A renowned international scholar has proposed remedies for bureaucracy in the public sector in oil producing countries such as Kuwait, noting need for partial privatization to tackle such drawbacks.
Prof. Giacomo Luciani of the Graduate Institute of International and Development Studies in Geneva, recently hosted by Kuwait Economic Society (KES), has addressed a lecture on reducing size of government bureaucracy in an oil producing country such as Kuwait by establishing autonomous "Pockets of Efficiency" within the public sector.
Prof. Luciani started from the consideration that "the local population and economy only benefit from oil revenue when the government spends locally. Whether this results in a very large government sector depends on how the money is spent exactly, but a tendency towards an overgrown and inefficient bureaucracy is inevitable." Luciani pointed out that "Governments are always tempted to deliver services directly, i.e. entrusting a branch of the bureaucracy to do so. There is an assumption that this will guarantee control and efficiency, while in fact the opposite is the case," stressing that such governments should instead choose solutions of indirect provision of services to citizens by establishing "Pockets of Efficiency." "Indirect provision," he explained, "means that the government sets up an autonomous agency or corporation, a 'Pocket of Efficiency' to deliver the service. Examples of services that can be entrusted to autonomous corporations are the provision of electricity or postal services.
"Such activities can generate a profit and the corporations may be partly or wholly privatized. Examples of services that are more likely to be entrusted to non-profit making agencies are universities or hospitals.
In all cases, autonomy is essential: the entities must have their own system of governance and decision making and be sovereign in their budgetary, management and investment decisions. The state should dictate the mission of each agency, appoint fixed-term administrators and monitor their performance through systematic benchmarking (e.g. Key Performance Indicators), but should not interfere in day-to-day or even investment decisions. If performance indicators reveal that the agencies are failing, their management should be promptly replaced." Autonomous "Pockets of Efficiency", Prof. Luciani noted, should charge the public for their services. It is preferable to bring the cost of subsidies to the surface, so that it can be monitored and discussed. The state can step in and pay for the citizen either in full or in part, but this task should be attributed to a different agency than the one delivering the service.
For example, one or more agencies will be created to offer scholarships to university students and pay for the tuition fees that universities charge: in this way, the agency granting the scholarship will be able to resist excessive tuition fees charged by universities, and a kind of "market" will be created.
He further explained: This "market" will not be perfect as in some cases there may be many providers competing with each other (e.g. many universities or hospitals, some of which may be private; but in other cases there will be just one monopolistic provider. Therefore, it may be necessary to establish autonomous regulators that will protect the customer and guarantee the well-functioning of the market.
Just as corporations need equity to be established, autonomous "Pockets of Efficiency" should receive an endowment, Prof. Luciani said, it is preferable for the government to support these autonomous agencies through the establishment of an endowment rather than through yearly budgetary transfers.
Establishing an endowment is in the nature of a capital investment, while yearly transfers are part of current expenditure.
A majority of governments in the world have very precarious financial situations and simply cannot afford to devote a significant share of their revenues to capital expenditure; in contrast, some oil producing countries enjoy significant financial room for maneuver and can engage in a strategy of systematically endowing autonomous agencies to provide for specific services, and get them off the government's current expenditure.
In this way, the importance of capital expenditure is increased and current expenditure is reduced, resulting in much greater budgetary flexibility for the government. In the face of oil price fluctuations, the pace of creation of endowments does not need to be stable or necessarily increasing year after year - which is normally the case with current expenditure.
He pointed out that allocating a large share of oil revenue to the creation of endowments also corresponds to the consideration that oil is a wasting asset and oil revenue is to a large extent the proceeds of the sale of an asset rather than net value added creation. Therefore, oil revenue should be used for investment rather than consumption expenditure.
According to Prof. Luciani's projection, if a strategy of systematic creation of endowed autonomous "Pockets of Efficiency" is followed, the financial markets will be strengthened by the presence of a significant number of institutional investors (the endowed "Pockets of Efficiency") that will facilitate raising capital for private enterprises.
In contrast, if oil revenue is accumulated in a single domestic government-controlled investment fund, many private companies might end up being government owned. As this is not a desirable outcome, the government faces a difficulty in using oil revenue for providing capital to private enterprises (it can offer concessional loans, but equity is also needed). This difficulty can be overcome if oil revenue is used to establish endowed autonomous "Pockets of Efficiency" which behave as institutional investors.
"Of course, there is the possibility that some of these autonomous agencies may fail in their mission or lose their endowment through ill-conceived placements. In any decentralized or market-based system a certain percentage of actors will fail. When market discipline is imposed, failure becomes visible early on and the management is replaced, or the agency/corporation is turned around, or sometimes it is declared bankrupt and liquidated," said Prof. Luciani, while stressing that "We should not be afraid of this: the same happens also in bureaucratic and hierarchical systems, except that failure is more easily covered up, and inefficiencies can persist for very long times." According to the professor, a strategy of slimming down government through the creation of autonomous agencies requires many more responsible and competent administrators that a centralized, hierarchical system: but after decades of emphasizing education the oil producing countries have today a significant pool of young talent that is keen to assume greater responsibilities and should be put to test.
Prof. Luciani is a renowned political economy scholar with extensive work on developing countries, with an emphasis on the Middle East. Since 2012, he has been an Adjunct Professor at the Graduate Institute of International and Development Studies, Geneva; Director of the Executive Master in International Oil and Gas Leadership.
Since 2010, he has been Scientific Director of the Master in International Energy, Paris School of International Affairs, Sciences Po, Paris; he is also a Princeton University Global Scholar.