Improving service delivery to a level commensurate with that of a "xiaokang" society - moderately well-off and middle class - will require far-reaching reform of public service units, beginning with redefining the government's role in service delivery, according to a new World Bank report released in Beijing today.

The report, "China: Deepening Public Service Unit Reform to Improve Service Delivery" notes that China has more than one million public service units (PSUs), or shiye danwei, with a labor force of around 30 million, the same as its state-owned enterprise sector. Most PSUs were created to public service providers. Non-state involvement in service delivery remains limited in China today. PSU performance is therefore crucial for improving service delivery in the public sector. 

"We hope the delivery of this report is timely and useful," said David Dollar, World Bank Country Director for China. "Clearly, a redefinition of the role of the government in service delivery is one component of government reform, which has been put at the top of reform agenda by Premier Wen Jiabao in his report to the National People's Congress this year." "We believe that success in this reform will unlock the great development potential of China's services sector, and significantly improve the government's public service delivery function," he added.

Recognizing the achievements in the past reform efforts to "push PSUs into the market," the report points to "undesirable incentives" they have simultaneously introduced to services delivery. According to the report, nearly half of PSUs' funding is raised through fees, which often allow for bonuses and staff welfare on top of formal salaries. This gave a strong incentive for PSUs and their supervisory departments to distort the market in which PSUs operate. With a widening gap in income, reliance on user charges for financing service delivery is becoming a barrier to access for the poor. In addition, greater autonomy in revenue generation often was not accompanied by better performance management and stronger financial accountability.

"PSU reform is as important as SOE (state-owned enterprise) reform, but is much more complex. This is largely because of the high degree of diversity and complexity of PSUs. It is therefore crucial for any major reform action to be designed with full consideration of sector- and region-specific circumstances," said Bert Hofman, the bank's lead economist for China. He added: "In the meantime, however, the complexity of reform also calls for clearly defined objectives and an overall strategy to safeguard it from losing direction mid-stream. And there exists a range of cross-cutting issues that must be addressed in the reform of any sector and region."

As part of its recommendation of a reform strategy for the government, the report calls for a reconsideration of the government's role in service delivery in view of market failure and a divestment from commercial production of private goods and services.

"Government intervention in service delivery should be justified by not only public interest, but also market failure, and due consideration should be given to the potential cost of government failure," said Chunlin Zhang, the World Bank's senior enterprise restructuring specialist and lead author of the report. "Therefore, a redefinition of the role of the government is in essence about the right balance between market failure and government failure in the delivery of a particular service in a particular time and a particular place."

The report made a range of recommendations involving both financing and incentives issues. On the financing side, it urges the government to revamp public finance for public services by strengthening budget institutions and realigning intergovernmental fiscal relations. In the light of international experiences, the report provides a list of seven organizational forms that China could consider adopting for its service providers, including non-profit organizations and private firms.

A legal and regulatory framework should be created to allow for more non-state participation in public service delivery. Within the public sector, the report proposes that two separate legal categories be created for existing PSUs to allow for more flexibility in governance structure, namely, delegated and devolved PSUs. Accountability should be strengthened through better performance management, further improvements to the personnel and compensation system in the public sector, as well as the empowerment of clients, according to the report. To organize the reform effectively, the creation of a central, multi-ministerial task force to guide and monitor reforms might well be desirable, the report says.

The report believes that it is probably inevitable that some reform measures that are necessary for improvement of public services might negatively affect job, salary, bonus, and pension benefits of some PSU employees, at least in the short term. However, the report adds that based on the nature of services provided by PSUs and the characteristics of its labor force, it is conceivable that the government would not be faced with mass layoffs at the aggregate level or employment pressures in certain regions, as was the case in SOE reforms.

(China.org.cn June 22, 2005)