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Dr Phil McDermott

Local government restructuring – putting the cart before the horse?

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The Quest

In March 2012 central government launched a multifaceted reform programme, Better Local Government. The aim is to “refocus” local councils in the interests of improving governance, efficiency, and management. It identified eight areas for action:

1.       refocus the purpose of local government;
2.       introduce additional fiscal responsibility requirements;
3.       strengthen governance provisions;
4.       streamline reorganisation procedures;
5.       establish a local government efficiency task force;
6.       develop a framework for central/local government regulatory roles;
7.       investigate the efficiency of local government infrastructure provision;
8.       review the use of development contributions.

In it I touch on the key components of the proposed reform and raise a question or two around why and how we are going about it.

Better Local Governance?

The programme is reductionist – breaking reform down into separate parts as if they can be acted on independently. The risk is that the sum of the various initiatives adds up to something less than a satisfactory whole.

For a start, none of the seven subsequent objectives can be considered independently of the first.

The recently issued Local Government Act 2002 Amendment Bill pursues their integration by introducing a new purpose statement. This seems reasonable.  The purpose of local government should shape its funding needs, governance, and management arrangements; determine how it allocates and manages its resources; and influence what it regulates, and how.

Promoting the Bill as the first step in the reform process also seems to take care of the first four objectives.  It offers the prospect of containing and streamlining what local government does, informed about how it might best do those things by the four reviews promised in the second four objectives.

Or More Central Direction?

Reintroducing statutory limits to council activity risks pre-empting what might emerge from those reviews, though.  The new Bill requires local government to focus on functions that only it can perform. This return to basics means that councils might only act where markets fail or where they can demonstrate collective benefits sufficient to justify local public action. This is a step back from the breadth of purpose outlined in the 2002 Act.

The inference is that since the 2002 Act councils have acted too broadly.  With only a small number of exceptions (the larger councils stand out in this respect), this is highly debatable.

Other provisions of the Bill further reassert central over local authority. These include scope for setting prudential standards or benchmarks by Order in Council and much strengthened powers for the Minister to intervene in the affairs of councils considered to be “struggling”.

Ironically, provision for elected councillors to dictate staffing and remuneration policy increases the likelihood that councils will “struggle”, confusing roles and reducing executive accountability.  And allowing mayors more power in running their councils – which may be a worthwhile measure in its own right  –  is unlikely to offset the increased exposure to governance failure. In practice, tinkering with mayoral powers may simply lift the tendency evident in our largest authorities towards divided councils and sectional alliances.

Is this the thin edge of the amalgamation wedge?

Perhaps the biggest concern is the much greater weight given by the Bill to restructuring. Unlike the reforms of 1989, which were geared towards increasing the effectiveness of local government by doing away with the redundancy, duplication, inefficiency, and excessive overheads of a fragmented, hide-bound system, the objective of these measures in the current bill is not clear.  Lurking behind them, I suspect, is a commitment to further amalgamations, encouraged by provision for applications for restructuring rather thanproposals.

A preoccupation with amalgamation again raises the spectre of a solution looking for a problem. The evidence that better governance or enhanced efficiencies are delivered by larger units of local government is decidedly mixed. Internationally research suggests that efficiencies may be increased by moving from very small to medium-sized units of local government. But there is little evidence that moving from medium to large units will deliver the goods.

Certainly I have seen no evidence to support such an approach across the board in New Zealand.  It doesn’t exist in the Department of Internal Affairs Regulatory Impact Assessment for the current Bill, which acknowledges an aim to facilitate more interests and more communities moving on the “union or abolition of councils or the creation of unitary authorities” (Paragraph 158).

Technical efficiencies may be available from merging, sharing, or jointly purchasing particular functions or services across jurisdictions.  That hardly requires amalgamations.  And  there is scant evidence of administrative efficiencies.  Mergers that lead to multiple tiers of management simply pile up the challenges of internal and cultural alignment within enlarged bureaucracies  already struggling to engage with their communities.

The Auckland Experiment – too soon to tell?

In New Zealand’s case we should at least wait to see if the Auckland Experiment works.  The Local Government Auckland Council Act (2009) sought to create a bigger, more influential, and more effective council from the eight that went before.

Maybe it’s too early to judge the success or otherwise of this  experiment. However, there are sufficient  disquieting signs to suggest that the Government should make haste somewhat more slowly elsewhere.

For example, the operating budget for Auckland Council in 2012/13 is $2.8 billion compared with the collective 2008/09 operating expenditure of the eight councils identified of $1.95 billion (see Royal Commission Report Appendix B).  Spending growth of 45% (or $721m in 2009 dollars) compares with just 8% inflation between 2009 and 2012.  Transition costs alone can’t explain such a jump in costs – the Royal Commission suggested that at most transition would cost  just $60 million a year for four years.

So much for operating and administrative efficiencies from amalgamation. What about capital expenditure?

I have not compared collective capital expenditure by the prior councils with the plans of the new council. However, I have already raised doubts grounded in the evidence for Auckland over the Council’s planned capital programme. This is marked by an over-emphasis on the CBDand the $2-3billion it is throwing at an underground rail connection, the benefits from which are both constrained and uncertain.  That central government does not accept the arguments put forward by Auckland Council to justify this investment (despite the $500m already committed to the electrification necessary for under-grounding) is evident in its reluctance to support the proposed rail connection financially.

The Risks of Amalgamations

These question-marks over Auckland’s capital programme highlight serious questions over the allocative efficiency of larger councils (and, as we often see in the private sector, of large corporations generally).

The creation of oversized municipalities does away with the sorts of checks and balances associated with medium-sized councils.  It raises the spectre of single minded spending of larger budgets on ever more ambitious – and unrealistic  –  pet projects.  Bigger councils with bigger budgets but the same old thinking risk serious misallocation of finite public funds.  And allocative inefficiency is  a greater threat to aggregate productivity with more far reaching consequences than any operating inefficiencies that might be associated with smaller organisations.

A more cautious approach to restructuring, an approach which encourages modest reform and puts barriers in the way of building large, remote bureaucracies  may be called for.  I suspect that the Auckland Experiment will demonstrate sooner rather than later that restructuring is not the silver bullet that might put an end to run-away council costs – or run away councils.

Seeking out Efficiencies

Better Local Government also sets the stage for an expert group to advise the Government on how best to deliver good quality infrastructure at an economic cost.  We need this advice before going too far down the track on local government reform generally.

Operating efficiencies might be gleaned from improved process, procedures, training, investment, and, ultimately, purchasing. Administrative efficiencies might be husbanded through moderating the size of councils.  Allocative efficiencies with respect to infrastructure, however, call for best practice in policy analysis and the decisions that sit behind investment regardless of council size.

It’s early days yet, but it seems that the advice that emerges from this investigation should ultimately inform any local government reforms, suggesting that the Bill is premature within the wider programme.

Similarly, it seems premature to promote restructuring while the Local Government Efficiency Taskforce is only now looking at how to streamline consultation, planning, and financial reporting. Equally, the New Zealand Productivity Commission has only just commenced its inquiry into what regulations are best developed and administered at local government level.

Resource Management Review

Something else that bothers me about the Local Government Act 2002 Amendment Bill clearing the way for amalgamation is what happens to the environment under unitary councils?

Again we have some experience here, and I would expect to see it brought to bear in the reform process.

Prior to the 1989 reform of local government and the 1991 Resource Management Act it was all too easy for the environmental gamekeeper to also be the environmental poacher. We need to be aware of the risks of this happening again.  How far, I wonder, is the Technical Advisory Group exploring options for streamlining the RMA (convened by the Minister for the Environment) able to do so in the face of parallel initiatives likely to change both the shape and practice of local government in New Zealand?

Make haste slowly

There may well be merit in the wider programme of reforms the government has instituted, especially in the context of its economic development mandate.  But it seems important that multiple programmes and initiatives do not lead to conflicting outcomes.  An enthusiasm to reform – and restructure  –  local government should not pre-empt the efficiencies that might be achieved by simply boosting the quality of decision-making. Only when we have examined how infrastructure, regulation, and resource management might be delivered most effectively will we really know what sort of reforms might be needed in local (and central) government.