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Striking a Balance: Centralised and Decentralised Decisions in Government - WP 02/15

3  Factors influencing (de)centralisation

Economic, social, managerial and constitutional perspectives offer a number of useful insights when considering questions of centralisation or decentralisation. These perspectives are briefly described in the Appendix. As a summary of the four perspectives we might say an economic perspective maximises effectiveness and efficiency while a social perspective seeks, in addition, to enhance social well-being through mechanisms such as participation. A constitutional perspective introduces the notions of democracy, separation of powers and the rule of law, thus, in considering centralising or decentralising decision rights, the current legal and constitutional frameworks must be taken into account. A managerial perspective emphasises giving managers the authority to make decisions and holding them accountable. This paper draws together approaches from across these perspectives to identify the relevant issues to consider when thinking about centralising or decentralising decision rights.

Centralisation (or decentralisation) is a complex and multidimensional issue. Without seeking to understate the complexities, this paper seeks to identify the issues and provide a pathway through some of them. The paper first discusses centralisation of decision-making rights and then decentralisation of decision-making rights. Sometimes, as in the case of information asymmetries, different sides of the same coin can lead in different directions.

3.1  Centralised information, knowledge and perspectives

There are a number of sources of information asymmetries that mean in some circumstances centralised decision-making can enable better, more timely and more appropriate decision-making. These information asymmetries are most prevalent in decisions relating to the interest of the nation as a whole, judgements that impact on the whole system and decisions regarding key public policy values and broad taxation and resourcing issues. Through the use of the information available at the centre (regarding government objectives, high-level direction, foreign policy, the availability of resources etc.), centralisation may permit a greater level of responsiveness to government objectives. It also means that decisions requiring such information (eg, an understanding of the needs of the system overall, or of different organisations) may be better taken at the centre.

3.2  Constitutional issues

In some circumstances there may be a constitutional imperative for elected representatives to be directly responsible and accountable for decisions, such as those relating to key government objectives and broad taxation and resourcing issues. This constitutional argument for centralised decision-making may be in part motivated by a concern to address the informational asymmetries that favour centralisation, as well as concerns about legitimacy, buy-in, accountability and incentives.

Centralisation of decision-making rights can be used to ensure accountability remains with Ministers who have the democratic mandate to undertake decisions. Such control over decision-making allows the government to more directly pursue its objectives and control the allocation of resources through the closer coupling of taxation and expenditure decisions. This may be of particular importance for decisions relating to key judgements about public policy values, tradeoffs between different organisations, and broad resourcing and taxation issues.

3.3  Risk management

Centralisation may also allow the government to manage processes more closely and thus manage risks more directly. Central risk management may be appropriate in many cases due to the information that is held at the centre. For example, the budget process may be managed at the centre as the centre has access to information spanning across the public sector and, as a result, is better able to manage risks. However, there are also incentive and control considerations regarding risk management. It may be the case that Ministers have better incentives to manage risk than departments and other decentralised decision-makers. This might explain, for example, why only the Minister of Finance has the authority to raise a loan on behalf of the Crown (see also the related discussion later in the paper on incentive problems).

Table 3 – Information, constitutional and risk management factors
Factors Examples
Decisions requiring knowledge of central information, that it is not practical to transfer, an understanding of the needs of the system overall, or knowledge of a number of different organisations and non-localised tradeoffs imply centralised decision-making. Whole of government resource allocation
The need for accountability for key judgements to remain clearly with the democratically elected government implies centralised decision-making. Key judgements about public policy values, tradeoffs between organisations, broad resourcing and taxation issues
The need for the government to manage processes closely in order to manage risk more directly implies centralised decision-making. Management of an international relations crisis

3.4  Economies of scale and scope

The achievement of economies of scale and scope may also suggest centralisation of some decision rights. Economies of scale can arise when similar operations are combined in order to achieve increased output without increasing fixed costs. For example, combining “back office” functions may be achieved in a decentralised way (eg, through shared services). However, the achievement of economies of scale often requires some centralisation of decision rights due to the level of coordination required across the sector. This is particularly the case when individual agencies have only weak incentives to look for efficiencies through collaboration (as an individual agency receives only a fraction of the total efficiency gain yet could bear the majority of the costs from attempting to set up collaborative arrangements).

Economies of scope, on the other hand, can arise as a result of combining different operations and functions. The gains from economies of scope are closely related to the information asymmetries that favour centralisation. For example, there are economies of scope in having a centralised budget process where information across the public sector is available in budget setting. Furthermore, there are economies of scope in combining the budget-setting process and macro-economic forecasting within the one organisation. The complementarities between economic and fiscal policy functions lead to the achievement of economies of scope.

It may, however, be possible to realise economies of scale and scope through careful structuring and contracting of activities, still allowing decentralised decision-making. For example, in some cases the benefits of economies of scale can be purchased from the market through outsourcing. Gupta and Eerola (1997) note that the ability to obtain economies of scale and scope may provide enhanced opportunities for innovation due to the ability to specialise and to better utilise technology.

Economies of scale and scope are closely related to each other and also to the achievement of coordination and consistency. For example, E-government initiatives can increase coordination across the sector by ensuring computer systems and information technology are compatible across departments. This consistency allows the achievement of economies of scope by enabling the use of an information network, and can also result in economies of scale as the central agency may have greater purchasing power when buying in large quantities.

3.5  Coordination and consistency

Centralisation can also aid in achieving a strong and unified culture with the centre conveying coherence and clarity of direction. This can be beneficial from an efficiency point of view, for example it is efficient to have the Crown Law Office[4] as an authoritative figure providing legal opinions. This may reduce the cost and time involved in determining the legal considerations relevant to a particular issue. Where the costs of decision-making are high, centralised policies can help avoid the costs of duplicating information and decision-making (Kerr, Claridge and Milicich 1998).

In addition, centralisation may provide advantages in ensuring uniform and consistent national standards, minimising regional and social inequalities, and reducing variability Aucoin and Bakvis 1988). In this way centralisation of certain decisions, such as benefit entitlements and eligibility criteria may increase equity.

Table 4 – Economies of scale and scope, coordination and consistency factors
Factors Examples
Decisions where it is possible to achieve economies of scale imply centralised decision-making. New Zealand Debt Management Office’s overnight cash “sweep”
Decisions where it is possible to achieve economies of scope imply centralised decision-making. “Brokerage” roles, budget-setting functions, spreading “best practice”
The need for coherence and coordination across the public sector implies centralised decision-making. Leadership on core public policy values
The need for uniform and consistent national standards and guidelines implies centralised decision-making. Benefit entitlement and eligibility rules, tax administration and rulings

Notes

  • [4]The Crown Law Office provides legal advice and representation to the New Zealand Government on matters affecting the Crown, and in particular, government departments.
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