Government super-departments: efficiencies gained, policy lost?

By David Donaldson

Monday December 15, 2014

Despite the enthusiasm for squeezing ever more functions into a few giant government departments, there is little agreement that doing so actually works out better. Former New South Wales cabinet secretary Gary Sturgess even thinks so-called super-departments may degrade the quality of governance, saying it’s “entirely dubious” that the ever-larger departments are more efficient.

It’s often argued small agencies suffer from poor economies of scale and limited bargaining power in procurement. Greater pooling of resources is seen as a way of overcoming some of these disadvantages. Co-location of portfolios is also cited as a means of breaking down silos, ostensibly leading to better policy.

But Sturgess is sceptical. “I know of no evidence that super-departments deliver lower costs,” he told The Mandarin. “The economies of scale proposition is entirely dubious. People who push that line are talking ideology.”

Sturgess argues evidence from NSW, which has nine principal departments, suggests outsize departments have a detrimental effect. “The NSW experience seems to suggest that, at least in some cases, it makes co-ordination worse not better,” he said.

“There are enormous problems in having one director-general reporting to five ministers. It creates enormous complexities. In NSW there are issues I know are not getting up in agencies because departments are too big.

“Certain points of view are being excluded before the debate has even begun. You want to have the right debate and a vigorous debate. You want people to feel they’ve had their say — governments begin to fracture because people are irritated they don’t have their say.

“NSW’s super-departments are locking out certain issues.”

But Sturgess adds that how public sector resources are utilised depends on individual politicians’ leadership styles. “What’ll work under a particular leadership won’t necessarily work under another,” he said.

“Scale has to be seen not just in terms of the range of areas found in departments of state, but differences between what departments and agencies do.”

The new Victorian government announced last week it would reduce the number of departments from nine to seven. The changes will include the merger of the Departments of Health and Human Services to take place next year, which one bureaucrat described to The Mandarin as creating a “monster” department. Some question whether merging two already large departments will really bring efficiency of scale benefits. Merging Health and Human Services may create an organisation that is too large to manage — as was arguably the case with the old Department of Health and Human Services.

But others are positive about the potential rationalisation benefits of amalgamations. When Jeff Kennett became Victorian premier, he sliced over 20 departments down to eight by grouping a range of similar functions. Former senior Victorian bureaucrat Yehudi Blacher told The Mandarin the mergers made sense.

“There was a lot of duplication between different departments in what they did, and there were very significant back of house, as well as front of house, efficiencies that were achieved. In addition it made sense to group like functions together rather than thinking about them as discrete silos operating in isolation of each other,” he said.

Terry Moran, a former secretary of the Victorian Department of Premier and Cabinet, broadly agrees with Sturgess but says “the case is more complex” than simply the relative size of departments. Moran wrote in 2013:

“There are of course some benefits in having a few larger departments, compared to lots of small departments. But the risk of the former is that you end up with some departments that are vast, complex public sector conglomerates that inevitably tend to lose their strategic focus and innovative edge and end up being a lot less efficient than we, and their leaders, want them to be.”

What is important, Moran thinks, is that functions are appointed to the right parts of the bureaucracy. “Super departments can be quite efficient provided service delivery and regulation are passed down to well-structured agencies,” he told The Mandarin.

“Scale has to be seen not just in terms of the range of areas found in departments of state, but differences between what departments and agencies do.” He argues that more functions could be taken out of cumbersome departments and given to more nimble, specialised agencies with professional governance structures.

It’s easier for agencies to bring in expertise from outside government, creating the potential for more effective and innovative service delivery and more specialised advice in policy and regulation. Moran adds that part of the problem is also that there is “too little clarity as to what ministers have the authority to do”. Making this clearer would lead to more effective management of public sector bodies.

Research by former NSW Treasury secretary Percy Allan suggests that, in the realm of local government at least, big is not always beautiful. Making councils overly large leads to efficiencies in some areas and inefficiencies in others, but past a certain point the negatives begin to outweigh the positives.

Instead of merging local government areas, Allan recommends creating shared services companies, taking advantage of economies of scale in pooled finance and ICT, without the inefficiencies gained by sharing other functions.

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[…] Those who promote super-departments claim they are more cost-effective and prevent silos. But could they actually undermine governance? Experts respond.  […]

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