Part One
2.1 Contracting and Voluntary Organisations
The early 1990s, driven by rising fiscal debt, saw a rethink of what was the appropriate size and function of the state. New Zealand’s public management system, drawing on economic and administrative theories, was consequently radically restructured (Boston et al., 1996). Several aspects of the restructuring altered how government agencies approached their relationship to voluntary organisations. In particular, based on insights from agency theory, the assumptions government agencies made about voluntary organisations were changed.
2.1.1 Agency Theory
For agency theorists, social and political life can be understood as a series of contracts. Principals delegate tasks, using contracts, to agents. Agents undertake work on the principals’ behalf in return for rewards. The focus of the theory is the contract governing the relationship between principal and agent and determining how the contract can be made as efficient as possible (Eisenhardt, 1989a). What constitutes a contract is broadly interpreted by agency theorists. Contracts may be
‘classical’: arms length, formal and explicit. They may also be ‘relational’: implicit, open-ended, incomplete and based on obligations (Boston et al., 1996).
Two problems can arise from contractual relationships because agents need a degree of discretion to complete their tasks (Davis et al., 1997). First, problems arise when the goals of the principals and agents are different (the problem of goal conflict) (Eisenhardt, 1989a). Second, problems arise because the agent is assumed to have more information than the principal about the task at hand. Their performance, especially when it is difficult and expensive for the principal to verify what the agent is actually doing, creates the problem of information asymmetry (Waterman and Meier, 1998). The focus of agency theorists is how to minimise the impact of these problems for the principal (Moschandreas, 1994; Boston et al., 1996; Shaw, 1999).
The theory, drawing on its neo-classical economic roots, assumes that individuals are
‘rational, self-interested, utility-maximisers’. As such, the interests of principals and their agents are bound to conflict because each party will be trying to maximise personal benefits (Eisenhardt, 1989a). Even if principals and agents have similar goals, the assumptions about the nature of individuals leads to the suggestion that agents will still shirk by producing outputs at a higher cost than required or produce outputs of a lower quality than required (Waterman and Meier, 1998). This is termed moral hazard: a lack of effort on the part of the agent (Eisenhardt, 1989a). Agents may also claim that they have skills and expertise and capacity to deliver that they actually do not. Adverse selection may occur as principals contract with agents who have misrepresented their abilities (Eisenhardt, 1989a).
Principals have a number of options available to them to minimise the risk of their agents shirking, cheating, or operating with guile. They can provide incentives for the agent to operate according to the principal’s wishes, monitor the agent’s actions to ensure they are doing so and sanction the agent if their performance is not satisfactory (Eisenhardt, 1989a; Boston et al., 1996).
2.1.2 Agency Theory and Contracting
Influenced by agency theory, a number of relationships within the New Zealand Public Service were restructured to model contracts. Purchase agreements between
ministers and chief executives for the purchase of services from departments were introduced, as were performance agreements between chief executives and the State Services Commissioner.
The contract model was also applied to the relationship between government agencies and voluntary organisations. Grant-based funding ceased for many voluntary organisations in the early 1990s and instead they signed contracts for the delivery of services (Martin, 1995; Smith, 1996). As voluntary organisations were expected to shirk and use information asymmetries to their advantage, government agencies as principals attempted to specify what services they required, introduce monitoring regimes and sanction poorly performing organisations by not renewing their contracts. Clear objectives in the contracts would ensure the voluntary organisation providers focused on results. Reporting on the objectives would provide good information to government agencies about the provider and the quality of the service (Boston et al., 1996).
Overlaying the introduction of contracting was pressure to reduce government spending. Competition between providers was encouraged. Voluntary organisations were often required to tender. Market pressures were sought to ensure efficiency in service delivery (Shaw, 1999).
A drive to increase transparency and accountability was also an important aspect of the restructuring. Accountability, as it was used in the restructuring process, was interpreted as answerability and took the form of formal reporting against specified measures (Mulgan, 2003). As Martin concludes:
Officials have received a message: this is your allocated task, you are being given resources and authority to achieve it; go to it; report at intervals; and your remuneration and often continued employment will be related to your performance of the given task (Martin, 1997: 5).
Enhanced accountability was seen as a way of developing more efficient and effective organisations and service delivery.
… the argument runs, improved performance in the public sector will follow if there are clear and transparent systems of managerial accountability within agencies, those providing policy advice as well as those delivering services (Martin, 1997: 4).
Accountability was to be increased at the department level by carving them up into entities with specific functions: policy or the delivery of services. This was based on another influential body of theory: Public Choice. Public Choice theorists contend that all public servants will seek to advance their personal interests in terms of their own pay, size of their department, status or ambition. This is called ‘rent seeking’
behaviour. Departments with monopolies are assumed ripe for public servant or
‘provider capture’; public servants will be able to extract the most personal benefit in such situations. Similarly, departments with many functions are prone to provider capture; any policy advice given will ensure the department grows and benefits in terms of its service delivery (Shaw, 1999).
The performance of public servants in the decoupled organisations could be closely specified and monitored and any inefficiencies generated by ‘provider capture’
removed. Any tensions caused by multiple accountabilities or conflicts of interest would also be removed in the new organisations as they had only one function (Boston et al., 1996). At the personal level, increased accountability was to be ensured by making managers more accountable for measurable outputs. Managers were given more discretion but more emphasis was placed on them reporting against specified measures of their performance (Mulgan, 2003).
By the mid 1990s, the result of these changes for voluntary organisations with a funding relationship with government was that they were now service-providers.
Many had a formal contract, usually a ‘classical’ contract, with government. What they were required to provide, at what quantity, quality and price was specified in the contract. Detailed reporting on service delivery was required. They often interacted with officials from operational departments who had little input into policy processes, including programme design. Officials also had specific performance measures to achieve, often with tight budgets and timelines. Driving down the price of service delivery was also at the forefront of officials’ agendas.
As mentioned in the previous chapter, the extent of public service delivery via contract is unknown. Indeed, Boston et al (1996) consider the question of the extent of contracting being undertaken as one of the key areas of the New Zealand public management system needing research. However, it is widely considered an important part of the delivery mechanisms of the New Zealand government so much so that Von Tunzelman and Murphy (1998) conclude that the contract has become the predominant means for the government to procure services.