1.

Public Policy and Governance

The learning tasks and objectives of this topic are:

 to distinguish between public policy and governance

 to understand the various meanings and modes of governance
 to locate traditional understandings of government and public policy within a
governance framework

What is Public Policy?

It was once the case that the main role of governments and states was to raise revenue to fight wars
and protect the realm. In recent centuries, especially in the twentieth century, there has been a
massive ‘growth of government’ as urbanisation, industrialisation and a wide range of other issues
have produced ‘problems’ which those in government have deemed to require ‘public’ solutions of
one kind or another. In other words the reach of government action and public policy have expanded.
These days there is hardy any aspect of our lives that is not regulated in some shape or form by
authoritative decisions of governments or agencies of the state (eg. government departments,
regulatory commissions, etc.).

The purpose of this topic is to briefly introduce the concept of public policy and then to explore
more recent debates about ‘governance’. Public policy is essentially about what governments (and
state agencies) do (or chose not to do) about public ‘problems’ and other issues.

We can broadly define policy analysis as the study of what governments and state agencies do in
policy terms, why they do it, and the impacts this has. Policy analysis may also be about policy
review and evaluation and whether policies can be improved.

What makes policy studies intriguing, however, is that there are no simple answers or definitions that
can accurately describe public policy. Even the emphasis above on ‘public problems’ and how we
define them is itself a complex and often highly political process (involving power struggles, a clash
of values, efforts to win votes, etc.)

Hence, it is important to realise that there is not much agreement in the literature on what public
policy is. You should ask yourself whether this is particularly problematic, or whether such
definitional ambiguity simply reflects the complexity of public policy processes and political reality.
In the final analysis, it is the policy researcher who needs to decide on the relevant scope and features
of the public policy terrain in question.

All of the following are reasonable definitions of public policy or at least highlight important aspects
of public policy.

1. Authoritative choice (and perhaps action) by government with a goal or purpose in mind.

2. Authoritative decisions by governments that allocate values and/or resources.

3. Policy as a symbol or guide to what things ‘mean’ officially, what issues ‘matter’, or what has
caught the attention of government.

4. Policy as an ongoing process of defining reality, arguing and persuading others.

5. An official experiment perpetrated on the public, hopefully, based on some reasonably
accurate causal means-ends theory. This highlights the uncertainty of dealing with real
world problems, the limits of time, information, rationality, good causal theories etc.

6. ‘Symbolic policy’: what governments do when they want the electorate or key interests to
believe they have done something about a problem.

7. Policy as the latest stalemate in an ongoing political struggle.

8. Policy as its own cause. A policy ‘solution’ may create more problems that need further
policy ‘solutions’.

The degree of ambiguity surrounding public policy suggests that policy should not be seen in
narrowly rationalist or technocratic terms: as straightforward efforts by governments or state
agencies to ‘solve problems’ using ‘scientific’ or technical means. This might be a facet of what
happens in the policy world but things are often more complicated than this. Policy is usually more
than just a ‘technical’ exercise of solving problems. Typically, any policy or policy arena is
politicised and institutionally embedded – featuring conflicting interests, the protection of turf or
reputations, differing versions of reality, power struggles, the constraints imposed by institutional
arrangements and past practices etc.

Note also, especially in light of the above definitions, that it is up to the policy analyst to define what
a policy is and to explain and evaluate it in any particular context. Official statements or documents
that outline a government policy may only be the first step in working out what the policy is really
about, how it might be defined and characterised, and who or what it effects. What governments or
agencies say they are doing and what they do in practice may be quite different. Often, a good guide
to government priorities is to examine where they spend money and how much. As one writer once
said: ‘The budget is the skeleton of the state stripped of all misleading ideologies’.

In the last decade the concept of public policy has been joined by that of ‘governance’. It’s probably
best to think of governance as a subset of public policy, incorporating an expanded tool kit of
options used by governments to deal with policy issues and problems.

Governance

The term ‘governance’ goes back a long way and has Latin origins based on the concept of ‘steering’.
In recent years the term began to be widely used in political and public policy debates, especially
since the 1990s. In its contemporary form it implies something about mechanisms and
arrangements to achieve order and rule in society and how to achieve collective goals. For example,
governments might use tools such as markets to help rule (eg. price mechanisms and water
markets) or they might engage with community organisations or non-government organisations
(NGOs) in partnership arrangements to help govern r achieve collective goals.

Interest in the concept of governance has grown partly because, as a concept, governance points to
ways of achieving order, rule or collective goals beyond the traditional focus on the role of ‘top
down’ public policy role of government. In this sense, the governance concept is broader than that
of government. For example, in recent decades, under the impact of neoliberalism or economic
rationalism, much interest has been generated in using the market as a tool or mechanism for
governance. Also, the search for new modes of governance has opened up an array of governance
possibilities that involve collaboration between governmental and non-governmental actors (more
on this below).

The broadest definition of governance I have seen suggests it is about ‘creating the conditions for
ordered rule and collective action’. If we zero in a bit, and paraphrase the World Bank, we can
define governance as the as the exercise of political authority and the use of institutional resources to
manage society’s problems and affairs (see World Bank, 1992, Governance and Development, World
Bank, Washington DC). My favourite definition is that governance is about the tools and
instruments used by governments to help govern.

These definitions imply that governments and agencies of the state typically play a leading role in
governance strategies. Also implied, however, is the idea that institutions besides those of states or
governments might be involved in governance functions. Hence, governance, as a process, is not
necessarily the same as ‘government’, an agent. The notion of governance does not necessarily
make any assumptions about which agents do the governing; governance may be broader than
‘government’ and may involve non-state actors. Public policy is more or less about the
authoritative actions (or inactions) of governments and state agencies. Governance, however, is
potentially a much wider concept.

In very general terms, we can think of governance as occurring in three broad ways: (1) through
top-down methods (primarily involving governments and the state), (2) through market mechanisms
(where resources are allocated or behaviour regulated through a combination of competitive markets
operating under government regulation) and (3) through networks involving public-private
partnership or collaboration involving governments and private or community associations. The
shorthand for these alternative modes of governance is hierarchy, markets and networks (see topic
two).

Why the Interest in Governance?

Overall, the last decades of the twentieth century have seen much ferment about how to steer
society and achieve collective goals. The new debates about governance are of central importance
in this respect. As noted above, interest in the concept of governance is fairly recent. Why has this
interest arisen?

The broadest answer is that many argue there are growing problems with the state or top down forms
of governance. Some have argued that authority has leaked away from the state. Below the state,
regions and localities have become more important. Above the state, forces such as globalisation are
said to be weakening the state. The term ‘hollowing out of the state’ has often been used in this
regard to depict what is allegedly happening. We will explore the role of the state in governance
more fully in topic eight. There the argument is presented that the hollowing out thesis is itself a
bit hollow and that the role of the state is still central in relation to issues of governance.

Even if it is not clear that the role of the state has become less central, the search for governance
alternatives has certainly been on. The search is often highly political and ideological. For example,
since the 1970s the economic rationalist right have campaigned against ‘big government’ and called
for market solutions to problems of governance. This program has been very influential. On the
left as well there have been somewhat similar concerns about the so-called ‘fiscal crisis of the state’,
about ‘alienating bureaucracy’, about the limits of the state in the face of ‘globalisation’ and a range
of other concerns. Some of the left have conceded that markets should play a greater role in
governance arrangements and some have joined the so-called ‘third way’ movement, which, in part,
seeks alternatives to both the state and the market and instead seeks to ‘empower the community’.
2. Modes of Governance
The tasks and learning objectives of this topic are:

 to build on topic one and further unpack the range of possible modes governance
 to introduce the concept of a ‘state centric’ approach to governance
 to explore ways of applying governance concepts to a practical case

Modes of Governance

We can start this topic by defining what we mean by a ‘mode of governance’. This refers to the type
or mechanism of governance used in a particular arena or site of governance. An arena or site of
governance may be, for example, anything from managing levels of inflation in the economy to dealing
with salination in the Murray-Darling river system. In topic one above, we distinguished between
states, markets and networks as a first approximation of how we might think about different
modes of governance. In this topic we further unpack this and look at more elaborate ways of
categorising different modes of governance. We begin by looking at states, markets, contracts, and
move onto examine more collaborative and network-based modes of governance as well as modes of
governance that rely on ‘self discipline’.

The central perspective of this topic is that governance is about the tools and instruments used by
governments to help them govern. In this respect this course questions the dissolving state and
largely horizontal view of governance outlined in topic one. This is a view of governance which still
figures prominently in the literature. It is however worth questioning this approach to governance,
largely because it excessively downplays the role of the state. We will return to the question of the
state more fully in topic eight and argue against the vanishing state view of governance and
highlight the importance of the concept of ‘meta-governance’ or the ‘government of governance’; a
role which heavily involves the role of governments and the state in the formulation and management
of governance arrangements of all kinds. The sections below are an excerpt from chapter two of
Bell and Hindmoor’s 2009 book entitled The Dynamics of Governance. This section of the chapter
outlines an alternative to the vanishing state view of governance; namely, a state centric view
of governance. (Note: the references are contained in the course Reader).

A State Centric View of Governance

For now let us simply assume a state-centric approach to governance, where the state and
government remain the central authoritative actors in governance arrangements and where
governance serves rather than replaces government. This approach, which gives us a conceptual
alternative to that of the dissolving state, regards the new governance arrangements and the
partnerships or other arrangements they imply as perhaps strengthening the state and improving
its governing capacity (Keating 2004). The task is to elaborate what a state-centric model of
governance might look like. Along these lines we suggest a definition of governance as the
strategies and tools which governments use to help govern. This approach suggests that states and
governments are the central agents in governance arrangements and are involved in steering,
coordinating, resourcing, legitimating and rendering transparent and accountable a series of activities
and behaviours designed to achieve desired collective outcomes. Central to this approach is the
notion that governments operate at the top of a hierarchy of authority relationships and that only
governments have the legitimate authority to sanction or endorse governance arrangements.
Using this approach we can define a range of different modes of governance (see also White 1993;
Book Review Lindberg, Campbell and Hollingsworth 1991; Pierre and Peters 2000):
 traditional ‘top down’ approaches via the direct hierarchical authority of government;
 governance via the use of markets and the price mechanism;
 governance via contracts with profit-making firms or not-for-profit voluntary
organizations;
 governance via partnerships or networks with associations or communities;
 governance via inculcating modes of ‘self discipline’ or ‘compliance’ in target subjects.

Governance through State Authority

It is argued more fully in topic eight that the state remains the pre-eminent actor in politics and that
many though not all of the arguments about the dissolving state need to be treated with a degree of
scepticism. The fact remains that states and governments are amongst the largest economic and
organisational entities and the main locus of legitimate authority in society. Large multi-national
corporations like Ford or IBM employ around three hundred thousand people globally. In
comparison, the United States federal government alone employs two and a half million people.
Furthermore, whilst many people feel a strong sense of loyalty to the company they work for, it is
worth noting that states have traditionally found little difficulty in encouraging people to fight and
potentially die for them on a voluntary basis (See Levi, 1997, Book Review). Governments and
agencies of the state are also the main locus of systems of democratic accountability. Even where
authority has been partly devolved to the private sector or to non-governmental organisations, the
ultimate accountability for such arrangements rests or least should rest with government;
ultimately this is where the buck stops (cf. the notion of ‘meta-governance’ elaborated in topic
eight). As Pierre and Peters (2000, 197) comment, ‘we cannot see any serious rival to states as
sources of democratic, accountable governance’. Government and the state also play an important
role in coordinating and even resourcing other governance arrangements. In this way, and even
when government is not governing directly it is likely to be ‘meta-governing’.

Perhaps the most straightforward way of thinking about governance through state authority is in
terms of top down regulatory or command and control strategies where rules and the law are
implemented and enforced by state agencies. Laws against speeding, speed cameras and speeding
fines are a good example of such direct command and control strategies. The decisions to wage war
or to impose taxation are also examples of hierarchical state authority. This mode of governance, then,
is about the direct application of state authority to target populations.

Governance through Markets

Governance can also occur within and through markets. In capitalist countries, markets and
processes of buying, selling and trading are of course important mechanisms through which
resources are allocated. As Lindblom (1977: 172) explains in his book Politics and Markets: ‘In any
private enterprise system, a large category of major decisions is turned over to business’. The so-
called ‘invisible hand’ of the competitive market, through atomised market exchange and the forces
of supply and demand, allocate resources, establish the nature and level of production and set
prices in the economy. This is all about ‘governing the economy’. All this, especially in liberal ‘free
enterprise’ market theory, is said to occur more or less automatically, in a kind of self-regulating
fashion (thus the use of the ‘invisible hand’ metaphor), implying little need for government oversight..

In a market system there are, however, limits to the reach of the market. Within firms, market
allocation is replaced by hierarchy. Managers of private firms do not use the price mechanism to
regulate the behaviour of their local branches. They simply order them to behave in particular
ways. According to analysts such as Coase (1937) and Williamson (1975), firms exist because they
offer efficiencies in economic exchange and reductions in transaction costs; the latter defined as the
information gathering or contract enforcement costs associated with market exchange: essentially
the costs of running the market (Milgrom & Roberts, 1990). The organisation of the market can,
however, occur not only within firms but also across firms. Some forms of anti-competitive and
usually illegal activity include corporate connivance, ‘gentleman’s agreements’ and cartels aimed at
artificially raising prices, making life difficult for potential competitors or exerting other forms of
market control (Lindberg, Campbell and Hollingsworth 1991: 23). This is a shadowy world,
essentially a black market, where the role of government is limited or non-existent (often via choice
by governments). Beyond this, however, inter-firm transactions aimed at joint-ventures and other
form of legal, state sanctioned, collaboration are increasingly common. Indeed, Lazonick (1991)
argues in his book ‘Business Organization and the Myth of the Market Economy‘, that the history of
capitalist development in the 20th century reveals the growing importance of economic
transactions organised not only within but between business organisations based on essentially
non-market or extra-market criteria. Economic success stories here include the emergence of
Silicon Valley in California, and high-technology manufacturing in Baden-Württenmberg (Cooke,
1997). Why have such arrangements proven so popular? Transaction costs once again provide a
part of the explanation. Gerlach (1992: 48) argues that, 'inter-firm transactions are … often
structured in repetitive, informal and socially significant relationships'. By encouraging loyalty,
ensuring predictability of supply and demand, facilitating the exchange of information and the
sharing of risk, such relationships significantly reduce the transaction costs of doing business.

Property rights, markets and prices can also be used as tools of governance. Consider the emerging
policy problems posed by water scarcity. According to UNESCO, at least forty eight countries with a
total population of over two billion are projected to be water scarce by 2050 (WWAP, 2003). Water
shortages are likely to be particularly acute in developing countries but will also afflict the Middle
East, where there is a great deal of potential for ‘water wars’ (Shiva, 2002). Within the developed
world, including in Australia and the West coast of America, here are also severe water shortages. If
a government wanted people or irrigators to conserve scarce water, how might it go about
achieving such a goal? One way would be through top down regulation and control by imposing
quantitative limits on the amount of water each farmer or irrigator was allowed to extract. Another
way would be to use the price mechanism. Governments typically own water resources and store
and provide access to water via public infrastructure. If governments switched from treating water
largely as a free good and starting charging high prices for it, less, in theory at least, would probably
be used. In other words, prices would help drive efficiency in water use and perhaps even a reduction
in usage. Similarly, if governments established a system of legal access entitlements for water users
and then set up a market in such entitlements, then water could be traded in markets. According to
mainstream economic theory, such a water market would lead to the more efficient use via water
trading (Easter, Rosegrant & Dinar, 1999).

The main problem with this type of liberal account of governance via the market is that the role of the
state is largely ignored. Markets and even private property are not spontaneous social creations
but are instead the creation of the state. As Wilson (1990: 4) argues in his book ‘Business and Politics:
A Comparative Introduction’:

It is the state which, by laws, establishes 'the market' whose existence is sometimes treated as if it were an
act of nature. Markets require a vast institutional underpinning. Without courts to interpret and enforce
agreements, for example, commercial life would become chaotic. Without laws to define, and police to
enforce them, property rights would be non-existent. The modern corporation itself - the limited liability
joint stock corporation - is, in historical terms, a comparatively modern creation of the state
The state thus provides and regulates the basic institutional foundations of the market, most
notably private property rights, and set the rules of the market game through competition policy. The
neo-liberal ideal of a ‘nightwatch’ man state responsible for little more than the provision of defense
and sanitation is a fantasy. Indeed the shift towards market allocation in many liberal democracies
over the last few decades has been accompanied by demands for greater business regulation. In the
United Kingdom, for example, the privatization of a swathe of industries in the
1980s and 1990s led to the creation of an elaborate regulatory regime in which bodies like the
Office of Communications, Office of Water Services and the Office of Gas and Electricity Markets which
negotiate directly with firms about their pricing arrangements (Jackson & Price, 1994, Privatization
and Regulation: A Review of Issues).

Markets also have an important social dimension. As economic sociologists remind us, markets are
always deeply embedded in social relations and require trust and reciprocity for their efficient
functioning (Granovetter 1985). The point, then, is that contrary to mainstream economic analysis,
market relationships are not impersonal transactions based on narrow, short-term calculations of
utility, but are typically rooted in deeper sets of cultural and social understandings, expectations,
norms and even obligations. Examples of such ‘soft institutional parameters’ can be found in Hausner
and Ami n’s 1997 book Beyond Market and Hierarchy: Interactive Governance and Social
Complexity (page 5) include the trust and obligations underpinning the forms of alliance or network
capitalism discussed above and the ‘efficiency wage’ systems wherein workers are paid above
market wages in order to secure loyalty and commitment (Akerlof & Yellen, 1984).

Governance through Contracts

Governance can also occur through the use of contracts between governments and community or
private sector organisations to deliver particular services. The neoliberal argument here is that
government provision is inherently inefficient: that it results in budget-maximising (Niskanen,
1971 (Niskanen’s book is entitled ‘Bureaucracy and Representative Government’), leading to waste and
so-called X-inefficiency (Leibenstein, 1987) (Leibenstein’s book is entitled ‘Inside the Firm’) and
unresponsive services. The conclusion is that service delivery ought to be performed by non-state
bodies whether in the private or voluntary sectors. One of the most high-profile examples of
governance through contract has occurred in Wisconsin. During the 1990s, the then Republican
governor of the state, Tommy Thompson, oversaw the implementation of a series of ‘welfare-to-
work’ reforms which, in return for assistance with childcare, transportation and training, required
welfare recipients to work. As a part of this process, competitive bidding for welfare management
was introduced throughout the state. Traditionally, public sector workers have exercised a
monopoly on the delivery of welfare and employment programs. Under new legislation passed in
1995 organisations were informed that unless they met performance targets their contracts would
be subject to competitive bidding from profit-making, and voluntary groups. The Wisconsin
reforms, which attracted international publicity, provided a template for subsequent welfare
reform in other American states, the United Kingdom, New Zealand and Australia (see book review
Mead, 1994, Dodenhoff, 1998).
Yet whilst it is now possible to talk about the emergence of a ‘contract state’ (Davis and Rhodes,
2000 (in Weller et al’s 2000 book ‘From Hierarchy to Contracts and Back Again’), in which the state
is responsible for ‘steering’ but not ‘rowing’ (Osborne & Gaebler, 1992) (In their book Reinventing
Government), it should be remembered that government decides whether to use contracts to
deliver services, sets the terms of those contracts, determines who should be given the contract,
and then monitors compliance with it. As Dunleavy (1991) points out in his book ‘Democracy,
Bureaucracy and Public Choice‘ the use of contracts has transformed the role of the state and may
perhaps have made the working lives of state officials far easier. It has not, however, resulted in the
dissolution of the state.
Governance through Networks, Associations and Communities
Governance via contracting is mainly about service delivery. But there are other types of
partnerships that are more directly associated with the actual processes of governing and decision
making. Governments have sought to engage communities, associations and key stakeholders in a
wide range of such governance partnerships in areas from ‘community consultation’ to ‘self
regulation’, to the formal incorporation of private or community interests into government decision
making. Such relationships, as with the contracting relationships above, are often described under
the banner of the ‘third way’, but this term is usually too vague to be analytically useful.

An older but related terminology pointing to the role of private associations in governance
practices refers to ‘private interest government’ or PIG (Streeck and Schmitter, 1985). In the
regulatory arena, for example, White (1993: 7) refers to the ‘endogenous regulation’ of market
activity, whilst Jessop (1993: 117) refers to the combination of the invisible hand of the market
with the ‘visible handshake’ of collective agreement amongst private participants in practices of
‘self regulation’. A common form of industry self-regulation occurs when business associations
develop codes of conduct in an attempt to discipline member firms. Hence, instead of direct
government involvement, industry associations adopt a regulatory role in their industry;
monitoring and even policing the behaviour of firms. In the United Kingdom, for example, a series
of financial scandals in the late 1980s – most notably the theft of pension funds from Robert
Maxwell’s Daily Mirror newspaper and the collapse of the Bank of Credit and Commerce – led to
renewed pressure to overhaul systems of corporate governance. Making clear its preference for a
system of self-regulation, the then government commissioned the former chairman of the Cadbury
chocolate company, Sir Adrian Cadbury, with devising a code of conduct (published in 1992) for
publicly listed companies clarifying their legal and ethical responsibilities. Although companies can
still choose whether to abide by the Combined Code of Corporate Governance, as it has now
become, the relevant regulatory body, the Financial Services Authority, requires firms to state
whether they are complying with it and, if they are not doing so, to explain why. Although this topic
is not about corporate governance, it is nevertheless worth briefly noting that the recent
resurgence of interest in this subject (Hirschey, Kose and Makhija, 2005, Gillian, 2005 (‘Corporate
Governance at the Crossroads’), Sternberg, 2004 (‘Corporate Governance Accountability in the Market
Place’), in both the United Kingdom and, more recently and following the Enron debacle, the United
States, has been prompted and overseen by the state.
The notion of self-regulation suggests that governments and the private sector have become wary
of top down, command and control forms of regulation and are exploring alternative and more
negotiated approaches. Effective regulation in this view thus becomes a combination of developing
norms amongst the regulated aimed at fostering compliance, as well as dialogue between
regulators (whether public, private or both) and the regulated that help establish common
understandings and commitment. There is a new literature which describes such as approaches as
‘smart regulation’, but, as the intellectual leaders of this field acknowledge, even successful
examples of such negotiated or ‘self regulation’ occur under the ‘shadow of the law’ (Ayres and
Braithwaite 1992 (In ‘Responsive Regulation’); Moran 2002).

In some countries associations play a major role in governance, leading some to coin the term
‘associative governance’ (Bradford 1998). For example, the Danish ‘negotiated economy’ model
features patterns of wider social dialogue and bargained consensus between major associations in
the economy and government (Nielsen and Pedersen 1993, Chapter 13, In S jos trand’s 1993 book
‘The Institutional History of the Danish Polity’). The management of the Irish economy has also
featured coordination and bargaining between key state and non-state actors, to a point where in
some arenas ‘corporatist’ governance would be an appropriate label to use (House and McGrath
2004). Corporatism is a governance arrangement where the state shares power with non-state
associations or peak bodies, such as a trade unions confederation, in formally making and
implementing public policy (Cawson 1986) (a book entitled ‘Corporatism and Political Theory’). In
an important sense, such associations cease being private and become ‘arms of the state’. Such
joint decision making and policy arrangements are more likely to emerge in countries like Austria,
Belgium, the Netherlands and Denmark and, to a lesser extent, Japan and Germany, with collectivist
political cultures in which there are established traditions of social partnership and consociational
politics characterised by power-sharing and the search for consensus (Lijphart, 1977) (a book
entitled ‘Democracy in Plural Societies’). In more liberal or individualistic countries, governance is
more likely to occur through top down authority or perhaps markets and contracts. Yet even in a
relatively liberal country such as Australia, the Labour governments of the 1980s forged an initially
very successful corporatist wages policy via formal, ongoing negotiations and bargaining with the
peak union organisation, the Australian Council of Trade Unions (ACTU). The unions helped
implement the deals by exercising wage moderation, whilst successive wages Accords (as they
were called) committed the government to providing tax cuts and other public policy offsets for
workers in order to help secure ongoing union cooperation (Bell, 1997, 183-99) (In ‘Ungoverning the
Economy’).

These approaches also resonate with the so-called ‘state capacity’ literature which coins the term
‘state embeddedness’ to describe the ability of state leaders and policy makers to forge positive,
collaborative and change-oriented relations with key groups or sectors (Evans 1995) (‘Embedded
Autonomy. This capacity for positive state-society collaboration, or what Weiss (1998) (in a book
entitled ‘The Myth of the Powerless State’) terms ‘governed interdependence’, in turn depends on
the organisational and associative capacity and outlook of major social or economic groupings and
interest associations. Primarily, then, the relevance of the state capacity concept is that it
underlines the fact that the resources and capacities of political leaders will be heavily shaped by
the particular types of institutional and relational environments in which they operate.

The key dynamics of such partnering relationships will be shaped by a number of factors which will
be explored more fully later in this course. However, issues such as the degree of mutuality or the
extent of government reliance on private or community associations in governing is important in
determining the strength of the partnering relationship. A critical aspect of the strength or depth of
the relationship is also reflected in how much power the government is willing to share with
partners. There is a big difference between sort of corporatist and formalised partnership
described above in terms of the Accord, and a relationship such as ‘community consultation’; a
relationship where governments listen to but do not share power with outside interests.

Governance through Self Discipline or Compliance

This mode of governance occurs when individuals, groups, associations or even whole societies act
to control their behaviour in order to achieve collective ends, be it less litter in the streets, more
community volunteering, reduced incidences of sexual disease, reduced water consumption, or better
health through reduced rates of smoking. It is possible that changes in norms, values and behaviours
can occur independently of the state. For example, the spread of ‘fairtrade’ products in shops –
intended to enhance global social justice – occurred in the absence of government intervention. Yet
in most cases changes in behaviour are preceded by campaigns paid for and led by the state.
Successful campaigns to reduce drink-driving and the spread of the HIV virus in the 1980s can be
taken to show just how effective such ‘cognitive fixes’ can sometimes be.

More recently, post-modern writers have argued that how people think about the world and define
‘reality’, as well as how they define their own identities is also an important 'constitutive' aspect of
governance. The ideational dimensions of governance, examined more carefully in topic ten, have
been the subject of an increasing amount of research in recent years (Yee 1996; Blyth 1997;
Campbell 1998). As Walters (2000: 3) puts it, ‘the exercise of power is always discursively
mediated’. A further step in this direction has been to apply post-modernist approaches to explore
the relationships between politics and authority and questions about the self and identity. Here the
focus is on how behaviour is shaped via ‘normalising’ self-governing attitudes or beliefs.

In discussing governance through self-discipline, mention ought also to be made of the concept of
social capital, a term which, along with governance, academics have now made a part of
mainstream policy debate. Social capital can be defined as all those 'features of social organisation,
such as networks, norms and social trust that facilitate coordination and cooperation for mutual
benefit' (Putnam 1993: 6). The argument here is that the state will find it easier to govern and
achieve its policy goals in societies characterised by the presence of social capital. It will, to take
just one example, be far easier for the state to achieve a goal of improving people’s health by
encouraging them to regularly exercise if there are already a large number of sports clubs and
societies embedded within a local community. There is an ongoing debate about whether levels of
social capital are declining (as Putnam, 2000 argues in his book ‘Bowling Alone, this is the case in
the United States) or are constant or even growing (as Hall, 1999, argues is the case in the United
Kingdom). Yet all governments have, in recent years, sought to build additional social capital within
communities through, for example, education programs emphasising citizenship or grants to local
community associations (OECD, 2001).
3. Governance through Markets

The tasks and learning objectives of this topic are:

 to understand markets, property rights and contracts as forms of governance

 to examine the strengths and weaknesses of such arrangements as tools of governance

It was suggested in topic two that one increasingly important mode of governance is via property
rights, markets and contracts. In other words, governments are increasingly interested,
particularly in these neoliberal times, to harness the power of individual motives, market
mechanisms, and contracts in order to help achieve public purposes and goals. Privatisation,
contracting out government functions to private providers, the rise of the ‘contract state’, the
deregulation of the financial system, the rising clout of financial markets, tariff reductions and
Australia’s open economy/free trade stance, all bear witness to the market shift and the vastly
increased role of markets as a form or mode of governance in the economy and in other arenas.

Many scholars argue that the rising scope of the private sector and of markets, especially global
trade and financial markets, have weakened governments. It is true that global corporations and
financial markets wield enormous influence if not power. Governments around the world worry
about negative market reactions to their policy decisions. The impact of capital flight from Asian
countries during the so-called Asian crisis of the late 1990s left many of them in a parlous financial
and economic condition; particularly Indonesia. However, as outlined in topic two, markets, the
nature of private property rights and the use of contracts, are for the most part, ultimately sanctioned
and regulated by state authority.

REVIEW QUESTION 3.1

Governments entering into a Public-Private Partnership (PPP) often defend their choice
arguing the partnership will enable government to harness competition and to increase
Value for Money (VfM) for taxpayers. According to Mols (2010), what are the hindrances, in
actual practice, to achieving VfM for taxpayers through PPPs?

Black or illegal markets and also corruption are cases where state authority in relation to market
activity is either weak or lacking for one reason or another. The solution to such problems is often
an assertion of new forms of state authority. Even in the case of the illegal drugs market, one potential
response is simply to legalise and regulate the market; as occurred in the case of liquor after
prohibition in the United States.

Most of the discussion about contracts and markets in relation to governance issues has seen them
as strategic tools used by governments to help boost governing capacity. As recent book by Michael
Keating (a former Secretary of the Department of Prime Minister and Cabinet) has challenged the
concept of the ‘hollowing out of the state’, arguing instead that governments have been devising forms
of governance – such as the use of markets and contracting – which have helped improve or
strengthen governance.

Indeed, it is useful to see markets as a form of partnership between the public and private sectors.
The authority of the state, the establishment and enforcement of property rights as well as myriad
other forms of government regulation of market activities all provide essential support for private
market actors. Markets, in other words, involve mutual dependence and resource exchanges
between the public and private sectors. One prominent aspect of this has been the use of markets
instead of top-down authority as a mode of governance. Arguably, this has probably been the largest
shift in governance practices in many countries in the last couple of decades.

Read Pollitt’s 1995 article Justification by Works or by Faith? Evaluating the New Public
Management.

*REVIEW QUESTION 3.2

According to Pollitt (1995), should we welcome the shift from top-down regulation to
reliance on market forces? Do other governance scholars agree?

Markets and Water Governance

An interesting case of the use of markets and the price mechanism in relation to governance comes
in the case of water governance in Australia under the recent reform regime established by State
and federal governments – the so-called COAG reforms. The use of market instruments has been
pronounced in one of Australia’s more substantial endeavours in water use and environmental
protection issues in the Murray Darling basin. This issue arena is important to Australia’s future.
Australia is heavily reliant on agricultural production and the Murray-Darling system is by far the
largest agricultural system and river basin in Australia. The system is under dire threat with
potentially very serious consequences. The main problem is over the use of water. Too much is being
taken from the river system resulting in poor ‘environmental flow’, poor water quality, and too
little water reaching South Australia etc.

The old system of essentially state-based governance of water was structured around fairly
generous water entitlements to farmers and communities in the catchment. In the mid-1990s a
new governance system was installed in the Murray-Darling system. This has two aspects. First, a
cap on water usage from the river system was imposed. Second, a water market was established in
which water could be priced and traded. This also involved some efforts to clarify the nature of
water entitlements or ‘property rights’ for water.

One of the key ideas of using the market as a form of governance was that by using prices
(especially higher prices) water would be allocated and used more efficiently. Low quality users, it
was thought, would sell their water to more efficient users. The market has boomed and efficiency
in use has increased. Whilst higher water prices have encouraged greater efficiency, it is also the
case that the new governance arrangements have seen an in increase water usage volumes; hardly a
good outcome environmentally. It seems that farmers with entitlements to water and who might
not have been actually using them are now on-selling their water.

These issues are still being assessed and debated. The long-term solution it seems clearly implies
less water usage in the system. This implies restructuring of rural industries and communities. For
example, should Australia be engaging in extensive water guzzling rural industries such as rice
growing? The problem, however, is that substantially less and more efficient water usage will mean
some serious rural restructuring and job losses. How high will the price of water need to go (under
a market-based system of governance) to achieve the desired environmental outcomes?

This case of governance highlights two issues: the market mechanism in this case appears to have
distinct limits and those limits and other issues require a substantial role for government and
centralised authority. These issues again point to the important role played by the state and
governments in all systems of governance (cf. topic eight of the ‘government of governance’ or the
concept of meta-governance).
 Read Bell and Quiggin’s 2008 paper ‘The Limits of Markets: The Politics of Water
Management in Rural Australia’. This paper uses water reforms in the Murray-Darling system
as an example to highlight some of the limitations of markets, and the importance of ongoing
government oversight.

*REVIEW QUESTION 3.3

What lessons can be drawn from Bell & Quiggin’s 2008 article on water management? Can
higher prices and water trading act as a viable governance strategy to achieve greater
environmental flow in the Murray-Darling system? What are transaction costs within
markets and why do these tend to require government attention?

PPPs
Governments have often thought in recent times that offloading public infrastructure provision
(such as roads and freeways etc) is a good idea, primarily because it is thought to shield the public
sector from risk and governments from short term costly expenditures. As usual, however, things
are not quite that simple and the experience of PPPs or Public Private Partnerships are of some
cause for concern. The article below by John Quiggin (2004) outlines some of the issues.

Hard Partnership Lessons | John Quiggin | AFR 16/12/2004

The news that one of the two remaining tenderers for Queensland’s flagship Public-Private
Partnership, the Southbank TAFE redevelopment project, has withdrawn provides an opportunity
to reconsider the whole idea of PPPs. The evidence so far suggests that PPPs are an appropriate
model of infrastructure financing only in relatively rare special cases.

Looking at the predecessors of PPPs, the so-called BOOT (Build, Own, Operate and Transfer) schemes,
widely used in the 1980s and 1990s, it’s easy to find examples where the private investors earned
handsome returns, and the public did very badly. There are also a few examples where the private
investors lost out and the public acquired infrastructure at low cost.

It is hard, however, to find examples of BOOT schemes that yielded both satisfactory returns to
investors and value for money for the public sector. In part, this is because of the (often
deliberately) obscure accounting surrounding such schemes. In most cases, attention was focused
on cosmetic elements, such as the idea that the handover of the asset to the public at the end of the
contract period represented ‘something for nothing’.
The introduction of PPP schemes with detailed formal guidelines is supposed to overcome these
problems and ensure that only projects yielding genuine value for money to the public sector went
ahead. In particular, the underlying principle that risk should be allocated to the party best able to
bear it has been applied fairly systematically. Although the process is still far from perfect, there is no
doubt that it represents a big improvement on what went before.

At the same time, the private sector has learnt that, in a PPP arrangement, the private partner may
indeed bear more risk. The lengthy dispute over the Spencer Street Station project in Melbourne
indicates that this discovery has been an unwelcome one for some. In the past, governments routinely
bailed out failed BOOT schemes. Continued overleaf
If governments insist on value for money, and private investors expect a return that compensates
them for the additional risk of a PPP arrangement, PPP projects will outperform the alternatives
only in special cases. Where infrastructure services are supplied in a competitive market, as in the
case of CBD office space, governments will generally be better off leaving the whole investment
process to the private sector and renting the space it needs in the ordinary commercial fashion. On
the other hand, where the public sector is the only likely user of special-purpose infrastructure, as
in the case of schools and public hospitals, it is appropriate for the public to own the infrastructure

The argument for PPP arrangements is strongest in the case of once-off projects with innovative
design elements tied to the operational needs of the project. The Victorian County Court project,
involving large investments in new reporting and monitoring technology is a good example. Even
so, the private partner’s contract to provide court services specified an initial term of only five
years, renewable at the government’s option.

Some advocates of the PPP process have compared the successful County Court project with
Federation Square, which suffered massive cost overruns. This is silly. Major cultural monuments like
Federation Square almost invariable involve public controversy, midcourse redesigns and costly
changes in specifications. No system of financing can avoid these costs - the only way to avoid them is
not to pursue projects of this kind.
Looking at the case of the Southbank TAFE project, it’s hard to see any merit in a PPP approach. The
TAFE College is a collection of fairly old buildings sitting on land which, thanks to the booming
development of the Southbank entertainment and cultural precinct, is now very valuable. Arguably,
the optimal solution was to sell the site outright and build a new college somewhere else, or to sell
part of the site and use the proceeds to fund a redevelopment on the remainder.

The desire to pursue a PPP solution leads inevitably to schemes in which the TAFE College is
integrated with a range of commercial activities which would generate profits for the private
partner. There’s no obvious reason to suppose that this kind of integration (which is not standard)
makes any commercial sense, and the difficulties encountered in the tender process reflect this. The
fact that a rigorous process of assessment will end up rejecting the PPP option in most cases, should
be regarded as a success rather than a failure. Local governments and others considering going
down the PPP route should learn from this experience.