Functional decentralization in Portuguese local governments.

AuthorBallesteros, Beatriz Cuadrado


In the 1980s, the large bureaucracies that characterize most states across the world were seen as a threat to the efficiency of public administrations. Thus, the theory of new public management (NPM) was an attempt to overcome the problems of large bureaucracies through private sector mechanisms (Haynes, 2003). It is characterized by the principles of economy, efficiency, and effectiveness, and it aims to allow public administrations to manage public resources efficiently. One of the main reforms proposed by the NPM theory is the functional decentralization processes used for public service delivery. This process consists of governments creating autonomous entities to provide citizens with public services. These new entities have autonomous characteristics and management systems, but continue to form part of the public administration since this maintains the decision-making and control capacity. The main advantage is that they can specialize in certain services and they are closer to citizens. Thus, they know their preferences and needs to a greater extent (Hayek, 1945).

Since the 1990s, there has been a general increase in the creation of these agencies around the world (Cuadrado-Ballesteros et al., 2012). In the specific case of Portugal, functional decentralization processes have gained importance at the local level in recent years, in an attempt to improve municipal management and productive efficiency, taking advantages of the flexibility and financial management rules of decentralized entities (Tavares & Camoes, 2007). Accordingly, because of the growth in the number of decentralized entities in Portugal (Carvalho et al., 2013), the aim of this paper is to show the situation of Portuguese public service delivery at the local level by population range and service type, since we have not found previous papers that carry out this task. Then, we introduce some reasons explaining the Portuguese situation in relation to local public services, proposing the basis for future empirical research. These reasons are mainly related to the size and indebtedness of local governments.

To achieve these aims, we consider the 308 local governments that existed in Portugal in 2011. We divide our sample into population ranges (fewer than 5,000 inhabitants, between 5,000 and 10,000, between 10,000 and 20,000, between 20,000 and 50,000, and more than 50,000 inhabitants). The year under review is the most recent for which information is available (2011).

The results show the strategic use of functional decentralization; the biplot analysis illustrates that functional decentralization tends to be used by local governments of municipalities with more than 50,000 inhabitants, since these agencies are closer to citizens, therefore allowing their demands to be met. In addition, large municipalities tend to be more indebted (Mitchell, 1967; Pettersson-Lidbom, 2001; Ashworth et al., 2005; Hagen & Vabo, 2005). Thus, local politicians may use these agencies to transfer part of the indebtedness and at the same time increase the public revenues through public fees instead of taxes. Authors such as Cuadrado-Ballesteros et al. (2013b) found for the Spanish case that functional decentralization is used to overcome indebtedness restrictions imposed on local governments and increase the public revenues associated with the real cost of the public service delivery. Taxpayers do not perceive an increase in incomes, because it is carried out not through taxes, but rather through fees and public charges collected by public companies, leading to "citizens' myopia".

Moreover, by taking into account the typologies of public services provided by Portuguese local governments, the results show that decentralized agencies are usually used to provide water, urban planning, cultural, and economic services. Functional decentralization is not used for health services in any municipality, and protection, social, and environmental services are decentralized in very few cases. Thus, services entailing a high level of human assets are provided by the local government itself to a greater extent, instead of transferring the service delivery to decentralized entities. In this way, greater productive efficiency is achieved, since local officials may claim credit for delivering human and social public services (Tavares & Camoes, 2007).

This paper is divided into four further sections. The next section presents the basic ideas of NPM and functional decentralization processes. The third section describes public administration in Portugal. In the fourth section, we present the results of several analyses to show the use of these processes in Portuguese local governments. Finally, we present the main conclusions and reflections derived from this study.


Functional decentralization occurs when the public administration (central or under central) creates smaller, more flexible, and business-oriented entities (Aberbach & Rockman, 1999), such as companies, organizations, and foundations for public service delivery. In this paper, we focus on decentralized agencies created at the local level. These entities have their own legal personality, with an autonomous management system, but continue to form part of the public administration--in this case local governments--which enjoy the decision and control capacity to a large degree.

The decision on whether to provide public services in-house or to create decentralized public bodies could be taken through a cost perspective (Tavares & Camoes, 2010). When services are provided in-house, bureaucratic monopoly inefficiencies arise. In addition, a "discretionary budget" problem may lead bureaucrats to request a greater necessary budget (Niskanen, 1971), and "influence costs" may arise since the number of employees and hierarchy levels would also increase (Bendor, 1985; Miranda & Lerner, 1995).

Decentralized agencies may avoid these costs; they are smaller, more flexible, and business-oriented entities (Aberbach & Rockman, 1999) that may avoid the typical rigidities of public administrative systems. From the view of the new public management theory (1), these agencies may improve their efficiency in attaining goals (Boyne, 1996) and streamlining bureaucratic processes (Niskanen, 1971), modernizing the traditional public sector. In addition, these entities produce faster service provision (Downs, 1967), because they are closer to citizens and therefore more aware of their preferences and needs (Hayek, 1945). The fact that the management units are smaller and more flexible as a result of less normative rigidity makes them more dynamic and leads users to express greater satisfaction than with traditional bureaucracies. Furthermore, functional decentralization reinforces the delegation of responsibilities, which may inhibit the ability of public officials to manage public resources opportunistically (Pollit & Bouckaert, 2000).

However, when public services are provided by an autonomous public organization, transaction costs may appear (Tavares & Camoes, 2010) in economic and political terms (Rodrigues et al., 2012). Following Williamson (1989, p. 142), transaction costs are "comparative costs of planning, adapting and monitoring task completion under alternative governance structures".

Economic transaction costs are derived from the uncertainty involved in decentralizing decision-making, since bounded rationality and opportunism can occur. This situation leads to negotiating, monitoring, and enforcing contract costs (Brown & Potoski, 2003a, 2003b; Rodrigues et al., 2012), since decentralization may involve excessive fragmentation of the public sector, producing poor coordination and overlapping functions and use of resources (Rhodes, 1994). In other words, a greater number of entities represent a greater cost, derived largely from control mechanisms to avoid the previous problem, so functional decentralized administrations may be more expensive than large bureaucracies (Andrews & Boyne, 2009).

Furthermore, in the specific case of local governments, political transaction costs arise in relation to the credibility of the local government in a contractual exchange (North, 1990; Dixit, 1996; Rodrigues et al., 2012). The desire for re-election is very influential in the case of the political market, in which, following public choice theory, agents interact to achieve their goals (Downs, 1967; Niskanen, 1971). Information asymmetries between politicians and citizens (Lindstedt & Naurin, 2008) favour politicians, who act opportunistically with the aim of being re-elected (Osborne & Slivinski, 1996; Dixit & Londregan, 1998). When local governments create decentralized agencies, they lose political control, but this is compensated for by greater flexibility in service delivery and greater satisfaction of citizens/voters. Thus, functional decentralization may occur either when voters will be more satisfied or when it will improve the productive efficiency (Tavares & Camoes, 2007).

In view of these arguments, local governments carry out a balance analysis of the costs/benefits when they choose how to provide public services. In short, public services will be decentralized if the risk arising from this transfer is insignificant or the potential exists to achieve great gains in productive efficiency through greater operational and financial flexibility (Tavares & Camoes, 2007). In fact, functional decentralization processes have become particularly important around the world (Molinari & Tyer, 2003; Utrilla, 2007; Cuadrado, 2008). The empirical evidence shows that municipalities that carry out functional decentralization processes for local service provision improve the quality of life (Sanderson, 1996; Marshall, 2004; Cuadrado-Ballesteros et al., 2012), social welfare (Hong, 2011), and income distribution (Gupta, 2004), as well as reducing the public deficits (Vengroff & Reveron, 1997).


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