COSTOS DE CONSTRUCCIÓN DEL SISTEMA DE RECICLAJE

2.12.1

Agency theory

This theory explains the relationship between principals (shareholders) and agents (management) in a business or corporate environment. It is concerned with resolving challenges that exist in agency relationships. There are two challenges that this theory tries to address:

i) The conflict of desired goals between the principal and the agent in situations where the principal is unable to confirm the actions of the agent; these are difficult to confirm due to differences in their duties and access to information; and

ii) The challenge with regard to risk management, when the agent is risk averse while the principal may be more risk tolerant or more aggressive in risk appetite; this means that their actions and approach are bound to be different (Carrington, DeBuse and Lee, 2008). The notion that boards should be independent from management is derived largely from the agency theory. The agency theory posits that executive managers act as agents of the shareholders. This runs the inherent risk that a self-serving management can pursue its own priorities that are at odds with those of the shareholders (Thomas, Schrage, Bellin and Marcotte, 2009). As a solution to this conflict of interest problem, this theory introduces independent boards of directors, which are not linked or associated in any way with management. The main role of the boards of directors is to monitor management’s performance and to use levers such as pay determination to elicit expected behaviour.

Overall, following various arguments by Butler (2005), Grant and Keohane, (2005), and Stone, (1995) the agency theory is a supposition that explains the relationship between principals and agents in business. It is concerned with resolving problems that can exist in an agency relationship between principals (shareholders) and agents (executives). This theory is relevant to this study because DFIs have executive management, shareholders who are mainly government represented by various departments, and the boards of directors. This tripartite relationship can be complex. The agency theory recognises the role of information in this relationship. It recognises that management at all times knows more about the business then the shareholders and the board of directors. This kind of information asymmetry is one of the key factors that enable management to pursue divergent objectives. Based on this theory, the board of directors has the responsibility to overcome the information asymmetry so that it maintains a firm grasp of the core business and

risks facing their organisations. Openness between boards of directors and management around each other’s interests, expectations, aspirations, fears, and objectives drives the effectiveness of the relationship (Thomas et al., 2009).

The challenge of the separation of ownership and control dates back to the early 1930s because investors could not collectively make the daily decisions needed to operate the business, and shareholders did not wish to be part of the daily activities of different firms. This brought about a challenge with respect to separation of ownership and control, which is not unique to the private sector, but is also applicable to public entities such as the DFIs. This is referred to as the principal- agent problem. The owners are the principal and the manager is the agent who is supposed to work for the owner. If shareholders cannot effectively monitor the manager’s behaviour, managers may be tempted to use the firm’s assets for their own ends at the expense of the shareholder (Kim and Nofsinger, 2007). Various authors, e.g. Kim and Nofsinger (2007), Dorstein (1988), and Khoza (2005), suggest the tying of wealth of the executives to the wealth of the shareholders, so that shareholders and executives want the same thing. This means that when the business makes a profit and achieves targets, the executives also get a share of the profit. This is often referred to as performance bonuses.

In the public sector, the matter is much more complicated in that the shareholder of public entities is mainly government, whose role is exercised through relevant mother departments. The appointment of the boards of directors for public entities intends to provide oversight to the executives of the public entities on behalf of government as a shareholder. This arrangement does not resolve the challenges relating to the principal-agent problem. The mother department, minister or member of the executive council, as principal and the board of directors as agent do not always pursue the same interests. As an attempt to regulate the relationship, often a shareholder compact is drawn up annually setting up roles for each party and indicating the performance targets for the board. The assumption of the agency theory that boards of directors will resolve the challenge of the conflict of priorities is not always correct. Boards are not always

neutral to the two parties (shareholder and management); they normally fall on the management side, probably because of their reliance on management for information.

In this study, the shareholder compacts coupled with enabling legislations were reviewed as part of the document analysis in preparation for the face-to-face interviews. In the case of DFIs, the donors (government departments) become principals as they determine the purpose for which the funds are available. The agent’s role is to implement the directives of the principal. According to Hawkins, Lake and Nielson (2006), the key concern of the principal is agency slack (an independent action of the agent that is contrary to the principal’s requirements). The alternative models to channel development finance would seek to minimise occurrence of slack. Slack may occur in two forms; first, shirking, when an agent adopts a ‘go slow’ approach in delivering on the results desired by the principal; and second, slippage when the agent drifts away from the outcomes of the principal (Hawkins et al., 2006).

Smyth (2011) proposes various solutions to the principal-agent problem. Among them is the need to construct the principal-agent relationship as a rule-based delegation by the principal to the agent, limiting the agent’s discretion. Another way is for the principal to establish an ex post monitoring and reporting requirement. One other possible solution proposed by Hawkins et al. (2006) is for the principal to create its own agency from scratch. They maintain that while creating an agency from scratch might be more expensive, it is likely to emerge with an agency that would have the same preferences as that of the principal.

Scholars in different fields have used this theory, over a long period dating as far back as 1971; nevertheless, it is still not without controversy. Its proponents argue that it is revolutionary and the foundation for a powerful theory of organisations is being put in place (Eisenhardt, 1989). On the other hand, the detractors of this theory label it as trivial, dehumanising, and dangerous. It is seen as excessively narrow and addresses no clear problem, which suggests it has no obvious worth (Perrow, 1986).

The agency theory is also criticised as being overly simplistic and that it does not reflect the real- world business environment. Furthermore, empirical research has failed to support its basic tenets. Researchers are not only seeking ever finer incremental adjustments to the theory but are also asking for re-examination of the theory so that research can move into new and different directions (Lan and Heracleous, 2010).

Government control is often a source of conflict between those representing the government and those representing public entities (DFIs). The overall impression is that the majority of conflicts arise because the legitimacy of governmental authority, over various matters concerning the conduct of the entities, is often contested by those heading the entities. Within the DFI environment, the authority of the shareholder appears to be regarded as ultimate.

A study conducted by Dorstern (1988) revealed that board members in Britain and Israel did not agree with the use of public entities for the implementation of economic policies. Most of them felt that government intervention purely for short-term political and social reasons was not sustainable due to the short-term horizon of politicians.

In the same study, board members emphasised that government interference is mainly caused by financial dependency of the entities on government. Such interference impairs the ability of the entities to react expediently to opportunities and market forces. Some maintained that government controls obstruct and cause severe distortions in the implementation of long-term corporate plans and therefore have a negative impact on the economic efficiency of the entity. There is, however, less government intervention when the entities are successful, i.e. independent of government support financially.

2.12.2

Accountability theory

According to Carrington et al. (2008), accountability and governance are two sides of the same coin. Holding an organisation accountable means ensuring that their internal policies and procedures are lawful and reflect the best interests of its stakeholders and that they act according to their

governance arrangements. Accountability is only possible when the governed are separated from the governors (Grant and Keohane, 2005).

For the purpose of this study, accountability refers to a situation where decision-making power is transferred from a principal (government) to an agent (DFI), which requires that there must be a mechanism in place for holding the agent to account for his decisions and if necessary for imposing sanctions, ultimately by removing the agent from power. According to Carrington et al. (2008), accountability is one of several methods for constraining power for the benefit of those represented. The relevance and importance of the theory of accountability for DFIs comes from the understanding derived from Bentham’s principle, namely, “the more strictly we are watched, the better we behave –we give an account only when it is requested, and only when that request is backed up by power” (Butler, 2005:11).

Accountability is associated with the act of governing that is related to the authoritative allocation of resources and exercising control and coordination (Kooiman, 1993). DFIs are expected to maintain effective financial stewardship and demonstrate social impact. Accountability is crucial in development finance due to the nature of the funding arrangements that exist between various stakeholders. Over and above fiscal responsibility, DFIs must pay attention to ensuring a reasonable return for investors (government) and demonstrate social impact (DFF, 2004).

According to Carrington et al. (2008), accountability requires a state of affairs in which some actors have the right to hold other actors to a set of standards, judge whether those actors have fulfilled their responsibilities in the light of these standards, and impose sanctions if they determine that these responsibilities have not been met. In the case of development finance, the sponsors or donors have an obligation therefore to hold the DFIs responsible for the utilisation of the funds. It is therefore appropriate for government as the shareholder in most DFIs in South Africa, and KZN in particular, to make it mandatory for the DFIs to account for fund utilisation.

2.12.3

Theory of bureaucracy

Kingston (2011) defines bureaucracy as a body of non-elected government officials and/or an administrative policy-making group. Historically, bureaucracy referred to government administration managed by departments staffed with non-elected officials while in modern times, it refers to the administrative system governing any large institution.

Max Weber (1860-1920), known as a political economist and sociologist, is the founder of the bureaucratic theory. He argued that bureaucracy is the most efficient form of organisation because of the clear lines of authority it creates. In other words, bureaucracy is a rational and effective mode of organising activities of large numbers of employees as decisions are made according to general rules rather than whims of officials or experts. In this way, the risk of corruption and nepotism is reduced. In a bureaucratic environment, there are clear and well-defined rules and regulations that are strictly followed. According to Weber, bureaucratic organisations have common features, such as a high degree of division of labour; a well-defined hierarchy of authority; formal and impersonal relations among the members of the organisation; interpersonal relations based on positions and not on personalities; all rules must be strictly followed; and only legal power is given importance. “Modern societies cannot function without bureaucracy, which leads to the question of whether bureaucrats can adopt Pareto efficient solutions? The objective of bureaucrats is to maximise the size of the budget, since they are concerned with the size of the budget of their organisations” (Nemec and Wright, 1997:164). This confirms that politicians enact legislation but bureaucrats run government programmes.

Pareto efficiency refers to an economic state where resources are allocated in the most efficient manner. Pareto efficiency is obtained when a distribution strategy exists where one party's situation cannot be improved without making another party's situation worse. With budget maximising bureaucrats it would be unfair to expect a Pareto efficient outcome (where resources are optimally utilised). Therefore, bureaucratic organisations cannot be effectively run as suggested

by Weber. In fact, a number of reasons have been put forward as criticism of bureaucratic organisations, such as too much emphasis on rules and rigid regulations; a lot of wastage of time; effort and money due to a lot of paper work involved; difficulty in coordination and communication; and limited scope of human resources.

Nemec and Wright (1997) further argue that there is common agreement among economists that bureaucracies generally produce too much output and may be technically inefficient by producing at too high costs per unit of output.

Adam and Khoza (2005) maintain that several practical problems limit the level of efficiency in bureaucratic administration. It is often impossible to measure the performance of the bureaucracy for several reasons. The processes of objectives setting are very complicated. Programs provide for a multiplicity of objectives. Some countries restrict salaries of public servants, but this may have a negative impact on motivation and on the quality of persons hired. Some countries have special legislation on public servant job security so that it may be very difficult to dismiss somebody from a government job; thus, there may be a non-competitive environment for bureaucratic services with elements of imperfect information. Government agencies often cannot go bankrupt as opposed to private enterprises; at the same time, bureaucrats are considered to be risk-averse individuals. Government representatives (bureaucrats) are unable to take high-risk decisions because of the nature of government and the accountability that goes with being in government. The word ‘bureaucracy’ has come to have negative connotations as bureaucracies are criticised for their complexity, inefficiency, and inflexibility. The elimination of unnecessary bureaucracy is a key concept in modern managerial theory and has been a central issue in numerous political campaigns (Kingston, 2011).

Various scholars have criticised bureaucratic organisations as very rigid organisations that place little or no importance on human relations. Instead, it may be suitable for organisations where change is very slow. Other scholars argue that bureaucracy is appropriate for government

organisations because government is a bigger institution with a very slow wheel to turn. Therefore, policies, rules and regulations are the best mechanism to ensure efficient operations.

While Merton (1957) agrees with Weber’s theories of bureaucracy in certain analyses, he also criticised it for the dysfunctional aspects, which he attributed to the requirements resulting from over conformity to the written rules and regulations. He confirmed that bureaucrats are more likely to defend their own entrenched interest than to act in a manner that benefits the organisation as a whole.

The theory of bureaucracy has both positive and negative features, and it is clear that a number of initiatives have been undertaken in many countries, including South Africa, to improve the efficiency in the provision of public services. However, some degree of inefficiency in bureaucratic behaviour is expected as a standard feature of government administration. As a result, there is a belief or assumption that the creation of entities outside the government will have better capacity, systems and resources to deliver much more efficiently and effectively.

This study examined the compliance requirements of the DFIs to assess whether they are more effective and efficient than government departments. The result was that DFIs are subjected to the same bureaucratic structures and behaviour as departments as they are expected to comply with the same legislation (PFMA), to have written policies and procedures about every process, and a hierarchy of approval requirements. These requirements can have a negative impact on the service delivery standards of the DFIs.