Late last month, the National Development and Reform Commission, the Organisation for Economic Co-operation and Development and the World Bank convened a timely conference in Beijing on a critical issue: public sector restructuring, or more specifically, reform of public service units in China. This important transformation is only just beginning. There are about 1.3 million public service units, with 29 million employees and 300 billion yuan in assets. Reforms will surely have a widespread impact.
Yet the anticipated changes will be far more complex than even the protracted and problematic programme to restructure state-owned enterprises. Successful reform 'will unlock the great development potential of China's services sector', said World Bank official Austin Hu.
In China, public service units have particular characteristics that distinguish them from similar entities in developed market economies. The majority provide basic education, medical care, scientific and cultural services. More than 70 per cent of science and technology researchers and more than 95 per cent of teachers and doctors work in various types of state-funded public service units. China spends more than 30 per cent of its fiscal budget on these agencies, reflecting their importance in delivering essential services.
We can roughly divide the public service reform agenda into two tasks: first, the state must sever its ties with some public service units; second, and more difficult, the government must construct an efficient system for providing public services.
In reforming the public sector, all the agencies will have to be examined, sorted and their services standardised. For example, some administrative and law enforcement agencies operate as public service units. While they perform official functions, they are financially independent from the government. Obviously, there could easily be conflicts of interest. Meanwhile, some actually produce commercially competitive products. But they cannot establish a functional corporate governance structure and are therefore plagued by economic inefficiency.
Those agencies that do not provide real public services such as education and health care should be reclassified. Those engaged in producing goods and offering commercial services must be converted into business enterprises with clear ownership structures so that they can develop within the market system. In the long run, these new business entities should prosper.
