Value is hard to find in a fossilised public sector

Public sectors are important employers in all economies, typically accounting for about 20 per cent of total jobs. Compensation in government organisations is structured quite differently to what is found in the private sector: it is usually higher, when one takes into account the education and experience of workers; pay scales are very rigid; and, there is almost a complete absence of performance-related pay.

These are part of the reason that UAE nationals, and GCC citizens more generally, prefer working in the public sector, and why a majority end up working there: in 2009, 86 per cent of employed Kuwaitis and 88 per cent of employed Qataris were in their respective public sectors. Understanding what accounts for the differences in compensation structures is important as the GCC countries look to restructure their economies towards the private sector.

In the GCC and beyond, the private-public discrepancy in compensation structure is underlain by two primary differences between the sectors.

First, governmental organisations are non-profits, pursuing alternative goals that are typically difficult to measure. One of the virtues of targeting profit is that it is easily quantifiable, making it easier for the organisation’s principals to hold the management accountable. By looking at the bottom line, private shareholders can quite easily identify poor performance by the chief executive, at which point they can justifiably fire him, or her.

In contrast, in the public sector, goals are somewhat nebulous (serving the public). For example, how are we to measure the performance of Saudi Arabia’s police force, especially if we wish to take into account the resources consumed? What about Oman’s judiciary?

This creates a serious risk of cronyism in hiring: in the private sector, nepotistic hires can hurt profits quite transparently, diminishing the likelihood that they occur in the first place. But when measuring the organisation’s success is itself elusive, top managers instantly acquire significant discretion in hiring decisions, which can be deployed in a corrupt fashion by the unscrupulous.

This is why civil services inside and outside the GCC have such rigid hiring and promotion structures, and why so many approvals are required for even trivial human resources decisions. No system is flawless and eventually bureaucrats work out a way of paying themselves more than the market values them, which is why public-sector pay tends to exceed what is available in the private sector. For example, during the period 2000-2010, Bahrainis working in the public sector earned about 55 per cent more than those in the private sector.

The difficulty of measuring performance in the public sector also explains the rarity of performance pay. This is especially true when organisations have multiple goals that differ in their measurability; for example, an immigration officer has to process visitors’ paperwork (easy to measure) and prevent those who pose a security threat from entering (difficult to measure). If management naively pay a bonus based on the number of visitors processed, then that gives an incentive to ignore security considerations in the pursuit of the highest bonus possible.

In fact, after securing its independence from the United Kingdom in the late 18th century, the US government used to give its employees performance-related pay, inadvertently creating a horde of overzealous bureaucrats who abused their power at the public’s expense. This led to public demands for less strongly incentivised civil servants.

The second key difference between the public and private sectors is the lack of competition faced by government organisations. When dealing with companies, consumers can eliminate bad services – a bad restaurant will quickly lose customers and go out of business. This channel is typically absent in the public sector because the service is either an antecedent of competitive markets, such as law enforcement, or it transcends them, such as national defence.

Sometimes, the government provides a service that can actually be delivered competitively, such as public transport, and in those cases, the enforced absence of competition usually leads to terrible service and glacial rates of innovation. In the GCC, privatisation of telecommunications has led to dramatic improvements in service quality.

Generally speaking, the lack of competition means that government organisations have to work extra hard at measuring the quality of their output, which means lots of tiresome audits and KPI briefings. This reinforces the rarity of performance-related pay and is another reason that human resources departments can get away with compensating the organisation’s employees at an above-market rate.

Generations of GCC citizens have become used to the public sector’s structure, which poses a challenge for policymakers seeking to strengthen private-sector employment. Educational institutions and civil society organisations need to help nationals change some of their labour market preconceptions. Gulf citizens need to realise that performance trumps seniority in pay and promotions and that Byzantine oversight systems by human resources departments are typically inferior to the discipline that markets offer.

Crucially, GCC citizens need to modify their educational investments. Previously, commercially worthless academic qualifications were pursued to secure promotions in credentialistic public sector organisations. Now, Gulf nationals need to consider how a degree will help them deliver a service that a private organisation is willing to purchase.

In March last year, the UAE Minister of Finance declared that the Government had no plans to give pay rises to public-sector workers. For many, the immediate reaction was a mixture of disappointment and indignation. For the UAE to fulfil its potential, its citizens need to get to the stage where they wonder how on earth the public sector salaries got that high in the first place.

Omar Al Ubaydli is the programme director for international and geopolitical studies at the Bahrain Centre for Strategic, International and Energy Studies, and an affiliated associate professor of economics at George Mason University in the US.

business@thenational.ae

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