Image courtesy Washington Post

There is little value in simply reiterating complaints about government service delivery since there is an over-supply of dissatisfaction.  Instead I seek to provide a set of conceptual tools that can be useful in understanding what government services are essential and why government over-extends itself in service delivery, doing too many things badly.  Hopefully, this will help us structure our thinking and expectations relating to government services.

The incentives of politicians and bureaucrats are to always do more things, irrespective of need and efficiency.  As long as opinion leaders and the general public also continue to demand more and more kinds of services, there will be no check on the incentives that bureaucrats have to expand their budgets, as postulated by Niskanen, and by politicians to expand the range of resource they can extract resources from.

I conclude with discussion of a concrete example of a government office that tried to improve services but is now falling back.

Public goods
Government must provide public goods; otherwise they will be under-supplied.  These are goods (and services) that satisfy the two conditions of non-rivalry and non-excludability.  The best example is early warning of impending disasters.  If the warning of an oncoming cyclone is given to one person, it does not reduce the ability to give that same warning to another.  Therefore, its consumption exhibits the quality of non-rivalry.

The best way to communicate the warning is through means such as broadcasting and public announcements.  It is difficult to exclude members of the public within a geographical area from the warnings for practical and moral reasons.  Therefore its consumption exhibits the quality of non-excludability.

Another public good is national defense.  It is difficult to protect only some citizens from a foreign invasion (non-excludability); and, when protecting a specific region, the protection afforded one citizen does not take away from the protection afforded another (non-rivalry).

Since one cannot exclude persons from the enjoyment of public goods, the market cannot supply them.  Therefore, government must.  Public goods are the core business of government.

Goods and services with positive externalities
The second category of goods and services that governments must supply are those with significant positive externalities.  Here, the transaction can occur within the context of private supply and payment, but the benefits to third parties are so extensive that there is merit in government supplying the good.  The best example is inoculations against communicable diseases.  The benefits to all from universal inoculation are so high that it makes sense not to charge for it and even to make it compulsory.

There is justification for government supply of goods and services with extensive positive externalities.  But this category tends to be defined too broadly (arguments have been made that a national airline falls into this category when it does not) and there is no reason for government supply when regulated provision may be a better option.

The inoculation example highlights an oft-neglected aspect of service delivery by government.  Universal, subsidized inoculation can be provided by private parties; it does not have to be supplied by the government.  The government can fully or partially subsidize the costs; it can even make inoculation mandatory.  But there is no innate requirement that the inoculations be supplied by persons employed by the government.  What government must do is ensure that inoculations of proper quality are provided to all the designated persons and that the subsidies are not misused.  This is a regulatory function; not a service-delivery function.

However, in reality, governments directly supply many goods and services, without allowing private parties to supply them under regulatory oversight.  The one exception in Sri Lanka is telecommunication, which used to be provided directly (and badly) by government, but is now supplied in a superior manner by private parties under regulation.

The reasons for direct supply by government are several.  The most significant is the difficulty of regulating private suppliers.  The government is the Principal; the private supplier is the Agent.  Government’s objectives are not the same as those of the private suppliers.  In addition, the private supplier, being closer to the activity, has more information about what is actually happening than the government that is attempting to regulate it.  Therefore, there tends to be dissatisfaction about the quality of regulation, or at least a perception that the private suppliers are not doing what they are supposed to do.

One response to this problem has been that of “nationalizing” supply.  In theory, expropriation of private agents abolishes the Principal-Agent Problem.  After expropriation, all the government has to do to achieve its objectives is to supply the good or service directly.  This is how many services came to be supplied by government.

Originally, electricity was supplied by private entities; education in the English medium was supplied by private entities except for Royal College; and so on.  Yet over time many of these activities have been taken over by government.  The underlying logic was the resolution of the Principal-Agent Problem, though ideological factors such as faith in planned economy and pecuniary factors such as the need to expand government so that politicians have access to greater resources to exploit for their personal gain also played a role.

The unfortunate truth however is that the Principal-Agent Problem is not actually resolved; it simply changes its form.  The Minister becomes the Principal, and the managers of the expropriated enterprise the Agent.  The management has different objectives from the Minister and knows more about what is going on.  As a result, the Minister has difficulty getting them to do what he (or, technically his Principal, the voters) wants.  In addition, the management is now free of hard budget constraints; if the enterprise runs at a loss, the government will bail it out.  So the management panders to the employees on one side and to the Minister on the other, allowing both to exploit the enterprise for personal gain.  In return, the Minister allows slack to management and the workers do not create too much trouble.

The immediate loser in this iron triangle is the consumer.  In the long term, all citizens lose, because the losses of the enterprise have to be paid for through higher taxes or inflation caused by money printing.  Of course, the overall productivity of the economy is also harmed.

Think of the Ceylon Electricity Board.  Some or all Ministers may have made money on corrupt procurements, as may have managers.  The managers have served themselves well, by for example creating 80 plus Deputy General Manager positions.  Ministers have gained political benefits by stuffing the CEB with unnecessary and unqualified workers.  The workers have made above- normal gains in salary and benefits.  Consumers, tax payers and the economy as a whole have paid dearly for their gains.

Government should stick to the supply of public goods and those with strong positive externalities.  Even with these, there is not necessity for supply by government-owned enterprises, because they will necessarily lack the discipline needed for efficient supply because hard budget constraints are absent and because the incentives for the people’s representatives and the employees to collude in ripping off the enterprise are rather strong.

The problems of over-extending into non-essential areas is exemplified by the renationalization of SriLankan Airlines.  After the renationalization, the airline lost close to LKR 10 billion in one year, a sum larger than the LKR 7 billion spent on Samurdhi payments that year.  One could quibble about the efficacy of the Samurdhi program, especially the corrosive effects of the Samurdhi animators on the polity, but clearly the country’s principal welfare scheme is of much greater importance than ensuring that the President and his security detail can offload confirmed passengers at will.  Running an airline does not fall with the scope of either the supply of a public good or the supply of a service with strong positive externalities.

Better would be a focus on regulation, with private parties (for-profit as well as non-profit) doing the actual supply.  Why regulation?  Because most government services are supplied under monopoly conditions.

In some cases, it is necessary.  For example, one cannot have a competitive supply of passports or national identity cards, even though we pay above-cost prices and receive sub-optimal quality services.  In other cases, there is competition, but the market is so sharply segmented that there is de facto monopoly in the government-supplied segment.  For example, there is competition in the market for higher-education, with around 12 percent of school-leavers obtaining some form of higher education, and only 3 percent obtaining it from government universities.  Yet the different segments barely interact, with those who have the finances moving to the higher-quality fee-based segment (except in the case of medicine and engineering) and those without the wherewithal being content in the lower-quality government no-fee segment.  Within the latter, there is no competition, the University Grants Commission acts as cartel manager and allocates places administratively.

Users of government-supplied services get lower value for money like with all monopolies.  A government that actually cares for the citizenry would recognize this phenomenon and institute remedial measures.  Published performance indicators, rewards to organizations and individuals who produce high performance, and so on need to be set in place.  Service-process reengineering can make a strong contribution, as is shown by the example of the passport office below.

I applied for a new passport on the 26 December 2007 and spent less than 30 minutes total inside the passport office.   What surprised me was the enormous improvement in the handling procedures and attitudes since 16 December 2005, when I had last applied for a passport.  I had downloaded the forms and instructions from the website.  The instructions were crystal clear.  If my documentation was incomplete, it would have to be my fault.

There were lines but they moved fast, with the people managing them focusing on ensuring that the necessary documents were there and that accompanying persons did not enter the official areas.  The attitude was positive.   Let people enter; clear the line; keep moving.

The signage could have been better.  A clear sign above the staircase indicating that new passports are issued on the second floor would have been useful.   But the guardians at the various doors were helpful and I made my way upstairs quickly.

Again, a sign telling me to go first to the number dispenser would have been useful.   I had to be redirected there by the guardians.   I was then instructed to go to a particular seating area and wait for my number and the counter number to come up on the electronic display.  I settled down with a magazine for my number to come up (according to the display, there were 15-20 numbers ahead of me), but a uniformed lady came up and requested all those who were waiting to go to the counters.  The electronic display was lagging the humans, it seemed.

I went to the closest counter where my sheaf of papers was immediately accepted.   It would have been helpful if the sequence of steps was explained in a sign, but it was not too complicated to manoeuvre with eye signals.

Four people processed my application:  the first one checked the documents; the second (the executive officer) looked at my face and approved the application; the third entered the data into a computer; and the fourth took Rs. 7,500 from me, gave me a receipt, returned my old passport and ID and told to me return in three hours.  The application and the documents did not leave the circle.  In less than 20 minutes, the Government of Sri Lanka had accepted my application for a new passport, approved it, and taken the fee.

I came back for the passport.   After one misdirection that was quickly corrected, I reached the correct counter for non-Mideast passports, collected the document, signed and left in less than 10 minutes (if not for the first mistake, I would have been out in five).   Total time inside the office was 30 minutes.

But sadly, the improvements did not last.  Things have not deteriorated to the levels of service when the passport office was in Chaithya Road (or even in Bambalapitiya), but on my most recent visit in September 2010 the entry controls were weak; the electronic numbers dysfunctional; and the process of getting documents accepted was beginning to resemble the scrum that existed in Bambalapitiya a few years back.  Instead of 20 minutes, I spent two hours just to hand over the documents.  I was not given a firm answer on when the passport would be ready.  The SMS that was to have been sent saying it was ready never came.  I have also been informed that officials are seeking bribes again, especially from Sri Lankan living abroad.

This shows that process reengineering by itself is inadequate.  Unless the incentives structures are properly aligned, the bad old ways can creep back, like the jungle reclaiming any piece of land in Sri Lanka that is left untended for too long. My hope, in using the passport office as an example is to alert the leadership of this most exemplary government department to tend the garden and beat back the jungle.