On April 16, Xinhua News Agency released a set of draft guidelines outlining future reforms of public institutions for feedback about one year after a similar draft was circulated internally among China's central government departments. The reform is nothing less than an upheaval to China's public sector. The country has 1.26 million public institutions that employ around 30 million people and the reform roadmap promises changes to how public institutions manage and insure their employees, share profits, pay tax and the way they are structured.

Historically, China's public institutions included all public schools, universities, clinics, hospitals, libraries, performing groups, research institutes and media organizations. These were all fully or partly funded by the government. The personnel management of these quasi-government organizations used to be characterized by rigid and uniform pay scales.

The reform of China's public institutions can be traced back to a national conference in 1995, where pilot programs in several cities were announced. Over the following two decades, the Central Government has issued more guiding principles and conducted new pilot programs in various provinces. Although new personnel and pension management measures have been introduced to some public institutions, there has not been a universal national reform.

The development of public institutions lags far behind social development, many of these institutions have ambiguous functions, according to a circular that contains the guidelines from the Communist Party of China Central Committee and the State Council. "As a result, the provision of public services in China is insufficient and ineffective," it says.

In recent years, the public's complaints about public institutions have focused on those with administrative powers imposing unnecessary fines and fees to fund themselves, for-profit operation of public hospitals and schools, and outdated organization and management methods of public institutions, which result in the waste of public resources.

According to the circular, an efficient, clearly-defined and regulated mechanism for public institutions will be established by 2020.

Reform focus

The number of public institution employees is actually far greater than the number of civil servants in China and financing such a large number of institutions and people has become a major burden on the government.

According to the Ministry of Human Resources and Social Security, public institutions employ more than 20 million skilled professionals, a whopping 47.3 percent of all skilled professionals in China in 2010. The upcoming reform of public institutions will also affect 9 million retirees from these institutions, whose retirement benefits could be affected by changes in their former employers.

According to a Xinhua News Agency report on April 17, the essential goal of the reform is to offer better social services to the public instead of simply laying off workers, dismantling organizations and getting rid of financial burdens.

The core of the reform is the reclassification of all public institutions into three groups: Public institutions with administrative roles should be turned or merged into government departments; those that have business operations, such as publishing houses, will be gradually transformed into enterprises; and those providing social services will retain their status as public institutions.

The third group will be subdivided into two categories: Those providing basic public services, such as schools for compulsory education and research institutes engaged in fundamental sciences research, and those whose resources can partly be allocated by a free market, such as institutions of higher education. Institutions of the first category are entitled to full government funding while those of the second category are entitled to partial government funding as well as government support in the form of service purchases.

According to the draft guidelines, the Central Government will complete the categorization of all existing public institutions by 2015.

Efforts should be made to conduct assets inspections, financial auditing, capital rating and debt verification before transforming public institutions, the circular says, adding that national assets must be registered.

Additionally, the program to peg the salaries of public institution employees to their performance will be accelerated.

The circular also clearly defines how employees of these quasi-government institutions will be paid and insured in the future. At the center of these pay reforms is a plan to gradually shift such employees away from employer-based pension schemes over to the universal social security system.

To ease the pain of these reforms, the pensions of retired public institution employees will be managed according to the old scheme, future employees will join the new system while current employees will enjoy a slightly better deal during a transitional period.

Points of disagreement

The new guidelines, which are expected to complete the reform once and for all, will face several hurdles in implementation.

Experts said that the reclassification of public institutions will be an arduous task. There has been wide consensus that public institutions with administrative roles, such as the China Earthquake Administration, the China Securities Regulatory Commission and the China Banking Regulatory Commission, will be merged into the government and those that can operate as businesses, such as publishing houses, will be transformed into companies.

However, an anonymous expert told the China Business Journal, a weekly published in Beijing, that there are institutions that perform administrative functions, offer social services and get involved in commercial activities at the same time and their classification can be baffling. One example raised by the expert is universities, which in general should be classified as public institutions yet often have many purely money-making training programs under them.

"During the next stage of reform, many public institutions will try to prove themselves as providers of social services, which will make them entitled to government funding," Gu Xi, a professor at the School of Government of Peking University, told The Economic Observer, a Beijing-based business weekly. He said that many public institutions will have to be partitioned into several entities according to different natures of their functions.

Cheng Enfu, a researcher with the Chinese Academy of Social Sciences, said that the number of public institutions that provide social services should not be reduced too dramatically after the reform, otherwise the lack of vital services would cause social dysfunction.

But some public administration experts said that the reform guidelines should have stated more clearly how public hospitals are expected to partially fund themselves. According to the guidelines, community-based clinics are entitled to full government funding while the expenditure of hospitals will only be partly covered by the government. In China's previous health care reforms, insufficient government funding, sometimes only accounting for 10 percent of a hospital's operational costs, forced medical facilities to run like businesses and prescribe unnecessary medicines and tests for patients to make ends meet.

Employees of organizations that will retain their status as public institutions after the reform, such as hospitals and educational institutions, worry that their benefits package will shrink after the reform.

As a result of a pilot reform in Shanghai, university lecturer Jiang Wen complained that various subsidies totaling nearly 1,000 yuan ($159) disappeared from her monthly salary. Like other public institutions, the university Jiang works for was required to divide its employees' salaries into two parts: a base salary and a performance-based salary. Instead of giving their staff a pay rise, many public institutions put former subsidies aside as "performance-based salary."

"If the payment reform is to replace subsidies with a performance-based salary, nobody will be happy," Jiang said. "Unlike subsidies that were a fixed part of the salary, the amount of performance-based salary depends on one's appraisal results."

However, the new guidelines will tailor design appraisal methods for public institutions of different types to ensure that employees will be fairly paid and motivated.

The Shanghai Century Publishing Group, which consists of five publishing houses, one magazine, one newspaper and a book trade company, started its makeover to switch from a public institution to an enterprise in 2003.

The group has injected a large proportion of its assets into a joint-stock company whose shareholders include several investment companies. Outside investors sent four people to sit at the Board of Directors of the Shanghai Century Publishing Co. Ltd. to represent their interest in decision-making.

According to People's Daily, the general payment level within the publishing group has been greatly boosted due to the improvement of its profit making capacity after the reform.

Public institutions' employees are also dissatisfied with a probably reduced retirement benefits package after the reform. An anonymous retired professor at Shanghai Jiao Tong University told The Economic Observer that the reform would cut the university's retirees' monthly pension by 1,000 yuan to 2,000 yuan ($318). He said that while the pension gap between retirees of enterprise and public institution diminishes, retired civil servants are enjoying a far better deal, which makes the reform unacceptable.

During a pilot reform in Guangdong Province since 2008, a large number of staff members of universities have applied for early retirement so that they can enjoy better retirement compensation deals before they are diminished by the reform of public institutions. The tide of early retirement has even disrupted normal teaching activities in some universities.

A success story

Like many hospitals in China, Guangdong Hospital of Traditional Chinese Medicine initiated a payment system reform in the 1980s, shortly after the inception of China's reform and opening up.

Before the reform, staff in this hospital was paid mainly according to their academic titles and length of service at the hospital. The reform pegged a physician's salary with the total value of medicines he or she prescribed. "After the reform, physicians became willing to work longer hours and treat more patients in one day while the side effect was that some of them prescribed more unnecessary and expensive medicines to increase their own payment," Xuan Guowei, former president of the hospital, told People's Daily.

In 2000, the hospital conducted another payment reform, pegging the payment with one's workload, performance in training and achievements to reduce patients' total expenses.

Lu Yubo, president of the hospital, said that while the second reform failed to increase staff's paychecks directly, the hospital invested generously in providing the staff with opportunities to improve their skills. "We wanted to make sure that all staff members could see a path to excellence in their own fields in front of them," Lu was quoted by People's Daily.

The hospital started to invite the most prestigious medical experts from around the country to conduct on-the-job training for its staff. "At the beginning, many of my colleagues complained about how frequent and demanding these training sessions were. However, it was not long before we stopped complaining when we realized how fast we became experienced in our fields," said respiratory physician Zhang Zhongde.

The hospital also adopted more flexible and competitive human resources management policies that encourage people to work at posts they like and are best at. Chen Yu, Director of the Human Resources Department of the hospital, told People's Daily that it was not unusual for the administrator of one department to go back to his or her original post of a physician if staff of the department elected a better candidate.

After the reforms, the hospital has grown rapidly. As the largest public hospital in China in terms of the annual number of patients, the hospital has more than 6.3 million outpatient visits every year and received more than 100 million yuan ($15.9 million) in research funding from the government over the past five years.

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