Since risk management practices in the public sector

Since the 1990s, private sector risk management processes
and techniques have become increasingly utilized by public sector agencies
(Fone and Young, 2000). These private sector techniques are considered to be an
important tool in improving the delivery of public services and an essential
aspect of good governance (Audit Commission, 2001). However, there a number of
scholars who have criticised the use of private sector risk management
practices in the public sector with many who believe that the rising
expectations of public accountability has resulted in risk management being
used for defensive management and blame avoidance, which has led to a focus on
documentation rather than service delivery (Power, 2007; Hood and Miller,
2009). Additionally, some scholars have argued that standard risk management
frameworks pose a number of challenges when applied to public services (Hood
and Miller, 2009; Lapsley, 2009). Furthermore, corporate failures such as Enron
and Lehmann Brothers has saw the superiority of private sector management being
called into question (Lapsley, 2009).

Public sector management has had a long history, and whilst
some form of administration existed earlier, the traditional model of public
sector management is often regarded as starting in the 19th century
and is largely underpinned by Max Weber’s theory of bureaucracy (Ostrom, 1974). Mih?ilescu (1993) defines
bureaucracy as “a way of organization, meant for widespread administration of
resources through a specialized body of persons, usually placed in a
hierarchical structure and having the powers, responsibilities and procedures
strictly defined”. According to Weber, bureaucracy has five key elements.
Firstly, bureaucracy is based on capability and is regulated by a number of
rules and predefined procedures. Ridley (1996) adds that for bureaucracy to
function properly activities should be organised as official duties and must be
guided by a list of rules and procedures. Second, bureaucracy functions through
a clearly defined hierarchical structure in which higher-level officials
control and monitor the activities of lower-level officials. Third,
bureaucratic organisations are based on written documents that are preserved as
originals for increased transparency (Weber, 1968). Documents must be gathered
in permanent files and archived in order to enhance accountability,
traceability and possibilities for retrospective evaluation (Jain, 2004).
Fourth, dedicated staff who deal with the public must be fully trained to do
so. Lastly, and arguably the most notable characteristic of bureaucracy is that
it follows explicit and formal rules and regulations. In the view of Merton
(1940), “the chief merit of bureaucracy is its technical efficiency, with a
premium placed on precision, speed, expert control, continuity, discretion, and
optimal returns on input.” Furthermore, Weber (1968) claimed that bureaucracy
was technically superior to all other forms of organisation and hence
indispensable to large, complex organisations. Whilst many people were in
favour of bureaucracy, it also had its critics, with many who believed that the
system placed too much emphasis on rules and regulations making public
officials very robotic, thus stifling innovation (Newman, 2005; Thompson and
Alvesson, 2005). Walsh (1995) also argued that the system is not suitable for
coping with the tasks, purposes, and circumstances of contemporary democracies.

During the public sector reforms of the 1980s and 1990s, a
new paradigm known as New Public Management emerged in response to the
inadequacies of bureaucracy (Hughes, 2003). Osbourne (1993) explains that one
of the core dysfunctions of bureaucratic government is that it is resistant to
the changing needs of society. The standardized delivery of a one-size-fits-all
service to mass markets was the core of bureaucratic activity and when society
changed, government bureaucracies failed to adapt. The main goal of NPM was to
strengthen management capacity in government and introduce the performance
incentives and disciplines of a market environment (Flynn, 2000). One of the
most influential factors leading to the emergence of NPM was the economic and
fiscal crisis which triggered the quest for efficiency and ways to cut the cost
of delivering public services. Another important driver of NPM was the rise in
popularity of neo-liberalism throughout capitalist countries. Neo-liberalism
was a political framework which rejected the idea of the welfare state, opposed
a large public sector, believed in private sector superiority and emphasized
market competition in service delivery (Haque, 2003). Hodge (2006) argues that
the foundations of NPM rest in both institutional economics and managerialism.
Institutional economics proposes disaggregating public bureaucracies and the
use of competition; whilst managerialism includes an emphasis on private sector
management techniques and performance measurement. The essential
characteristics of NPM have been specified by a number of scholars in public
management. Key elements include increasing the use of markets and competition in
the public sector, decentralization of management and an emphasis on
performance, outputs and customer orientation (Carroll, 1998). Advocates of NPM
argue that it provides efficient alternatives for service delivery, better
incentives to public managers, and improved accountability. Moreover, it was
responsible for the rise of an entrepreneurial culture throughout public sector
management. Conversely, many have criticised NPM for its ambiguity regarding
efficiency, blurred accountability, and for causing conflict in public
organisations as a result of competition (Minogue, 2001). The heaviest
criticisms of NPM concern its fragmented nature, intra-organizational focus and
its use of out-dated private-sector techniques for public policy implementation
and service delivery (Rhodes 1997). Whilst NPM is said to have influenced a
number of public sector reforms, it was said to have passed its peak by the
early 2000s (Hughes, 2003; Dunleavy et al 2006).

NPM is said to have had an influence on the introduction of
Compulsory Competitive Tendering (CCT). CCT was one of the privatisation
measured introduced by the Conservative government which was aimed at managing
the inflationary pressures of the public sector and the political power of public
sector unions (Walsh, 1995). The use of competitive tendering by British local
authorities for the provision of goods and services has a long history, but
compulsory competitive tendering for the provision of local government services
was first introduced in the 1980 then extended through the 1990s. CCT involved
a relationship between client and contractor whereby the client would specify
exactly the type of service that they required and would then invite tenders
from both in-house contractors and private contractors, with the contract being
awarded to the tender which offered the most value for money. The winning
contractor was responsible for delivering the service according to the terms
agreed in the contract for a pre-determined price. Initially, CCT helped local
authorities reduce the costs of public service provision and maximise operating
efficiency, however, it came under criticism for achieving the goals of
efficiency and economy at the expense of service quality (DETR, 1998). Furthermore,
a hostile atmosphere existed between the public and private sectors as a result
of the compulsion element of CCT; this was detrimental to the delivery of
public services, depriving them of quality and innovation (Bovis, 1999). Whilst
there were initially high hopes for CCT, it ultimately fell short of expectations
and attracted widespread dissatisfaction from both the private and public
sectors. CCT became an excuse for poor service quality and was deemed
responsible for alienating local government from the public.

In 1997, New Labour came into power, ending the
conservatives 18-year reign in government. By 1999 they had opted to replace
CCT with the Best Value regime. Best Value was a major part of the Labour
government’s manifesto and was intended to improve the quality and
delivery of public services by
preventing local authorities from opting for the lowest cost options
as it was recognised that this did not always provide the best long-term
solution (Boyne, 2000). The regime was managed by the Audit Commission which
carried out regular best value inspections on local government services, from
waste disposal to corporate strategy (DETR, 1999). Unlike CCT, Best Value did
not necessarily require privatisation or competitive tendering of services, however,
competition was always considered as an option. The Best Value regime
maintained that the choice of deliverer should be wholly dependent on which
sector provides the service with most quality and efficiency, as opposed to the
cheapest. Services should be provided through the sector best placed to provide
those services most effectively, whether this be public, private or a
partnership between the two. Whilst Best Value always considered competition as
an option, New Labour believed that it was not appropriate for all areas of the
public sector. A prime example is the NHS, where the New Labour government
abolished the internal market introduced by the Conservatives in 1990. New
Labour criticised the internal market, arguing that it had fragmented health
services by creating thousands of organisations which were often in competition
with one another when their efforts should have been combined to best serve the
health of the population (HMSO, 1997). The internal market forced organisations
to compete even when cooperation was more appropriate; many organisations were
unwilling to share principles of best practice for fear of losing their
competitive advantage (HMSO, 1997)

In 1997, the New Labour government introduced two pieces of
legislation: The National Health Service (Private Finance) Act 1997 and The
Local Government Act 1997. This new legislation allowed public sector
organisations to introduce the private sector as a partner, rather than as a
contractor, in the process of delivering public services. Public Finance
Initiatives (PFI) gave local authorities access to new sources of funding and
management skills for new and improved facilities and created new opportunities
for the private sector to combine construction, facilities management,
maintenance and operating skills (Hood & McGarvey, 2002). Under the
Conservative government, PFIs maintained a clear division between public sector
organisations and private companies. However, under New Labour, public sector
and private sector organisations were encouraged to work closer together and
form stronger partnerships; the private sector brought its management expertise
as well as finance (Eaton, 2008). Prior to their election in 1997, the Labour
government often criticised the use of PFIs, so in order to remove the negative
imagery surrounding the initiative, the Labour government renamed them Public
Private Partnerships (PPP) (Hood & McGarvey, 2002). The term PPP relates to
a government service or private business venture, which is funded and operated
through a partnership between the government and one or more private sector
companies, including the transfer of council homes to housing associations
using private loans, and contracting out services like waste collection to
private companies (Henderson, 1999). PPP projects are long-term partnerships,
typically lasting anywhere between 15 to 40 years. Public organisations choose
the type of the service that they require along with specifications regarding
its quality, the price and the control mechanisms. The private sector
organisation then implements the project by providing funding and ensuring
maintenance (Barrie & Mitchell, 2011). One of the main advantages for
public sector organisations is that it is the private sector company which
bears the risk of invested capital. Another advantage is that it allows the
public sector to borrow money without the debt appearing on the public balance
sheet (BMA, 2011). Common criticisms of PPP projects are that they are
inflexible; the processes involved in contracts are unclear and that they do
not provide good value for money (Triggle, 2010). Stewart (2011) emphasises
this with the example of the Edinburgh Tram Project which was originally
supposed to cost £365m but has ended up costing more than double. Furthermore, Unison
(2001) maintained that PFI schemes lacked accountability, cost councils too
much money and that they should only be used as a last resort for capital
projects. On the other hand, supporters of PPP projects argue that it allows
the public sector to avoid significant capital expenditure and also enables
them to tap into private sector management expertise (Collin, 2001). Local
authorities would argue that it allows them to focus on strategic priorities,
leaving operational management to the private sector. PPPs also allow local
authorities to plan and budget more effectively as long term contracts pass
significant ongoing maintenance costs to the private sector.

Up until 1992, there was very little evidence of
standardised risk management processes present in UK local authorities, with
the vast majority of them relying almost exclusively on MMM (Municipal Mutual
Insurance) to provide cover against the vast majority of their insurable risks.
MMI had been in existence since 1903 and by the 1970’s it was providing
insurance to over 90% of UK local authorities (Fone and Young, 2005). Due to a
number of factors including an increase in the number of claims and a weak
diversification strategy, MMI collapsed in 1992 with the staff and renewal
rights then becoming absorbed by Zurich Insurance Group to become Zurich
Municipal Insurance. The collapse of MMI brought an end to the low-cost, full
insurance regime that previously existed and local authorities soon found themselves
faced with rising premiums and a distinct lack of cover (Hood & Kelly,
1999). Local authorities were, therefore, forced to seek alternative risk
management strategies, particularly in high-risk services such as education
where security had become a major issue and was less than appealing for
insurers. The 1990s saw significant growth in both the interest in and practice
of public sector risk management. No significant single event created this
interest, but amongst the contributory factors were risk-related issues arising
from major public enquiries such as the Kings Cross fire and the Dunblane
school shooting; the move to risk-based health and safety legislation; changes
in the public sector insurance market; the growth of the Private Finance
Initiative; and the fact that many aspects of risk management aligned with the
core doctrines of New Public Management (Hood, 1991). The period post-1992 saw
a number of initiatives aimed at furthering the practice of risk management in
local authorities, many of which had their roots in the demise of MMI.
Ironically, therefore, the insurance-related crisis that was the collapse of
MMI led to improvements in the way that local authorities view, and
subsequently manage, risk.

The provision of what were once regarded as traditional
public services today often involves input from both the public and private
sector, a prime example being the social services industry which relies on both
funding and strategic direction from the public sector, whilst service delivery
is often left to private sector organisations. When looking at the industry as
a whole, it can be difficult determine where the role of one sector ends and
another begins. Therefore, it could be argued that the principles of risk
management are largely the same for many industries in both the public and
private sectors as organisations from different sectors exist together in the
same policy system (Mikes, 2011). Organisations from public and private sectors
have similar organisational structures; perform similar tasks and on the whole
face similar risks to people, property and processes (Woods, 2011). However, in
relation to the public-private distinction there are a number of key
differences which must be addressed.  

The biggest difference between public and private sector
organisations ultimately lies in the reason for their existence – public sector
organisations exist to provide a service whilst private sector organisations
exist to generate profit for shareholders. Another key difference being the
number of stakeholders that each type of organisation is accountable to. Whilst
private sector organisations are required to generate profit for a small number
of shareholders, public sector organisations have an obligation to provide
services to the wider community. Whilst this may seem obvious, the importance
of this distinction lies with the risks that they face. Public sector
organisations are government funded so they never have to worry about
bankruptcy or liquidation, however, this is a huge concern for private sector
companies and as a result this will be of great interest to them when they are
assembling their risk management strategy. In general, the activities of public
sector organisations are more diverse and cover a wider geographical area than
the activities of private sector organisations. As a result, public sector
organisations are faced with a wider range of loss exposures, making risk
management extremely challenging (Head & Wong, 1999). Whilst private sector
organisations can eliminate risks by avoiding them completely, public sector
organisations do not have this luxury. The government is obligated to build and
maintain roads, parks and other facilities, and also provide other important
services like education, healthcare and emergency services, all of which can
result in a variety of risk exposures (Greiger, 2001). Whilst, government
reform is generally not a cause for concern for private sector organisations,
it can, however, pose a huge threat to public sector organisations as changes
in government reflect public attitudes regarding the funding of public
services. Whilst the finances and operations of private sector organisations
often manage to escape public and political scrutiny, the same cannot be said
for public sector organisations who are consistently regulated and required to
provide accountability for their operations and funding. Furthermore, the
activities of private sector organisations largely go under the radar of most
people unless they directly need to purchase a service, hence why they are not
subject to the same kind of debate that surrounds public service provision. The
majority of people have an opinion on public services such as healthcare and
education because they directly affect their lives. This highlights another key
difference between public and private sectors in that private sector
organisations focus on technology and competition when defining their key
risks, whilst public sector organisations are forced to consider social and
political aspects when defining theirs (Woods, 2011). Another key difference
between risk management in public and private sector organisations relates to
the risk management process itself. Whilst private sector companies often take
risks in pursuit of profit, the lack of profit incentives for public sector
organisations explains why many adopt a risk-averse approach to risk
management. A number of examples can be found in local government where
children’s play areas have been dismantled due to risk of injury, and where
schools have been equipped with high-end security measures to deter those who
may wish to cause harm. The challenge for most public sector organisations is
to develop a risk management strategy that effectively manages risk whilst also
helping them achieve their strategic objectives (Crawford, 2010). Whilst an
effective risk management strategy is important for private sector companies,
it is absolutely essential for private sector organisations. Public sector
organisations are faced with strained budgets, an increasing demand for accountability
and more risk exposures than ever before. The ability to address these risks in
a systematic and integrated way will prove to be a key difference between
public organizations that succeed and those that fail (Fone and Young, 2001).

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