Performance contracts and its implications in public sector

Performance Contracts (PCs) are state-of-the-art mechanism for improving the quality of organisational performance and satisfying customers’ needs. Performance Contracts in the public sector agencies are instrumental for enhancing good governance, promoting a culture of accountability in the government and translating development goals into reality. PCs as a tool emphasise more on outcome rather than the process. A well-designed PC determines several targets to achieve results within stipulated timeframe and specifies who, what, when, where, and how of performance expectations. It ensures transparency and accountability of an organisation, optimum utilisation of public resources, quantifies achievements of an organisation and above all increases efficiency of the organisation as well as its employees.
Eminent scholars and human resource practitioners have defined Performance Contracts from different viewpoints:
•    According to the American Heritage Dictionary (2009), Performance Contract is defined as, ‘the results of activities of an organisation or investment over a given period of time.’
•    Lane defines a contract as, a binding agreement between two or more parties for performing, or refraining from performing some specified act(s) in exchange for lawful consideration’.
•    OECD defines Performance Contract as, ‘a range of management instruments used to define responsibility and expectations between parties to achieve mutually agreeable results’.
•    Performance Contracting is public sector reforms aimed at improving efficiency and effectiveness in the management of Public service (Kobia, 2006).

Parties to performance contracts
Performance Contract comprises two parties namely Principal and Agent. Principal is the superior entity in the government hierarchy which monitors and evaluates performance of its subordinate office/department. It is responsible for public policy. On the other hand, Agent is a subordinate entity in the same hierarchy. Its performance is evaluated or supervised by Principal. Agent is responsible for implementation of public policies.

Historical perspective of performance contracts
The notion of Performance Contracts was first conceived in early eighteenth century when Robert Owen, a Welsh social reformer and manager of New Lanark Mills, Scotland introduced a system for performance measurement for the workers known as a ‘silent monitor’. The monitor was a small, wooden block hung next to each person’s machine to show the level of his performance. Each worker had a piece of wood, with its sides painted black for bad work, blue for indifferent, yellow for good and white for excellent. The purpose was to impose discipline and encourage better performance among the workers. Performance Contracting originated from France in the 1960s and subsequently was introduced by Pakistan, Korea and India. In Canada the government’s approach to performance contracting and management were rooted in early 1990’s expenditure management systems designed to cut costs during a period of budget deficits. In New Zealand, PC was introduced between mid-1980s and 1990s. In the United Kingdom (UK), PC in public sector was introduced in 1998. A large number of governments and international organisations are now implementing policies adopting this method to improve the performance of public enterprises in their countries.

Why public agencies need performance contracts?
Public agencies essentially require Performance Contracts mainly for the following reasons: to prevent confusion due to multiplicity of objectives and vicious circle of Not Me Syndrome; to improve co-relation between planning and implementation; to co-ordinate between various government agencies; to create benchmark competition among public agencies and enterprises; to align corporate goals, values, define expectations clearly, and identify job-specific outcomes; to assign weights to performance indicators; to establish a mechanism for ensuring achievement of the agreed performance targets; and to prepare public servants for the desired changes in working styles, attitude and work ethics.
Under Performance Contracting system, specific objectives are selected in light of the agency’s vision and mission, activities are determined to fulfil the objectives and sufficient authority is delegated to implement the activities at both organisational and individual level. It logically clarifies success or results through measurable indicators, determines strategy to achieve target and responsibility of the concerned to achieve the desired goal through mutual discussion. PCs have been successful in a number of countries such as France, Pakistan, South Korea, Malaysia, India and Kenya. Performance Contract is mainly of two types: 1. The French Based system (originated in late 1960s in France) by Simon Nora and 2. The Signalling system pioneered in 1980s in Korea and Pakistan simultaneously. Designing an effective PC system requires strong commitment from the top management. It cannot be effective without proper linkage between employee performance and organisational goals.

Key performance indicators
Key Performance Indicators or KPIs are a set of quantifiable measures that an organisation or agency uses to compare performance in terms of meeting their strategic and operational goals. KPIs reflect the critical success factors of an organisation. A KPI is the measurement that is used to track the overall success and abilities of an agency when it comes to achieving its strategic goals. It is imperative that accurate procedures and methods are followed in their development. KPIs vary from one organisation to other depending on their priorities or performance criteria. As a quantifiable metric, KPI reflects how well an organisation achieves its stated goals and objectives. For instance, if organisation’s vision includes providing superior customer service, then a KPI may target the number of customer support requests that remain unsatisfied by the end of a week. By monitoring this, how well an organisation meets its long-term goal of providing outstanding customer service can be directly evaluated.

Performance contracting in Bangladesh
The practice of Performance Contract is relatively new in the public sector of Bangladesh. Ministry of Finance introduced Medium Term Budgetary Framework (MBF) for all the ministries/divisions to empower the line ministries through delegating more responsibility and authority, institutionalising a system for measuring outputs from the resources allocated, improving budget discipline and predictability and increasing efficiency in budgetary spending through establishing performance indicators. Although MTBF of ministries/divisions determined their KPIs, activities and target, it was confined within annual budgetary framework/system. It did not reflect the overall performance of those organisations. The government is pledge-bound to transform Bangladesh into a middle income country through implementing its Vision-2021. One of the pre-requisites of achieving this goal is to ensure good governance at all spheres of public administration. It also necessitates an enabling environment for the public servants to discharge their duties in a pro-active, transparent and accountable manner. Besides, evaluating qualitative and quantitative outputs of organisational activities is a sine-qua-non for establishing efficient, effective and vibrant administrative system. Institutionalising good governance is the ultimate goal. To guarantee organisational accountability and transparency, optimum utilisation of public resources, delivering more with less cost, quantifying measurable outcome and above all to enhance competency, Prime Minister’ Office for the first time has introduced Performance Contracting with its agencies as a model of Performance Management. As part of this initiative, vision, mission objectives and activities of the agencies under Prime Minister’s Office (PMO) have been meticulously reviewed. Thereafter, Key Performance Indicators (KPIs) have been determined to meet or exceed organisational goals. Targets for each KPI have been set in light of the previous experience and after mutual consultation between the two parties (PMO and its agencies). Governance Innovation Unit (GIU), a specialised entity of the Prime Minister’s Office have been assigned to monitor and progress implementation of the KPIs, provide necessary inputs and overall guidance to the PMO agencies. Meanwhile, this Unit has also successfully organised a two-day short training course on Performance Management for the senior and mid-level officers of the PMO agencies. It is pertinent to mention that Power Division under the Ministry of Power, Energy and Mineral Resources was pioneer in determining KPIs in Bangladesh.
It is encouraging to note that the agencies of Power Division have been operating their activities effectively and efficiently in accordance with their KPIs for the last two years. Due recognition has been given to the officials who made outstanding contribution in implementing KPI.
Recently, Cabinet Division has organised a workshop for determining KPI in all the ministries/divisions. Within a short span of time, all the ministries/division/agencies will determine their respective KPIs. Organisational KPIs may be used as performance appraisals for their officials/employees in near future. There is no denying that Performance Contracts will bring qualitative changes in the administrative culture and create a competitive spirit among various agencies and individuals. Due to enhanced institutional accountability, it is expected that the workforce of an organisation will concentrate more on increasing their efficiency. To evaluate and measure the qualitative and quantitative outputs and also to achieve KPI targets for the fiscal year 2014-15, Prime Minister’s Office for the first time entered into Performance Agreement (Memorandum of Understanding) with its agencies on June 30, 2014. The agencies are Board of Investment (BOI), Bangladesh Export Processing Zone Authority (BEPZA), Bangladesh Economic Zone Authority (BEZA), NGO Affairs Bureau (NGOAB) and Public Private Partnership (PPP) to achieve KPI targets. The event was facilitated by Governance Innovation Unit.