Evaluation of incentives for efficiency in road maintenance organization : the U.K. experience

Discuissioui Paper TRANSPORTATI'ION ISSUES SERIES R.pof/ Nu IRP4J Evaluation of Incentives for Efficiency in Road Mjaintenance Organization: The U.K. Experience Brian E. Cox June 1987 REF .T'7 2 no.4 u1 thfi 'lllhIuI  DISCUSSION PAPER, TRANSPORTATION ISSUES SERIES, REPORT NO. TRP4 EVkLUATION OF INC8tNTIVES FOR 8WFICIENCY IN FLOAD IAINT&IArXE O.G&NIZATION: THE UK KXPKRIZNCE Brian E. Cox Transportation Department Operations Policy Staff The Worla Bank Washington, D. C.  Copyright 0 1987 The World Bank 1818 H Striet, N.W. Washington, D.C. 20433, U,S.A. All rights reserved First Printing June .987 This Is a document published itformally by the World Bank. In order that the information :ontalned in it can be presented with the leact posvible delay, thd2 typescript has not been prepared in accordance with the procedures appro- priate to formal prlnted text:s, and the World Bank accepts no responsibillty for errors, The World Bank does nor accept responsibilfty for the views expressed herein, whic1t are those of the author(s) and should not be attribuLed to the Wcrld Bank or to Its affili- ated organizazions. The findings, lnterpretations, and conclustons are the results Df research' supportea by the Pink; they do not necessarily represent official policy of Lne Bank. The designations employed, the presentar!oa of material, and any maps used In this document are solely for the convenience of the reader and do not imp;y the expres- sion of any opinlon whatsoever on the part of the 3orld Bank or Its affIliates conceLning the-legal status of any country, r:erritory, city, area, or of its authorities, or concerning the delimitation of its boundaries or national affiliation. Brian E. Cox is a consultant civil engineer on special assignment with the World Bank. He was forferly the Deputy County Surveyor of Lincolnnhire County Councli la UK.  - it. - ABSTRACT This discussion paper reviews and evaluates the productivity and cost effectiveness of lirect labor operat'ons of the county highway authori- ties In the United Kinrdow (UK) and traces the development and cost-effec- tiveness of work-study based bonus incentive schemes for highway maintenance labor in UK sirce 1960. The Direct Labor Organization (1LO) Legislation of 1981 is discussed, particciarly the provision requiring all lccal authority public works organizations to operate on a commercial basis as contractors to their client authorities. The experience witn the DLO Legislat:on suggesta that it has promoted improvements in the cost-effectiveness of bonus schemes and has strongly affected the organization of highvw1 authorities and the attitude of the employees. The introduction of the competitive element Into the operations of the local government public worka agencies has resulted in gaina In operational efficiency and has encouraged the development of user friendly malnrenance management Information ard control systems. More generally the study assesses the transferability of the UK experience to the developing countries, given the often very serious weaknesses In public administration in many of those countries.  - IV - A03OW~LEDG4UT This discussion paper is based on a report prepared by Brian E. Cox, which was subsequently revised by Asif Faiz based on comments received from J. W. Fellows and his staff of the UK Department of Transport, David Mackiln and M. J. Hatt of Devon County Council, and J. P. M. Cooke of the Federation of Civil Engineering Contractors (FCEC). Their review of the paper proved most helpful in revising the report and correcting a few factual inaccuracies. The information presented in the paper comes from many sources. The UK Department of Transport provided valuable aasistance regarding the DLO Legis- lation and its Interprecation. The Clief Officers and staff of the County Councils of Berkshire, Essex, Hereford an Worcester, Humberside, Cxfordbhire, Suffolk, and West Sussex supplied much of the data and inforsation reported in the paper. The Chartered Institute of Pubic Finance and Accountancy (CIPFA) provided an updated version oi its accounting code of practice for Direct Lah,3r Organizations. Kieron Walsh of the Institute of Local Govern- ment Studies, University of Birmingham advised on the effect of DLO Legisla- tion on the management of direct labor organriations. The advice and back- ground information provided by the Planning and Transportation Research and Computation (International) Co., Ltd. (PTRC) and FCEC is gratefully acknow- ledged. The report was produced and typed by Harjesna Gutrick.  TABLE OF COlTEWTS Su mary .............................................. vii I. INTRODUCTION ................................ .............. ... 1 Central and Local Government Responsibilities for Highway Haintenance in the United Kingdom ............................ I Financing of Road Maintenance ................................... 1 Purpose and Scope of this Study ................................. I II. THE DEVELOPMENT OF WORK STUDY BASED BONUS INCENTIVE SCHEMES ..... 3 Initial Development: 1960-1970 ................................. 3 Developments Since the Marshall Report: 1970-1981 .............. 14 Estimating, Program Planning, and Resource Allocation ........ 15 Standard Costing ............................................. 17 Target Bonus Schemeo ..................... 19 'Target' and 'Payment-by-Results' Schemes Compared ........... 20 Difficulties in Sustaining Gains in Cost Effectiveness ....... 21 Conclusions: Incentive Bonus S..:.emes, 1960-1981 ............. 22 Developments Since 1981 ......................................... 23 Evaluation of the Effect of Bonus Incentive Schemes on Producttvity and Cost-Effectiveness .......................... 26 Payment-by-results (p-b-:) Schemes: 1960-1981 ............... 26 Pre-targetted Schemes Since 1981 ............................. 28 III. THE DIRECT LABOR ORGANIZATION (DLO) LEGISLATION ................. 32 The Legislative Provisions ...................................... 32 Accounting Categories ....................................... 33 Fstimates and Tenders ........................................ 33 Prescribed Rate of Return on Capital ......................... 35 Provision and Publication of Reports ......................... 35 Power of Secretary of State to Close DLOs ........ . ........... 36 Implications of the DLO Legislation ...... I . ..................... 37 -Accounting ................................................... 37 Prices and Tenders ........................................... 39 Prescriled Rate of Return on Capital ......................... 40 Provision and Publication of Reports ......................... 42 Power of the Secretary of State to Close DLOs ................ 43 Evaluation of the Effecrs of the DLO Legislation ................ 43 Attitudes .................................................... 43 Working Relationships with Private Contr,ctors ............... 44 kccounting and Estimating Systems ............................ 44 Contract Procedures .......................................... 45 Organization ................................................. 46 Personnel ....... 47 Materials ....... 47  - vi - Flant and Vehicle Hanagement ................................ 51 Capital Asets. . 51 Overheads ..54 Maintenance Technology ...................... 54 Return on Capital ............. ......... 54 Closure of DLOs .. 55 Cost Etfectveness ..55 IV. CONCLUSIONS AND RECO?2ENDATIONS FOR DEVELOPING COUNTRIES .62 Bonus Incentive Schemes ......................................... 62 The Direct Labor Organization (DLO) Legitiation .62 Application to Develop.ng Countles .64 Incentives ................................................... 64 Management Information Systems .65 Contract Maintenance .............................. 65 Statiscical Table .............................. 67 Annex I The Rate System .68 Annex 2 Chronology and Brief DeEcription of Events Laading to the DLO Legislation ... ............... ...I......... - 89 References ........................................................... 91  - vii - SUWQAkY * KIBous Incentive schemes for highway ma1ntenanr. labor have been used and developed by highway ai,ui,orities it-, the Unit-. .gdom (UK) since 1960. From 1981 the local highway authorit'Xa heve bien reeutred to cArry out road maintenance on a _^atract ;asis, In partial competition with private contractors. This etudy reviews and evaluates the productivity and cost effec- tiveness of direct lanor operatlions of the county highway authorities in UK. It evaluates the p2rformance of seven co.'nty highwi" denartments and quantifies perforrmance indicators for four of these departments. More generally, the atudy assesaes the applicability .;f the UK experience to the developing countries, given the ofcen very esoious -eakr.esses in public administratlon in many of those countries. * In the 1960u, bonus incentives were mainl) introducei in high wage areas to facilitate the retentior dnd recruitment of labor. By 1968, some 25 percent of highway authorities had Introduced incentive schemes. Cocmon design principles for such schemes iaXd been eatablialed and there wai pressu.re froia central governiment on all local authorities to tie futu:re pay increanes to productivity. The 1970 Marshall Report showed that highway authorities could obtain considereble cost savings from bonus inrpiti"-e s'csemes and recommended their adoption. By 1972 highway authorities thro.lgh- aut UK had adopted bonus Incentive schemen for direct labor maintenance operations. * The incentive scheme commonly .dopted was the "paynent-by-rEaults" type providing a varying iaotint of bonus according to the amount of work claimed by the emplvyee. Standard minute values (SVV), derived from method- time-measurement techniques, were aesigned to discrete elemental acti-Itles, but they did not have a direct relationship with co-only recogr.ned roadwork opefations. * Initiall; high.ay autnortties obtained considerable cost savitngs and marked increases in p-oduc'ivity from the adoption of paymenL-by-results incentive schemes. Over time defects In the design and application of some schemes eroded both their effecLivene3s and the related producti-iLy gains. Owing to multiple work study valoes and laborious operating procedvres, the relationship between bonus earning performance and proauct:ve output inevitably deteriorate6. Most Importantly, th,ere vias no overall compelling incentive for managemont to improve cost effzctiveness through planning, programming, and control of wotk. * Some highwa-' author'izis, however, reilized that the work study data upon which the Incentive schemes were formulated had other uses. This led to the development of the computerized RATE aystem .or estimating, resource allocation, and standard costing.  - villi - * The concept of combining elemental values to form composite work values, similar to the items in a Schedule of Rates or Bill nf Quantities employed in thc RATE system prcvld--d the foundato'on for the 'pre-targeted' or 'pre-evaluated' bonus incentive 4chemes. But it was the combination of increasing pubiic dissatisfaction and the demands of legislation which prompted the change from the post-work measurement 'payment-by-results' ir:encive schemes, to 'pre-targeted' schemes. T,e latte: require the scope of the work to be predetermIned and provide a direct relationship between productivity and unit costs.