeutic interventions against diseases

quality and safety-, environment, etc.) • Greater efficiency of public finance (taxes, subsidies, transfers, public debt)

• Increase in safety and protection for savers, particularly small ones • Channeling of unspent income to borrowers, thus raising effective aggregate demand and reducing shortterm unemployment • Enhanced allocation of savings (goods for postponed consumption) to productive activities with highest returns (largest ratio of transformation of present into future goods), thus increase in consumption and living conditions over time • Reduction of transactions costs, facilitation of inter-temporal transactions and increase in productivity • Short-term effects on time allocation of households, and higher productivity, possibly larger labor market participation and increased labor supply (specially from women), larger incomes and reduced poverty, thus overall Immediate improvement in living conditions • Lower child mortality, overall health improvement, longer lifespan, better physical capabilities for people and lower vulnerability • Faster and more efficient accumulation of human capital • More long-term savings • Enhanced environmental sustainability, changes in differential growth of urban and rural settlements • Long-term impacts on demographic structure (aging, dependency ratios) and changes in morbidity (infectious, contagious, degenerative and chronic illnesses) • Improved health, longer lifespan , better physical capabilities for people and lower vulnerability • Particularly larger benefits for women (improved birth health, better maternal health) • Faster and more efficient accumulation of human capital • Increase in labor productivity • More long-term savings • Long-term impacts on demographic 10


• • • More knowledge available to people in the mid-term and over time

Education • Better reasoning, learning, scientific and technological, creative, work, communication and other skills

structure (aging, dependency ratios) and changes in morbidity (infectious, contagious, degenerative and chronic illnesses) Empowerment of individuals, better selfesteem, stronger self-determination Growing acceptance of formal legal institutions, better enjoyment of human rights, enhanced citizenship, more effective public governance Greater awareness and understanding of social, natural and technological phenomena, faster social, technical and scientific innovation Changes in social values and visions, more inclusive economic and social institutions More care for the environment and the sustainability of human and economic activities Increased capabilities of individuals, larger labor productivity

As summarized in the table, it can be stated in general that these services have pronounced mid- and long-term impacts, which translate into more dynamic development, faster economic growth and more rapidly improving living conditions, because they: •

• •

Create better enabling conditions for development, because they bring about enhanced social, economic, political, juridical and knowledge settings for human and material progress over time; Facilitate human capital accumulation, stemming from longer, safer, more free, better informed and more empowered lives; and Induce more private physical investment, as a result from higher productivity and competitiveness, better access to inputs and product markets, better access to finance, enhanced public finance and better provision of public goods, and more effective public governance.

Because of all the preceding reasons, services call for particular attention. It is desirable that service provision grows fast, and that essential ones reach all the population. The following section explores some basic issues which must be considered when designing or implementing public polices to foster different types of services.

2. Distinguishing different categories and broad families of services 2.1 Public and private services Distinction among services is often done on the basis of their nature and what they provide. However, for analytical purposes, particularly connected with public policy making and implementation, it is proposed here, at the outset, to distinguish services in two broad categories, from which rather different policy considerations are to be derived: 11


i) Services which for cultural, social and political reasons are required to be available for all people12, in reasonably equal conditions. ii) Services about which it is acceptable on cultural, social and political grounds, that these not be available for all people13 in the same conditions. The first category (i) corresponds to services from which no person should be excluded. The second one (ii) consists of services that are ordinarily available to only certain segments of the population (for instance, those groups who have enough income to afford these services, and particularly in certain geographical areas where these services are accessible). It would be appropriate to refer to services in categories (i) and (ii), respectively, as public services and private services (as it would be appropriate, following the same distinction made in microeconomic analysis between public goods and private goods). In making this contrast, the terms public and private are defined on the basis of the characteristics of the population who gets these services, or in other words, the clientele. The notion public services, in this sense, refers to those services which go to the entire population or general public, highlighting that no individual is to be left out. Similarly, the concept of private services, in this perspective, applies to those other services which are only for some individuals. However, while such definitions of public and private services is acceptable, this paper will remain to use the terms category (i) and category (ii) as defined above, for expository purposes . The reason for this is to avoid any confusion with services which are produced or managed by the public sector (public administration entities at any levels of government, and public service units), and those that are produced by the private sector (households, firms, corporations, non-government organizations, etc.). In this case, the terms public and private do not refer to the characteristics of the clienteles, but to the type of ownership over the production entities, that is, whether these are owned by the State or government sector or by the non-government sector. These alternative use of the terms public and private would lead to very different understandings, since, as it will become clear along this paper, services in category (i) which could properly be called public services for the reasons discussed before, can in practice be produced and managed by both the public and private sectors, just as well as services in category (ii), which could be correctly labeled as private services, are in real situations produced also by both the public and the private sectors.

2.2 Classification of services in categories (i) and (ii) Services which are deemed to be available to the whole population are not always clearly defined. In fact, this set of services has been conceived in different manners along history, and still is defined nowadays in diverse ways across different countries. The next sections discuss this fact and attempt to throw some light regarding certain fundamental

12

The expression “all people” shall not be taken literally; it is used here in the sense of “all people in the relevant age group”. These services belong to what is sometimes called merit goods, indicating that, because historically-relative social and political consensus, it is taken that they should be provided “to all”. In this later sense, the European Constitution refers to these as “services of public interest”.

13

See previous footnote. 12


issues, particularly relevant to assess large shifts in terms of public strategies for service delivery, taking place in countries around the world. For exposition purposes, three broad classes of services are highlighted next. First, State or government services. Second, social services. And third, infrastructure services. While it is true that each of these classes comprises a large variety of specific services which have features of their own, as well as these classes overlap to some extent in the case of determined services, the use of this classification proves useful to underscore key differences among services, which lead to rather different public policy considerations.

2.2.1 State or government services a. Their nature In all countries, along history, State or government services have essentially constituted category (i). These consist of activities performed by the public administration in connection with the fundamental functions of the State, and, as such, are made available by the government apparatus to all the people. Often, these services are closely related with the enforcement of rights by the State, which accrue to the people for a variety of reasons, such as presence, nationality, citizenship, and other. This is the case of services like the following: • Enacting and enforcing rules for common observance, in a variety of matters (particularly, in modern States, laws and public regulations, enacted through some deliberative and representative procedures); • Operating population and civil registries (birth, identity, marriage, death, etc.); • Protecting human rights and administering justice (in courts, tribunals or special institutions like different types of ombudsmen); • Protecting property rights (cadastres, commercial registries or special registries for vehicles and other types of property, etc.); • Maintaining public order, peace and security (through public police and armed forces in general), and so on. Besides these fundamental State functions, other services have also been part of the family of State or government services from early history -because they are key for a generalized decrease of transactions costs, control of widespread and highly costly externalities, and lead to Nation and State integration-, such as: • Operating a national monetary system; • Establishing and enforcing weights and measurements system; • Maintaining public health14 systems, etc. Evidently, these services have an intrinsic public goods character and are naturally included in category (i). In principle, it seems to be the case that in all countries these services are provided to all the people and, ideally, in the same conditions. However, in fact, it happens that in many counties this is not the case, for reasons mentioned next. 14

Public health refers to health conditions of systemic nature existing in a region or countrywide and not to the health conditions of individuals. 13


b. Typical problems regarding State or government services There are a number of frequently observed problems in different countries regarding State or government services, which make these not available to the entire population in the same conditions. First, the capacity of the public administration to provide these services may be quantitatively limited, because of insufficient public budgets. As a consequence, whenever these services become relatively scarce, it is usual that formal rationing or curtailing means are applied (based on Laws or regulations) and sometimes informal schemes (that is to say, ways not considered in the Law) arise to allocate their limited supply among individuals. This can include many forms of corruption, such as deciding on allocation based on political connections, bribes to government officials, etc. Second, access to State or government services may not be always accessible to people in all parts of the territory. Sometimes, their supply comes only from the central government, and population living outside of the capital, in smaller cities or in rural areas, needs to travel at considerable economic, personal and time costs to a few delivery points throughout the country. Third, it is also often the case that the quality of these services is not uniform, due to lack of standards, inadequate training of public officials, different degrees of responsiveness or motivation of said officials, and so on. In these circumstances, quality differentials are ordinarily observed across different parts of the State’s territory, usually with higher quality being offered in demarcations where people have larger power to influence the public administration, though direct political pressures, criticism in the media, personal connections, and so on. Also, individuals with higher incomes can afford more frequently to pay bribes, in order to motivate public officials to deliver them with better quality services15. As a result of the problems mentioned before, even though State or government services ought to be as a matter of principle (de jure) in category (i), scarcity and disparities in quality make these services in practice (de facto) not available to all the people in the same conditions, that is to say, to be delivered as category (ii) services. This is tantamount to an informal privatization of public services, something that tends to go unnoticed for the population and many analysts, given the preeminent ideological discourse that these services are strictly public. Last, but not least, at a more basic level, it must be recognized that the average quality of State or government services may be low and unsatisfactory for their users. Table 6 presents a few examples in this respect, regarding services provided to firms.

TABLE 6

15

Corruption is present to different degrees and assumes diverse forms in most countries. For the latest (2010) international ranking based on the Transparency International index, see: http://www.transparency.org/policy_research/surveys_indices/cpi/2010/results. In a list of countries, China ranked in position 78, after 77 counties with less corruption. For an international analysis of corruption in Asia, see: Bhargava, Vinay et. Al. (2004). 14


SOME INDICATORS ON STATE OR GOVERNMENT SERVICES IN CHINA AND OTHER COUNTRIES State Services for the Private Sector

China Brazil Canada Germany India Mexico

South Turkey Africa

Start-up procedures to register a business (number) (2009)

14

16

1

9

13

8

6

6

Time to prepare and pay taxes (hours) (2009)

504

2,600

119

196

271

517

200

223

Time to resolve insolvency (years) (2009)

1.7

4.0

0.8

1.2

7.0

1.8

2.0

3.3

Informal payments to public officials (% of firms)

NA

9.7 (2009)

NA

NA

47.5 (2006)

22.6 (2006)

15.1 (2007)

17.7 (2008)

Source: World Bank, http://data.worldbank.org/topic/private-sector. Note: NA means data are not available.

c. Usual public policies to address these problems Depending on political cultures and circumstances, governments in some cases openly admit that these problems exist, and implement a variety of public policy measures. Typical interventions to this aim include: generating additional public income to pay for a larger supply of services; strengthening financial and administrative controls, to better secure that existing budgets are effectively applied to service provision and deviations or inefficiencies in spending do not occur; delegating from central to regional or local authorities some viable functions to widen the geographical provision of these services; adopting innovative modes of delivery -including e-government methods16-, to further facilitate access to individuals in remote or sparsely populated geographical areas; training of public officials; simplification of administrative procedures, etc. In some countries, governments at the national or sub-national (regional, metropolitan, local) levels deny that problems of quality, inefficiency or corruption exist, with respect to State or government services. This is a self-defeating strategy for public officials and political actors, especially when these problems are widespread and before the eyes of large numbers of citizens17, as it leads to inaction or failure in implementing effective solutions, plus public 16

See Holliday, Ian, et. al. (2004, 2005), for an analysis of e-government services in Hong Kong and China, respectively. See also Jiang, Min, et. al. (2009). For an international review and comparisons, look at UNDESA (2010). 17

The accelerating use of new media –because of the fast development of information and telecommunication technologies- is also contributing in many countries for individuals to share more 15


trust on government is diminished, and a confidence gap widens between authorities and the population served18. Thus, to overcome these problems, other governments opt instead for making transparent to service users the regulations and quality standards that ought to be observed in regard to the provision of these services, and provide service users with ways to communicate to the public administration proposals to enhance services19, denounce inefficiencies and low service quality or corruption20, etc. To these aims, information and communication techniques are increasingly adopted in diverse countries, through egovernment and e-participation strategies21. d. Fiscal considerations The provision of any of these services is costly and, therefore, the public administration must secure the necessary resources for it. There are two major considerations in this regard. First, the magnitude of the costs of these services. And, second, the ways in which the public administration is to obtain the necessary resources to pay for these costs. 

Service costs

The costs of State and government services consist largely of labor costs, as relatively little capital is used for their provision. Unit service costs are affected by wage rates of the public servants employed in the production of these services, and their productivity. Usually, in an attempt to keep the costs of these services at reasonable low levels, public policies concentrate on wage setting for public servants, with relatively less attention to enhancing their productivity. In this context, wage setting is traditionally conducted in many countries within a segmented labor-market framework, under the assumption that workers don’t move between the public administration and the private sector. Thus, wage rates are determined by negotiations between officials in the public administration who are responsible for human resources management (in close consultation and cooperation with political authorities) and public sector labor union leaders. The rationales followed in negotiations depend mostly on shortterm circumstances, including macroeconomic conditions (inflation, fiscal deficit, general unemployment rate, etc.) and relative political strengths of the government and labor unions openly their experiences and opinions, thus making more public the issues of low quality and corruption in State or government services. For information on the uses of internet by Chinese citizens, see: Guobin, Yang (2003, 2007). 18

Pesqué-Cela, Vanesa, et. al. (2009) analyze political distrust on government in rural China and selfgoverning organizations.

19

In the appendix, several practices are presented from different countries, in relation with ways in which citizens are engaged by the public administration to improve State or government services.

20

In the interview quoted before, the Chinese premier, Wen Jiabao, also mentioned: “I often say that we should not only let people have the freedom of speech. We, more importantly, must create conditions to let them criticize the work of the government. And it is only when there is the supervision and critical oversight from the people that the government will be in a position to do an even better job and employees of government departments will be the true public servants of the people. ” 21

See Holliday, Ian, et. al. (2005) and UNDESA (2010). 16


at that point in time. However, in countries with more developed labor markets and more modern public administrations, remunerations to public employees tend to be determined by scales including specific grades and categories, about which wage rates are determined to some extent looking at efficient rates of return on the human capital typically required for the different grades and categories. Evidently, the former method provides public sector workers with less certainty about the future trends of their wages. This may provoke in the short run higher turnover in the public sector labor force, and may cause in the longer run adverse selection in public sector employment, attracting more frequently individuals with less human capital and lower clientor service-orientation and public entrepreneurship. Besides, if over time wage negotiations fail to reach adequate remuneration rates, corruption is more likely to arise as public employees will seek complementary sources of income from bribes and other corrupt acts. This form of corruption even gets tacitly accepted by managers and authorities in some cases, either because no alternative is perceived to offer reasonable wages to public employees, or because they obtain in some ways a proportion of the overall income resulting from corruption. Along with this, it happens that corruption also extends over time to the filling of vacancies in the public administration, asking bribes from applicants in order to get the job. In contrast, the later method, if scales are adequately constructed and adapted over time to cope with inflation and changing labor market conditions, appears to reduce to a considerable degree many of the problems mentioned above. Moreover, in countries in which auditing, accountability and transparency have been adopted as part of the modernization strategies of public administration, other measures are also put in place to control or eliminate corruption in the forms described before, including: mandatory periodical disclosure of personal and family assets and liabilities by public sector employees, publication of remuneration scales of public employees in internet, formal competitive recruitment processes, and so on. From a different angle, the higher the productivity of the public sector employees who provide the State or government services, whatever they wage rates are, the lower the unit cost of these services is. Traditionally, managers of these employees have few or no policy instruments to stimulate higher productivity. Simplistic straightforward approaches, consisting in setting quantitative output targets per employee over a given period of time, can result in lowering the quality of services. Linking economic incentives to performance evaluation is usually not allowed by regulations. Thus, effective measures to enhance productivity rely mostly on labor training, administrative simplification of procedures for the delivery of services, and introduction of more efficient technologies, for instance based on information and communications technologies (ICT). Training is obviously always adequate, but its ultimate effects on productivity are interwoven with other labor conditions, such as workplace climate, promotion and career policies, etc. Simplification of processes for the delivery of State and government services is normally very effective, particularly when indepth reengineering is undertaken and not only marginal continuous improvements. Finally, the introduction of ICT achieves high impacts, especially if well accompanied by labor skills development. ICT can be applied for the provision of services in many useful and complementary manners: to automate a variety of administrative functions; to better manage information; to provide services to remote locations (e-government applications); to enhance

17


auditing, monitoring and timely evaluation; to facilitate transparency and engage nongovernment stakeholders in social auditing, and so on22. In any case, productivity in the provision of State and government services needs to be looked at with broad comprehensive approaches. Even though measures like those mentioned before are helpful, it must not be overlooked that the public entities of different kinds in charge of the provision of these services (commonly known as public service units23), are in many cases immersed in a web of numerous constraints which negatively affect productivity. These include: limited budgets, determined exogenously by other government entities, often with very limited knowledge of the actual operational requirements of each particular public service unit; inadequate rules and regulations on human resource management, which do not address recruitment, wages, promotions and performance bonuses in adequate fashions; burdensome rules and regulations on authorizations for investments to expand capacity, procurement, evaluation, etc.; systems of goals settings which focus on use of budgetary resources and quantitative output measures, with little or no attention to efficiency of performance, quality of outputs, client-orientation (people-centered service delivery), and so on. And last, but not least, it must be kept in mind that in the majority of cases public service units are local monopolies in the provision of these services, so they do not face any incentives from competition to perform better. Thus, while many incremental improvements may be attained to control the costs of State and government services through piecemeal public administration measures, strategies for more in-depth and integral reform of PSU need to be considered. Many countries around the world perceive pressing demands in this sense, and new paradigms are being elaborated regarding the transition from public administration to public management24. 

Finance

In the case of State and government services, since any individual will potentially benefit from them, as a general principle everyone must contribute with resources for their provision. So, these services are usually financed from general taxes applicable to the entire population. The precise forms in which the corresponding tax rules are designed depend on the social and economic characteristics of the population, other objectives sought from taxation (beyond covering for the total service cost, for example, redistributive concerns), and political constraints.

22

For a comprehensive discussion and international comparisons on e-government, see UNDESA (2010). For e-government in China, look at: Holliday, Ian, et. al. (2005). On using ICT to enhance citizens-government relationships, consult: Seifert, Jeffrey W., et. al. (2009).

23

In Chinese language, these are referred to as shiye danwei.See: Schick, Allen (2004) and Zhang, Chunlin (2005).

24

See: Jing, Jijia (2009a); Knox, Colin et. Al. (2007); Xu, Songtao (2002). 18


Even if taxation to this aim were income-neutral (i.e., everyone is taxed in the same percentage of his income), the provision of State or government services free of service fees25 and financed entirely by general taxes, constitutes an intrinsic redistributive mechanism. This is because the unit cost of these services is in theory equal for all individuals, while those with higher (lower) income contribute with larger (smaller) absolute amounts. On top of this, as some of the State or government services are not necessarily used by everyone (for instance, the majority of people never in their lifetime use the services of a public court or ombudsman), it suffices for the State to set an aggregate tax target equivalent to the actuarial cost of provision of these services. As in other contexts characterized by shared contributions to recover actuarial service costs (like insurance, lotteries, etc.), this tends to create incentives for cohesion among contributors to the system. Thus, State or government services financed by neutral income taxes are to some extent redistributive and cohesive. This is an important element to take into consideration regarding overall national development strategies. In particular, when for other reasons (discussed below), strategies see the convenience or need to adopt privatization in other areas of development, it becomes even more important that State and government services are available to all individuals in the same conditions. These services then not only satisfy concrete immediate needs of the people vis a vis the State or government, but they also constitute an important political instrument for maintaining basic levels of redistribution, equity and cohesion, and a leveled field for all to access and afford the most basic services. Against this scenario, in countries with marked inequality in the personal distribution of income, it makes sense, for distributional equity: to tax proportionately more those individuals with higher incomes (that is to say, to have a progressive income tax), and to apply service fees which are also progressive to specific State or government services which are typically used more intensively by richer people, such as real state registries and specialized courts (like tribunals on financial offenses).

2.2.2 Social services a.

Their nature

Social services represent another family of services, essentially different from the one discussed under section 2.2.1. These include a variety of services related to enhancing the human capital of the people (education, labor training, healthcare26, etc.) and their social capital (community development, promotion of organizational efforts by civil society groups, etc.), as well as diminishing vulnerability of the entire population or particularly vulnerable 25

Since the demand for most State and government services usually exhibits little variation when the corresponding fees or prices change (i.e., low price elasticity), there is no big need to use service fees as an instrument to avoid excessive demand. This is discussed further in the next sections, with regard to social services and infrastructure services, in which price elasticities may be considerably bigger.

26

A variety of aspects of the healthcare system in China is discussed in Koplan, Jeffrey, et. al. (2005a, 2005b). For additional information, see: Eggleston, Karen, et. al. (2008); and Ooi, Elaine and WeeLing (2005). The provision of education services and related dilemmas for public and private providers is analyzed in Lopez Ramon et. Al. (1998) and Painter, Martin, et. al. (2008). 19


groups (diverse types of insurance mechanisms to face different types of risks, such as: unemployment, illness or death of an income provider to a household, work injuries, catastrophic health care costs, wealth loss as a result of a natural disaster, gender violence, etc.). In contrast to State or government services, which have practically in every case been in category (i), public policy approaches to social services have varied markedly, along history, in all countries. For example, education and healthcare were seen as private services -that is, as pertaining to the category (ii) of services, which are not expected to be necessarily available to all people in the same conditions- up to the late ninetieth century, even in the most developed countries. Education services for the children of rich families were provided by private instructors, and paid totally by the families. Similarly, healthcare services were delivered by private doctors, nurses and birth maids, and also paid entirely by the households. Public education and healthcare systems, aimed at providing these services to the whole population –or entire relevant age groups-, in rather similar conditions, are largely a development of the twentieth century. And, in most developing countries, even if such public education and healthcare systems exist nowadays, their services unfortunately do not reach yet all the people in equal conditions. Coverage is still very much incomplete and marked quality differentials are noticeable27 28. Therefore, it is fair to say that education and healthcare services are undergoing a transition in countries around the world, from category (ii) to category (i), as labeled above. Countries are at very different points of this transition, some still at very early stages, where education and healthcare services, even if provided by some public sector entities, continue to exhibit characteristics of category (ii)29 30. 27

In the United States of America, for example, public healthcare services and insurance were introduced since the administration of President Roosevelt, seven decades ago. Yet, in 2010, about 30 million Americans did not have access to those services, as several legislative reforms to extend coverage to those individuals repeatedly faced with political opposition in Congress because it was considered that very large costs and expenditures would result for the public sector. It was only in 2010, under the Obama administration, that a legislative majority approved necessary reforms to extend services provided by the public sector to those people who had chronically remained out of the public system.

28

UNDP-CIRD (2008) provides data on the disparities in healthcare services between rural and urban areas in China. In 2006, hospital beds per every 1000 inhabitants in rural and urban were 0.8 and 2.5, respectively. In the same year, the number of medical personnel on average per 1000 inhabitants was 1.2 and 3.6 in rural and urban areas, respectively. Thus, the urban to rural ratios of both indicators reflect that urban areas had on average close to three times more hospital beds and medical personnel than rural areas, after adjusting for the size of population.

29

UNDP-CIRD (2008) presents data which indicate that in 2002 only one third of the funding for education services in China came from the government, and the other two thirds were covered by the people (63%) and social organizations (3.7%). As for healthcare, expenditures by the people declined gradually, from 59% to 49.3%, while social expenditures rose from 25.6% to 32.6%. These figures reflect two combined effects. One, the lack of access to public education and health services for wide groups of the population, and their need to acquire these services privately. And, additionally, the economic or financial contributions made when charged by public service units for public service fees. In any case, out-of-pocket expenditures on healthcare represented in China, at the end of the last decade of the twentieth century, about 60% of total health expenditure, a proportion higher than that recorded in many other Asian countries in those years, like Hong Kong, Indonesia, Korea (Republic of), Malaysia, Philippines, Sri Lanka, Taiwan and Thailand. 20


Similarly, services to reduce vulnerability of diverse types were absolutely considered as private services in the large majority of countries until the mid twentieth century. Only a small percentage of the entire population would privately buy determined types of insurance against some specific risks. In the case of healthcare insurance, or specifically insurance against catastrophic healthcare expenditures, public systems began to be created in certain countries only some decades ago. Typically, coverage of these services has remained circumscribed to the families of workers in the formal sector. Workers in the informal sector, which in most countries represent between one fourth and up to two thirds of the total employed labor force, do not have access to the respective public health insurance systems, and cannot afford either to buy these services from private providers. In most counties, even today, social protection mechanisms against unemployment do not exist31, and pension systems are very limited32. And, in many cases, policy instruments to act upon the occurrence of natural disasters -to reconstruct public infrastructure, and to assist the individuals, families or communities hit by a disaster, particularly if they are in low income groups-, are not well funded, regulated and institutionalized33. Thus, once more, it can be said that services to face vulnerability are also undergoing a transition from category (ii) to category (i), in the terminology proposed earlier in this paper34. The reasons guiding the transition of social services, in general, from category (ii) to category (i) in diverse countries, are not totally clear, and it seems that there has been considerable evolution in thought on this matter over time and across countries. Conservatives could argue that attaining higher levels of education and healthcare is largely a matter of individual effort and, therefore, these matters belong to the sphere of private affairs. Socialists could state that nobody should go through life with reasonable education and health, as that would be among the most damaging situations mankind could live in 窶田omparable to slavery, or perhaps worse-, because it cancels the possibilities for developing inherent human capabilities and condemns people to live under their natural potential, sometimes in conditions that may be considered sub-human. Technocrats could point to the fact that education and health levels of 30

In most countries, however, there exist education and healthcare systems operated by public sector entities. Even if coverage of these is sufficiently wide, these systems coexist with corresponding private ones, and people are free to choose for the option offered by public sector entities or from private ones as an alternative. These dual systems exist for several reasons. Firstly, for ideology and values sake. Some people prefer to get the respective services from public entities, while others find that their fundamental freedoms are best preserved when they have a private alternative. Secondly, to accommodate for different expectations about the quality of services. Indeed, public services in most cases aim to warranty basic satisfactory quality levels, which are appropriate in technical and cost grounds. Yet, some groups of people, particularly of higher incomes, aspire to higher quality and prefer to obtain the corresponding services from private sources, among which variety is diverse and in some cases it can reach actually higher standards.

31

The case of unemployment insurance in China is studied in Vodopivec, Milan, et. al. (2008).

32

On pensions, see Piggott, John (2007).

33

See: Brixi, Hanna (2008); Teets, Jessica (2009) and Ying, Sheng (2009).

34

A discussion on vulnerability and public service delivery is presented in Renard, Mary-Franテァoise, et. al. (2007). According to UNDP-CIRD (2008), in 2006 there were in China only 160 million holders of medical insurance, 112 million holders of unemployment insurance, 100 million holders of workplace injury insurance and slightly more than 60 million holders of maternity insurance. 21


individuals exhibit on average strong correlations with their income level, with people in the higher (lower) deciles of the personal income distribution having greater (lower) schooling and life expectancy. It could be further pointed out that this correlation may be due mostly to affordability, in contexts where there are no effective systems to redistribute opportunities to access these services for the disadvantaged –through subsidies and grants of different types-. But it could equally be sustained that causality goes the other way around, since more human capital –additional education, more health- results in higher productivity and larger income. And, finally, it can perhaps, more realistically and holistically, be affirmed that causality runs in both directions and social services are consubstantial to development (for reasons like those summarized in Table 6), and that it is because of this that social services must be included within the core of national development strategies as category (i) services. b. Typical problems regarding social services Development strategies in countries around the world meet particularly difficult and big challenges regarding social services. The first major challenge is about coverage, or in other words, to make these services available to all people. This implies making social services accessible or reachable in the physical or geographical sense, and also affordable in the economic or financial sense. Expanding access to social services is far more challenging than in the case of State or government services. The latter are to some extend used by people more sporadically than the former, which in some cases, like healthcare, need to be accessible on a regular and frequent basis, and in the case of education, usually on a daily schedule. Also, social services are intrinsically more complex than many State or government services, as the former imply very personal and close interactions of individuals with the persons who deliver the service (teachers, doctors, paramedics, managers, etc.), while State and government services are delivered to a considerable extent more in an arm-length fashion. Increasing geographical coverage of social services may be faced with restrictions regarding resources for physical investment in new delivery points at different locations, lack of skilled individuals to deliver the services in some regions, or by challenging spatial distribution of human settlements, for instance, in remote and sparsely populated zones. Physical investment decisions may additionally be complicated when facilities for the delivery of services exhibit some minimal efficient scale and, thus, can not be located in all areas alike –for example, universities and third level hospitals-, or when targeted populations at certain location may eventually decrease over time because of demographic changes, including aging and outmigration. To a large degree, these phenomena reflect in the comparative lower coverage ratios in rural areas, with respect to urban ones35. Yet, physical access is not sufficient to solve all coverage problems, as affordability is another key issue. This problem shows both in regions or localities where adequate points for social service delivery already exist, as in others where supply is inexistent and yet individuals could not even afford the services (thus, adding complexity to delegating the provision of services

35

As already cited, UNDP-CIRD (2008) data indicate that hospital beds and medical personnel are roughly three times more numerous in urban than rural areas in China, after adjusting for the size of population. For an additional analysis of public service reform for the rural sector of China, see Fock, Achim (2007).

22


on non-state actors). These challenges are all most frequent in countries and regions with higher incidence of poverty. Secondly, important challenges are faced regarding the quality of social services. In many countries, citizens are not satisfied (and sometimes are markedly frustrated) about the quality of social services provided by the public sector. And, furthermore, there exist disparities in quality within and among regions or localities, often in correlation with the capacity of their inhabitants to politically create pressures on public sector authorities or managers. Thirdly, as commented in section 2.2.1, shortages in supply or quality differentials many times give raise to corruption, as individuals who can do it try to bribe public officials to get physical access to the services, or to be granted financial support to afford them, or to obtain better quality. And last, but not least, there are also legislative and regulatory challenges, of a twofold nature: service standards need to be established (with the aim to secure desired quality parameters, facilitate benchmarking and make more objective evaluations and auditing possible), and rights need to be defined (to warranty that social services become true entitlements for all, and not only managerial targets for public service units and supervising Ministries). Table 7 provides data from several countries to illustrate how these problems are reflected on development indicators, as well as on the public administration. TABLE 7 SOME INDICATORS ON DETERMINED SOCIAL SERVICES IN CHINA AND OTHER COUNTRIES Social Development

China Brazil Canada Germany India Mexico

South Turkey Africa

Education Public spending on education, total (% of GDP) (2006)

4.9

4.4

Literacy rate, adult total 90 94 (% of people ages 15 and (2008) (2006) above)

NA

NA

*School enrollment, primary (% gross) (2006)

111

NA

99

105

112

112

104

97

School enrollment, secondary (% gross) (2006)

72

NA

101

103

55

86

95

82

21

NA

NA

NA

12

25

NA

35

School enrollment,

NA

5.0

3.2

4.8

5.4

2.9

63 89 92 (2006) 88 (2006) (2006) (2008)

23


tertiary (% gross) (2006) Health Health expenditure, total (% of GDP) (2007)

4.3

8.4

10.1

10.4

4.1

5.9

8.6

5.0

Health expenditure, public (% of total health 44.7 expenditure) (2007)

41.6

70.0

76.9

26.2

45.4

41.4

69.0

72

81

80

63

75

51

72

Life expectancy at birth, total (years) (2007)

73

*Gross enrollment ratio is the ratio of total enrollment, regardless of age, to the population of the age group that officially corresponds to the level of education shown. Sources: Education, World Bank, http://data.worldbank.org/topic/education; Health, World Bank, http://data.worldbank.org/topic/healt. Note: NA means data are not available.

Social services, properly delivered for the totality of the people, can be a powerful engine for human, social and economic development, plus a valuable social and political safety net to address vulnerability and strengthen trust and support about State institutions. The importance of further developing the human and institutional capacities of the public administration to promote the delivery of social services is very large36. Specific considerations about public policies to face these different challenges are presented next. c. Usual public policies to address these problems Improving physical access to social services poses big challenges in all countries. Viable solutions are in most cases dependent on particular conditions. In some instances, it is practical to implement policies to facilitate periodical commuting or travel of individuals to the nearest service delivery points, rather than establishing costly and inefficient facilities in disperse locations. In other cases, policies go for providing incentives for voluntary relocation of people, to geographical hubs where not only one but most social services can be provided in efficient and sustainable manners. Still, in other cases, alternatives are found in the adoption of new service delivery modes (for example, based on Information and Telecommunication Technologies, ICT). And, also, solutions can be met by delegating the provision of specific social services in determined geographical areas to non-state providers, like civil society organizations or the private sector, who may operate in different ways which could sometimes be efficient to face particular conditions in certain regions or localities, yet

36

The importance for the government to adopt a “citizen-focused approach� in the provision of public goods and services, in China, is highlighted in Knox, Colin, et.al. (2007). 24


following rules and regulations from government when this may be necessary to warranty basic standards of equity and quality across the territory37 38. The later avenue is generally referred to as public-private partnerships for the provision of public services39. This can in some circumstances facilitate the increase of coverage by both bringing in capital resources to build additional service points, and by providing operational and managerial resources. When the public sector lacks resources for investment, or when there is limited capacity in the public administration to manage a larger volume of determined social services, partnerships with civil society organizations or the private sector can help overcome these constraints in the near term. This must be distinguished from privatization of social services, as privatization means that non-state actors can on their own provide these services, while public-private partnerships means that those non-state actors deliver the services on behalf of the state. Under public-private partnerships, government and non-state partners establish by contracts of different types the responsibilities of the non-state providers of the services (including more or less detailed plans for expanding coverage, standards of quality with which services are to be delivered, ways in which the government is to pay the providers, and so on). These contracts are of fundamental importance for the outcomes from public-private partnerships, as they must secure incentives for all parties to perform as expected. Often, shortcomings of public-private partnerships result because, from the outset, said contracts were inadequate. One of the key elements to take into consideration is that there must be a fine balance between the actions that are to be pursued and the risks to be faced by the non-state partners, and the remuneration they are to be paid by the government. Mistakes can be made, by which government ends assuming significant risks of non-compliance by the non-state partners (like not reaching on time the coverage targets or the quality standards agreed), while over-protecting the investments and returns for the latter (through payment formulae that do not properly incorporate actual performance, while sovereign warranties are given for the non-state partners to obtain financing). In such cases, it may come out that public finances are burdened with contingent obligations, with relatively less security that social services are to evolve as expected. To overcome the problems of affordability of determined social services by the poor, mechanisms are called for, to manage subsidies or income transfers to those who can not afford certain social services. In some developing countries, where public finances are very weak, the issue is delegated to non-state actors, who may be willing to provide assistance from civil society or private charities, or which are qualified to be funded by foreign aid agencies. In other developing countries, in which public finance has been strengthen through tax reforms, this is publicly financed40. A largely debated aspect of public policy in this regard is whether support should be targeted directly to poor individuals or households, or to 37

For the case of China, special emphasis on the transition of government, from a direct provider of public services to a public resources coordinator, is given in Jing, Jijia (2009).

38

For a discussion on the participation of civil society organizations in China’s healthcare services see: Gill, Bates, et. al. (2007). 39

See Ho, Paul (2006) for a discussion on public-private partnerships.

40

See: Villarreal Roberto (2008b). 25


regions where most people are poor, or simply not targeted but granted to all. This issue is further discussed in section 2.2.2.d below. In any case, effective auditing, transparency and accountability policies need to be in place to prevent corruption in the management and allocation of resources aimed to assist the poor41. As for ensuring adequate quality in social services, human resources employed in their provision are crucial. The labor force employed in these services ought to have the necessary human capital. Well educated and trained personnel in the education and healthcare systems are fundamental to attained good quality outcomes. Yet, many of the problems faced in connection with human resources in the case of state and government services (for instance, those commented in section 2.2.1.d), are also critical with regard to social services. In particular, as in some countries public employees in education and healthcare services represent a large percentage of total public sector employment (see Table 3 again), authorities in charge of public finance tend to repress public wages in those activities as a means to maintain aggregate public expenditures and the public deficit within certain limits. If wages are managed in this fashion, it is likely that incompatibilities will arise relative to the requirements of human capital in these sectors. As a consequence, labor force turnover may be high in the short run, and adverse selection may be also a long term problem. Besides, corruption is more likely to arise as public employees in the education and healthcare systems will seek complementary sources of income from bribes and other corrupt acts, and if this is not effectively controlled, corruption also extends over time to the filling of vacancies in these activities, with managers and supervisors asking bribes from applicants42. To prevent these problems, sound human resource management should prevail. In addition, civil society organizations and citizens can also contribute to reduce these problems, for instance through civic observatories on education and healthcare services, either at national or local levels, to monitor the quality of services delivered, the satisfaction of their users, the trends in the human capital of employees in these services, the incidence of corruption, and so on43. Furthermore, to secure adequate quality about specific social services and, specially, to succeed in narrowing disparities, it is useful to establish service quality standards and to make these publicly available. With standards in place, determined according to development strategies lead by government, operators of different Public Service Units can be made effectively more accountable and evaluation, either by government entities or non-state actors (civil society organizations, private auditors, citizens in general, etc.) is largely facilitated. In the absence of standards, citizens engagement to monitor and evaluate the quality of social services turns less effective, as appraisals become extremely subjective, given that in such case civic evaluation would be done against unspecified –and possibly unrealistic- quality levels.

41

42

On related matters, see: World Bank (2004). For a discussion on corruption in Asian countries, see: Bhargava, Vinay, et. al. (2004).

43

Historical and structural aspects civil society in China are analyzed in: Chamberlain, Heath (1993); Chen, Bin, et. al. (2009); Fishkin, James, et. al. (2010); Lu, Yiyi (2005) and Shu-Yun, Ma (1994). The following also address participatory responses in China, linked to particular events, including natural disasters: Brixi, Hana (2008); Hu, Dan (1998); Ru, Jiang, et. al. (2009); Teets, Jessica (2009) andYing, Sheng (2009). 26


In particular, decentralization of social services, from the central or national government to regional and local governments, is also facilitated on the basis of quality standards44. The specific degrees of decentralization that could follow, range from delegation –in which subnational governments are to deliver these services in ways fully prescribed by central authorities-, to a variety of forms in which sub-national governments have diverse degrees of autonomy regarding the provision of these services -inter alia to adapt these more closely to the conditions and needs that prevail in their respective region or locality-, yet honoring indispensable obligations on accountability about the use of public resources decentralized to them. In any case, quality standards would help to sustain desired quality levels, through facilitating relatively objective evaluations from public auditing entities, as from civil society organizations and the private sector. Moreover, on the basis of public standards, and with support of public mechanisms to make social services affordable for the poor, government can more easily delegate in some cases the provision of certain services on civil society organizations and the private sector; that is, through standards, governments can better secure quality when entering into different forms of partnerships with civil society organizations and the private sector45. Finally, standards are also useful to make mobility possible for individuals across different service providers, in ways which make more efficient utilization of infrastructure that is available system-wide, compared to the case in which individuals are authorized to receive services only from determined public service units. In some countries, governments at the national or sub-national (regional, metropolitan, local) deny that social services are affected by problems of quality, inefficiency or corruption46. As commented before, this is a backfiring strategy for public officials and political actors, especially when these problems are widespread and before the eyes of large numbers of citizens47, as it leads to inaction or failure in implementing effective solutions, public confidence on government is diminished, and a trust gap widens between authorities and the population served. Thus, to overcome these problems, other governments decide instead to make transparent for service users the regulations and quality standards that ought to be observed in regard to the provision of social services, and provide service users with ways to communicate to the public administration proposals to enhance services48, denounce inefficiencies, quality or administrative problems and corruption, etc.

44

Fiscal decentralization issues are discussed in Wildasin, David (1998).

45

It is often perceived that a greater role of the non-government actors needs to be encouraged in China, in relation to public services, particularly healthcare. See Gill, Bates (2007).

46

Bhargava, Vinay, et. al. (2004) study the incidence of corruption in diverse countries of Asia.

47

The accelerating use of new media –because of the fast development of information and telecommunication technologies- is also contributing for individuals to share more openly their experiences and opinions, thus making more public the issues of low quality and corruption in State or government services.

48

In the appendix, several practices are presented from different countries, in relation with ways in which citizens are engaged by the public administration to improve State or government services. 27


Creativity and innovation are much needed to find solutions to all these problems, and to this aim, governments can gain many useful ideas or proposals from consultations with citizens, civil society organizations and the private sector. In particular, government strategies ought to see the engagement of citizens and publicprivate partnerships in the provision of social services as specific instruments which can be used in certain circumstances for well determined purposes49. Sometimes, the engagement of citizens can occur not necessarily through civil society organizations, but through direct participation of communities and people who are themselves users of the services and, thus, these arrangements are some kind of co-production schemes. Citizens’ engagement and public-private partnerships do not constitute comprehensive alternatives to substitute for the provision of these services by the state, but rather they are useful as concrete means to enhance specific functions, harnessed by the state, about the delivery of social services. Essentially, public-private partnerships can be best understood as an instrument for the public administration to increase investments and managerial capacity in connection with these services, while the engagement of citizens and civil society organizations can be an additional instrument most suited to strengthen accountability, monitor quality and control corruption. In any case, the normative, planning and strategizing roles of the state and public administration are indispensable to successfully connect the progress of social services with overall economic development. Yet, while the commitment from governments is praiseworthy when it comes to champion gradual efforts for making social services accessible, affordable and equitable for all, the true revolution impending around the world with respect to social services consists in responsibly pursuing legislative reforms to establish the rights of all people to these services. When these rights are recognized by the State, social services definitively enter the category labeled as (i) in section 2.1. Only when social services are converted into rights-based social services will these become authentic public services. In a very meaningful manner, it will be then that social services will most fully contribute to the social and political strengthening of the Nation-State. Those States who succeed in this will be, properly, beyond what has been considered as modern States in the past decades. Moreover, these rights will be more effectively enjoyed if they are defined in ways that make them portable, so that individuals fully or largely maintain them even if they move to different locations or if they change across service providers. Portability not only increases welfare and enhances protection against vulnerability, but it also contributes to make the overall most efficient use of existing service capacity by not locking in social service users to determined fragmented institutions or public service units. Thus, consistent strategies to responsible legislate on rights to social services ought to be pursued pari passu to progress on all other dimensions discussed above. d. Fiscal considerations As any other service activity, social services are costly. The State must prudently secure the necessary resources to cover their costs, including not only those incurred in the short-run by delivery operations, but also the mid-run costs associated with maintaining and enlarging the respective productive capacity or service infrastructure. 49

See Tsang, Stephen, et. al. (2009) and Uslaner, Eric, et. al. (2003). 28


Financing social services exclusively from general taxes would not be an economically efficient solution, for two reasons. First, most of the specific social services are not utilized equally by the whole population; rather, each service is more intensively used by some groups than others, largely because of demographic differences related with their stage along the lifecycle, as well as geographical factors50. Thus, if financed only from general taxes, there will be likely major cross-subsidization, not necessarily between the high- and low-income groups, but between cohorts, regions, etc. The equity implications from this are unclear and the economic efficiency will be rather low. And, second, the demand for most social services is rather sensitive to service prices (the price elasticity is considerably). Therefore, service fees can be a useful public policy instrument to avoid excessive levels of demand motivated by moral hazard51. Compared to the financing of State and government services, in which the use of public debt makes little sense because those services do not contribute as much to the growth of overall productivity, this is not the case of social services, since these do impact productivity in considerable degrees. Indeed, by covering for the costs of social services now with debt resources, effective payment is translated into future generations who will be taxed to service the outstanding debt. While this does not make sense for State or government services (why should future generations pay for civil registration and security services received by their earlier cohorts?), it does when it comes to social services: future generations benefit from public investments made now in the Nation’s human capital, as this increases productivity, competitiveness and economic growth, and raises savings and investment, so that the later generations inherit a wealthier country. Finally, it must be acknowledged that in cases when there are chronic supply shortages, quality deficiencies and corruption, taxpayers tend to lower compliance with tax payments. In certain cases, as it takes considerable time to fix these deep problems and to induce higher morale and trust among taxpayers, it is found practical –efficient in the short run, although not as a permanent solution- to create local trust funds geared to specific services, having taxpayers resources channeled to said funds in order to directly impact on improvements in the provision of determined services.

2.2.3 Infrastructure services a.

Their nature

Infrastructure services comprise diverse services whose provision depends crucially on certain types of physical and technical infrastructure. To mention just a few examples: safe water, sewage and sanitation services (which require dams, reservoirs, pipelines for 50

The young, adult and elderly people evidently do not utilize education and healthcare services in identical ways. This is also true about their respective needs for unemployment and health insurance. As for other services to address vulnerability, needs are also different across regions: some are more exposed to natural disasters and determined diseases than others. 51

For a general review on the use of taxes and social transfers see: Prasad, Naren (2008).

29


transportation and distribution, treatment plants, quality monitoring labs, etc.); transportation services for passengers and cargo (which involve roads and highways, railways, water ports and airports, inter-modal facilities for loading and unloading, etc.); electricity services (which depend on generation plants from different primary energy sources, transmission and distribution lines, dispatch mechanisms, etc.); and so on. The list could be extended with other infrastructure services like natural gas services, fixed or wireless telephones, radio and television, broadband internet, intra-urban transportation, urban infrastructure services like public lighting, inter-city speedways, etc. Infrastructure services are practically a universal need both for people and for businesses in all countries. Individuals and households, just as productive entities of all types in the private and public sectors, utilize these services ordinarily to some considerable extent. Deficient quality and inadequate prices of these services negatively impact the welfare of people and the competitiveness of productive units. And, in the extreme case when some of these services are not available, because of no physical access or affordability, diverse functionings of individuals and units of production are severely hampered. Historically, infrastructure services have been seen in most countries until the Twentieth Century as pertaining to category (ii). Movements towards considering them as category (i) services have begun in diverse countries at different points in time, because of urbanization and globalization. Indeed, from the late nineteen hundreds, when new technologies allowed providing these services at considerably larger scales, urbanization in the most advanced countries gradually lead to social and political pressures on government, to generalize the provision of these services to the entire population, which had started as a private market development. As urbanization accelerated in many countries in the following decades, including developing countries, these trends became relatively common. Furthermore, as globalization deepened decade after decade, economic pressures on governments also arose from the demands of businesses to have access to adequate infrastructure, in order to strengthen their competitiveness, growth and creation of jobs. There are numerous factors why infrastructure services differ from most other economic activities or industries, both from the side of their supply, as regarding the demand for them. All these factors, in turn, pose particular challenges for public policies.  Supply side From the supply side, the provision of infrastructure services exhibits several distinctive features. First, the infrastructure involved uses particular technologies, which are of specific complexity. It takes significant time to get to master these technologies. Often, there are not many entities or agents who dominate these technologies, particularly in small and less developing countries. Second, the efficient scale of infrastructure projects, considering the characteristics of most commonly available technologies, is usually large. Indeed, technologies under consideration are such that the average service costs tend to decrease the larger the volume of service is. Thus, it is too costly and inefficient to produce small volumes of a service and it doesn’t make economic sense to build infrastructure whose scale would be under reasonably efficient scales.

30


Third, said infrastructure is highly capital-intensive, which combined with the features previously mentioned, implies that infrastructure projects need very large investments. In turn, this brings about two other repercussions: unit service costs are largely affected by the cost of capital, and additions to infrastructure imply bulky capital disbursements. Fourth, infrastructure projects need long gestation periods, because of the intrinsic difficulties in their planning, engineering and construction. Thus, it is necessary that the respective infrastructure is expanded with enough anticipation to meet larger demand ahead. Fifth, infrastructure projects usually have rather fixed capacity limits of physical or technical origin, beyond which larger volumes of service can not be generated, unless at high risks of serious quality failures, if not a total collapse of supply. Actually, to prevent reaching those critical capacity levels because of extraordinary high demand which causes congestion, infrastructure projects are normally built with a margin of extra capacity as a buffer to secure reliability of supply. Yet, it is also the case that below the fixed capacity limits, the cost of providing an additional unit of service from the existing infrastructure is practically constant52 and, therefore, many users can be served at the same time under rather identical conditions. Because of this, infrastructure services look like services in category (i), in the terminology proposed in earlier sections. Sixth, the services provided by infrastructure are noticeably circumscribed to a geographical ratio around the respective infrastructure facilities, because of physical and technical factors which restrict delivering the services to longer distances, as the costs for doing it are too high53. And, lastly, the useful life of the infrastructure is usually very large (encompassing normally several decades) and the financial recovery period for investments is considerably long. Investors must have adequate sources of finance at hand to get the resources necessary for constructing the infrastructure, as profits to repay for the needed investments will flow in gradually, and particularly to a lesser amount in the early stages of the infrastructure life cycle when utilization rates are still growing.  Demand side From the side of demand, infrastructure services exhibit as well other special characteristics. In traditional or considerably underdeveloped communities, people use these services rather rarely and are used to that, although their welfare levels may be assessed as relatively low. As income increases, people initially afford these services as luxuries, then convenience makes their use more frequent and, eventually, as income continues to rise, the use of these services becomes a practical necessity. Demonstration effects on other community members, combined with generalized income increases in the locality –possibly from external economies-, tend to make other individuals or households follow the same path and the utilization of these services becomes culturally established. As a result, it is generally observed, as a first distinctive feature from the demand side, that when income grows in a 52

The cost curve looks rather as L-shaped.

53

On infrastructure and regional factors, see: Luo, Xubei (2004, 2005). 31


region, the demand for these services augments even in a larger proportion (the income elasticity of demand is greater than unity, in the terminology used by economists). From another angle, it is often the case that for many of these services there are no close substitutes which people may use to satisfy their respective fundamental needs. For instance, private transportation may be substituted by collective or public transportation at a loss in time and route flexibility and in comfort, and modern public transportation can be substituted by animal traction, or walking, at even larger inconvenience. Electricity may be replaced by natural gas only for a few ends (like heating and lighting), but not for others (operating electrical machinery, equipment and appliances). Clean pipe water can be substituted by well water or truck-distributed water for drinking and housekeeping, and bottled water may come in handy for the former, but there are costs of different types associated with this. As a consequence, users of these services find it inconvenient or difficult to reduce their utilization when the respective fees or prices are increased, and it happens usually that the demanded volume of services lowers in a smaller percentage than the proportion by which the fees or prices go up. This is recorded as a second typical characteristic of many infrastructure services (the price elasticity is smaller than unity, in the economic jargon). Taking the whole set of supply and demand side features of infrastructure services mentioned above, it is especially challenging in all countries to secure an optimal availability of infrastructure services, not just in the sense that there are no shortages, but also that the services are provided in efficient, reliable, inclusive and fair ways to the people and production units throughout the territory. Significant problems and challenges are faced in this regard in most countries, as discussed next. b. Typical problems regarding State or government services If, in any country, the provision of infrastructure services were to be the sole responsibility of profit-seeking risk-averse investors from the private sectors, with no intervention from the government in any way, because of the supply and demand features of these services, it would be very likely that problems like the following will occur. First, private investors will require considerable amounts of information regarding the conditions for economic growth faced in the overall national economy and in different regions54. Since demand for infrastructure services has a high income elasticity, capacity utilization rates and economic returns on investment from infrastructure projects depend considerably on growth prospects, which in turn are conditional on government policies and out of control for the private investors. In countries where economic shocks or macroeconomic policies are more difficult to predict, investors will find larger investment risks, and in the case of infrastructure services, because of their high capital intensity, long gestation periods and long useful-life periods, these risks are even bigger. Thus, private investors will tend to secure wider profit margins and would apply relatively high fees or prices to these services in order to somehow compensate for the perceived high market and macroeconomic risks, even if higher prices will reduce the demanded volume to some degree and this will translate in higher average service costs because of lesser exploitation of scale economies in the respective infrastructure.

54

Regarding the combination of national and regional policies to foster regional development in China, see Bourguignon, Franรงois (2003). 32


Second, because of the economies of scale originated on technology factors, the more (less) pronounced this feature is in a given infrastructure service, the more (less) likely it becomes that in free competitive markets the supply of this service will be concentrated in a few rather large providers. Thus, it would usually be the case that service provision will take place under some sort of oligopoly or monopoly arrangement, in which service providers will tend to abuse the market and set relatively high fees or prices for the service. The impact will evidently be economically inefficient and socially unfair, as the users of the service will have to pay more: units of production which utilize the service in any industry throughout the regional economy will be affected by higher costs, and individuals or households who consume the service will face more difficulties to afford it and will suffer welfare losses. In turn, the units of production affected by higher infrastructure service costs will lose competitiveness relative to competitors from other regions or abroad, and this will make it more difficult to maintain existing jobs or create additional ones at a reasonably fast pace. These problems are exacerbated in those cases when the infrastructure services under consideration have less chances of being substituted by other services which are similar to certain extent, or by identical services which could be provided by new providers entering the market; in these circumstances the abuse of market power by providers will be even bigger and fees or prices for the service will be set still higher. Third, the quality of infrastructure services is frequently also another challenging issue. Particularly when oligopolistic or monopolistic market conditions prevail, users of the service find it very difficult, or impossible, to change to a different service provider when the quality of the service they get is unsatisfactory. The lack of sufficient competition resulting from the conditions commented above translates into weak incentives for service providers to deliver quality and reliable services. As discussed before in the case of abusive pricing, quality deficiencies also damage the competitiveness of the service users throughout the different industries, provoke erosion of employment and job creation in the regional economy, and lower the welfare of individual and household consumers. Fourth, the weak competition which is regularly observed in infrastructure services also slows the speed of innovation in technology and management among service providers. This provokes that their costs and quality evolve less favorably over time and makes that the problems listed before last for considerable periods of time. Finally, in countries where infrastructure services are mostly provided by public service units, and even if some participation from private and social actors take place, bottlenecks in the supply of these services lead to curtailments and administrative rationing in different forms (express authorization to get a service, long waiting time for new applicants, etc.). This presents a fertile environment for corruption, as service users who can afford it opt to pay bribes in order to receive the services55. Again, as mentioned in previous sections regarding other classes of services, governments at the national or sub-national (regional, metropolitan, local) deny in some countries that problems of quality, inefficiency or corruption exist with respect to infrastructure services. This is a counterproductive strategy for public officials and political actors, or for non-state actors who sometimes provide the services (private sector firms, civil society organizations, etc.), especially when these problems are widespread and before the eyes of large numbers of citizens56, as it leads to inaction or failure in 55

See and Bhargava, Vinay, et. al. (2004), and World Bank (1999).

56

The accelerating use of new media –because of the fast development of information and telecommunication technologies- is also contributing for individuals to share more openly their 33


implementing effective solutions, public trust on government is diminished, and a gap widens between authorities and the population served. To overcome these particular problems, other governments go instead for making transparent to service users the regulations and quality standards that ought to be observed in regard to the provision of these services, and provide service users with ways to communicate to the public administration proposals to enhance services57, denounce inefficiencies and quality problems, corruption, etc. Table 2 in Section 1 provides relevant data on how these problems impact on development, on very basic needs. Complementing this, Table 8 below presents some additional statistics from different countries to illustrate also how problems in the provision of infrastructure services impact in other dimensions of development, for instance with regard to modern needs arising in the information age. TABLE 8 SOME INDICATORS ON THE USE OF DETERMINED INFRASTRUCTURE SERVICES IN CHINA AND OTHER COUNTRIES Electricity &

South China Brazil Canada Germany India Mexico

Connectivity Electric power consumption (kWh per capita) (2007)

Turkey Africa

2,332

2,171

16,995

7,184

542

2,036

4,944

2,238

Mobile and fixed-line telephone subscribers (per 69.3 100 people) (2007)

84.4

116.9

181.8

24.3

82.0

97.9

109.8

Personal computers (per 100 people) (2005)

4.9

16.1

87.6

60.6

1.6

13.6

8.5

5.7

Internet users (per 100 people) (2007)

16.1

30.9

72.8

72.5

4.1

21.2

8.2

30.1

Fixed broadband Internet subscribers (per 100 people) (2007)

5.04

4.00

27.52

23.83

0.28

4.34

0.78

6.51

Source: Infrastructure, World Bank, http://data.worldbank.org/topic/infrastructure

Overcoming these many challenges to secure an adequate provision of infrastructure services to a country or region is a complicated task. Yet, succeeding in it is crucial for unleashing experiences and opinions, thus making more public the issues of low quality and corruption in State or government services. 57

In the appendix, several practices are presented from different countries, in relation with ways in which citizens are engaged by the public administration to improve State or government services. 34


development. The next section discusses some public policies which are applied by different countries in this regard. As it will be seen, the effectiveness of such policies rests not only in their adequate conceptualization and design to address concrete circumstances at a given region and moment in time, but, with the same importance, on their implementation, which calls for considerable capacities from the State and the public administration, both politically and technically. c. Usual public policies to address these problems Governments in countries around the world have historically faced the problems enumerated in the preceding section mostly through the direct intervention of the public sector as a provider of infrastructure services. Indeed, up to the late seventies of the past century, the percentage of the total supply of many of these services (railroad transportation, highways, electricity, airports, telephone, etc.) carried out by State owned enterprises was considerably large in the most industrialized countries, with variations of course among them, but not rarely being over 50% and 75%, and in many cases even 100%. While there were private sector providers of some of these services in several countries, operating under strict regulation by government, it is relatively a recent phenomenon of the last 30 years that privatization of infrastructure services has attained a larger momentum. This can be explained by the fact that most of the challenges associated with determined functions related to infrastructure –like planning, financing, building, operating and maintaining projects- were easier to address through direct intervention by the public sector – through a variety of organizational schemes and public service units-, than through the involvement of non-government actors, who would take part as entities acting on their own or as agents of some sort for carrying out said functions with respect to the public sector-lead infrastructure. In the more distant past, private firms were seldom prepared in many countries to undertake infrastructure projects, because they could not raise the required amounts of finance at reasonable capital costs, or because it was not attractive enough for them to develop the human resources to master complex projects if there was uncertainty as to what the market for infrastructure services would be later on, this being largely dependent on strategies and policies decided by the public administration. And, only some decades ago, even when firms in a variety of countries had learned to leverage larger amounts of capital and have accumulated significant expertise related to infrastructure –in closely related sectors, like housing or industrial construction, or small to mid-size infrastructure projects, including sometimes engineering works of increasing complexity-, their more frequent engagement in infrastructure services has met different obstacles, ranging from insufficiently developed legal frameworks for governments to hire their participation in some or all of the functions mentioned above, to highly risky macroeconomic and regulatory environments. In contrast, public service units were less affected, or not at all, by the limiting factors faced by private firms, as they could in many cases, through soft financial constraints, translate onto public sector finance the high investment, labor and technology costs. The movement towards privatization of infrastructure services which started in the eighties has often been read as an ideological program of conservative governments, perhaps because it was promoted in a highly visibly manner at that time by the governments of Margaret Thatcher and Ronal Reagan, in the United Kingdom and the United States of America, and later transmitted through multilateral financial institutions around the world by imposing it as conditionality on development loans. Countries where governments had closer relations with the private sector, both domestic and foreign, followed these trends. 35


Yet, eventually, the number and diversity of countries around the world, which have come to consider an active participation of the private sector in fostering the provision of infrastructure services, has multiplied. This is because, under certain conditions, this offers interesting possibilities to better allocate the scarce financial resources generally available to the public sector, to other equally important –or some times higher- priorities of development, such as social services, regarding which needs are very large and private investors are relatively less attracted to. After a series of economic crisis, detonated along the same three-decades period by the insolvency of highly indebted governments in different regions of the world (Mexico, Argentina, South East Asia, Greece, Ireland, etc.), with profound regional or global impacts on international financial markets, financial investors both official and private, have adopted increasingly strict lending policies to governments in all countries. Countries with large public deficits and rapidly growing public debt are perceived as more risky destinations for international financial and direct investments and, based on the bad experiences of the last decades, are considerably cut off as attractive financial destinations. Faced with limited access to international finance, the development prospects of said countries are geared more to domestic savings only, thus pointing to slower economic growth and less rapid improvement of living conditions. Thus, to maximize investment finance -public and private-, under closely scrutinized public deficits, governments in very diverse countries look nowadays at the possibilities of fostering investments for infrastructure services through resources that can be available from private investors, to release public investment resources from those activities in order to better allocate them to State or government services and social services. From this perspective, privatization of infrastructure services has become a practical strategy to foster development, under the circumstances which permeated through global financial markets in the past decades, although at its origin this strategy had different roots, more ideological and less structural58. Yet, the intrinsic problems about infrastructure services enumerated in the previous section remain and must not be overlooked under any circumstances by governments, at the risk of committing serious mistakes when adopting strategies for the provision of infrastructure services based on the active participation of private investors. Historically, infrastructure services were largely provided directly by the public sector in most countries, because it was the case that governments could exert better control over State owned enterprises (or public service units), than over private suppliers. Their central public administration had at earlier stages of development, sufficient capacity to decide on priority infrastructure investments, within and across regions of the country. However, innumerable errors may have occurred59, in the sense that that infrastructure projects were not always completed by the time when surrounding development needs required them most, causing both sometimes bottlenecks in the provision of determined services in certain regions or 58

The history and development of public-private partnerships in public service delivery in China are analyzed in LooSee Beh (2010). 59

Unfortunately, these errors were seldom evaluated and documented, thus limiting the possibilities to share knowledge and learning from past experiences for other development stakeholders. 36


locations, and at other times resulting in idle capacity for significant time when investments were pursued before strictly needed (often because of political, electoral or corrupt interests on behalf of public decision makers). As the complexity of planning evolved with higher development levels, and as such errors became increasingly costly, diverse countries have pursued decentralization strategies in different ways, involving sub-national (regional or local) governments to certain extent in the planning and implementing stages of infrastructure projects, while maintaining control at the central or national government on the aggregate expenditure and debt flows. Similarly, the provision of infrastructure services through State owned enterprises or public service units permitted the public administration to effectively control the fees or prices charged to the users of those services. It is impossible to assess to what extent these were efficiently set to the right values by the public administration in most countries over time60, as public managers and decision makers were usually confronted with varying incentives to set these service fees or prices below or above the corresponding economically efficient levels. On the one hand, whenever public finances permitted, service prices or fees could have been maintained below the optimal levels such as to repress inflation, protect their affordability to the neediest people, prevent social conflicts or unrest, or to avoid negative political effects for government as a whole, particular government agencies or determined political personalities. In some cases, however, the lower sales income for the public service units could have reduced successive investments for the corresponding public service units, constraining their expansion of capacity or the improvement of their performance and quality, harming service users in these other ways. In extreme cases, supply limitations of some infrastructure services could have resulted in major bottlenecks in inter-city transportation, severe urban traffic congestion, electricity blackouts, curtailment of water services, long waiting times to get a contract for telephone or internet services, and so on. On the other hand, under more binding constraints on public finance, service fees and prices could have been set above their optimal values, with public decision makers actually abusing of the market power intrinsic to these activities, to generate more public income. This latter case was more likely to arise in those cases when service prices or fees could be determined by administrative decisions, thus avoiding the complications of applying taxes which could only be done through approval by legislative bodies. Yet, this avenue to generate additional income for the public sector in general and for public sector units in particular, has always, brought about considerable collateral costs, consisting in negative reactions of different intensity from service users and, even more importantly, generalized economic inefficiencies which work against economic growth and social welfare61. Finally, the provision of infrastructure services directly by the public administration has frequently caused, in different countries, pervasive problems of quality and nil or slow technical and administrative innovation. This comes as a natural result from the insufficient 60

Again, no systematic efforts have been made to gather and document such experiences, making it more difficult to learn from past practices.

61

A well established conclusion from microeconomic fiscal analysis is that taxing intermediate inputs of production generates most distorting effects in the overall allocation of resources throughout the economy. Yet, evidently the same result occurs when some infrastructure services are used by producers in other industries and the prices of such services are administratively set above their economically optimal levels. 37


competition which is natural in many cases to the provision of infrastructure services, as discussed before. Nevertheless, these problems are magnified when service delivery is carried out through State owned enterprises (public service units), because of the myriad of constraints imposed on them by the public administration, through budget restrictions, rules and regulations on human resource management, procurement, and so on. In sum, State ownership and operation of public service units by the public administration, with diverse degrees and modalities of decentralization, has historically provided in most countries an avenue to foster the provision of infrastructure services, but this strategy has in no case been exempt from the problems commented above62. As alternatives, countries have explored other strategies, including the reform of public sector units and privatization. The reform of public sector units may proceed as an extrapolation of the historical strategy, looking in a piecemeal fashion to overcome the most evident deficiencies in particular public service units. In many cases, capacity building in human resources, at all levels –workers, managers, executives and boards of directors- has some positive results. In special cases, institutional and organizational reforms are also helpful, for example to merge some units into others, or to introduce mechanisms to enhance some collective improvements in a corporative-like manner63. Furthermore, these reforms can be strengthened by means of systemic improvements in public governance, applicable to all or determined groups or classes of public service units, like: changes in rules and regulations applied on many functions which affect their performance, including: decisions on investments, procurement, management of human resources, marketing, pricing, contracting of technology, etc. It is difficult to establish which aspects of the management of public service units can be enhanced most by specific changes in related rules and regulations, as the situation is different in all countries and varies over time64. In any case, it appears that the most promising systemic reforms in this regard nowadays consist in nation-wide measures to warranty satisfactory outputs and performance from all public service units, through introducing legislation on disclosure and transparency, as well as granting citizens the right to freely access public information about the public sector (on a very ample spectrum of matters, such as investments, procurement, recruitment, remunerations, outputs, beneficiaries, and so on). In addition, experience in many countries is cumulating, with regard to the enhancement of public service provision by means of engaging citizens and civil society organizations, in different ways and to diverse extents, in a variety of the functions carried out by public service units65. Indeed, if the ultimate goal of public service provision is to serve the people, it makes lots of sense to involve citizens and civil 62

For a discussion on public service units in China, see: Mako, William (2003); Schick, Allen (2004); Shirley, Mary, et. al. (1998); World Bank (2005). For an analysis of water utilities in urban areas of China, see Browder, Greg (2007).

63

See Mako, William (2003) for a related discussion.

64

For a discussion on the reform of public service units in China (not limited to infrastructure services, but in general), see: Schick, Allen (2004) and World Bank (2005).

65

See UNDESA (2008). 38


society in closer interactions with the public administration (from planning and design of strategies, policies and programs, to the monitoring of their implementation, up to their evaluation and the making of proposals for continuous improvement) 66 67. About privatization, it is clear that a free-market approach is out of the picture, because of the problems which are highly likely to occur, as already discussed. It is universally accepted that while the participation of private investors and operators can bring additional investment, managerial, technological and innovation benefits, it is always required that some types of public regulation be applied, to bring outcomes and performance from the private service providers closely to the goals established for the common good by government in the national development strategies. Said public regulation is necessary when previously State owned units are sold, leased or transferred for operation by the private sector (including civil society organizations in the form of not-for-profit private entities) in different ways; or when different kinds of concessions or authorizations for private service units are granted; or when publicprivate partnerships are to be put in place. The general regulations -applicable to all providers of a determined infrastructure service-, consists basically of rules on pricing, as well as on quality and reliability standards. In addition, more specific rules are imposed on each particular private investor68 who gets authorized by the public administration to deliver a specific infrastructure service, when concessions are granted or public-private partnerships are established. Such specific rules for particular providers typically refer to: geographical area for the delivery of the service, targets for the expansion of coverage over time; period during which the private provider is entitled to deliver the service and provisions on the transmission of ownership of the infrastructure over to the State at the end of said period; procedures to solve controversies between the public administration and the private provider, and so on69. Besides, in special cases, when the concessions or public-private partnerships may involve public goals to extend coverage to determined groups of population or geographical zones where people cannot afford the service, or where delivery is especially costly and unprofitable for the private provider, the concession document or the public-private partnership contract normally includes rules on the

66

The appendix to this paper includes a collection of examples from different countries, in which diverse ways of engaging citizens in public development affairs has brought about significant improvements in the outcomes, compared to traditional practices in which the public administration acts alone.

67

For a discussion on the participation of citizens in price-setting hearings in China, see Wang, Xixin (2008).

68

These generally include firms or corporations who operate for profit. However, in cases in which the goal is to bring determined services to targeted population groups or zones, as part of social development policies (discussed later on), it is often found that service providers consist of civil society organizations which may function as not-for-profit private entities. In the appendix, one of several cases presented illustrates how civic participation in the management of water supply in a region of India solved problems that could not be solved neither by a public service unit, nor by privatization to a private profit-seeking firm. 69

Lam, Jermain (2003) contains an analysis of public-private partnerships in Hong Kong. Additional discussion on public-private partnerships can be found in LooSee Beh (2010) and Yuan, Jing-Feng, et. al. (2010). 39


amount of subsidy that the public administration is to pay to the private provider by reference to performance criteria on the service delivered to the targeted groups or zones. This essentially reflects a framework in which private service providers are seen as agents, who act on behalf of the State and the people, under rules determined by the public administration, for the provision of determined infrastructure services70. In all these matters, there is an impending trend in diverse countries for the public administration to engage citizens, civil society organizations and the private sector, to provide views, reactions or proposals to the public administration, on issues of quality and pricing regulation, location of infrastructure projects, monitoring of implementation and performance, and evaluation of outputs and outcomes71. Whether a country can effectively benefit from the engagement of actors from the private sector and civil society, as an alternative strategy to the traditional provision of the services directly by public service units owned and operated by the public sector, depends crucially on the capacities of the public administration to determine the precise rules which best serve the common good, and to enforce them precisely72 73. In some countries, the public administration lacks the necessary technical skills for it, or the political and economic conditions are such that the public administration can not in fact prevent the capture of regulation and enforcement by the private sector or civil society organizations (through political pressures, corrupt acts, etc.). In such cases, the engagement of citizens and civil society may mostly create confusion and political unrest, while privatization is not likely to result in the enhancement of infrastructure services: desired outcomes will most probably not be achieved, quantitative and qualitative deficiencies in infrastructure services will persist, and government will be negatively affected by the proliferation of corruption in relation to large private economic interests. Moreover, when in certain countries the public administration cannot firmly establish in a trustworthy manner that applicable regulations will not be subsequently modified, unless for reasonable efficiency-increasing reasons, private infrastructure service providers perceive regulatory risks74. These are different from the market- or commercial-risks they normally 70

For a discussion on the issues faced in China about the transition of the State, from direct provider of public services, to rather intervene through strategic orientation, regulation and oversight, see Jing, Jijia (2009).

71

For a related discussion, see Brixi, Hana (2009).

72

See: Villarreal Roberto (2008a).

73

The experience of China on engaging citizens to enhance development in urban contexts is discussed in Enserink, Bert, et. al. (2007).

74

Public officials are also at administrative and political risk when regulations are not clearly and firmly established, as they can be made accountable for discretionary decisions and possibly be accused of corruption when they are in fact required to fill in regulatory gaps by means of special decisions which may be found sometimes unduly rooted on acceptable principles. The more likely it is that the State will seek repeatedly the active participation of private infrastructure service providers, the better it is for public officials to protect themselves by having reasonably precise rules which they can follow. When decisions on the participation of private providers are not to be made repeatedly, but rather in a few cases, it may not be practical to develop full-fledged regulations, yet in these cases public officials can protect themselves in their role of seeking the common good by relying on ad-hoc 40


face, which are rooted in the unavoidable fact that demand for the respective services may in practice be different than originally expected. And they are also distinct from the macroeconomic- or public policy-risks which are derived from the fact that government may affect, through a variety of public interventions, the economic and social development prospects of the region in which a private infrastructure service provider actually invests. The sum of all types of risks, or total risk, may be perceived in some cases by potential private providers as considerably large. Providers of finance for infrastructure projects will supply capital to investors facing large risks only at higher prices, and the cost of capital for infrastructure services will be larger. In turn, because of the high capital intensity of these services, the unit cost of service will be significantly increased. Moreover, investors will also be inclined to compensate for the eventual impact of total risk on the returns they will actually derive on their investments, by increasing the corresponding profit margins through higher service fees or prices. All this, as discussed in earlier sections of this paper, provokes negative impacts on economic competitiveness, employment and job creation, and social welfare. Thus, if the public administration is not capable enough to warranty that regulatory and macroeconomic or public-policy risks are to be reasonably low during the period in which private providers are to deliver the services, the possible gains from the privatization strategy to infrastructure service provision, in terms of competitiveness and welfare, will not clearly be reaped. Alternatively, if private investors are required by the public administration, upon negotiations about concessions or public-private partnerships, not to resource to unreasonably high service fees or prices, they usually request from government some forms of financial protection (like certain types of public warranties against determined events, or determined warranted basic payments) to reduce their exposure to risk. This will not constitute a true way out of the problem discussed in the preceding paragraph, if the underlying causes of regulatory and macroeconomic- or public policy risks are not effectively reduced or eliminated, because the public warranties will likely have to be paid by the government; this will increase public debt and, sooner or later, higher taxes would need to be introduced, thus damaging competitiveness and welfare75 76. In other words, pretending to solve the menace of real risks through warranties which essentially are contingent liabilities on the public finances, the problems do committees in which officials from different Ministries take part (technical sectors, finance and budgeting, public administration and auditing, etc.). 75

Special oversight –trough State auditing institutions or diverse forms of social auditing- is recommended over the granting of concessions or the negotiation of contracts for public-private partnerships for the provision of infrastructure services by private sector actors, as major problems can arise when these seek to gain different forms of protection from government, either in the form of corrupt schemes to win the concessions or contracts in supposedly competitive processes, or to receive more favourable treatment in the clauses of the concession titles or contract documents, including financial warranties as commented in the text. These corrupt acts translate into different kinds of problems. First, they have an impact on public finances and ultimately hit the taxpayers. Second, they also work against legitimate competition among service providers and risk that the provision of services be entrusted on providers who may not be the most efficient and innovative, thus harming the overall prospects for competitiveness, welfare and growth in the respective region. For a discussion on a variety of issues about corruption in Asian countries, see Bhargava, Vinay, et. al. (2004). 76

Brixi, Hana Polackova, et. al. (2002) studies diverse issues related with contingent liabilities of the public sector. 41


not disappear. If governments do not see ahead conditions –technical and political- to credibly make private investors perceive reasonably low risks, privatization is less of a positive alternative to the traditional provision of infrastructure services directly by public service units. In sum, it can be stated that the provision of infrastructure services is always a complicated matter because of the very nature and special features of infrastructure. All strategies for the provision of these services revisited in this section –direct provision through public service units, the reform of these in several directions, and privatization- imply considerably difficulties and uncertainties77. At the end, permanent improvements in the provision of these services are a byproduct of the maturity and strengthening of the State itself, as a key factor to foster economic and social development. Essentially, success in this field will be anchored in the increased capacities of the State to enact adequate legislation to make the functioning of public administration better (through human resources development and improved institutional organization) and by the closer and positive interaction with non-state actors from the private sector and civil society (through laws on transparency78, public-private partnerships, citizens’ engagement, civil society organizations, and so on). Table 9 presents some data on the use of public private partnerships for the provision of infrastructure services in several countries. TABLE 9 SOME INDICATORS ON PUBLIC-PRIVATE PARTNERSHIPS FOR INFRASTRUCTURE SERVICES IN CHINA AND OTHER COUNTRIES Public - Private Partnerships

China

Brazil

Canada Germany

India

Mexico

562.0

South Turkey Africa

Absolute Values (Millions) Investment in energy with private participation (current US$) (2008) Investment in telecoms with private participation (current US$) (2008)

678.8

5,576.1

NA

NA

12,454.3

NA

8,385.9

NA

NA

9,852.9

NA

3,434.0

3,636.5 1,927.0 3,954.0

77

Li, Chun (2009) addresses some dilemmas faced by China in this respect. An analysis focussed on the development of the public transport sector in China is presented in Gwilliam, Ken (2007).

78

On access to government information in China, with comparisons to other countries in Europe, see Carter, Megan (2011). For an analysis of regulations applicable in China to access government information, see Horsley, Jamie P. (2007, 2009, 2010) and Hubbard, Paul (2008). A discussion on freedom of information is also offered in Rick Snell (2007). 42


Investment in transport with private participation (current US$) (2008)

8,659.7

NA

NA

5,528.5

1,305.1

NA

1,843.0

800.4

NA

NA

75.9

NA

NA

NA

0.0157 0.3495

NA

NA

0.9933

0.0520

NA

0.4631

0.5256

NA

NA

0.7858

0.3362 0.6971 0.5333

Investment in transport with private participation (as 0.0049 0.5428 proportion of GDP at current prices) (2008) (%)

NA

NA

0.4409

0.1207

NA

0.2486

Investment in water and sanitation with private participation (as 0.0225 0.0502 proportion of GDP at current prices) (2008) (%)

NA

NA

0.0061

NA

NA

NA

211.6

Investment in water and sanitation with private 973.6 participation (current US$) (2008) Percentages Investment in energy with private participation (as proportion of GDP at current prices) (2008) (%) Investment in telecoms with private participation (as proportion of GDP at current prices) (2008) (%)

NA

Source: PPP investment figures are from Private Sector, World Bank, http://data.worldbank.org/topic/private-sector; GDP figures are from UN STATS, National Accounts Main Aggregates database, http://unstats.un.org/unsd/snaama/introduction.asp. Note: NA means data are not available.

43


d. Fiscal considerations Fiscal considerations have been interwoven in the discussion contained in the preceding sections, so this section adds only a few remarks. First, infrastructure services, being capital intensive and having usually large efficient scales, imply bulky investments. The public administration must plan and program its finances to secure adequate financial slack to accommodate infrastructure investments when these are timely. As under prevailing conditions in international financial markets, governments face stricter constraints in access to finance for investment, they must therefore assess the priorities for development and decide on the best allocation of public investment to State or government services, social services, and infrastructure services. Second, if facing financial restrictions, governments can find useful possibilities to complement public investments with private ones, directing the latter to infrastructure services and concentrating public resources on social and government services79. Specifically, in the case of infrastructure, governments may concentrate public sector investments in lagging regions –where market risk for infrastructure services is relatively higher, and thus private investors are less suited to provide these services-. As a general principle, governments can seek to free public investment resources from activities which are not among of the top priorities for development, or which present relatively lesser risks, and call in private investments to these activities. Thus, privatization is not to be seen as a policy to be applied across the board, but rather as a possibility to address concrete and well determined needs, when and where it makes sense. Third, governments must be capable to design and enforce adequate public regulations on private infrastructure service providers to best serve the common good. If governments lack sufficient capacities in this regard, attracting private investors to provide infrastructure services is unlikely to be an effective solution and will sooner or later increase public debt or translate in higher taxes. In this case, it would be more convenient to enhance infrastructure services via the reform of public service units, although looking beyond piecemeal interventions and more into systemic measures comprising institutional reorganization and legislative reform to make it more people-centered and to increase transparency and accountability of the public sector and engage non-state actors from the private sector and civil society with the public administration for the provision of public services.

79

Data presented in UNDP-CIRD (2008) show that, in China, a deep structural change in fiscal expenditures has gradually been implemented. Fiscal expenditures on economic development have decreased markedly as a proportion of total fiscal expenditures (from approximately 65% in 1978 to about 28% in 2005). This has permitted to better fund administrative costs in the public administration (whose share in total expenditures was increased from about 14% in 1978 to roughly 26% in 1991, since when administrative expenditures have remained practically at the same proportion of total expenditures up to 2005). And, with equal or greater importance, fiscal expenditures on social, cultural and educational development have also been augmented gradually and continuously, as a percentage of total fiscal expenditures (from only 5% in 1978 to almost 20% in 2005). While these figures reflect mostly a far-reaching reallocation of fiscal expenditures in ways not necessarily geared to privatization of infrastructure services, they are indicative of the sort of fiscal strategies suggested in the text, about liberating additional fiscal resources –through public-private partnerships or other ways of injecting private resources into infrastructure investments- to devote increasing amounts to social and State or government services. 44


Fourth, as for the sources of revenue that appear best suited to pay for the investment and operation costs of infrastructure services, several considerations can be made. The use of general taxes looks appropriate the more the specific services would pertain to category (i); for example, transportation projects that are used by large numbers of people from different localities and income levels, or basic water transportation or treatment systems for entire cities. If determined projects would rather serve only certain population groups (such as people from high deciles in the personal income distribution, or just urban dwellers, or particularly the inhabitants of a determined locality), it would make sense that a larger share of the total cost recovery should come from the very users of the services, through special levies or from user fees; for instance, an urban highway that will mostly serve private car users of determined neighborhoods. Finally, it is important that, whenever possible, part of the cost of service be transmitted to users via service fees or prices, in order to modulate demand and avoid wasteful consumption and unduly high utilization or congestion of determined infrastructure services. Demand management through efficient pricing can have significant impacts on the needed investments in infrastructure80. These policies can be combined with other special ones to help the poor afford infrastructure services in equitable terms81.

3.

General conclusions and preliminary ideas to integrate inter-related public policies into a coherent strategy for enhancing public service provision.

This paper has revisited the importance of public services regarding their short run effects on wellbeing, income and employment, and their mid- and long-run effects on development. From either perspective, their importance is considerably high. The paper has offered a conceptual framework to highlight the relevance of those services which are expected to be available to all people in the same conditions, within a country. These are the services which can duly be deemed as public services –because they are to attain everyone-, regardless of whether they are provided by the public sector or by non-state actors like the private sector or civil society. Three broad families of services were analyzed in some detail: i) State or government services; ii) social services; and iii) infrastructure services. For each class, the paper discussed their intrinsic nature and features, revisited the problems most generally observed regarding their provision, commented on public policies which are usually adopted to overcome those problems and offered some basic considerations on the fiscal implications associated with the enhancement of public services in each of these three classes. Clearly, as seen throughout section 2, the issues to keep in mind with regard to each of these different classes of public services are different. An overall or comprehensive effort in any country to enhance public services should not ignore their differences. Rather, specific strategies are called for each of these classes of services.

80

An interest experience in this regard, from China, is documented in Wang, Xixin (2008).

81

A discussion on these issues, specifically for the case of water services, can be found in World Bank (2007). See also Villarreal (2008b). 45


Yet, to best foster economic and social development, it is required that all types of public services be enhanced. In what follows, a preliminary attempt to describe how an overall strategy to this aim could look like. The following diagram summarizes the main elements. DIAGRAM 1. SCHEMATIC OVERVIEW OF A COMPREHENSIVE STRATEGY TO REFORM PUBLIC SERVICES.

As a point of departure, it needs to be established, at decisive political levels, a fundamental consensus on what the overall reform of the public services is about, and how this entails improvements not only in certain services of government, but also on social services and infrastructure services. The simultaneous reform of these three classes promises progress in terms of public governance and enhanced trust of the people in government, as well as better social equity and inclusion, combined with higher competitiveness and welfare. Thus, the reform ought to be appealing for constituencies in the public, social and private sectors82. In this regard, the fundamental motives for such a reform should be adequately found both in the domestic needs to improve services with a focus on better servicing the people in the country, and simultaneously transforming the structure of activities in the economy to cope with increasingly demanding and competitive challenges in a globalized world.

82

The impact of citizens and civil society organizations on Chinese governance reforms, especially in the local governance level, is analyzed in Teets, Jessica (2008). 46


Furthermore, it is fundamental to reach a general understanding among political forces and decision makers, in the sense that required changes comprise not only additional investments by the public sector, but that overall success needs also administrative and organizational reforms in every public service unit, as well as nation-wide legislative reforms to create solid foundations for a permanent improvement in the provision of public services. None of these changes is trivial, and, as all changes, it is likely that resistance is to be met in one way or another from different fronts: • taxpayers, or the population initially in the informal economy, who would need to contribute to enlarge the resources available for the public administration to expand coverage and increase quality of government, social and infrastructure services; • public sector employees and managers, who would be confronted with the needs of further training, changes in organization –including further decentralization with accountability- and new production and administrative procedures, aimed at augmenting productivity and lowering service costs, as well as stronger commitments with service quality, transparency and accountability, including the reduction of corruption; • political authorities, who would have to assess with prudence and responsibility farreaching legislative reforms to make social services truly public ones, and to reasonably create spaces for non-government actors -like citizens, civil society organizations and private sector entities-, to engage with the public administration in joint efforts to monitor public quality, the correct utilization of public resources and possible opportunities for innovation and improvement; and • high-level decision makers in the public administration, who would have to decide on numerous concrete cases, especially with respect to infrastructure services, on the relative merits of reforming public sector units or opening for the active participation of public service providers, on the basis not of ideology, but on the capacities of the public administration to design and enforce necessary public regulations to best serve the common good, preventing capture from interest groups and securing reasonably low regulatory and macroeconomic- or public-policy risks. Once a shared understanding among political decision makers is reached on what the comprehensive reform entails, negotiations have to generate adequate endorsement to move forward with a clear sense of direction. Thereafter, a gradual process needs to be pursued over considerable time for the twofold purpose of creating better juridical foundations and transforming existing institutions. While the circumstances and particular needs of every country are different, in general terms, reforms have to address the following aspects. On their part, legal reforms ought to result in improvements on a number of different matters related with public services, particularly to provide: • Decentralization principles and rules; • rights-based social services (focussed on individuals and households, communities and regions; thus introducing portability), regarding: education, healthcare and social protection to face vulnerability; • regulations on infrastructure services (pricing, quality, etc.); • fiscal principles and rules (use of taxes, service fees, subsidies, transfers, grants, public debt); • principles and rules on public-private partnerships; and 47


• principles and rules on civil society organizations and citizens’ engagement in public services provision, including related rights (free speech, association, petition, transparency and access to public information83, and participation in public development affairs). In the recent interview to an international news netwoerk quoted in the introduction to this paper, the Chinese Premier, Wen Jiabao, expressed: “My view is that a political party, after it becomes a ruling party, should be somewhat different from the one when it was struggling for power. The biggest difference should be that this political party should act in accordance with the constitution and the law. The policies and propositions of a political party can be translated into parts of the constitution and the laws through appropriate legal procedures. All political parties, organizations and all people should abide by the constitution and laws without any exception. They must all act in accordance with the constitution and laws. I see that as a defining feature of modern political system development.” Thus, the political views at high leadership levels point to further elaborate the juridical foundations on which the next stages of development in China are to be rooted. Analysts should pay close attention to changes in the Chinese legislation, if the quotation above is to be interpreted as a signal that, more and more, major policies for development –economic, social, political, environmental, etc.- are to be firmly anchored in laws and regulations. For fostering public services, the list of legal reforms suggested above contains important elements for a preliminary legislative agenda. Indeed, the importance of this should be underlined, as it represents a key element of State and institutional modernization. Not only the Rule of Law would continue to prevail for the administration of justice and the conduction of civil affairs, but it would progressively encompass the official development strategies and policies, which all public officials and other development stakeholders will follow. The implications are several, and all of significant importance. First, development will be ever more sustained on State policies, providing continuity and certainty to strategies and policies, thus reducing the margins for discretionarily or possibly capricious variations introduced when leaders or officials change. Second, public governance for development will be enhanced, as administrative arrangements of the national, provincial and local governments will be progressively codified in the Law, resulting in increased juridical certainty which will lower negotiation costs and will protect public officials from political risks when making necessary decisions for development. And, thirdly, there will be legal standards against which to contrast public strategies and policies applied in practice. This will undoubtedly facilitate more objective evaluation, will increase accountability and will make more effective the fight against corruption. All this is of fundamental importance for enhancing public administration and development management. In particular, as discussed in this paper, far reaching strategies to foster public services in ways which are effective, efficient, equitable, inclusive and sustainable, need well established legal frameworks in several regards. First, to convert social services in truly public ones, that can be enjoyed by all the people in the same conditions. This may comprise legislation on substantive issues -to make these services fundamental entitlements, and to enact countrywide mechanisms aimed at securing inclusive and equitable public service delivery by expanding coverage and warranting affordability for the poor and vulnerable-; and also on ancillary matters, such as establishing reasonable service standards. Second, to enhance the 83

See: Horsley, Jamie P. (2007, 2009, 2010) and Hubbard, Paul (2008). For a comparison of policies on access to government information in China and in Europe see: Carter, Megan (2011). 48


conditions for further decentralization of the public administration, including aspects of a fiscal nature, effective inter-governmental coordination among different agencies –including ministries, public service units, etc.- and between the national and sub-national levels of government, accountability and transparency. Third, to provide enabling conditions for the participation of non-state actors in several ways in the provision of public services, whenever convenient for determined purposes, including public-private partnerships and the engagement of citizens, civil society organizations and community organizations. In a complementing way, institutional reforms are simultaneously called for. These must typically address both, the national and sub-national levels of government. The following reforms seem central to the process at the national level: • To establish some kind of national decentralization coordination entity, to champion the process and look inn a comprehensive and ordered manner to aspects of design, implementation, monitoring and evaluation, while considering not only issues about public finance, but also on territorial development; • to found a national poverty alleviation and social equity entity, which in connection with other institutions in the field of social development, pays particular attention to matters of access and affordability for target groups to public services of different types. This entity should establish criteria on subsidies, transfers, grants, etc., and on priorities to target in terms of population groups, regions, and so on; and • to create national regulatory agencies, endowed with competent personnel, most importantly with respect to: telecommunications, transportation, healthcare, water and electricity. And at the sub-national level, the reforms listed below appear also as of top importance: • Reform of public service units, including training and reorganization issues, plus administrative simplification to ease unnecessary and inefficient controls that are some times applied on a large number of matters; • capacity building in local governments, through training, knowledge sharing, technological modernization (including e-government applications), etc.; and • capacity building in civil society organizations (observatories, councils, non-profit private organizations), as their engagement with the public administration, in diverse functions and ways, can contribute to more innovation in public services, better design and implementation of programs, more effective oversight on performance and control on corruption, more complete and fair evaluation of outcomes, and so on84. On the bases of said legal and institutional reforms, the provision of State or government services, social services and infrastructure services is to be improved over time. This requires, in most cases, strategies which look not only upon the public administration, but which somehow take a more ample view on development management. Among key aspects to take into consideration in this respect are: • To foster a more integrated public administration, and better governance over the public sector, to attain well coordinated inter-governmental interventions. This may be

84

White, Gordon (1993) discusses some prospects of citizens’ engagement in China, based on a case study from an urban area. 49


accomplished through better developed rules and regulations, coordinating commissions and e-governance85; • to permanently engage citizens and civil society organizations in the enhancement of public services in diverse ways (including the use of citizens-friendly information and indicators systems, deliberative fora, oversight organizations, e-participation, etc.)86; and • to secure transparency and free access to public information in the public sector. Versatility in the systems that deliver public services –category (i) services, in the terminology utilized in this paper-, in the classes of State or government services, social services and infrastructure services, is needed to combine different, yet complementary, modes of service delivery, and to bring in this variety of mutually reinforcing public policies to increase coverage and quality, while making public services affordable with equity for the poor. As addressing all these challenges in a simultaneous manner is evidently an extremely complex endeavor for any government, particularly in a short period of time, gradual approaches must be followed while keeping attention on the whole picture. In the case of China, in particular, a review of the literature and available information suggest that consistent efforts need to be made along most of the lines mentioned in this section, specifically: to introduce necessary regulations; to strengthen regulatory agencies in ways to improve public governance and lower regulatory risks; to create public institutions to pursue universal access to public services in similar conditions to the entire population, or relevant age groups-, and equitable access to public services for the poor and disadvantaged; to improve legislation and practices on the involvement of civil society organizations, citizens and the private sector in diverse functions (planning, design, financing, implementation, monitoring, auditing, evaluation, etc.) in relation with the provision of public services; to reform public service units, and to improve or innovate the design and implementation of fiscal strategies and policies that are best suited to finance the provision of public services of different types, including State or government services, social services and infrastructure services.

85

See Seifert, Jeffrey W., et. al. (2009).

86

In 2003, the law on Environmental Impact Assessment was approved in China and it encourages public participation in the appraisal of the environmental impacts. However, case studies also show the necessities of capacity building of Chinese environmental organizations (Andreasen, Bjarne 2010). Similar new laws and regulations on citizens’ participation in China are seen to have brought positive influences to the society. For example, the Open Government Information Regulations is considered to be “a remarkable development” (Horsley, Jamie 2007 & 2010). “It defines individual rights on requesting government information” (Carter, Megan 2007). Related practices include legislative hearings, meetings and workshops, notice and comment procedures, and so on (Horsley, Jamie 2007; Warwick, Mara 2007). However, the challenges of nationwide policy implementation, as well as other difficulties, still exist (Hubbard, Paul 2008) and actions need to be done accordingly (Wang, Xixin 2008; Carter, Megan 2007). Case studies also show that deliberative democracy, of which the aspiration is for the mass public to influence policy making through public discussion, has appeared in the format of deliberative polling in some areas of China (Fishkin, James, 2010). For a discussion on the limits of citizens’ participation, see: Wang, Xixin (2003a, 2003b). 50


Ideally, these reforms would be carried out with a broad systemic approach87, to avoid that piecemeal interventions –for instance, to reform particular public service units- lack sufficient coherence and result in a myriad of distortions. As a consequence of reforms in these directions, not only will the provision of public services in China be enhanced as needed by the country in its coming development stages, but they will likely also gradually translate into more modern public administration practices, in general, which are more people-centered, more quality-oriented, more efficient and more transparent. Last, but not least, these reforms will without doubt also strengthen the capacities of public service units from the public and private sectors of China, to export later on their technical and managerial expertise on public services to a variety of developing countries.

87

China has already started to design and implement strategies and policies for public services with this approach. For example, after several years of experimentation at the local level in diverse cities. The State Council introduced in 1998 the “Decision on Establishing the Urban Employees’ Basic Medical Insurance System” to cover all urban employees. Yet, more ambitious and inclusive strategies have to be followed to further develop a universal social security system, covering both urban and rural residents. Similarly, a free compulsory education system for all rural areas is being developed by the Ministry of Education, to provide all rural students from poor families with compulsory education, free textbooks and boarding subsidies. See UNDP-CIRD (2008). This new system is likely to enhance financial and operational efficiency, plus coverage and equity, compared to the prior situation in which more than three-fourths of funding for compulsory education was provided by townships. 51


APPENDIX SUMMARIES OF SOME RELEVANT CASE STUDIES ON THE ENGAGEMENT OF CITIZENS TO ENHANCE PUBLIC SERVICES Every year, the United Nations grants its Public Service Awards, to organizations which innovate within the public administration in several ways. One of the categories in which these awards are granted, is that of engaging citizens to participate in public development affairs, particularly with the aim to enhance the performance of public administration. The summaries presented below, of relevant case studies on the engagement of citizens to improve public administration, are taken from the international United Nations Public Service Awards Database. The cases are organized in what follows by major regions of the world, listed alphabetically.

A. AFRICA 1. Phelopepa Health Care Train (South Africa, 2008). Link http://unpan3.un.org/unps/Public_NominationProfile.aspx?id=302

:

Abstract: The Phelopepa Health Care Train travels to 36 remote rural areas each year to provide primary healthcare services and health education to the rural poor. All of the train’s clinics and offices are equipped with computers and connected to the internet. In its classroom, Phelopepa gives a 5-day training course to 16 community members in each location in basic healthcare measures. Graduates of this programme become health volunteers in their community, sharing the information they learned during their training. Following the train’s departure, the graduates are given a one week training in home-based care, with a focus on HIV/AIDS. Phelopepa also runs several community outreach programmes throughout the course of its stay. These include a school outreach programme through which it offers screenings and examinations as well as health education to children at community schools and pre-schools in the surrounding villages and a counselling outreach programme wherein staff visit local schools to conduct sessions with teachers, children and parents on a health topic of their choice. Community support and participation are of key importance to the credibility and effectiveness of Phelopepa. A week ahead of the train’s arrival, a Phelopepa team arrives in the area to hold preparatory discussions with the community, local medical personnel and community leaders and to jointly identify the 16 people who participate in the 5-day training and the schools to be visited during the outreach activities.

B. ASIA 1. Institutionalization of community managed drinking water supply programme and user level water quality (Water and Sanitation Management Organization, WASMO, India, 2009). http://unpan3.un.org/unps/Public_NominationProfile.aspx?id=560 Abstract: This initiative scaled up water reforms by building social capital and engaging citizens in one of the most draught prone areas of India, the Gujarat State. The initiative led to the formation of Village Water and Sanitation Committees (VWSCs) in 13.542 out of total 52


18.600 (72 per cent) villages of Gujarat. Partnerships have been formed with 75 NGOs. 50 per cent (160 million people) of the population now has household tap water connectivity, compared to 12 per cent at the country level. The initiative has led to a partnership between the state and the people, the resources and responsibilities having been transferred to the community leading to a paradigm shift in the role of governance from provider to facilitator. Local leadership has been trained for taking on the responsibility of their own water supply. 2. Climate Mitigation - Ensuring Water and Food Security through Improved Service Delivery (Multi Disciplinary Programme Unit, India, 2010). Link: http://unpan3.un.org/unps/Public_NominationProfile.aspx?id=780 Abstract: Tamil Nadu is one of the driest states in India, with only 925 millimetres of rainfall a year and droughts occuring in 3 out of 10 years, severely limiting food production. Lack of ownership by the community, absence of grassroots level institutions and dying communal practices have resulted in dilapidated irrigation infrastructure. The previous rehabilitation attempts were infrastructure centric and hardware driven, neglecting the voice, choice and wisdom of the community. Community collective action was lost in a culture of recipient behaviour. Limited interactions between farmers and public agencies resulted in small portion of the population capturing benefits. This left geographies, regions and communities without service. To change the situation, and to give choice and voice to citizens in water decision making, 3695 Water Users associations (WUAs) have been established, benefiting 1.54 million acres. This provides for direct participation of 2.2 million water users. The WUAs have been legally empowered for leading water and agriculture management in 24.000 villages. The water service delivery has been improved by establishing common meeting places “Single Window Centers” in the villages. The programme reached 3695 Water Users Associations; benefiting 20 million farmers, 60 per cent of whom are small and marginalized. An ICT based model of technology transfer (e-Agri Extension) delivers instant technical advice on crop production, plant protection, and weather and market information to farmers. 3. Collaboration Testing (Saga Prefectural Government, Japan, 2010). Link: http://unpan3.un.org/unps/Public_NominationProfile.aspx?id=818 Abstract: “Collaboration Testing” is an annual process to enhance citizens’ satisfaction level on public services through engaging the emerging new types of public service providers, i.e. civil society organizations (CSOs) and the private sector, in public service delivery. The initiative has three modules for the Government to: i) disclose what the whole Government does and call for proposals on how and to what extent CSOs and the private sector can outperform the Government-provided services, ii) discuss with the proponents whether the proposing entities outperform the Government in reality, and iii) let the private or civil society entities take over the Government through outsourcing or collaboration agreements unless it is clear that the Government outperforms the applied CSOs or private sector institutions. 4. Power of Participatory Public Policy to Save Your Life (Taphraya hospital, Thailand, 2010). Link: http://unpan3.un.org/unps/Public_NominationProfile.aspx?id=800 Abstract: Taphraya is a district on the Thai-Cambodian border, with 55.000 residents and only one 30-bed hospital and thirteen small local health centers. In addition to insufficient health infrastructure, lack of public transportation, financial difficulties, and lack of communication channels to seek help can delay patients with serious health conditions from 53


getting treatment. This results in a significant loss of life that could be prevented. Report of Taphraya hospital showed that the rate of deaths due to late accessibility to health services in Taphraya district is 60 per 100,000 population, twice as high as in the biggest province in Thailand. The high rate of early loss of life motivated the people of Taphraya to call for qualified emergency medical services (EMS). Their needs were expressed through community leaders and the local governors who cooperated to build a district policy to save people’s lives through implementation of comprehensive EMS services for Taphraya. Citizens also served on the EMS planning committee and made-up the majority of committee members. Public hearings were conducted and citizens were empowered to become involved in district-level decisions. The bottom-up policy of ‘Ready to Save Your Life’ enhanced a sense of ownership among citizens. 5. Children Imagination Park through Residents Participation (Seoul Metropolitan Government, Republic of Korea, 2010). Link: http://unpan3.un.org/unps/Public_NominationProfile.aspx?id=717 Abstract: The City of Seoul set up the Children Imagination Park Plan to renovate 300 outdated children’s parks in less-privileged areas by 2010. The renovation work for 100 parks was completed in December 2009. The project was first proposed by members of the community, the issue of outdated parks being raised by the media and local residents. Concerning the renovation work, the City of Seoul collected ideas from a total of 182 people, including college students. For the establishment of the plan, the City of Seoul held sessions to listen to the opinions of a total of 21,896 local residents, including children, in more than 300 locations. For the 100 Children Imagination Parks whose renovation work has been completed, a total of 3.000 volunteers are acting as caretakers to keep them in good shape.

C. LATIN AMERICA 1. Viva Nordeste (Secretaria do Trabalho, Assistência Social e Esporte, Brazil, 2007). Link: http://unpan3.un.org/unps/Public_NominationProfile.aspx?id=188 Abstract: The Viva Nordeste is a governmental program in the Northeast region of Amaralina, a poor and marginalized neighbourhood located in Salvador, Bahia. The slum area is characterized by poverty and violence. The programme promotes the improvement of the living conditions of the community through the introduction of basic policies of social inclusion, looking for changes in the conditions of education, health, living, social communitarian relations, financial-economical and social status of families. Using participatory methods the program created a Development Plan of Nordeste de Amaralina to deal with the social exclusion and high violence that affects the area. By bringing together government, community, non-profit and private sectors, the program seeks to integrate public action in the fields of work and income, education, health, public safety, knowledge, sports, justice and human rights, environment, housing and infrastructure, science and technology, and social work of the three government entities (state, federal and municipal). With the purpose of motivating the community to change their living conditions, the priorities of the program (young people and their families; services to support the community development; work and income generation; and women as heads household) were established with the participation of community members, grass roots organizations and businesses from the community. 54


D. OCEANIA 1. Waterfuture Strategies (Gold Coast Water, Australia, 2010). Link: http://unpan3.un.org/unps/Public_NominationProfile.aspx?id=648 Abstract: For a decade, parts of eastern Australia have been battling one of the most severe droughts in the country’s recorded history, known as the Millennium Drought. For the Gold Coast City the Millennium Drought has caused significant adversity as the city has relied on a single water supply source, the Hinze Dam, to supply a population of half a million people. In 2002, the Hinze Dam dropped to its lowest recorded level of just 28 per cent, leaving less than two years until the Gold Coast would ran out of water. With the city’s population expected to reach 1.2 million by 2056, the Gold Coast’s water consumption will increase from approximately 185 million litres per day (ML/day) in 2005 to approximately 466 ML/day in 2056. To meet the challenges of drought and rapid population growth, an innovative Waterfuture concept to sustainable water planning, management and use was created. The Waterfuture strategies recognise the fundamental value of involving the community in the development of solutions for their future. Involving the community from inception to implementation has subsequently led to outstanding outcomes in terms of social, environmental and economic sustainability. The citizen consultation process employed throughout the Waterfuture process has empowered the Gold Coast community to take ownership of their water future. The result has been rapid implementation of complementary and synergistic water supply, demand management and recycled water strategies that have secured the city’s water supply well into the future.

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VILLARREAL and CAI paper for CIRD Conference October 2010