EFFECT OF PERFORMANCE CONTRACTING STRATEGY ON SERVICE QUALITY IN PUBLIC UNITS IN NAKURU COUNTY

ABSTRACT 
Performance contracting is a management strategy which involves management control systems geared towards improving service quality. It is also a contractual agreement to execute a service according to agreed terms, within an established time period and with stipulated use of resource and performance standards. In the past seven years organizations in Kenya have been adopting performance contracting to enhance service quality. The purpose of this study was to examine the effect of performance contracting strategy on quality of services in Public Units in Nakuru County. The target population for the study was 43 Public Units in Nakuru County including; the devolved functions, the non-devolved functions, Sub- Counties and Parastatals. A census study of the 43 Public Units was conducted. The study used structured questionnaire as the main instrument of data collection. Descriptive statistics specially mean, standard and deviation were used to analyze the data. The relationship between elements of performance contracting strategy and quality of service were tested using Pearson’s correlation while the effect of performance contracting on service quality was tested using multiple regression analysis. The study established a strong significant relationship between performance contracting strategy and service quality. The study recommended that the management of the public units should conduct regular reviews of employee performance under the performance contracting paradigm to ensure that quality services were being delivered. Annual reviews could be less effective when trying to ensure better performance and improved standards of service delivery. In addition, it was recommended that a study on the effect of employees’ job satisfaction and service quality delivery to the Public Units County Governments in Kenya should be conducted.

CHAPTER ONE 
INTRODUCTION 
1.1 Background of the Study 
Performance contracting is a management strategy which involves Management Control Systems geared towards set performance and is also a contractual agreement to execute a service according to agreed upon terms, within an established time period, and with a stipulated use of resources and performance standards. Performance contracting has been part of the broader Public Sector Reforms aimed at improving efficiency and effectiveness in the management of the public service (An & Noh, 2009). The Public Sector borrowed the concept from the private sector as a strategy of enhancing service delivery. 

A performance contract is a freely negotiated performance agreement between either Government agencies or Private Sector, acting as the owner of a Government Agency or Private Sector and the management. The contract clearly specifies the intentions, obligations and responsibilities of the two contracting parties. A performance contract constitutes a range of management instruments used to define responsibilities and expectations between parties to achieve mutually agreed results. It is a useful tool for articulating clearer definitions of objectives and supporting innovative management, monitoring and control methods and at the same time imparting managerial and operational autonomy to public service managers (Culiberg, 2010). 

Employees working for both the Public and Private Sector involved in performance contracting contractual agreement are very important resource without which the sectors cannot achieve their objectives. The management view performance contracting as a strategy that ensures high job performance leading to improved service delivery to their customers/clients while on the other hand, the employees view it as a tool that should come with components that achieve their job satisfaction. The gap between the management expectations and employees service quality shows the effectiveness of performance contracting strategy that an organization adopts (Away, 2004). 
Performance Contracting Strategy 

Performance contracting is a management tool for ensuring accountability for results by public officials, since it measures the extent to which they achieve targeted results (Greer et al., 1999). Performance contracts originated from the perceptions that the performance of the public sector has been consistently falling below the expectations of the public. The decline is associated with excessive controls, multiplicity of principles, frequent political interference, poor management and outright mismanagement (RBM guide, 2005). 

However with the implementation of performance contracting in the last five years (since, 2004), there is need to establish how the implementation has impacted on service delivery. Implementation of the process of performance contracting began in 2004 in state corporations. Performance contracting is supposed to enhance service quality for the employees with the hope that their satisfaction would lead to improved job performance. The improved job performance should in turn lead to tangible and improved financial performance. The Economic recovery strategy for wealth and employment creation (2003- 2007) outlines the Government’s commitment to improve performance, corporate Governance and management in the public service through the introduction of performance contracts. The policy paper opens with a bold statement that “the public sector has become a bottleneck to the overall development of Kenya. 

In the Kenyan context a performance contract is a written agreement between government and a state agency (County Governments, State Corporation or National Government Ministry) delivering services to the public, wherein quantifiable targets are explicitly specified for a period of one financial year (July to June) and performance measured against agreed targets. The common issues that were being addressed include: improve performance to deliver quality and timely services to the citizen, improve productivity in order to maximize shareholders wealth, reduce or eliminate reliance on the exchequer, instill a sense of accountability and transparency in service delivery and the utilization of resources and give autonomy to government agencies without being subjected to the bureaucracies and unnecessary procedures. 

Measurement of organizational performance is the first step in improvement. But while measuring is the process of quantification, its effect is to stimulate positive action. The management should be aware that almost all measures have negative consequences if they are used incorrectly or in the wrong situation. Hence they have to study the environmental conditions and analyze these potential negative consequences before adopting performance measures (Government of Kenya (GoK), 2004). 

Measures matrix of performance in devolved government system usually embrace the following fundamental issues; money usually measured as value for the money employed, output/input relationships of customers satisfaction, customer focus, innovations and the key resources of employees. The specific measures include; Cost of quality: measured as budgeted versus actual, variances: measured as standard absorbed cost versus actual expenses, period expenses: measured as budgeted versus actual expenses, safety: measured on some common scale such as number of hours without an accident, profit contribution: measured in dollars or some common scale, inventory turnover: measured as actual versus budgeted turnover (Domberger, 1998). 

Public Units 
This study will focus on the following public units in Nakuru county; devolved unit, non- devolved unit and parastatals. Devolution is a kind of decentralization that changes communications in the system. It means the effect of system performance by transferring responsibility and authority to selected subject (Lodenstein & Dao, 2011). Concept of devolution: transferring authorities and responsibilities to local departments of governmental organization by independent income and authority by preservation of management control. It is defined as reassignment of personnel responsibilities to linear managers (Renwick, 2000). Devolution acts as an effective tool for increase of efficacy of public sector. Although there are improper consequences like horizontal in balance among local government and endangering macroeconomic stability. Thus, among the reasons mentioned for justification of decentralization is the ever growing trend that these policies could help in obtaining goals like increase in welfare, efficacy, reduction of costs, motivation of staff, preparation of future managers, control and economic growth (Budhwar & Sparrow 1997). 

Devolution is the main solution for organization participation, helping and involvement and responsibility and in case of knowledge it leads to value addition. Research shows that more than 70 percent of activities managers do can be delegated to subordinates. Some scholars believe that the managers should delegate the affairs to subordinates for them obtain knowledge and question the conditions. In devolution the individuals should have required authorities and are responsible for their acts (Niliahmadabadi, 2009). There is a significant difference between devolution theatrical concept and what happens in reality. In scholars opinion the linear managers do not have the final authority in decision making (Cascon- Pereira & et al, 2006). They should be given decision making power. The results show that authority submission increase organizational performance (Azmi, 2010). 

Devolution describes the transfer of authority from a senior level of government to a junior level, and can be viewed as both a theoretical concept and as an administrative process (Dacks, 1990). Viewed theoretically, devolution can be seen as an instance of decentralization which can be usefully related to literature on political development. Decentralization (devolution) has a spatial aspect in that authority and responsibility are moved to organizations and jurisdictions in different physical locations, from the center to the local level. And it has an institutional aspect in that these transfers involve reallocating roles and functions both within government, from one central government agency to lower-level jurisdictions and agencies; and between government and civil society, through service coproduction and partnerships as well as joint policymaking and feedback mechanisms (Brinkerhoff, Brinkerhoff & McNulty, 2007). 

According to Gregersen et al (2004), devolution is one form of administrative decentralization which transfers specific decision-making powers from one level of government to another which could be from lower level to higher level of government, in the case of federations, or government transfers decision-making powers to entities of the civil society. Regional or provincial governments, for example, become semi autonomous and administer forest resources according to their own priorities and within clear geographical boundaries under their control. Most political decentralizations are associated with devolution. 

The characteristics of the devolved functions in the County Government include; providing health services to the citizens in the County Government including; Public health, disease control, treatment of different types of diseases in public health facilities, educating the citizens on preventive measures of different diseases. Ministry of Water has a sole mandate of providing clean and safe water for domestic use by the citizens living in the Nakuru County. This includes collaborating with other Government Institutions to get water from the catchment areas, transmission of the water and final distribution to the citizens. Ministry of Agriculture has a sole mandate of advising the famers in the County on the whole faming process which include; ecological mapping of farming practices, extension advice on land preparation, planting, weeding and finally harvesting. The ministry also links farmers to the markets where they can sell their farm produce. 

The Ministry of lands, physical planning and housing was also devolved to manage the built environment within the county. This includes; approval of building plans, estate development, physical planning and road constructions within the County. The other Unit is the Non-Devolved Unit which was left solely to the Central Government. The Non-Devolved units include; Education, Internal security, Kenya Prisons, Immigration, National Treasury, Mining and Geology, Lands and Physical Planning and Social Welfare. These ministries offer services to the citizens living in the County with operations governed by the Central Government. 

The State Corporation Act Cap 446 (1987) defines a parastatal as a state corporation (SC) or a corporate body established by or under an Act of parliament; it is also a corporate body established by order of the president to perform the functions specified in that order; it also includes a bank or a financial institution licensed under the banking Act or other company incorporated under the company Act whose shares or majority of whose shares are owned by the government of Kenya or by another state corporation (Government of Kenya, 1987; Wamalwa, 2003). 

The government of Kenya forms parastatals to meet both commercial and social goals. They exist for various reasons including: to accelerate economic social development, to redress regional economic imbalance, increase Kenyan citizen’s participation in the economy and to promote foreign direct investment through joint ventures (GoK- Sessional Paper No. 4, 2005). The economic motive arose out of the government desire to promote or enhance private African enterprises (Wamalwa, 2003), since after independence, most private enterprises and entrepreneurships were European owned while a bulk of the locals were lacking in undertaking such business ventures. Establishing parastatals was also viewed as a means of generating other non-tax revenue for the government in order to support the country’s agenda. On the other hand, despite the high level of commercial and economic intents, parastatals were established with public policy motive in the conduct of their operations. They are required to serve as a stabilizer of highly profit oriented capitalists whose goal is profit maximization. They therefore stand as a bridge in providing goods and services to the general public at a much lower affordable prices compared to the private firm. 

1.1.4 Quality of Service Delivery 
Countries in both the developed and developing world are embracing New Performance contracting (NPM) initiatives in order to improve public sector performance and at the same time contain expenditure growth (Curristine, Lontt & Jourmard, 2006). The delivery of public services is a tangible indicator of government effectiveness. The quality of public services is often a dominant determinant of citizens’ perceptions of government (Katelaar, 2007). 

Effective service delivery is touted as one of the key strategies for the reduction of poverty and associated problems. In Kenya, the delivery of public services has not been entirely successful or effective. This is manifested by the poor road network, incessant water unavailability, inadequate health facilities and personnel as well as falling education standards (World Vision, 2011). Performance contracting adopts many approaches in an endeavor to improve public service delivery. Among the approaches are performance contracting, rapid results initiative and results based management (Obong’o, 2009). 

The policy decision to introduce performance contracts in the management of public resources was Strategy for Wealth and Employment Creation (2003-2007). Further, Kenya’s Vision 2030 has recognized performance contracting among the key strategies to strengthen public administration and service delivery. The strategies will, in this regard focus on deepening the use of citizen service delivery charters as accountability tools and entrenching performance as a culture in the public service (GOK, 2012). According to Gerhard et al (2007) some of the expected outcomes of the performance contracting include improved efficiency in service delivery to the public by ensuring that holders of public office are held accountable for results, improvement in performance and efficiency in resource utilization and ensuring that public resources are focused on attainment of the key national priorities. 

The Panel of Experts review of performance contracting in the public service and the former local authorities found out that there was involvement and empowerment of the public to demand accountability from all holders of public office. They noted that among the innovations that had given rise to that was the introduction of the Citizens’ Service Delivery Charter.” The Charter is a statement prepared by a public institution which outlines the nature, quality and quantity of service that citizens should expect from the institution (POE, 2010).The former Local Authorities were governed under Cap.265, of the Laws of Kenya. The authority composed of multiple and competing interests. Once the Local Authority had been created, its mission and objectives were still defined under Cap. 265 Laws of Kenya on which it is dependent for its authority (Messah, 2011). Despite the fact that local authorities are created to ensure efficient and effective delivery of essential services, majority have been mismanaged. However, New Performance contracting strategies have resulted to gradual improvement in service delivery (Messah, 2011). 

Sub-Counties which are the former Local authorities should be responsive to the demands and requirements of their clients and customers, while ensuring effectiveness in product and service delivery. Key objectives are expressed in terms of performance expectations linked to budget, service, outcomes and management of performance targets that are set and performance measures that are to be used to measure performance.The importance of service charters in service delivery is echoed by Menon, Mutero and Macharia (2008) whose study revealed that the government of Kenya in a bid to make local authorities to be accountable and improve service delivery had introduced service charters and performance contracts. 

The Government had also imposed conditions of good governance and financial management as part of its annual fiscal transfers to the big towns. Menon et al., (2008) however point out that despite that, a recent survey had found out that Kenyan cities, Nakuru included were not realizing their full potential in delivering efficient services. The study also established that only 20% of the respondents in Nakuru believed they were getting good services from the former Municipal Council. Obong’o (2009) looks at performance contracting as a strategy aimed at transforming the public service delivery system and making it a net contributor to the growth of the economy. The importance of Sub-Counties in development cannot be overemphasized. Naitore (2008) argues that many services such as education, health and social services are delivered at the local level and affect the poor and therefore have direct impact on the performance towards achieving the Millennium Development Goals. 

The commercial state corporations are state enterprises expected to generate revenue or make profit. State enterprises were established include the expectation that they were to earn a surplus to accomplish other societal goals, produce goods and services deemed necessary for development, engage in projects which require large capital outlay, are necessary for development but are unattractive to the private sector and to provide direction, regulation and support to the commercial enterprises and act as a consumers watchdog. The government of Kenya has encouraged the co-existence of private and pubic enterprises to enable it achieve its key objectives as enshrined in the constitution at independence of eradicating poverty, ignorance and disease. 

Karanja (2004) emphasizes that whereas the private enterprise has entrepreneurial roots, public corporations are created by some higher controlling authority with multiple and competing interests. The purpose and objectives of the state enterprise is defined by that higher controlling authority who also provide the operating resources on which it depends. In the past most of these commercial state corporations have been heavily relying on state 
funding instead of generating the expected revenues. Most of the commercial state corporations made losses, lacked accountability and transparency in service delivery and the utilization of resources.

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