Introduction
New public management (NPM) is a theory that is broad enough to compete with other existing approaches. It has emerged as a serious competitor to public administration and public policy. New public management looks upon government and the public sector as a nexus of contracts, a stream of reciprocal commitments that binds participants because they have agreed to these contracts.
In public administration, government decides what is to be done and authorises bureaucrats and professionals to go ahead doing it. In public policy, the policies government decides centrally are to be implemented either by means of central bureaux steering public employees at lower levels or through wide discretion on the part of policy networks. In the contracting state, there are basically two categories of people contracting with service providers: politicians and their managers, especially the CEOs.
How about public policy-making in public management? Government is typically engaged in the making and implementation of public policies. We must discuss how public policies enter the writing and monitoring of contracts in NPM.
Public policy results in something that is very public: laws and budgets, but contracting is something private, a concern between two contracting parties only.
How, then, can public management employing contractualism take into account the concerns of public administration for legality and publicness?
We need to discuss how politicians relate to the CEOs as well as how contracts can be written so that they satisfy public criteria.
The legality dimension
In traditional public administration as well as in the public policy approach, questions concerning legality are given a very prominent role, as it is regarded as a high risk that public authority could be misused. ‘Legality’ refers basically to the notion that public power must be exercised in accordance with rules, which define what is to be done and how it is to be done. It is a simple idea, but it can be developed in a very complex way, containing a number of provisions.
First: the legal permission. Legality implies that no action can be taken by the agents of the state without the existence of rules which admit the action or obligate the action. State activities must have a foundation in a legal system, which entails that activities that are not permitted are in principle ruled out. Since what is a duty must be a permission, all state activities need a permission in law.
Second, the legal entailment. Lots of minor activities in the public sector are conducted in accordance with instructions issued by public officials. Legality implies that all such instructions are entailed by a law which permits or obligates the public official to issue instructions. If activities lack instruction, then that is a violation of the legality norm. If instructions are issued without the backing of a law, then that is also a violation of legality.
Third, the lex superior requirement. The hierarchy of rules for the conduct of public activities goes all the way from the minor workplace instructions at the bottom to the fundamental laws of the state, enshrined in a constitution at the top. All the time, higher norms make lower norms possible, as the lower norms are issued in accordance with a competence stated in higher norms. At the end of the legal hierarchy of norms, higher norms are introduced because the constitution allows that (Kelsen, 1967). The constitution is thus the highest possible norm or the basic norm, which is a law of a special kind, having more protection than other laws in the form of severe rules about constitutional change or inertia.
To maintain legality in the public sector has been considered as a major goal of public activities, especially in public administration. Legality is alternatively described as the restrictions upon another major goal of public activities, namely productivity or effectiveness. The relationships between legality and efficiency have been much discussed also in the public policy approach, whereas in the management framework efficiency considerations tend to take precedence before legality concerns.
Legality may be interpreted as a means to containing public authority as with Max Weber, but it may also be seen as a value in itself, constituting an aspect of justice, giving each one what is due to him/her. Legality enhances predictability, as officials may calculate what they are expected to do and citizens may likewise make predictions about how they will treated by the officials. Legality and predictability do not ensure the Rule of Law, however, because the Rule of Law requires more in the form of protection of human rights. No doubt, these concepts are closely related, as legality in an authoritarian regime tends to degenerate into arbitrariness sooner or later.
The case for an emphasis upon legality would be strengthened if it could be shown that legality supports and does not reduce efficiency. Yet, the standard analysis of legality has been to consider it as reducing efficiency, i.e. as inflicting a cost upon efficiency. In itself, this may not be problematic, because legality could be seen as offering something inherently valuable, namely justice under the laws. Thus, one arrives at the conventional model of a trade-off between economic efficiency meaning reducing costs and justice in the sense of predictability under the laws.
Public policy, contracting and the CEOs 181 However, besides economic efficiency there is also administrative efficiency.
Rules when considered as restrictions upon action do not have only one impact, i.e. increasing costs, but rules may also stabilise the situation, meaning they could decrease costs. When legality is in place, then standard operating procedures emerge, which could economise upon the costs of searching for information and reduce transaction costs in the making of decisions. Legality may also help reduce the dissipation of rents through illegal activities, especially various types of corruption.
Administrative routines are not always the source of red tape and rigidity.
They may structure a situation channelling effort in certain directions, enhancing the achievement of organisational goals. The rules governing public sector activities may be looked upon as rationally devised mechanisms for channelling individual effort and ambition towards the accomplishment of objectives.
One may find in both incrementalism and rational choice theory arguments for the rationality of legality in the public sector. According to the first theory, legality presents the public sector with rules that may develop into standard operating procedures, whereas according to the second theory rules that establish so-called equilibria in decision-making tend to evolve.
Yet, the most profound explanation of the role of legality is to be found in the theory of the state suggested by Hans Kelsen. Government cannot operate in a stable fashion without a system of norms that is backed by sanctions (Kelsen, 1961). It is of the essence of the state to function with norms of various generality, which are linked in a logical fashion, where lower norms entail higher norms, which sanction the lower norms. Kelsen focused much upon the hierarchical nature of rules in the public sector which is the essence of validity in his conception of a pure theory of law. One may also enter another criterion, namely publicness in Kant’s conception.
Publicness
Legality is not the same as publicness, although legality tends to enhance publicness. It is conceivable that laws may give governments the right to put in place secret activities. Yet, on the whole legality supports publicness, as legality tends to be accomplished through laws and instructions which are available to all, in principle. Thus, a state which scores high on legality tend to score high on publicness. The opposite also holds, because publicness requires legality, or the request for rules.
Publicness seems to be a highly relevant requirement upon the public sector.
Public decisions concern a community of people, who would justifiably wish to know why such a decision was taken and not another one. If the grounds of public decisions cannot be stated publicly, then it is likely that these decisions lack proper justification.
Public officials and citizens may endorse the Kant criterion basically for two reasons. One the one hand, they would wish to know for their own sake what rules apply so that they can act rationally. Thus, public officials must be correctly
informed about the competencies that they exercise and in terms of which they relate to other officials as well as to citizens. Citizens would wish to know about their rights as well as their obligations, not the least because they may wish to take action against an official who in their opinion does not respect their rights.
On the other hand, people take a positive view as to the Kantian argument in favour of the inherently just nature of the criterion of publicness, especially in relation to matters in the public sector. If public decisions and their reasons cannot be stated openly, then one would either believe something wrong is taking place or one would accept that state security or some such special reason requires an exception from an almost universally valid rule of publicness.
Both legality and publicness constitute basic requirements upon a democratic state and its public sector. In the 1990s, they have been extended also to the private sector to some extent. However, NPM does not endorse these two requirements, focusing instead upon getting the job done as effectively as possible by means of contracting, i.e. in terms of a chain of agreements between government and managers and managers and service providers.
Thus arises the question about how public sector management can strike a middle-way between the strong emphasis upon legality and publicness in public administration and public policy on the one hand and the heavy commitment to managerialism on the other hand with NPM. Resolving this problem involves discussing how people are motivated to do the job in the public sector.
In traditional public administration government employs a huge number of people and instructs them with public law documents and budgetary instruction.
In NPM, government hires public managers who contract for service provision by means of processes of tendering/bidding. The key group in NPM is the set of CEOs. We must ask how they are to be instructed and what motivates them to try hard. Especially we wish to enquire into how the nexus of contracts can satisfy publicness.
Public managers or the chief executive officers
NPM suggests that public policy enters the contracts with public managers, the so-called chief executive officers or the CEOs. How can that be done, given that contracts are incomplete and are to be subjected to ordinary court disputes?
Public policies used to be confirmed in public law documents or in budgetary instructions. If they are to be entered into employment contracts, then how can their public nature be maintained and respected?
Public policy-making as contracting raises a number of questions about the limits of the use of contracting for allocation in the public sector, especially with regard to the soft sector. There are two things involved: (1) Can contracts really be specified as completely as is desirable from considerations about the Rule of Law or the requirements that follow from the need to surround public authority with restrictions?—the legality issue. (2) Can contracts containing public policy be regarded as open to the public?—the publicity issue.
Public policy, contracting and the CEOs 183 We wish to argue that although efficiency in contracting would be enhanced, if contracts are properly negotiated and self-enforced, it is far from easy to satisfy the legality requirement and the publicity requirement, when employment contracts are extended considerably to contain also lots of public policy. This leads us to the question of how to handle managerial motivation with the contract institution.
As a result of NPM, the CEOs are rapidly replacing bureaucrats and professionals. Are the CEOs in the public sector—the public managers—more managers than public servants? The question that the contracting state raises is whether there is anything left of public administration, bureaucracy and public law. Can there really be public sector management without the Rule of Law framework?
Why NPM cannot do without public law
Getting things done by mainly public law instructions as in public administration or exclusively by private law contracting as with NPM—this way of posing the question implies that one could choose either one or the other governance model.
However, public sector management may strike a balance between these two governance techniques, mixing public law and budgetary instructions with private law contracting. How, then, can private law contracting be used in a public law environment?
Under various schemes of public management using contracting on a major scale there will always be a need for public law arrangements. However, the score and range of administrative law will diminish, as contracting expands. That which is to be done is stipulated in contracts. At the same time one must emphasise that contracts cannot entirely replace administrative law.
In NPM, there has been a tendency to put everything into the contract. Thus, a contract between government and the CEOs could run into hundreds of pages.
And besides the employment contract a performance contract in a public organisation could contain an immense detailed specification of what the employee is expected to do. However, the limits to replacing administrative law with specifications in contract law must be pointed out.
First, contracting suffers from the problem of systemic incompleteness (Milgrom and Roberts, 1992). Except for simple transactions, contracting often fails to specify all the conditions and circumstances that impinge upon contractual fulfilment. Attempting to write complete contracts covering all contingencies is impossible. General and simple public law frameworks may complement contracting where contracting becomes incomplete or too complicated.
Second, some things are too important to be handed over to the contracting mechanism. People claim rights against the state which they would not want to become the target of negotiations in contracts of a private law kind. Officials exercise competencies, which again cannot be hidden in private law contracts.
Third, rights and competencies need to be stated publicly—this is part of the requirement of legality in the public sector. When the employment contract in
the public sector starts to contain lots of legal matters relating to rights and competencies, then one runs the risk of losing the public nature of a state to be run in accordance with the Rule of Law. Thus, detailed contracting may endanger legality.
Looking at the public sector by means of the public administration framework, one may claim that contracting in the public sector must respect an institutional setting, which goes beyond merely the institutions that are necessary for the respect of contracts, or contractual validity and enforcement. Public law contains numerous regulations about public sector activities, which cannot be negotiated in the contractual process. Administrative law hands down restrictions upon contractualism.
Seen from the looking glass of the public policy school, the public sector is governed by objectives which cannot be communicated merely in the form of contracts with the CEOs or in the performance contracts of public employees.
The policy objectives belong to public discourse, which entails that they are not merely an element in a contract between two parties.
If there are limits to how far contracts can be employed to govern public sector activities, then it is also the case that contracts remain necessary and desirable for motivating people to get things done in the public sector. Contracts are very suitable for agreements about who is to pay what for receiving which services.
How, then, is motivation forthcoming among the people who handle the provision of services in the public sector?
Motivation: politicians, managers and the professionals
What is motivation in the public sector and why is it problematic to come to an agreement about work effort and compensation in the public sector? Traditional public governance focused upon tenure and vocation as the motivational mechanisms for accomplishing the quid pro quo or reciprocity between politicians and the public officials, remunerating public officials and at the same time eliciting their interest in their work.
The idea about motivation in traditional public governance has long ago been abandoned. The various stakeholders in traditional public governance—politicians, bureaucrats and professionals—are not modelled as motivated by vocation, as in the Weberian approach. Instead, each group is modelled as maximising their self- interests, especially in the public choice approach.
Replacing the assumption about vocation with the assumption about self-interest maximisation opens up entirely new ways of looking at motivation in the public sector. If people active in the provision of services in the public sector are driven by self-interests, then what stops them from pursuing strategies which reduce public interests such as productivity and effectiveness?
When it is recognised that self-interests may be pursued with guile, then arriving at a quid pro quo in motivation between remuneration and work effort becomes far more difficult than realised within traditional public governance. The new insights
Public policy, contracting and the CEOs 185 into incentives and the economics of information focus upon the occurrence of opportunistic behaviour in various forms, with e.g. politicians, bureaucrats and professionals.
When it is assumed that the key groups of actors in the public sector are driven by self-interests, then one begins to understand not only why contractual fulfilment may be problematic but also why it may be tempting to engage more or less in cheating. A number of concepts for cheating or reneging have been suggested, all referring to the motivation on the part of people to get something for nothing.
In the standard employment relation between the employer and the employee, the motivation to get something for free is described as various forms of shirking.
With regard to the self-interest seeking behaviour of politicians, the opportunism of politicians is expressed e.g. in the political business cycle or in popularity functions. Incentives combine with information advantages to create strategies actors choose vis-à-vis each other (Campbell, 1995).
Whether one starts from traditional or modern public governance, one is bound to encounter interactions between people that may be analysed by a general model of principals contracting with agents, paying a remuneration to the agent as compensation for the effort that the agent is putting in for the achievement of the objectives of the principal.
Principal-agent theory was developed in economics in order to state the difficulties for two parties to arrive at an efficient contract in the private sector as soon as the interaction lasts longer than the elementary market interaction between buyers and sellers. The employment relationship is one kind of principal- agent interaction, and the relationship between a lawyer and his/her client is also a kind of principal-agent relationship. Agency relations occur often in economic life.
One may speak of principal-agent interaction in the public sector as well, at least in a figurative sense. Thus, politicians may be looked upon as the agents of their population. Bureaucrats, or the top officials in the bureaux, could be regarded as the agents of the politicians. And, finally, professionals could also be interpreted as agents when they are active in service delivery organisations. But to state who is their principal is far from clear cut, as besides government one could mention the bureaucrats, the population or the discipline to which a professional adheres by virtue of their training.
In modern governance, the problems in principal-agent interaction have received much attention, whereas in traditional public governance they were almost neglected. Following the framework stated in the introductory chapter, principal- agent problems arise both in the interaction between politicians and the key managers, the executive agencies or the regulators, as well as in the interaction between politicians as owners of enterprises and their CEOs. Which, then, are the key principal-agent problems?