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Modern Public Management, in Theory and Practice, with Special Reference to the Netherlands

Peter B. Boorsma

This paper examines the changes observed in the process of preparing the public budget, from the perspective of Modern Public Management - MPM. In this regard, the contributions of the principal-agent (PA) theory are reviewed and an analysis of the budget process model used in the major Dutch municipalities is presented, together with a discussion of their scope.

In many developed countries, the public sector underwent profound change in the eighties. In most cases, the forces that promoted such change emerged from budget demands, aimed at seeking greater rationality, efficiency and effectiveness in public management, and from the desire to adopt a management model closer to that used in the business sector.

Neoclassical economic theory tells us that agents act with a perfect capacity for foreseeing future situation and with a perfect knowledge of the products and conditions necessary for trade. The New Institutional Economics (NIE) has rejected these assumptions and introduced the concept of uncertainty, while developing a new body of knowledge based on the principal-agent theory.

According to this theory, every transaction contains the positions of principal and agent. The principal establishes the organisation’s goals and allocates a budget to the agent for meeting such goals. In turn, the agent has the power gained from knowing how to go about meeting the goals. One of the problems posed is that in this situation, the goals of the agent do not always coincide with those of the principal and this leads to the so-called agency losses. To reduce these losses, the principal may either increase control or establish positive or negative incentives to motivate a given form of behaviour on the part of the agent.

In the major Dutch municipalities, a budget model was adopted which aims to formulate a budget based on results, also known as a contract budget, and digresses from the traditional inputs budget. In this model, it is presumed that a contract is entered into between a principal, which may be the municipality, and an agent, which may be the public administration; this contract sets out flexible guidelines with respect to the margin of decision-making autonomy within which the agent may act in areas such as personnel, information, organisation and finance.

A budget evaluation by products poses specific problems in the case of service organisations due to the difficulty of objectively measuring the products that are the result of the organisation’s performance. On occasion, it is thus preferable to estimate the activities carried out that would indirectly be reflected in the resulting products, or the impact of these activities on the population, which is the case of the measures taken in the areas of health or education. In any case, flexibility is recommended in adopting a budget model and efforts should be made so that practice will produce the data needed to allow for a combination of the best aspects of each model to be realised in order to achieve the best results.

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