Opportunities for Increasing Efficiency by Public Utility Organizations

Introduction

1. Function, National Economic Importance and Role of Public Utility Organizations

The role of state and market, and their relationship is one of the stressed questions of economic theory and economic policy, but also one of the most disputed questions from several aspects (e.g.: social policy, ethics, competitiveness, regulation etc.).

It represents the values of a given society how the needful resources are secured for the state engagement, what are the aspects of allocation and what efficiency has the utilization of resources. It reflects what the political elite consider as important: the low tax rates or the improvement of public services? This political decision influences basically the principles for the reallocation of resources, which in some cases does not meet the society’s needs.

The satisfaction or non-satisfaction depends on the available resources and on the other hand on the efficiency of the resource utilization. That is why the operation of public utility companies is not alone an economic but also a social policy question.

The public services and service providers fulfil public needs, and because of this their financing comes partly or fully from public money (Figure 1).

Public sphere

Good state Competition (private)

sphere

Public utility organizations

supply need

society

Figure 1. Logic of public resource creation and allocation

Source: own compilation

It is not easy to harmonize the resources (which are from above limited) and the increasing expectations (which sometimes do not have any upper limit). This fact can be verified also according the last three decades’ national practice. It matters in what kind of efficiency the public utility organizations utilize the available resources for the public needs. That is why the government considers the improvement of the public services’ efficiency as a high priority in the recent EU financing period (2014-2020).

The public utility organizations can be different according their objectives, ownership or control, and economic character (Figure 2).

public utility organization

function

ownership

economic character

regulation background

of the operation

public health, environmental protection and sport tasks public education, public collection tasks social, child and youth Protection tasks public utility and communal tasks public financing tasks

local self government Hungarian Development Bank Hungarian National Asset Management Holding

market based

EU regulation Constitution Civil code Government Act

non market based

Figure 2. Typology of public utility organizations

Source: own compilation

Their operating conditions are regulated through the EU regulations (e.g.: the 90th clause of the Treaty; the CEC, 1996. etc.) and on the other hand through the national legislation. The first concentrates basically on the opportunities and limitations of state supports, while the second summarizes the performance regulations (which can be very different among the member states).

As it also the literature underlies the national economic role of the public utility organizations has changed and is changing depending on the liberal or welfare policy model (Leinhard, 2005; Reinermann, 2000; Pulay, 2012; Domokos, 2015).

As a result of the economic and social policy change happened after the governmental change in 2010 the state engagement has became greater in Hungary, which can be verified also through the increasing number of public utility organizations and the number of their employees. In this process the state share purchases have a significant role (Figure 3).

pc person

2500

70000

65525 64817 63335 61399 61105

65000

2000

2191 2151 2106

60000

2069 2067

1500

55000

1502

50000

1000

47352

45000

500

40000

2010

2011

2012

2013

2014

2015

Number of organizations (pc) Number of employees (person)

Figure 3. Change in the number and employment of public utility organizations (Left axis – number of public utility organizations (pc); right axis – number of employees (person))

Source: own compilation

The operation area of the public utility companies has been changed in the last five years. In some sectors the state has assigned its ownership position, while in other areas beside his regulation role also his ownership role has appeared. Most of the companies are working in the utilities sector as a result of the last years’ reprivatisation.

As an effect of the last years’ profile deepening and investments the total balance sheet and tangible assets stock of public utility organizations has been increased (Table 1).

Table 1. The improvement of public utility organizations’ balance sheet in Hungary (million Ft)

Source: own edited based on the dates of the Registry Court

2. Operation of the Public Utility Organizations

The operation logic of the public utility sector is basically different from the private (competitive) sphere. While in the second type the basic goal is the profit, and the social responsibility is only a sub goal; the basic goal of the public services is the social responsibility. At the same time this goal can not save the management of any public utility organization from efficiency requirements. So the quality and efficiency of the public utility organizations’ services and tasks is a sensible question not only from social policy aspects but also from economic aspects.

The losses in the operation of public utility organizations can be the results of external (institutional or control) and internal (economies of scale, competence, methodology, process controlling, ethics or assets management) causes (Figure 4).

The lack of resources is in most of the cases reality but it is not the only problem!

Figure 4. Factors reducing efficiency by public utility organizations

Source: own compilation

consequences

operational

economic image

technical/ technological depreciation

asset loss

loss in trust

negative balance sheet

negative discrimination

not utilization of capacities/ degradation

market loss

Figure 5. Consequences of loss

Source: own compilation

The external and internal causes have mostly multiplicative effects, which can sometimes intensify each other, and this can have a negative influence both on the efficiency and on the social effects of the organization (Figure 5).

3. The Performance Measurement of Public Utility Organizations

There are several aspects in the literature to define organizational performance. Most of these mention as important the efficiency to achieve goals, and the economic aspects (used expenditures for the achieved results) (Kocziszky – Veresné Somosi, 2015).

According our opinion the public utility organizations are systems with limited resources, which have some inputs and outputs. But the outputs are not the same as their effects. While the output can be measured basically with values (like properties and total balance sheet, etc.) or natural dates (quantitative and qualitative parameters); the welfare effects can be measured through the change of the life quality (the differences can be seen in the case of Hungary e.g. in Szendi, 2016) or the availability of public services (e.g.: in share of population, etc.) or environmental pressure (Figure 6).

Figure 6. Influential factors of public utility organizations

Source: own compilation

4. The Performance Management Process of the Public Utility Organizations

Former the terminology and methods applied for the analysis of public utility organizations’ performance were the same as applied in the enterprise level. The researchers have only recognized from the 90s that these types of organizations have got specific performance management system, which has to be in a concordance with the requirements of “goodstate” and “good-governance” concept (Schedler – Proeller, 2011).

The function of the public utility organizations’ performance management:

• defining development objectives and expectations which are relevant for the organization’s performance,
• follow up of the interventions which are made to meet the performance expectations,
• defining the development needs,
• defining and developing the individual performances which are relevant for the organization.

The performance management process of the public utility organizations can be separated into five steps (Figure 7):

• defining the organization’s mission, objectives and performance standards,
• estimating the initial conditions/situation, and building a value map,
• comparing targets and facts, and defining the performance expectations,
• elaborating the directions of interventions,
• feedback of the interventions’ results, implementing possible corrections.

mission, objectives

estimating initial

performance expectations

planning/ risk

feedback

conditions

analysis

Figure 7. Logical process of performance management by public utility organizations

Source: own compilation

4.1. Defining the Organization’s Mission, Objectives and Performance Standards

In the social public thinking, and social needs (e.g.: rights, security, well-being, etc.) the ethical expectations have an outstanding role by the definition of the public utility organizations’ mission (Domokos – Pulay, 2015). According to our opinion the operation of a public utility organization can be sustainable when it follows the ethics; so where the institutional system does not abuse with its rights, and which solves the problems through real innovation and not with budgetary tricks, etc. (Figure 8).

It is important to emphasize this, because the value system which was created through the effects of the geopolitical changes happened after 1989 is eclectic; at the same time contains elements of hedonist thinking and ideology which makes actions for public well-being. The value system is a stable point; with a help of it the mission and objective system can be defined.

building value system

strengthening the compliance aspect

improving community level

strengthening the strategic

commitment

thinking

building operation without corruption

increasing the coordination’s efficiency among the sub systems

applying the Lean philosophy

improving the commitment among the workmates

increasing the efficiency of network cooperation

self fulfilment

developing organizational culture

increasing the efficiency of risk management

developing knowledge management

developing project management

Figure 8. Goal/ Objectives tree

Source: own compilation

The organizations using public resources have to define parallel with their mission also the norms, which define the area of their operations.

4.2 Estimating the Initial Conditions

The objective of the initial conditions’ estimation is positioning the public utility organization, and examining the factors which can hinder the operational efficiency.

The Methodology of Estimation

We have elaborated a questionnaire to analyse the efficiency of the operation, which has a system approach, and which is adequate beside the analysis of input and output elements also for the analysis of transformation capacity.

The test is appropriate for the examination at a sum of 14 main directions, and 48 sub dimensions. It contains in the case of sub dimensions at a sum of 570 questions (Figure 9).

The main advantages of this questionnaire are:

• their questions have a common, unified approach, and their application is flexible, the questions can be complemented according the organizational and sectoral characteristics;
• the questions can relieve the applicant from the memoriter (he/she has to concentrate instead of “what should I examine” for the “how to evaluate” question);
• the questionnaire can be repeated based on the same aspects, which gives an opportunity for making chronological comparisons.

Evaluating the Questionnaire

The evaluation of the questions can be made based on a five point ordinal scale with points from 1 to 5 (Table 2, 3 and 4). As a result of the points the value and median of a given sub dimension can be calculated.

Public utility organization

Analysis of the input side Analysis of transformational capacity Analysis of the output

side

1. Analysis of social expectations

1. Analysis of value system and strategy

4. Analysis of the organization

1. Efficiency of the operation

1.1 Client focus, trustworthiness 1.2 Need for availability of services 1.3 Price/value share analysis

1.1 Analysis of value system 1.2 Examining mission 1.3 Examining objective hierarchy 1.4 Analysing methodology 1.5 Analysing workplace culture

4.1 Regulation of work system 4.2 Inner audit 4.3 Legality 4.4 Information management

1.1 Balance sheet 1.2 Results 1.3 Asset management

2. Analysing resources

5. Analysis of human management

2. Output analysis

2. Analysis of ethical norms

5.1 Personal competencies 5.2 Education, training 5.3 Conflict management, fluctuation

2.1 Analysing fiscal conditions 2.2 Analysing human conditions

2.1 Quantitative 2.2 Qualitative 2.3 Price/value share

2.1 Examining ethical expectations 2.2 Examining corruption 2.3 Examining ethical codex 2.4 Analysing ethical processes

3. Analysis of legal and institutional background

6. Evaluation of the organization’s acceptance

3. Analysis of social responsibility

6.1 Opinion of ownership 6.2 Opinion of workmates 6.3 Opinion of sevice users 6.4 Opinion of suppliers 6.5 Operation of professional organizations

3. Operational and economic processes

3.1 Comprehensiveness 3.2 Calculability

3.1 Tools and methods

3.1 Buying processes 3.2 Economic processes 3.3 Service processes 3.4 Production processes 3.5 Asset management 3.6 Facility management 3.7 Process of cost management 3.8 Knowledge management 3.9 Knowledge production, R&D processes 3.10 Evaluation of controlling 3.11 PR, marketing evaluation 3.12 Sales 3.13 Logistics 3.14 Maintenance 3.15 Waste management

7. Evaluation of communication

7.1 Internal communication 7.2 External communication

8. Risk management

8.1 Input side 8.2 Transformation 8.3 Output side 8.4 Project risks 8.5 Positioning risks 8.6 Risk management

Figure 9. The questionnaire structure for public utility organizations

Source: own compilation

Table 2. An example of the test’s structure

Table 3. An example of the output analysis’ test

Source: own compilation

Table 4. An example of the input analysis’ questions

Source: own compilation

4.3 Defining the Performance Expectations

In the case of the public utility organizations there is a problem with the performance expectations, which are imprecise and incomplete. There are some parts/requirements of the organization which should be among the performance expectations, these are:

• property situation (increase in the properties, asset management, etc.);
• environmental pressure;
• economic activity (employment, balance sheet, etc.).

4.4 Planning, Risk Analysis

The national public utility organizations and their business plans are created in some times in the old plan-bargain aspect, while the potential risks are not smaller as in the competitive sphere (Table 5).

Table 5. Risk elements

deregulation of business processes organizational deregulation deregulation of management processes

Source: own compilation

According to our opinion the compliance culture is more modest.

4.5 Feedback

The performance management is not one fold, but a permanent task, which has got some parts like: the review of achieved results, the comparison with the plans, analysing the differences and feedback.

5. Conclusions

The efficient working organizational structure is an important criterion in the operation of the good state’s concept. The performance management aspect is an important (but not sufficient) condition of this in the case of public utility organizations.

The performance management is a process in which the leaders of the organization define what the actors have to make for fulfilling the strategic goals; beside the individual performance to increase organizational performance. The described model has a complex viewpoint, which unseals the planning of organizational performance to individual performance requirements. It also combines the individual performance evaluation with the motivation system and competence development.

The presented model has a heterodox character; the novelty is its complexity, system and value approach, and the adaptation capacity of business solutions.

References