Australian Handbook of Public Sector Management

Sandra Nutley, John Halligan, Chris Aulich

• Publisher: Routledge
• Year: 2020
• Print ISBN:
  9780367717445
• eBook ISBN:
  9781000248555
• Topic: Politics & International Relations
• Subtopic: Business General
• Index: Politics & International Relations

'This is an excellent 'do-it-yourself' introductory study to public sector management, covering a wide range of issues, including recent public service reforms. I recommend it to anyone interested in the practice and study of public sector management.' - Tony Ayers, National President, Institute of Public Administration Australia

The traditional view of public sector management is under challenge. The shifting boundaries of the public-private sector are transforming the nature of the public sector in the 21st century and placing increasing demands on managers. This user-friendly handbook examines the changes that have taken place over the last twenty years and addresses the practical issues faced by public servants today. It makes abundant use of exhibits, case studies and real world examples to illustrate key concepts in public sector management. By including many 'points for reference', the authors challenge readers to apply both theory and practice to those public services situations with which they are familiar.

Australian Handbook of Public Sector Management is a unique blend of academic and practical approaches to current management practices in the public sector. It has been designed to assist students and those new to the public sector to develop the knowledge and skills they require to provide high quality public services.

1
The public sector

Chris Aulich and Sandra Nutley

The economy was traditionally divided into two discrete segments—the public and the private. The former sector represented activities undertaken almost solely by government agencies, and accomplished by a mix of departments of state, statutory authorities, and other legal and political institutions; while the latter sector was inhabited largely by private and non-government organisations. Apart from governments providing a legislative and regulatory framework for some private sector activities, these boundaries between public and private were generally tightly defined. Given the different views of the roles of the public and private sectors, it is hardly surprising, then, that the management tasks in the two sectors were seen by many commentators as fundamentally different.

A recurring theme throughout this book is the emerging nature of the public sector in the 21st century, and the unfreezing of the public–private sector boundary. In this environment, the traditional view of public sector administration is being challenged. In current times, it is common for non-government and private sector organisations to deliver public services, and for government agencies to compete for the right to deliver services in the private sector. These issues form the basis for the material covered in Chapter 2.

We first examine the nature of the public sector and then consider questions that governments are wrestling with internationally. What is the proper role for government? How can it discharge that role? The answers to these questions have profound implications for a third question: What is the appropriate size of the public sector?

By the end of the chapter, you should be able to:

• understand how governments justify the roles they assume;
• understand the concepts of market failure and the welfare state;
• appreciate the problems and issues involved in measuring the size of government; and
• appreciate the role and size of the public sector in Australia.

1.1 RATIONALES FOR GOVERNMENT ACTIVITY

Few would dispute that there is a role for governments in modern societies. Even the eighteenth-century economist Adam Smith, who proposed minimal state involvement, saw a limited role for government in providing defence, regulating monopolies and maintaining public order (Smith, 1976). However, there is a wide divergence of opinion as to the extent of state activity required. At one extreme is the argument that governments should only be involved where markets are unable to operate efficiently; and at the other extreme, there can be no limits to the scope of government activity because it is the embodiment of the popular will, with the appropriate level established through the democratic process. In order to make sense of this divergence of opinion, two key questions need to be addressed:

• What is the justification for government activity?
• How should governments undertake those activities?

We begin our inquiry by examining the conditions under which markets fail to operate efficiently.

Market failure

Traditionally there are two mechanisms for the allocation of resources in society: the market and the state. (More recently a third way, the use of networks, has been added.) A classical text by Mises argues that ‘there are two methods for the conduct of affairs within the frame of human action … One is bureaucratic management, the other is profit management’ (Mises, 1962). As a consequence of such arguments, the role of the public sector has typically been defined in relation to the limitations of the market (or market failure).

A strict definition of the conditions under which markets fail focuses upon two key concepts from economics:

• non-excludability; and
• non-rival consumption.

The concept of non-excludability follows from the argument that there are some goods and services (public goods) which would not be provided by a market, because it would not be possible to exclude those who chose not to pay from using the service. This is referred to as the ‘free-rider problem’. For example, if street lighting is provided in a neighbourhood, it is not possible to exclude those residents who do not pay for the service from enjoying its benefits. Another example is the armed defence of a country: once defence cover is provided, it is not possible to exclude those who do not wish to pay for it from its benefits. Because it is not possible to charge each user separately and to exclude those who do not pay, the response has generally been for the state to fund the provision of desirable public goods via taxation.

Public goods can also be defined in relation to non-rival consumption. Although it may be possible to exclude those who do not pay from receiving a service, this may not be desirable as such people could be served without any additional cost to the producer of the service: consumption by one person does not preclude consumption by anyone else. The pleasures of breathing clean air are non-rival. Charging a price which prevents people from breathing clean air unless they have paid for it is undesirable, since it could be made available at no additional cost to such people.

However, while public funding of public goods seems necessary, the resulting service does not have to be provided by a publicly owned organisation—the publicly funded provision of street lighting could well be contracted out to a private company. Indeed, some defence services could conceivably be provided by private organisations under contract—mercenaries have played a role in warfare for thousands of years!

Market imperfections

If non-excludability and non-rival consumption were the only ways in which markets failed, then this would result in a very limited role for public sector activity. It is possible to broaden the definition of the circumstances under which markets fail to include market imperfections—that is, when a market for a good or service exists but its operation is imperfect in some way. The key market imperfections are:

• economies of scale and monopoly supply;
• information imperfections;
• externalities (positive or negative); and
• justice in the distribution of income and wealth.

In a situation where there is only a small number of potential producers or a market which will support only one producer, there is the danger of monopolistic supply, where the producer/supplier may exploit its position visà-vis the consumer. The public utilities (such as water, electricity and gas supply) have traditionally been defined as natural monopolies, because the initial cost to enter this market is so high and the cost to marginally increase the scale of operations for those already in the market is relatively low. Establishing a competitive market is therefore difficult, and there is potential for monopoly suppliers to take advantage of this through charging higher prices and/or providing a poorer quality of service. The responses of governments to the problems of monopoly supply have taken the form of either regulating monopoly suppliers or taking them into public ownership. The privatisation of public utilities in several Organisation for Economic Cooperation and Development (OECD) countries (such as Australia, New Zealand and Britain) is an indication that, in the 1980s and 1990s, regulation, rather than nationalisation, was the preferred response to this market imperfection in many countries.

The efficient operation of a market also depends upon access to good information by both producers and consumers. In practice, there are information imperfections that affect both parties. An example affecting producers relates to the provision of health care via private health insurance. The private insurance company does not have full information about the people it insures, and as the insurance company cannot always know the risk status of those it insures, it errs on the side of caution. This means that insurance premiums are generally higher than social efficiency criteria would require. The public sector response in some countries, such as Britain, has been to fund health care from general taxation rather than by private insurance; in Australia, a combination of insurance and taxation funding has been preferred.

A further market imperfection relates to the concept of externalities. It is argued that market systems do not provide incentives or controls to ensure that private businesses take account of the social and long-term costs (or benefits) of their activities. These costs and benefits are referred to as externalities. A good example of a negative externality is pollution. The argument is that under a free market system, businesses would not take into account the external costs placed on society by their pollution of the environment. This results in a role for the public sector in regulating these external costs by means of legislation and environmental health controls.

Externalities can also be positive, in which cases they should be encouraged. A free market system only produces optimum social efficiency if it is assumed that the only person who benefits from a service is the consumer of that service. There are many instances where this is not the case. For example, it is not only the student who benefits from attending school; there are benefits to society as a whole in having an educated workforce. These benefits may not be realised if left to individual choice. The argument is that, as individuals, our calculations of the costs and benefits of investing in, say, school education may lead to an under-investment by many individuals which would be to the detriment of society as a whole. The existence of such external benefits has been used to justify public sector funding (via taxation) of these socially beneficial services, an...

Table of contents

• Cover
• Half Title
• Title Page
• Copyright Page
• Contents
• Contributors
• Preface
• Chapter 1 The public sector
• Chapter 2 Public sector management
• Chapter 3 The public policy process
• Chapter 4 Politics and the policy process
• Chapter 5 Strategic management and corporate planning
• Chapter 6 Financial management and budgeting
• Chapter 7 Human resource management
• Chapter 8 Diversity management
• Chapter 9 Managing the employment relationship
• Chapter 10 Public management in the information age
• Chapter 11 Performance management
• Chapter 12 Managing quality
• Chapter 13 Competitive tendering and contract management
• Chapter 14 Change management
• Chapter 15 Accountability
• Chapter 16 Conclusion
• References
• Index