The performance

of the public sector

Pierre Pestieau
CREPP, University of Lige,
CORE, PSE and CEPR
 Ou
tline
1. Introduction

2. The performance approach and the

concept of best practice
3. Measuring productive efficiency

4. The performance of social protection

5. Conclusion
2
 1.
Introduction
Measuring and ranking: a must

People do it anyway but badly

Transparency and governance
Yardstick competition Open Method of Coordination (OMC)

Important distinction between the public sector as a whole and

its components
Problem of aggregation
Technical link between outcomes (outputs) and resources (inputs)

The performance is to be measured by the extent to which the

preassigned objectives are achieved.

3
2. The performance approach and the
concept of best practice
The public sector is a set of more or less aggregated production
units (social security administration, railways, health care,
education, national defence, social protection,)

Each unit is supposed to use a number of resources, within a

particular setting, to produce a number of outputs

Those outputs are related to the objectives that have been assigned
to the production unit by the principal, the authority in charge

Approach used here: productive efficiency and to measure it, the

efficiency frontier technique is going to be used

4
 Productive efficiency is just a part of an
overall performance analysis. It has two
advantages:
It can be measured
It is a necessary condition for any other type of
objectives

Main drawback: it is relative

Based on a comparison among a number of rather
similar production units
Its quality depends on the quality of the observation
units.

5
 Illustration with one input/one output

Set of observations
Best practice frontier

Non parametric method: DEA (data

envelopment analysis)
Parametric method

Comparative advantage

6
 Set of comparable observations

output

input

Figure 1
7
 Parametric

output

input

Figure 2
8
 Non Parametric

output

input

Figure 3
9
 t+1
output


b
c t

A B input

Figure 4
10
Technical progress:
aA
Efficiency in t:
A
bB
in t + 1:
B
Change in efficiency: ca -

11
 Motivation of efficiency study:
performance improvement
Factors of inefficiency:
Exogenous (location)
Endogenous (low effort)
Policy related (ownership, competition)

12
3. Measuring productive efficiency.
Conceptual and data problems
Two problems.
Weak link between the inputs used and the
expected outcomes
Confusion between lack of data and conceptual
difficulties

Research strategy. Two areas quite typical of public

spending: education and railways transports; how
performance should be measured if data availability
were not a constraint?
More precisely, when listing the outputs and the
inputs, assume that the best evidence one can
dream of is available.
13
3.1. The best evidence

Inter-country comparison.
Importance of institutional, political and
geographical factors.

14
 Railways
Ideal data

Outputs Passenger kilometres

Comfort and punctuality
Freight tons and kilometers
- bulk
- containers
- others
Delivery quality and punctuality
Equity of access
Passengers per seat

Inputs Labor (disaggregated)

Equipment (disaggregated by type and by
quality)
Tracks (length and quality)
Energy (sources)

Environment Geography, stage length

Autonomy
Competition or contestability
Price discrimination
Community service obligation

Observations Very large number of years and countries

15
 High schools
Ideal data

Output Acquired skills (of sample of 18y. old

individuals)
- math, science, reading
- foreign languages
Direct employability
Indirect employability (through college)
Happiness
Contribution to R and D
Input Teachers (level and quality)
Staff
Building, equipment
Spatial distribution of schools
Skills at the end of the primary education level
Environment Competition between networks
Competition with private schools
Role of the family
Unemployment rate, economic growth
Pedagogical technique
Observations Large number of countries and years
16
3.2. Actual studies

Most qualitative variables are missing.

Difference between developed and less

developed countries.

Focus on financial variables.

17
 Railways

18
Note: v = OK; ~ = more or less; = unavailable
 Education
Ideal data Recent studies

Output Acquired skills (of sample of 18y. old

individuals)
- math, science, reading v
- foreign languages
Direct employability
Indirect employability (through college) ~
Happiness
Contribution to R and D ~
Input Teachers (level and quality) ~
Staff ~
Building, equipment v
Spatial distribution of schools
Skills at the end of the primary education level
Environment Competition between networks
Competition with private schools ~
Role of the family
Unemployment rate, economic growth ~
Pedagogical technique ~
Observations Large number of countries and years ~

Note: v = OK; ~ = more or less; = unavailable

19
 Productive efficiency comparative studies of public and private firm

Number of Mean
Sector and Type and outputs and efficiency Remarks and other
authors Number of units period of data inputs Method degrees findings
Education
Rhodes and 64 public and Panel annual 5 outputs Non About 88% a - Private universities have
South-wick 57 private 1971, 1974, 5 inputs parametric year slightly hither efficiency
(1988) universities in US 1981 scores, for everyyear
considered

Railways
Oum & Yu 21 railways Annual data 1 output Parametric 1 each year - Limited evidence has been
(1991) companies 1978-1988 found for a relationship
between the share of state
in capital and cost efficiency
- Positive correlation
appears between cost
efficiency and the
importance of the cantonss
participation in the deficit of
firms

Filippini & 57 railways under Annual data 1output Non 81% - Tendered services have
Maggi (1991) mixed ownership 1985-1988 3 inputs parametric higher efficiency scores that
non-tendered ones.
+2 network
characteristics
20
Is it worth the amount of time?
Yes, but with caution

Technical efficiency is just one aspect of

efficiency.
Lack of quantitative variables may distort
the results.
For education importance of
employability.

21
 4. Measuring the performance of
the public sector as a whole
Ideally:

Data on happiness (average and

distribution) with and without social
protection or at least on how the welfare
state fulfils its objectives: health, education,
employment, poverty alleviation, inequality
reduction;

Data on inputs.
22
 Actually:

Data on indicators of social inclusion (or

exclusion);
Data on social spending.

23
 Three issues:

Aggregation: DEA or SPI,

Scaling: (0,1) or average or goalposts,
Use of inputs: performance versus
inefficiency.

24
 Table 1: Indicators of exclusion. Definition and
correlations
Definition
POV At-risk-of-poverty rate
INE Inequality
UNE Long term unemployed
EDU Early school leavers
EXP Life expectancy
Correlation
POV INE UNE EDU EXP
POV 1.000
INE 0.912 1.000
UNE 0.420 0.409 1.000
EDU 0.668 0.782 0.252 1.000
EXP -0.069 -0.098 0.084 -0.203 1.000

Source: The five indicators are taken from the Eurostat database on Laeken
indicators (2007). 25
Table 2: HDI normalization and SPI1 - 2004

26
 SPI1 and SPI2
Difference in shadow prices

SPI1 SPI2
POV -0.02 -0.03

INE -0.05 -0.04

UNE -0.04 -0.05

EDU -0.006 -0.010

EXP 0.06 -0.003

Correlation: 0.9
Dependent on irrelevant alternatives.

27
DEA with same input:
- DEA1: 0.921
- DEA2: 0.990

DEA is not invariant to non linear transformatio

- DEA3: 0.992

28
 Figure 1: DEA1 frontier

q1
A
D*
B

E*
D
E
F*

C
F

0 q2

29
 Table 3: DEA efficiency scores. 2004

Note: DEA1, DEA2 and DEA3 results correspond to HDI, Afonso et al. and goalspot normalization data respectively.
30
Table 4: Correlations between indexes

31
 Measuring performance or efficiency

Problem: weak link between social

spending and education, health,
unemployment.

Ranking modified

32
 Table 5
DEA efficiency scores without and with social expenditures as input. 20

33
 Race to the bottom?

Test of convergence
SPI1 and Malmquist decomposition

34
 Figure 6: Convergence of SPI1

9%
y = -1.2741x + 1.0326

R 2 = 0.8024
8% ES

7%
Growth rate of SPI1 (1995-2004)

PT

6% IE
IT
UK
5%

4%

GR LU
BE
3%

FR
2%
AT
NL
DE
1%
DK
FI SE
0%

-1%
0,1 0,2 0,3 0,4 0,5 0,6 0,7 0,8 0,9 1,0

SPI1 - 1995

35
Figure 7: Convergence of DEA1 according to technical efficiency chang

5%
y = -0.0862x + 0.0853
IT
ES
R 2 = 0.9468
Average Effciciency change 1995-2004

4%

3%
GR UK

2%
BE

FR DE
1% NL

IE FI
0% SE
PT
LUAT
DK

-1%
0,4 0,5 0,6 0,7 0,8 0,9 1,0 1,1

DEA1 1995

36
5. Conclusion
Yes for efficiency measures when the
production technology is well understood.

Caution when the technology is unclear

and environmental variables are missing.

For the welfare states, ranking

performance is preferable.

DEA is to be preferred over SPI.

No clear guidelines on the choice of

scaling.
37