The World Bank has urged China to adopt a far-reaching reform of its public service units based on a redefinition of government role in service delivery for an improved public service delivery to a level commensurate with a better-off society.

According to the latest World Bank report, "China: Deepening Public Service Unit Reform to Improve Service Delivery," China has more than one million public service units (PSUs) with a labor force of around 30 million, in the same size as its state owned enterprise (SOE) sector.

Most PSUs were created as 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, according to the report made public Tuesday.

WB Country Director for China David Dollar said, "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 said.

According to the report, nearly half of PSUs' funding is raised through charging fees, which often allow for bonuses and welfare for staff on top of formal salaries. This gave a strong incentive for PSUs and their supervisory departments to distort the market in which PSUs are operating.

With the rise in income inequality, reliance on user charges for financing service delivery is increasingly becoming a barrier to access for the poor. In addition, the report said, greater autonomy in revenue generation often was not accompanied by better performance management and stronger financial accountability.

Bert Hofman, the Bank's Lead Economist for China, said "PSU reform is as important as SOE 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."

"In the meantime, however the complexity of reform also calls for clearly defined objectives and an overall strategy to safeguard it from losing direction in mid-stream. And there exist a range of cross-cutting issues that must be addressed in reform of any sector and region."

In recommending a reform strategy for the government, the report calls for a reconsideration of the role of the government in service delivery in view of market failure and a divestment from commercial production of private goods and services.

Chunlin Zhang, World Bank's Senior Enterprise Restructuring Specialist and lead author of the report, said government intervention in service delivery should be justified by not only public interest, but also market failure, and due consideration should be given to potential cost of government failure.

"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 makes 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 realign intergovernmental fiscal relations.

In light of international experiences, the report provides a list of seven organizational forms that China may consider the adoption 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, the report says.

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 by better performance management, further deepening of the personnel and compensation system in the public sector, as well as empowerment of clients, according to the report.

To organize the reform effectively, creation of a central, multi-ministerial task force to guide and monitor reforms may well be desirable, the report says.

Source: Xinhua