Since risk management practices in the public sector

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Last updated: May 19, 2019

Since the 1990s, private sector risk management processesand techniques have become increasingly utilized by public sector agencies(Fone and Young, 2000). These private sector techniques are considered to be animportant tool in improving the delivery of public services and an essentialaspect of good governance (Audit Commission, 2001).

However, there a number ofscholars who have criticised the use of private sector risk managementpractices in the public sector with many who believe that the risingexpectations of public accountability has resulted in risk management beingused for defensive management and blame avoidance, which has led to a focus ondocumentation rather than service delivery (Power, 2007; Hood and Miller,2009). Additionally, some scholars have argued that standard risk managementframeworks pose a number of challenges when applied to public services (Hoodand Miller, 2009; Lapsley, 2009). Furthermore, corporate failures such as Enronand Lehmann Brothers has saw the superiority of private sector management beingcalled into question (Lapsley, 2009).

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Public sector management has had a long history, and whilstsome form of administration existed earlier, the traditional model of publicsector management is often regarded as starting in the 19th centuryand is largely underpinned by Max Weber’s theory of bureaucracy (Ostrom, 1974). Mih?ilescu (1993) definesbureaucracy as “a way of organization, meant for widespread administration ofresources through a specialized body of persons, usually placed in ahierarchical structure and having the powers, responsibilities and proceduresstrictly defined”. According to Weber, bureaucracy has five key elements.

Firstly, bureaucracy is based on capability and is regulated by a number ofrules and predefined procedures. Ridley (1996) adds that for bureaucracy tofunction properly activities should be organised as official duties and must beguided by a list of rules and procedures. Second, bureaucracy functions througha clearly defined hierarchical structure in which higher-level officialscontrol and monitor the activities of lower-level officials. Third,bureaucratic organisations are based on written documents that are preserved asoriginals for increased transparency (Weber, 1968). Documents must be gatheredin 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 doso. Lastly, and arguably the most notable characteristic of bureaucracy is thatit follows explicit and formal rules and regulations. In the view of Merton(1940), “the chief merit of bureaucracy is its technical efficiency, with apremium placed on precision, speed, expert control, continuity, discretion, andoptimal returns on input.

” Furthermore, Weber (1968) claimed that bureaucracywas technically superior to all other forms of organisation and henceindispensable to large, complex organisations. Whilst many people were infavour of bureaucracy, it also had its critics, with many who believed that thesystem placed too much emphasis on rules and regulations making publicofficials very robotic, thus stifling innovation (Newman, 2005; Thompson andAlvesson, 2005). Walsh (1995) also argued that the system is not suitable forcoping with the tasks, purposes, and circumstances of contemporary democracies. During the public sector reforms of the 1980s and 1990s, anew paradigm known as New Public Management emerged in response to theinadequacies of bureaucracy (Hughes, 2003). Osbourne (1993) explains that oneof the core dysfunctions of bureaucratic government is that it is resistant tothe changing needs of society.

The standardized delivery of a one-size-fits-allservice to mass markets was the core of bureaucratic activity and when societychanged, government bureaucracies failed to adapt. The main goal of NPM was tostrengthen management capacity in government and introduce the performanceincentives and disciplines of a market environment (Flynn, 2000). One of themost influential factors leading to the emergence of NPM was the economic andfiscal crisis which triggered the quest for efficiency and ways to cut the costof delivering public services.

Another important driver of NPM was the rise inpopularity of neo-liberalism throughout capitalist countries. Neo-liberalismwas a political framework which rejected the idea of the welfare state, opposeda large public sector, believed in private sector superiority and emphasizedmarket competition in service delivery (Haque, 2003). Hodge (2006) argues thatthe foundations of NPM rest in both institutional economics and managerialism.Institutional economics proposes disaggregating public bureaucracies and theuse of competition; whilst managerialism includes an emphasis on private sectormanagement techniques and performance measurement. The essentialcharacteristics of NPM have been specified by a number of scholars in publicmanagement. Key elements include increasing the use of markets and competition inthe public sector, decentralization of management and an emphasis onperformance, outputs and customer orientation (Carroll, 1998).

Advocates of NPMargue that it provides efficient alternatives for service delivery, betterincentives to public managers, and improved accountability. Moreover, it wasresponsible for the rise of an entrepreneurial culture throughout public sectormanagement. Conversely, many have criticised NPM for its ambiguity regardingefficiency, blurred accountability, and for causing conflict in publicorganisations as a result of competition (Minogue, 2001). The heaviestcriticisms of NPM concern its fragmented nature, intra-organizational focus andits use of out-dated private-sector techniques for public policy implementationand service delivery (Rhodes 1997). Whilst NPM is said to have influenced anumber of public sector reforms, it was said to have passed its peak by theearly 2000s (Hughes, 2003; Dunleavy et al 2006).NPM is said to have had an influence on the introduction ofCompulsory Competitive Tendering (CCT).

CCT was one of the privatisationmeasured introduced by the Conservative government which was aimed at managingthe inflationary pressures of the public sector and the political power of publicsector unions (Walsh, 1995). The use of competitive tendering by British localauthorities for the provision of goods and services has a long history, butcompulsory competitive tendering for the provision of local government serviceswas first introduced in the 1980 then extended through the 1990s. CCT involveda relationship between client and contractor whereby the client would specifyexactly the type of service that they required and would then invite tendersfrom both in-house contractors and private contractors, with the contract beingawarded to the tender which offered the most value for money. The winningcontractor was responsible for delivering the service according to the termsagreed in the contract for a pre-determined price. Initially, CCT helped localauthorities reduce the costs of public service provision and maximise operatingefficiency, however, it came under criticism for achieving the goals ofefficiency and economy at the expense of service quality (DETR, 1998).

Furthermore,a hostile atmosphere existed between the public and private sectors as a resultof the compulsion element of CCT; this was detrimental to the delivery ofpublic services, depriving them of quality and innovation (Bovis, 1999). Whilstthere were initially high hopes for CCT, it ultimately fell short of expectationsand attracted widespread dissatisfaction from both the private and publicsectors. CCT became an excuse for poor service quality and was deemedresponsible for alienating local government from the public.In 1997, New Labour came into power, ending theconservatives 18-year reign in government. By 1999 they had opted to replaceCCT with the Best Value regime. Best Value was a major part of the Labourgovernment’s manifesto and was intended to improve the quality anddelivery of public services bypreventing local authorities from opting for the lowest cost optionsas it was recognised that this did not always provide the best long-termsolution (Boyne, 2000). The regime was managed by the Audit Commission whichcarried out regular best value inspections on local government services, fromwaste disposal to corporate strategy (DETR, 1999). Unlike CCT, Best Value didnot necessarily require privatisation or competitive tendering of services, however,competition was always considered as an option.

The Best Value regimemaintained that the choice of deliverer should be wholly dependent on whichsector provides the service with most quality and efficiency, as opposed to thecheapest. Services should be provided through the sector best placed to providethose services most effectively, whether this be public, private or apartnership between the two. Whilst Best Value always considered competition asan option, New Labour believed that it was not appropriate for all areas of thepublic sector. A prime example is the NHS, where the New Labour governmentabolished the internal market introduced by the Conservatives in 1990. NewLabour criticised the internal market, arguing that it had fragmented healthservices by creating thousands of organisations which were often in competitionwith one another when their efforts should have been combined to best serve thehealth of the population (HMSO, 1997). The internal market forced organisationsto compete even when cooperation was more appropriate; many organisations wereunwilling to share principles of best practice for fear of losing theircompetitive advantage (HMSO, 1997)In 1997, the New Labour government introduced two pieces oflegislation: The National Health Service (Private Finance) Act 1997 and TheLocal Government Act 1997.

This new legislation allowed public sectororganisations to introduce the private sector as a partner, rather than as acontractor, in the process of delivering public services. Public FinanceInitiatives (PFI) gave local authorities access to new sources of funding andmanagement skills for new and improved facilities and created new opportunitiesfor the private sector to combine construction, facilities management,maintenance and operating skills (Hood & McGarvey, 2002). Under theConservative government, PFIs maintained a clear division between public sectororganisations and private companies. However, under New Labour, public sectorand private sector organisations were encouraged to work closer together andform stronger partnerships; the private sector brought its management expertiseas well as finance (Eaton, 2008). Prior to their election in 1997, the Labourgovernment often criticised the use of PFIs, so in order to remove the negativeimagery surrounding the initiative, the Labour government renamed them PublicPrivate Partnerships (PPP) (Hood & McGarvey, 2002). The term PPP relates toa government service or private business venture, which is funded and operatedthrough a partnership between the government and one or more private sectorcompanies, including the transfer of council homes to housing associationsusing private loans, and contracting out services like waste collection toprivate companies (Henderson, 1999). PPP projects are long-term partnerships,typically lasting anywhere between 15 to 40 years. Public organisations choosethe type of the service that they require along with specifications regardingits quality, the price and the control mechanisms.

The private sectororganisation then implements the project by providing funding and ensuringmaintenance (Barrie & Mitchell, 2011). One of the main advantages forpublic sector organisations is that it is the private sector company whichbears the risk of invested capital. Another advantage is that it allows thepublic sector to borrow money without the debt appearing on the public balancesheet (BMA, 2011). Common criticisms of PPP projects are that they areinflexible; the processes involved in contracts are unclear and that they donot provide good value for money (Triggle, 2010). Stewart (2011) emphasisesthis with the example of the Edinburgh Tram Project which was originallysupposed to cost £365m but has ended up costing more than double. Furthermore, Unison(2001) maintained that PFI schemes lacked accountability, cost councils toomuch money and that they should only be used as a last resort for capitalprojects. On the other hand, supporters of PPP projects argue that it allowsthe public sector to avoid significant capital expenditure and also enablesthem to tap into private sector management expertise (Collin, 2001).

Localauthorities would argue that it allows them to focus on strategic priorities,leaving operational management to the private sector. PPPs also allow localauthorities to plan and budget more effectively as long term contracts passsignificant ongoing maintenance costs to the private sector.Up until 1992, there was very little evidence ofstandardised risk management processes present in UK local authorities, withthe vast majority of them relying almost exclusively on MMM (Municipal MutualInsurance) 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 providinginsurance to over 90% of UK local authorities (Fone and Young, 2005). Due to anumber of factors including an increase in the number of claims and a weakdiversification strategy, MMI collapsed in 1992 with the staff and renewalrights then becoming absorbed by Zurich Insurance Group to become ZurichMunicipal Insurance. The collapse of MMI brought an end to the low-cost, fullinsurance regime that previously existed and local authorities soon found themselvesfaced with rising premiums and a distinct lack of cover (Hood & Kelly,1999). Local authorities were, therefore, forced to seek alternative riskmanagement strategies, particularly in high-risk services such as educationwhere security had become a major issue and was less than appealing forinsurers. The 1990s saw significant growth in both the interest in and practiceof public sector risk management.

No significant single event created thisinterest, but amongst the contributory factors were risk-related issues arisingfrom major public enquiries such as the Kings Cross fire and the Dunblaneschool shooting; the move to risk-based health and safety legislation; changesin the public sector insurance market; the growth of the Private FinanceInitiative; and the fact that many aspects of risk management aligned with thecore doctrines of New Public Management (Hood, 1991). The period post-1992 sawa number of initiatives aimed at furthering the practice of risk management inlocal authorities, many of which had their roots in the demise of MMI.Ironically, therefore, the insurance-related crisis that was the collapse ofMMI led to improvements in the way that local authorities view, andsubsequently manage, risk.

The provision of what were once regarded as traditionalpublic services today often involves input from both the public and privatesector, a prime example being the social services industry which relies on bothfunding and strategic direction from the public sector, whilst service deliveryis often left to private sector organisations. When looking at the industry asa whole, it can be difficult determine where the role of one sector ends andanother begins. Therefore, it could be argued that the principles of riskmanagement are largely the same for many industries in both the public andprivate sectors as organisations from different sectors exist together in thesame policy system (Mikes, 2011). Organisations from public and private sectorshave similar organisational structures; perform similar tasks and on the wholeface similar risks to people, property and processes (Woods, 2011). However, inrelation to the public-private distinction there are a number of keydifferences which must be addressed.  The biggest difference between public and private sectororganisations ultimately lies in the reason for their existence – public sectororganisations exist to provide a service whilst private sector organisationsexist to generate profit for shareholders. Another key difference being thenumber of stakeholders that each type of organisation is accountable to. Whilstprivate sector organisations are required to generate profit for a small numberof shareholders, public sector organisations have an obligation to provideservices to the wider community.

Whilst this may seem obvious, the importanceof this distinction lies with the risks that they face. Public sectororganisations are government funded so they never have to worry aboutbankruptcy or liquidation, however, this is a huge concern for private sectorcompanies and as a result this will be of great interest to them when they areassembling their risk management strategy. In general, the activities of publicsector organisations are more diverse and cover a wider geographical area thanthe activities of private sector organisations. As a result, public sectororganisations are faced with a wider range of loss exposures, making riskmanagement extremely challenging (Head & Wong, 1999). Whilst private sectororganisations can eliminate risks by avoiding them completely, public sectororganisations do not have this luxury. The government is obligated to build andmaintain roads, parks and other facilities, and also provide other importantservices like education, healthcare and emergency services, all of which canresult in a variety of risk exposures (Greiger, 2001). Whilst, governmentreform is generally not a cause for concern for private sector organisations,it can, however, pose a huge threat to public sector organisations as changesin government reflect public attitudes regarding the funding of publicservices.

Whilst the finances and operations of private sector organisationsoften manage to escape public and political scrutiny, the same cannot be saidfor public sector organisations who are consistently regulated and required toprovide accountability for their operations and funding. Furthermore, theactivities of private sector organisations largely go under the radar of mostpeople unless they directly need to purchase a service, hence why they are notsubject to the same kind of debate that surrounds public service provision. Themajority of people have an opinion on public services such as healthcare andeducation because they directly affect their lives. This highlights another keydifference between public and private sectors in that private sectororganisations focus on technology and competition when defining their keyrisks, whilst public sector organisations are forced to consider social andpolitical aspects when defining theirs (Woods, 2011). Another key differencebetween risk management in public and private sector organisations relates tothe risk management process itself. Whilst private sector companies often takerisks in pursuit of profit, the lack of profit incentives for public sectororganisations explains why many adopt a risk-averse approach to riskmanagement.

A number of examples can be found in local government wherechildren’s play areas have been dismantled due to risk of injury, and whereschools have been equipped with high-end security measures to deter those whomay wish to cause harm. The challenge for most public sector organisations isto develop a risk management strategy that effectively manages risk whilst alsohelping them achieve their strategic objectives (Crawford, 2010). Whilst aneffective risk management strategy is important for private sector companies,it is absolutely essential for private sector organisations. Public sectororganisations are faced with strained budgets, an increasing demand for accountabilityand more risk exposures than ever before. The ability to address these risks ina systematic and integrated way will prove to be a key difference betweenpublic organizations that succeed and those that fail (Fone and Young, 2001).

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