Reshaping Australia's Local Government: Finance, Governance and Reform

RESHAPING AUSTRALIAN LOCAL GOVERNMENT

RESHAPING AUSTRALIAN LOCAL GOVERNMENT FINANCE, GOVERNANCE AND REFORM

Edited by

Brian Doller y, Neil Marshall and Andrew Wor thington

UNSW PRESS

A UNSW Press book Published by University of New South Wales Press Ltd University of New South Wales Sydney NSW 2052 AUSTRALIA www.unswpress.com.au © UNSW Press 2003 First published 2003 This book is copyright. Apart from any fair dealing for the purpose of private study, research, criticism or review, as permitted under the Copyright Act, no part may be reproduced by any process without written permission. While copyright of the work as a whole is vested in UNSW Press, copyright of individual chapters is retained by the chapter authors. Inquiries should be addressed to the publisher. National Library of Australia Cataloguing-in-Publication entry: Reshaping Australian local government : finance, governance and reform. Bibliography. Includes index. ISBN 0 86840 653 8. 1. Local government - Australia. I. Dollery, Brian. II. Marshall, Neil, 1950- . III. Worthington, Andrew. 352.140994 Printer BPA

CONTENTS

List of contributors Foreword 1

ix xiii

INTRODUCTION

Brian Dollery, Neil Marshall and Andrew Worthington

Outline of the book PA RT A 2

I N T E R N AT I O N A L C O N T E X T

L O C A L G O V E R N M E N T : R E F O R M I N C O M PA R AT I V E PERSPECTIVE

3

11 13

Janice Caulfield

United Kingdom Australia New Zealand Germany The Netherlands Switzerland Sweden North America Japan Other OECD countries The data Analysis Conclusion PA RT B

1

4

FINANCE

FINANCING LOCAL GOVERNMENT IN AUSTRALIA

20 21 21 22 23 23 24 24 25 26 28 28 32 35 37

Andrew Johnson

The nature of the problem

38

VI

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The genesis of the problem Commonwealth financial assistance grants Managing the problem Conclusion

41 53 59 62

LOCAL GOVERNMENT FINANCIAL REPORTING

64

Christine Ryan

5

External reporting Conclusion

64 77

A M A L G A M AT I O N A N D V I RT U A L L O C A L

79

GOVERNMENT

Paul May

Characteristics of Australian government Tensions between efficiency and democratic representation Pursuing the economic panacea: optimum size Virtual governments Chasing the pot of gold Conclusion PA RT C 6

80 85 87 89 91 96

G OV E R N A N C E A N D M A N AG E M E N T

99

REASSERTING LOCAL DEMOCRACY?

101

Rosemary Kiss

7

What is community? Community and local government legitimacy Local government, democratic representation and the franchise Conclusion

105 107 111

MANAGEMENT REFORM IN LOCAL

117

GOVERNMENT

8

115

Geoff Baker

Top-down management reform — the role of the States and the Commonwealth Local government and the new public management Conclusion

118 124 137

THE ROLES AND RESPONSIBILITIES

139

OF CHIEF EXECUTIVE OFFICERS AND COUNCILLORS IN AUSTRALIAN LOCAL G O V E R N M E N T : A C O R P O R AT E G O V E R N A N C E PERSPECTIVE

Neil Marshall

The context of corporate governance The public sector

140 141

CONTENTS

Corporate structure in local government The role of councillors The role of chief executive officers Some corporate governance perspectives Conclusion PA RT D 9

•

VII

142 144 147 152 155

POLICY REFORM

157

POLICY NETWORKS AND LOCAL GOVERNMENT 159 Joe Wallis

Local government involvement in multi-organisational partnerships (MOPs) Overcoming co-ordination problems through alternative governance mechanisms The capacity of councils to supply local governance Conclusion 10 LOCAL GOVERNMENT EFFICIENCY MEASUREMENT

11. LOCAL GOVERNMENT FAILURE

Brian Dollery

Taxonomies of local government failure A new taxonomy of local government failure Conclusion FUTURE DIRECTIONS

171 175 176

LOCAL GOVERNMENT

179 181 186 188 195 198 212

213 215 228 229

12 FUTURE DIRECTIONS FOR AUSTRALIAN

231

Brian Dollery and Neil Marshall

The achievements of Australian local government Future directions References Index

161

Andrew Worthington

The theory of efficiency measurement Efficiency measurement techniques Problems in measuring local government efficiency Studies measuring efficiency in local public services Determinants of local public sector efficiency Conclusion

PA RT E

160

232 238 251 268

CONTRIBUTORS

Geoff Baker has worked on reform of the legislative framework for local government in Queensland since 1989. His roles have included being instructing officer for the development of Queensland’s new Local Government Act in 1993. He was appointed to the Queensland Government’s Senior Executive Service in 1994. He has also had parttime academic roles at a number of universities in Queensland since the early 1990s. He is currently undertaking further postgraduate studies at the Australian Graduate School of Management. Janice Caulfield is Research Assistant Professor in the Department of Politics and Public Administration, University of Hong Kong, where she teaches public sector management and public policy analysis. Her current research interests include performance and accountability in the public sector, public sector reform and development administration. She is co-editor with Helge O. Larsen of Local Government at the Millennium, which was published in 2002 by Leske and Budrich. Brian Dollery is Professor in the School of Economics at the University of New England, Armidale, and Visiting Professor in the International Graduate School of the Social Sciences, Yokohama National University, Yokohama, Japan. He has previously held academic positions at the University of South Africa, Rhodes University, East Carolina State University, the University of Cape Town and Creighton University. Brian has published extensively on the economics of Australian local government and is a founding member of the University of New England’s Centre for Local Government. Together with Neil Marshall, Brian coedited Australian Local Government: Reform and Renewal in 1997.

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Andrew Johnson is the Director of Finance and Administration of Guyra Shire Council in New South Wales. Andrew holds an MBA degree from the University of New England (specialising in local government) and is a chartered public accountant. He is presently working on a doctorate at the University of New England dealing with the financial problems confronting contemporary local government in Australia. Rosemary Kiss is Senior Fellow in the Department of Political Science at the University of Melbourne. She served as an elected councillor for some years in Melbourne and is a past member of the Victoria Grants Commission. She has published widely in the area of local government. Along with Peter Johnstone, she co-edited the 1996 volume, Governing Local Communities — The future begins. Neil Marshall is Associate Professor in the School of Social Science at the University of New England and teaches in the areas of Australian politics, public policy and public sector management. He has published a number of articles and edited volumes in these areas, including the 1997 book Australian Local Government: Reform and Renewal, which he co-edited with Brian Dollery. Neil is a founding member of the Centre for Local Government at the University of New England. Paul May has 29 years experience in local government. He spent 23 years working in planning departments at Manly, Shellharbour and Eurobodalla Councils in New South Wales. For thirteen of those years Paul occupied senior management positions. In 1997 he established Planning Initiatives, his own consultancy practice specialising in local government policy, research and urban and rural planning. Paul assisted Professor Kevin Sproats on the Inquiry into the structure of local government in eight council areas in the inner city and eastern suburbs of Sydney. He is presently completing a PhD with the University of Technology, Sydney, that involves examining approaches to regional governance. Christine Ryan is Senior Lecturer in the School of Accounting at the Queensland University of Technology, Brisbane. She has published a number of papers on accounting standards and the Australian public sector. Joe Wallis is Senior Lecturer in the Department of Economics at the University of Otago, Dunedin, New Zealand. Joe holds a PhD in economics from Rhodes University and has previously held academic positions at Rhodes University and the University of Cape Town. He has

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co-authored Market Failure, Government Failure, Leadership and Public Policy and The Political Economy of Local Government (both with Brian Dollery). Joe has also written extensively on organisational leadership and the public sector during periods of comprehensive public sector reform. Andrew Worthington is an Associate Professor in the School of Economics and Finance at the Queensland University of Technology, Brisbane. Andrew has a PhD in financial economics from the University of Queensland and has previously worked in both economics and finance at the University of New England. He has published widely in the area of public sector economics, and especially on the measurement of efficiency in the public sector. Andrew has also produced considerable research output on the efficiency and productivity of the Australian financial sector. The past year has been personally difficult for him and he especially thanks his family and friends for their loving support during this time. He dedicates his contribution to the fond memories of his wife Leanne Michelle Cummings.

FOREWORD

As we enter the new millennium with new global configurations the need for strong structures of governance at the sub-state and local levels is increasingly important. Despite the reform initiatives of the latter years of the twentieth century, in this country local government structures remain largely as they were at the beginning of the century. There may be fewer of them, and they may be providing a different range of services more efficiently, but by and large they still reflect their antecedents. Local governments are not universally valued highly by citizens. Too often they are seen as havens for self-seeking politicians and over-regulating bureaucrats. A recent publication by the United Nations Centre for Human Settlement (2001) raised challenges for governance in our cities, including: •

to ensure the benefits of globalisation are shared more equally;

•

to redress the unbalanced emphasis on economic growth and accumulation of wealth by placing renewed emphasis on social justice and environmental sustainability;

•

to develop enabling strategies that include support for the exercise of citizenship;

•

to provide local government with more political legitimacy, responsibilities and resources;

•

to develop co-operative partnerships between government, private sector and civil society;

•

recognition that the complementarity of civil society and government is at the core of good governance.

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In October 2000 I was commissioned by the New South Wales Government to conduct an Inquiry into the structure of local government in eight council areas in the Inner City and eastern suburbs of metropolitan Sydney (Sproats 2001). At the end of that Inquiry in May 2001 I came to the firm judgement that local government structures in the area should be recast to provide fewer, better resourced, more strategically focussed councils. The very few voluntary attempts at structural reform in NSW up to that time had involved simplistic amalgamations of two or more adjoining councils. But the Inquiry found that restructuring needed to be substantially broader than simply achieving scale. It also highlighted the imperative of more strategically focused attention to the characteristics and aspirations of suburbs at one level and regions at another level. In general I found that while the present structures of councils had provided services and facilities to their communities with varying levels of satisfaction, there were significant inadequacies in their fundamental operations. These related especially to: •

deficient strategic planning;

•

inadequate formulation and communication of policy and sustained commitment to it;

•

minimal regional perspective and focus;

•

poor inter-governmental cooperation;

•

unresolved aspects of the roles and functions of mayors and councillors;

•

inability to manage cross boundary issues, particularly on several key region-level sites;

•

inequitable distribution of, and access to, resources.

A voluntary approach had proven to be not sophisticated enough to achieve this scale and scope of reform. I argued that recasting was needed, recasting of what local government was, what it did, and how it did it. No significant change has yet emerged from either local or state governments as an outcome of the Inquiry. Equally, I have lamented at the limited debate on the big questions of transformation of local government and recasting of council structures. I am delighted that the editors of this volume have drawn together academics and practitioners to address some of the issues raised in the international forums and those to emerge from my local Inquiry. Strong, highly valued local government in Australia is essential. The contributions here provide substance to the debate. Professor Kevin Sproats University of Western Sydney

1 INTRODUCTION Brian Dollery, Neil Marshall and Andrew Worthington

Scholars have invested a vast amount of effort into the theoretical and empirical analysis of government in representative democracies. Despite this impressive literature, local government can nevertheless justly be described as the poor cousin of its more exalted state and federal relatives in terms of the attention it has drawn from the research community. At least three factors may explain the existence and persistence of this unfortunate state of affairs. In the first place, in many advanced economies expenditure by local government often comprises a relatively small proportion of total public sector outlays and thus it may have been construed as somewhat less deserving of scholarly inquiry than relatively larger provincial and central governments. This certainly appears to have been the case in Australia where around 730 municipalities outlay $13 billion, representing some five per cent of total government expenditure or about 1.6 per cent of gross domestic product (NOLG 2001). Secondly, even when local government expenditure in absolute terms is high — and $13 billion can hardly be deemed negligible in the Australian context — the constitutional fact that local governments are typically statutory creatures of higher tiers of government generally implies that they are manipulated and constrained by state and federal governments. Most scholars of government have thus focused on these higher levels of governance in their attempts to account for the behaviour of local governments. The constitutionally subordinate nature of local government in Australia is vividly illustrated by the fact although both the Commonwealth and state and territory governments are enshrined in the Australian Constitution, local government has no constitutional standing at all. Thus all local authorities in Australia derive

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their powers and functions exclusively from state and territory legislatures through state acts and regulations. Finally, and perhaps in large part due to its residual status, in many countries local government has a historically inchoative and metamorphic character in more or less constant flux. For instance, in his analysis of British local government, Stewart Bailey (1999, p.4) has noted that ‘the ill-defined status of local government combines with changing perceptions of local autonomy, accountability, equity and the need for macroeconomic control, causing the relationship between central government and local government to be in a continuous state of change’. The federal nature of the Australian polity adds further complexity to this characteristic of local government since each of the eight states and territories can bestow different roles and functions on their systems of local governance at mere legislative whim. Thus the capricious and quixotic character of municipal governance seems to have discouraged scholars from investing time and energy in its investigation. Despite the comparative paucity of research directed at local government in Australia and elsewhere, municipal managers and elected representatives are nevertheless obliged to formulate and implement policy in an increasingly complex environment. It need hardly be stressed that this onerous task is made even more difficult without the guidance that could be derived from disinterested scholarly inquiry. There is thus an urgent need for accessible published research to inform policymaking. The present volume seeks to meet this need by presenting the views of a range of scholars on questions of concern in contemporary Australian local government. The complexities of Australian local governance and its multi-faceted nature mean that no single academic discipline is capable of providing an adequate conceptual basis for a thorough coverage of all its dimensions. For instance, the statutory service obligations imposed on local authorities in Australia, with their continued, if diminishing, emphasis on ‘services to property’, necessarily imply a strong engineering focus to tackle thorny questions surrounding the development and maintenance of physical infrastructure, like roads, sewerage systems and water reticulation. Urban planning and related disciplines also offer insights into these questions. A second area of concern involves the prudent and imaginative management of financial, human, physical and other assets held by councils. Law, and various business specialties, such as accounting, auditing, economics, finance and management, can shed light on perceived problems in this area. Similarly, local governments have been increasingly

INTRODUCTION

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drawn into the provision of ‘services to people’ and have thus fallen into the realm of policy analysis, social work and sociology. Economic development and the allied problems of urban growth, environmental and heritage management require additional sources of expertise. The democratic dimension of local government, as well as its relationship to other tiers of governance under the federal constitution of Australia, raise issues intrinsically bound up with political representation and fiscal federalism, and thus call for the specialised knowledge of political scientists. Finally, the turbulent nature of the local government policy milieu and the increasing demands placed on it by both citizens and higher levels of government require an advanced awareness of the nuances of policy formulation deriving from economics, policy analysis, public administration and several other social sciences. These considerations bespeak the necessity of a multidisciplinary approach to contemporary Australian local government. Accordingly, in this book we have sought to draw upon the expertise of contributors from a wide range of academic disciplines. Since our focus falls on the socio-economic rather than engineering aspects of current local government, the authors in this volume write from a social science and business discipline perspective. It is hoped that the result is a policy-orientated view of Australian local government in the twenty-first century that combines state-of-the-art conceptual developments in the various disciplines with contemporary policy dilemmas. Our aim has been to provide decision makers in local government with a sound analytical basis for policy formulation and implementation. The complexities of local government and its relative neglect by scholars imply that various caveats should be appended to any analysis of Australian local government. While the terms ‘local government’, ‘municipality’, ‘council’, and ‘local authority’ are used synonymously throughout this book to describe democratically elected sub-central governments with legal jurisdiction over spatially limited areas, they nonetheless all describe a tier of government characterised above all else by diversity. After all, while some municipalities serve large populations in big cities with budgets measured in billions of dollars, their much more modest cousins may attend jurisdictions with a mere handful of people. Similarly, whereas some local authorities embrace areas comprised largely of commercial and industrial activity, others preside over widespread rural constituencies. Moreover, under current intergovernmental financing arrangements, councils with different demographic and geographic characteristics face different funding regimes.

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Compounding these complications, a given municipality with identical spatial and socio-economic characteristics will confront different financial circumstances in different Australian states. The high degree of diversity in Australian local government is thus cause for caution in extrapolating policies in a ‘one-size-fits-all’ manner. A second caveat attaches to the policy role assigned to local government. It is possible to identify two diametrically opposed approaches to the question of appropriate policy making at the local government level. In the first place, elected representatives and municipal managers can adopt a ‘minimalist’ position and seek to reduce the gap between rising expectations on the part of the public and higher tiers of government and their limited ability to meet these expectations by sticking to their historical ‘core’ functions of ‘services to property’. Alternatively, councils can pursue a more ‘activist’ posture and attempt to play a catalytic role in the economic and social development of their communities by expanding ‘services to people’. While the constitutional status of Australian local government undoubtedly places heavy constraints on the capacity of councils to determine independently their policy stance, scope nevertheless exists for at least some choice. It should be stressed that the selection of a policy role along the ‘minimalist’/’activist’ continuum derives at least as much from ideological imperatives as ‘pragmatic’ considerations and thus depends partly on ethical factors immune to rational analysis.

OUTLINE OF THE BOOK With these considerations in mind, the text is divided into five main sections. Part A sets the scene by providing an overview of the salient characteristics of Australian local government and locating Australian local government in the wider context of international local governance. Part B focuses on the financial environment in which local government operates. It explores some of the critical issues and problems and suggests possible solutions. Part C deals with governance and management: it examines the changing conceptions of governance and management over the past decade and investigates their implications for councils. Part D provides an analysis of policy reform in Australian local government. In particular, the question of policy formulation and policy networks is considered, the issue of efficiency measurement and improvement discussed and the problem of local government ‘failure’ investigated. Part E concludes the volume by distilling its major themes and considering future directions. A full index and bibliography are included.

INTRODUCTION

• 5

In Chapter 2 Janice Caulfield considers the extent of recent managerial reforms in Australian local government from an international perspective. She attributes the global growth of the New Public Management (NPM) since 1980 to the requirement for local authorities to cope with a declining resource base and the need to respond to rising public expectations for improved services. The particular focus of the chapter is upon explaining the cross-national variations evident in the implementation of the NPM; why some countries have become leaders while others have lagged behind. She suggests that fiscal autonomy — the degree of discretion which local authorities have over their sources of finance — may be a critical variable in explaining outcomes. To test this hypothesis, Caulfield discusses the scope and substance of the NPM reforms across eleven nations and assesses their level of advancement in terms of eight established benchmarks. Each country’s level of NPM development is then combined with indicators of fiscal autonomy. The chapter concludes that systems with low levels of fiscal autonomy are likely to be at the forefront of the NPM reform. Yet the reverse proves not to be true; nations with high levels of fiscal autonomy were also found to be NPM leaders. In these cases, however, the initiators of reform were central governments rather than the local authorities themselves. In Chapter 3, Andrew Johnson examines the economic dilemma confronting contemporary local government in Australia. He argues that municipalities face not only rising expectations from their key constituencies for more and better local services, but also heightened demands from both state and Commonwealth governments to assume greater responsibilities for service delivery and infrastructure maintenance. At the same time, municipalities encounter severe restrictions on their revenue-raising capacity. The inevitable result of escalating costs and constrained funding is a growing ‘community expectations/funding gap’ that threatens the very future of efficient and responsive local government in Australia. After considering the nature of the financial problems afflicting Australian local government, Johnson examines a number of significant expenditure pressures, including the devolution of functions from higher tiers of government, ‘raising the bar’, cost shifting, increased community expectations and inefficiency in municipal operations, as well as the Commonwealth Financial Assistance Grant system. Various methods of ‘managing the problem’ are outlined, not least dampening expectations, improved efficiency and transparency, and financial assistance from higher levels of government to accompany the devolution of responsibility.

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In Chapter 4, Christine Ryan deals with the financial reforms undertaken in Australian local government over the past decade and the current state of financial reporting by councils. A cornerstone of these reforms lay in the shift away from cash-based accounting methods to accrual accounting. The accounting standard set out in AAS 27 Financial Reporting by Government has been mandated by almost all local government regulators in Australia and obliges municipalities to report on an accrual basis and value assets at current cost. A major feature of AAS 27 is its assumption that local government authorities have general-purpose users: that is, users who wish to know about the financial affairs of councils and who do not normally have access to financial information. A second important attribute of AAS 27 resides in the fact that it uses the same framework to develop private and public sector accounting standards. Ryan questions the appropriateness of both of these characteristics for Australian local government. She argues that the massive diversity of local government in respect of size, asset base and geographic location may mean that a ‘one-size-fits-all’ financial model may not be optimal. In particular, one of the chief purported advantages of the application accrual accounting standards to local government was supposed to be comparability of financial information between different councils. Ryan examines how problems associated with the valuation of assets, depreciation and revenue recognition have complicated this goal. In Chapter 5, Paul May tackles the explosive issue of local government amalgamations in Australia. After reviewing the scale of Australian municipal consolidation from 1910 through to 2001, May conducts a detailed evaluation of the various factors underlying the case for fewer and larger local authorities: in particular, he develops a very useful distinction between ‘primary motivational factors’ and ‘secondary motivational factors’. The chapter then discusses tensions arising from the purported trade-off between economic efficiency and local democratic representation, a problem that goes to the heart of the controversy surrounding amalgamation. The related question of potential economies of scale and scope that may derive from larger local government is examined, together with the thorny empirical issue of whether it is possible to identify an ‘optimal’ size for local government. In contemporary policy debates some commentators have sought to avoid ‘all-or-nothing’ policy choices between larger, more ‘efficient’ councils and their smaller, more ‘responsive’ counterparts by proposing the concept of ‘virtual councils’. May explores this line of argument fully,

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pointing out its similarities with earlier ‘resource-sharing’ suggestions also aimed at reducing potential trade-offs between economic efficiency and democratic participation in local governance. In Chapter 6 Rosemary Kiss disputes the widely held perception that the local government reforms of the 1990s reinforced community participation and constituent involvement. Rather, she suggests, state legislative changes in fact weakened the democratic legitimacy of the third tier. There are two dimensions to her argument. First, the notion of ‘community’ has become so vague as to be meaningless. The concept can be easily redefined by committees of inquiry in terms of particular interests, or as circumstance demands. Moreover, community can be claimed by both state and federal agencies; it is no longer the preserve of municipalities. The extent to which the concept of community has become devalued, Kiss claims, is evident in the amalgamation programs of the 1990s where it seemed to count for little. Second, Kiss asserts that citizen participation cannot become a substitute for representative democracy. Councillors alone are responsible for making decisions and it is therefore vital that the manner of their election has integrity. Kiss demonstrates that this is not so. While other levels of government are based on citizenship and residence in an electoral district, local government in many states is subject to property-based, non-resident plural voting. Kiss concludes that local government in Australia will not be considered a sphere of democratic government until proper representative democracy is restored. In Chapter 7 Jeff Baker considers the nature of the managerial revolution that has substantially altered the way Australian local governments operate over the last decade or so. Baker explains how the traditional bureaucratic hierarchies on which councils were based in the early 1980s have given way to the precepts of the NPM. Municipal activity is now shaped by a corporate ethos embracing such features as corporate planning, performance measures, an emphasis on generic executive skills, and devolution of authority. He argues that the new management style has been shaped to a considerable extent by legislative changes and policy initiatives imposed by higher levels of government. Despite the influence of state and Commonwealth agencies, however, Baker points out that individual councils have themselves often taken the lead in terms of introducing new strategic initiatives. The second half of the chapter looks first at the Victorian experience, and then considers the impact of National Competition Policy (NCP) on the other states. Victoria is singled out for analysis because of the

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radical nature of the reform program which was implemented, particularly compulsory competitive tendering. The manner in which NCP has affected the function of local governments in the other states and territories is explored in some detail by Baker. The chapter concludes with a discussion on the need to integrate efficiency concerns with democratic principles. In Chapter 8 Neil Marshall explores the nature of the relationship between chief executive officers (CEOs) and councillors in local government. This has been a problematic issue within the sector for a long time. State legislation enacted during the 1990s attempted to resolve the problem by clarifying the respective roles and responsibilities of elected members and senior management. Marshall argues that the outcome of this attempt was only partially successful and significant obstacles remain. The functions that councillors are expected to carry out have become very demanding and are simply beyond the capacities of many citizens to fulfill. Consequently, when in office, such people become heavily dependent upon the CEO for advice and direction. Normally this situation would place the CEO in a position of considerable power within the council. The move to contract appointments, however, has left the senior manager in a much more uncertain and vulnerable position. The overall outcome is that the relationship that develops between councillors and CEOs may be less than constructive and can create real difficulties for the operation of the municipality. Marshall suggests that one way of resolving this problem is to move towards a corporate governance model. Such an approach, he asserts, will not only improve effectiveness, but also help to strengthen democratic values. In Chapter 9, Joe Wallis examines the role of policy networks and policy entrepreneurs in the development and evolution of local government policy in Australia. Markets, hierarchies and networks can all be seen as alternative solutions to the horizontal coordination problems that arise when the relationship between local authorities and both central and state government agencies and non-government organisations is characterised by ‘resource dependency’. Under the federal system of government in Australia, the problems of resource dependency are exacerbated by a high degree of vertical fiscal imbalance, with the Commonwealth government accruing most revenue and then dispensing some of these monies to state and local governments. Wallis argues that policy networks might enable local governments to alleviate the resultant burdens of ‘doing more with less’ by involving themselves in ‘multi-organisational partnerships’. He considers the problems inherent

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in coordinating these implementation structures, before undertaking a comparative institutional analysis of markets, hierarchies and networks as alternative governance mechanisms. The analysis then focuses on the capacity of Australian local government to deploy each of these different mechanisms. In Chapter 10, Andrew Worthington examines the question of economic efficiency in Australian local government and its empirical measurement. After a brief outline of the theory of efficiency measurement, the chapter provides a synoptic review of the different techniques employed for the measurement of local public sector efficiency. The author then investigates the various ways in which public sector provision of services differs from that of the private sector and the implications these differences hold for the measurement of efficiency in local government. The chapter then provides a very useful survey of the literature on the empirical measurement of inefficiency in local public services, both in Australia and elsewhere. With this empirical evidence in mind, the discussion focuses on the determinants of local government efficiency. The chapter concludes with various caveats concerning the application and interpretation of efficiency measurement in the context of a highly differentiated local government system, such as that found in Australia. In Chapter 11, Brian Dollery draws on the generic phenomenon of ‘government failure’, or ‘the inability of public agencies to achieve their intended aims’, and seeks to apply this public choice approach to the problem of local government failure in Australia. The chapter begins with a review of the relevant literature on government failure in general and local government failure per se. He then develops a new five-fold taxonomy of local government failure that includes ‘voter apathy’, ‘asymmetric information and councillor capture’, ‘iron triangles’, ‘fiscal illusion’, and ‘political entrepreneurship’. In contrast to the conventional wisdom, which holds that government failure is likely to be more acute at higher levels of government, he contends that municipal councils are especially susceptible to local government failure, despite being ‘closer to the people’. Moreover, this can substantially impair their capacity to deliver and provide services efficiently. The typology developed by Dollery provides a very useful conceptual tool for Australian local government policy makers to employ in any analysis of actual councils. Finally, in Chapter 12 Brian Dollery and Neil Marshall draw together some of the broader insights which have emerged from the preceding contributions and ponder desirable future directions for the sector. The first part of the discussion assesses recent achievements in the areas

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of management, democracy and finance, and considers some of the problematic issues that remain to be confronted. The second half of the chapter looks at possible ways of meeting these concerns. In particular, it is suggested that developing sound intergovernmental consultative bodies in the form of state–local government partnerships, and linking such structures to regional organisations of councils, offers a constructive way forward. So too is enhancing the efficiency and effectiveness of municipal service delivery by entrenching the principle of comparative advantage in all of its operations. The chapter concludes by emphasising the need to raise community awareness about the value of local government through wider public discourse and establishing relevant university studies.

PA R T A I N T E R N AT I O N A L CONTEXT

2 L O C A L G O V E R N M E N T: R E F O R M I N C O M PA R A T I V E P E R S P E C T I V E Janice Caulfield

An international survey of local government reveals a wide variety of organisation and governance models, but despite this diversity, reform trends of the last twenty years suggest a convergence in thinking about solutions to common problems. Key among these trends has been structural reforms which target jurisdictional arrangements and represent, in some cases, a significant departure from traditional approaches to local self-government and administration; and process reforms that focus on political and administrative action. Structural reforms include a reorganisation of functions between levels of government and a redrawing of boundaries, often to create a new space for regional level government, a feature of reform developments in several countries in recent times. No less significant have been the numerous changes in process, which include administrative and management reforms on the one hand, and political reform (electoral and leadership changes) on the other. Australian local governments have not escaped these global trends, and over the last twenty years have experienced wide-ranging reforms (in varying degrees in different states) embodying all of these dimensions, as the chapters in this volume testify. This chapter examines one aspect of the reforms, often described in the literature as ‘new public management’ or NPM, a powerful concept and set of practices which has gripped national governments in many countries world wide.1 Equally, in the closing decades of the twentieth century, new management and governance ideas had a wide appeal and impact on local government. Ideas about ‘institutional standards’ and ‘what is a good organisation’ became paramount and were encapsulated in the NPM doctrine. New public management can be summarised

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CONTEXT

as a new instrumentalist view of bureaucracy and an approach centred on management rather than the traditional approach to administration based on public law. Hood (1996) has identified seven elements or ‘dimensions’ of NPM as follows: 1

variations in the degree of hands-on management (that is, the degree of active control of public organisations by visible top managers wielding discretionary power);

2

variations in the degree to which public organisations operate with explicit and measurable (or at least verifiable) standards of performance in terms of the range, level and content of services to be provided;

3

variations in the degree to which public organisations are controlled by output measures (particularly in pay-based, on-the-job performance rather than rank or educational attainment;

4

variations in the degree to which public organisations are disaggregated into separate self-contained units, rather than operating as a single aggregated unit;

5

variations in the degree to which organisations within the public sector formally compete with one another and with private organisations for the pursuit of particular tasks, rather than having semipermanent ‘ascribed’ roles;

6

variations in the degree to which organisations within the public sector conduct business or use management practices that are broadly similar to or different from those employed in the private corporate sector;

7

variations in the degree to which public sector management stresses discipline and parsimony in resource use.

Most usually portrayed in local government discourse as a ‘modernisation and efficiency’ agenda, its features are in most cases identical to those identified by Hood. To Hood’s list can be added an eighth dimension which has a particular resonance for local government. This dimension may be called ‘clientalism’ and refers to the recasting of citizens as clients, a popular and parallel development in NPM. Clientalism includes a range of techniques designed to engage the taxpayer as consumer of government services and thus, it is argued by the reformers, to impose a discipline on the provider of those services. The techniques used include public consultation, citizens’ charters, performance pledges, stakeholder engagement through partnerships and the like. Clientalism as a reform feature is not exclusive to the local government sector, but it has possibly been given greater emphasis at the local level because, in many countries, the bulk of public services are provided by local government.

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What does the global trend to NPM tell us about the changing nature of local government? In a recent publication, Helge O. Larsen and myself made the case that there is a strong normative aspect to local government reform (Caulfield and Larsen 2002). Following Meyer and Rowan (1977), we argued that the quest for legitimacy is a dominant one for local government, but that legitimacy cannot be achieved by attending only to functional requirements and the technical environment. In their efforts to maintain legitimacy, local governments window dress in order to be in tune with the institutionalised norms and standards that are dominating in their environment. In this sense, the ‘reform movement’ itself illustrates a convergence, if only by means of a policy fashion. There is, however, a more practical set of explanations for the popularity of management reform and the direction it has taken. Local governments of the period since the global economic crisis of the 1970s have faced two conflicting pressures. The first is declining revenues; intergovernmental transfers and the ability to tax have diminished while demands for increased services have continued to grow. The second has been rising expectations on the part of citizens for improved public services. This has been described as an ‘equalling up’ of public expectations derived from experience of private sector services and imported into public sector contexts (Pollitt and Bouckaert 2000). For the reformers, the solution has been to organise government in such a way that more can be achieved for less or at least a belief in the possibility. In this respect, there has been a notable convergence across countries of problems faced and solutions available, especially those with an NPM flavour. The aim of this chapter is not to describe the reform experience of other countries in great detail, but rather to offer a comparative look at developments and consider how cross-national variations in the uptake of NPM might be explained and what this can tell us about local government systems more generally. Such a perspective implies, in the first instance, attention to methodology, which means identifying suitable variables and indicators of comparison. There have been several attempts made by others using the comparative method to explain the widespread adoption of NPM at the national level. With the exception of some casual comparative observations, however, no systematic crosscountry comparisons of NPM’s development within the local government sector have so far emerged (Bekke et al, 1996; Pollitt and Bouckert, 2000; Schedler and Proeller 2002). What this kind of analysis requires is the development of some cross-national indicators of reform and the identification of a set of independent variables that have

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a universal application and against which a ranking of countries according to their NPM status can be measured. To achieve these aims, I have borrowed from the work of Christopher Hood (1996), who adopted a similar method in testing hypotheses about new public sector management in relation to national governments. However, unlike Hood, who was able to look for answers in a much greater available range of statistical information (such as GNP figures and individual country responses to OECD questionnaires), local government data that allows for systematic cross-national comparison is more limited. Notwithstanding these limitations, there is data available in a sizeable number of country-specific case studies which describe new managerial reforms at the local level. The picture drawn from these studies shows considerable diversity among local government systems in the adoption of NPM, but a diversity that reveals within it clear patterns of development. For example, in the Anglo speaking countries it is national governments that have typically been the ‘leaders’ in NPM development (or at least the initiators of reform), while in other national jurisdictions it is local government that has lead the way (most Continental countries for example). These country variations give us an opportunity to examine public management reform and speculate whether it is, indeed, a converging process or is contingent on national factors. Various theories have been advanced for what drives reform: economic hardship, imitation, competition between governments and, as suggested above, the need to seek legitimacy in an environment of public distrust. While these are plausible arguments, for purposes of cross-national comparison they are difficult to measure. An important variable in local government, which may act as a benchmark and help shed light on the question of why one local government system is a ‘leader’ in managerial reform while another remains a ‘laggard’, is that of local autonomy2. The concept of autonomy arose from notions of political separateness in local government, its adherents arguing that because local government is closest to its citizens, it is in the best position to represent their interests. While this ‘grass roots’ notion of democracy assumes an autonomy and freedom from interference by higher tiers of government, in practice this has rarely been the case. Any examination of central-local relations, be it administrative or financial, shows real limits to local autonomy. In all countries, centrallocal relations are at the heart of the local government reform experience, if not directly at least implicitly. Reform agendas are often imposed on local government by national and regional governments,

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and for this reason local government has typically been seen as highly subordinated. On the other hand, local autonomy continues to be an important legitimising principle for local government, and recent structural reforms have lead some commentators to see the intergovernmental relationship as one of ‘negotiated partnership’ rather than as centrally directed (Baldersheim, 2002). Local government reformers too, have seen local democratic vitality as a necessary corollary of managerial and boundary reforms (Marshall and Sproats 2002). The question then becomes one of how to measure local autonomy. While autonomy may be represented along several dimensions (constitutional, political, financial), finding adequate and comprehensive cross-national data which can be measured is extremely difficult. One, immediately available source comes from the OECD, which collects local government finance statistics on an annual basis (OECD Revenue Statistics for Sub-central Governments). A widely used indicator of fiscal autonomy has been the degree of discretion local government has over its revenue source. This is typically measured by the size of a local government’s ‘tax share’ of its total budget. It is recognised by the OECD, however, that fiscal autonomy is a more complex matter and that ‘tax share’ in itself is not a completely satisfactory indicator of financial autonomy. Accordingly, autonomy is seen to be greatest in countries where local governments are free to determine both the taxable base and the rates of a particular tax, without any aggregate limits on revenues, base or rate enforced by the central government (OECD 1999a). The OECD has established five categories of tax autonomy, in descending order as follows: 1

local government sets tax rate and tax base

2

local government sets tax rate only

3

local government sets tax base only

4

tax sharing arrangements (a) local government determines revenue-split (b) revenue-split can only be changed with consent of local government (c) revenue-split fixed in legislation, may unilaterally be changed by central government (d) revenue-split determined by central government as part of the annual budget process

5

central government sets rate and base of local government tax

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While some work has been done on these more sophisticated measures of fiscal autonomy (OECD 1999b), the comprehensive data set still relies on the simple measurement of ‘tax share’. There are, however, two other revenue categories from the OECD annual data which help to give a more complete picture of fiscal autonomy. These are: (a) non-tax sources of revenue (fees, charges etc.) (b) grants from central government

Non-tax sources of revenue, while still only a relatively minor part of local government budgets, have been of growing importance for many countries in recent times. The problem of declining local revenues in the 1990s was partly ameliorated in some countries by a substantial increase in fees and user-charges. In North America, user-charges are viewed as both highly efficient and politically acceptable on the presumption that, unless the service provided is a pure public good or the policy intent redistributive, then local services should be charged for (Bird and Slack 1991). Countries which have relied most heavily on ‘non-tax’ forms of income are Finland, the Netherlands, United Kingdom, Ireland, Austria, Germany, and Switzerland. In Finland, non-tax revenue more than doubled between 1980 and 1995. In Norway, the Netherlands, France and Spain there was also growth, although not of the same magnitude. To the extent that they have been able to expand their non-tax source of revenue, local governments in these countries have demonstrated residual powers of fiscal autonomy. By contrast, in Sweden and Iceland there was a marked decline in non-tax revenue as a proportion of own-source revenue over the same period. In the United Kingdom and New Zealand, there was also a marked decline, but in these latter cases, privatisation of local government enterprises has been a major contributing factor (Stoker 1999; Martin 1991). Central government grants, on the other hand, have negative implications for local autonomy, although this will vary depending on the form in which the grant is given, for example, tied or untied, and the formula used for distributing the grant. The proportion that grants represent in the total local budget is also an important factor. Intergovernmental transfers constitute at least 30 per cent and more of local budgets in most countries. Belgium, Canada, Denmark and Spain depend for close to half their revenues on grants, whereas for Norway, France and the United States grant income is around 40 per cent. The most heavily grant dependent countries are the United Kingdom, The

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Netherlands and Ireland, where approximately 70 per cent of revenue comes in this form. Australia, Austria, New Zealand, Sweden and Iceland receive 20 per cent or less of their revenues in grants. Grants are not to be confused with stable tax-sharing arrangements (where a central government will act in an agency capacity in the collection and remission of taxes), but are rather monies allocated on the basis of discretionary choices made by central government (Smith 1996). Regardless of the form in which grants come, they remain a controversial aspect of local fiscal autonomy. An over reliance on funding from central government can undermine planning and weaken local policy capacity. Programs established on the promise of grants have collapsed when funding is scaled down. Grants have also been used by central governments to regulate local taxing powers. Following a shift to block grants in Sweden, for example, local authorities found that central government used the grant to punish councils that increased the tax rate beyond a centrally determined level3. In the United Kingdom, grants have been used to impose sanctions on local councils that do not conform to centrally determined spending levels (Barnett 1998). Some commentators have portrayed central government grants as ‘a violation of the right to local self-determination’ (Netherlands Scientific Council Report 1990). The proposition of this chapter is that fiscal autonomy, as an important measure of local autonomy more generally, may be a significant factor in the adoption of NPM reforms by local governments, and thus help to explain cross-national variation. The chapter proceeds first with a discussion of NPM reforms within selected countries considered the most advanced in NPM development. Second, these countries and selected others from the OECD are ranked in terms of their local government systems’ development of NPM. Third, each will then be compared to its level of autonomy, measured in fiscal terms. The first part of the analysis draws on specific cases to identify which of the five elements of NPM (listed above) have been implemented. The countries are then ranked as having high, medium or low NPM development. This is determined by how many of the dimensions of reform each country’s local government has emphasised. Those countries with six or more elements are ranked ‘high’ on NPM development, those with two to five elements are ranked ‘medium’ and those with one or less are ranked ‘low’ (Table 2.1). The size and tasks of local authorities within a single country may vary, considerably, which in turn may affect how far individual authorities have implemented reform. For the purpose of this chapter, however, internal variation is not a consideration, save to say

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that most countries reveal a dominant pattern. The countries selected for analysis are drawn from the OECD member states but, due to limitations in the data available, do not include all member countries. The countries represented here are those for which data is available on both NPM development or not, and available revenue statistics. The revenue data, which is presented in the second part of the analysis, takes two points in time, 1980 and 1995, and not only shows the degree of fiscal autonomy that pertains for each country, but allows us to see what change has occurred in the fifteen year period. This period roughly coincides with the decade of most intense reform. It may be the case that low-ranking countries will have developed NPM post 1995 but, for the purpose of this chapter, it is the period in which the first wave of NPM reform occurred and should indicate better than later periods if there is a causal relationship between the variables.

UNITED KINGDOM Recent British experience of NPM has perhaps held most interest for Australian local government reformers. The ‘Best Value’ regime, introduced by legislation in the British Parliament in 1999, carried much promise as a more inclusive approach to reforming the local government sector than did the previous Conservative government’s Compulsory Competitive Tendering (CCT) regime, which was subsequently deemed a failure (Stoker 1999). Inclusiveness, however, amounted to little more than central-local consultation in an environment of financial incentives held out by the national government, both of reward and punishment for compliance or non-compliance. Moreover, Best Value ‘runs wider and deeper’ than did CCT (Audit Commission 1998, cited in Martin 2002). There is no doubt that local government in the United Kingdom has gone furthest and perhaps faster than other national local governments in implementing new public management. Best Value includes at least seven dimensions on the NPM scale, including performance management, output controls (national performance audits), disaggregation (e.g. housing trusts), competition (competitive tendering), private sector management practices (e.g. benchmarking), cost cutting and clientalism. On this last dimension, British local government now has a legal duty to consult with all manner of groups who have ‘an interest in any area within which the authority carries out functions’ (HMSO 1999: clause 3.2, cited in Martin 2002). Thus, New Labour seeks to control local government just as vigorously as did the Conservatives before them (Peters 1998).

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AUSTRALIA In Australia, an early and perhaps most visible sign of NPM development in local government was the emphasis placed on hands-on management (Hood’s dimension one) or to use the popular idiom, ‘letting the managers manage’. Council ‘town clerks’ became ‘general managers’ whose job it was to think strategically, be proactive and most radical of all, in some states following legislation, assume the role of chief executive officer of the council (Jones 2002). These early changes in leadership were designed to facilitate other NPM type reforms, including the introduction of performance management, competitive tendering (one Australian state, following the United Kingdom lead at the time, made it compulsory), adoption of National Competition Policy requirements, and resource parsimony (Marshall and Sproats 2002; Aulich 1999; Johnston 1997). Corporate management models were widely adopted along with output measures based on structural efficiency principles, which traded pay increases for more flexible work practices. There was considerable variation between and within states as to how quickly and how radically NPM was adopted by local government. Nevertheless, the principles have been universally applied to the extent that local government in Australia can been seen a leader in the managerial revolution. Clientalism too has been an important element of local government reform, notably through its incorporation in corporate planning exercises (Marshall and Sproats 2002). Other developments have included public forums, precinct committees and customer charters. While the federal government has no direct legislative control over local government in Australia, it has exercised considerable influence in the reforms through Commonwealth-state cooperative mechanisms (see Chapter 7 in this volume).

NEW ZEALAND In New Zealand, local government reform has been extensive but with a greater emphasis placed on structural adjustment than on managerialism per se. The economic orientation of wider public sector reform was pursued no less aggressively at the local level where market discipline was held up as the panacea. The emphasis here was on cost transparency and accountability where subsidies were interpreted as creating allocative inefficiencies. A belief by the reformers in market discipline led to substantial privatisation and corporatisation of government activity. The development of Local Authority Trading Enterprises, as part of the

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structural reforms, meant the disaggregation of units previously part of the local authority into separate commercial units. Within these units, the other elements of NPM were rigorously implemented. Legislative change in the mid 1990s strengthened the financial accountability and transparency of local authorities by effectively doing away with central government subsidies and forcing a greater use of user pays mechanisms. The development of a system of ‘top managers’ within councils was also an important aspect of the reforms, ensuring a clear separation of governance and management roles. (Drage 2002; Howell 1997). In parallel with the experience in other Anglo countries, the New Zealand reforms placed a heavy emphasis on clientalism. The principle of public participation and scrutiny of local government was advanced by the reformers themselves and encouraged an active engagement by academics and commentators on the value of deliberative democracy (Cheyne 1999).

GERMANY What sets the European Continental countries apart from the Anglo countries is that in almost all cases where NPM reforms have been implemented locally, they have developed at the grass roots, so that national governments have been followers and/or facilitators rather than leaders in the reforms. Germany is a case in point where the principle of local selfadministration provides considerable scope for local authorities to regulate their own affairs. It was the German municipal association of management reform, the KGST, which pushed NPM type reforms in response to a ‘constellation of factors’ (Wollmann 2002)4. These included fiscal pressures, actors’ perceptions of problems and search for solutions, and the ‘takeover’ of discourse by NPM modernisers within the sector. The key initial focus of reform was on internal reorganisation, specifically, disaggregation and autonomisation designed to increase managerial responsibility and break the legalistic, hierarchical mould of Weberian bureaucracy for which local government in Germany is traditionally known (Loffler 1995). The second, related step was to shift the budget emphasis from input controls to output controls with the introduction of global budgeting. This shift in focus was accompanied by a set of performance measures or ‘indicators’ of local government ‘product’ intended to make transparent local government resource expenditures (Wollmann 2002). The managerial reforms were followed by reform of ‘social administration’, that is, participatory procedures and the establishment of ‘citizen centres’. Some city authorities have actively engaged their citizens in developing the city’s mission statements (Schedler and Proeller 2002).

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THE NETHERLANDS Reform of German local administration was inspired by the experience of the famous Dutch case of the city of Tilberg which radically reformed its local administration in the 1980s along private sector lines of decentralised ‘holding companies’. The Netherlands was a leader in the reform movement in Continental Europe, not just locally but public sector wide. National reforms focused on ‘functional decentralisation’ in the pursuit of efficiency gains and a rationalisation of public expenditures. Locally the emphasis was on a ‘concern division model’ (holding structure), and contract management. Thus, disaggregation into separate, self-contained units, hands-on management and internal markets formed the core elements of NPM as it developed in Dutch local government. A later reform development was involvement of the citizenry in such areas as service delivery and neighbourhood management, although this was less an NPM reform than (in part at least) a reaction to it (Schedler and Proeller 2002).

SWITZERLAND Switzerland, like Germany, is a federal state wherein the ‘cantons’ equate with the lander, and it was at this cantonal level where NPM reforms first took hold, eventually spreading to the municipal level. Schedler and Proeller (2002) found, as in the German case, that the reformers came from the ranks of public administrators where a core group perhaps supported by one or two politicians led the development of NPM. The major focus of the reforms has been on strengthening the hand of managers vis-a-vis political leaders, or at least redefining roles and responsibilities. ‘Results-oriented Public Management’ was the term given to the Swiss reforms, but implementation, with some exceptions, has tended to be confined to human resource management. Nonetheless, concerns underlying the pressure for reform such as opaque outputs and impacts, inflexibilities caused by a lack of market pressure and political over-control of operative decisions remain important drivers for reform (Schedler and Proeller 2002). Privatisation has not been a feature of the Swiss reforms. Internal variation that is perhaps worthy of note is that which follows the linguistic division of the country. The French speaking areas of Switzerland, as is the case with Belgium (see below) have been less inclined to adopt NPM strategies than have the German speaking areas.

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SWEDEN Among the Northern European countries Sweden stands out as a leader in NPM reform. In common with its Nordic neighbours, the Swedish system of municipal government carries a major responsibility for social welfare. The expansion of welfare state services according to Montin and Amna (2000) ‘can be re-conceptualised as a municipal welfare expansion’. Swedish local government enjoys a strong level of autonomy, constitutionally and financially, from the central government but has been described as an integrative central-local government system (Kjellberg, 1988). Fiscal stress and deficit budgets, following economic recession in the early 1990s, and high unemployment unquestionably contributed to the development of NPM in local government. However, privatisation reforms (including contracting out) had commenced in the late 1980s and followed a pattern of decentralisation which began some years earlier with the ‘free commune experiment’ (Baldersheim and Stahlberg 1994; Haggroth et al. 1999). A major thrust of the ‘third wave’ of reforms (encapsulated in the new 1991 Local Government Act) was to delegate to a professional class of managers greater decision-making power and hands-on management, while strengthening the role of political officials in strategic decision-making (Montin and Amna 2000; Kleven et al. 2000). Management by Objectives (MBO) and Results Oriented Management (ROM) were tools adopted towards this end. Performance measurement and benchmarking are more recent developments in Swedish municipalities, and the Association of Local Authorities has developed methods for measuring the attitudes of local residents toward municipal services. Another development has been the privatisation of some portions of the social services such as housing and nursing care (Haggroth 1999).

NORTH AMERIC A Reform of local government in the United States in the 1990s followed a long established political ideal in American politics, which may be encapsulated in the phrase ‘small is beautiful’. While the ideas of NPM first found voice and a willing audience in the United States, especially at federal and state levels5, what characterises local government administrative reform of the period was large-scale cut-backs and privatisations. Many traditional functions of local government were either sold-off to the private sector or contracted out using a variety of forms, including the use of franchises, grants, vouchers or agreements

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(Hrebenar 1998). Couched in politically acceptable jargon, ‘load-sharing’ meant contracting out services such as waste-disposal, traffic management systems and airports. An alternative concept, ‘cost-sharing’, was adopted by some city governments who privatised their jails and even tax-collection agencies. These reforms were in large measure a response to tax revolts by the public, the first documented example of which is the infamous Proposition 13 introduced by the State of California in 1978 (O’Sullivan 1995). Concerns about ‘public choice’ also led to other reforms in some local jurisdictions such as the voucher system for locally run schools (Hrebenar 1998). Later reform development placed more emphasis on ‘resizing’ than ‘downsizing’ and introduced ‘managing for results’ as key concepts of NPM reform. To some extent this softer approach reflected a change in reform policies nationally, following a change in political leadership from the Reagan/Bush administrations to the Clinton/Gore government; a trend mirrored in Britain following the change from a Conservative to a Labour leadership. Unlike in Britain, however, local government in the United States appears to have more choice in adopting NPM reforms. This is, in part, explained by their different political systems, that is, federal and unitary, but perhaps more so by a tradition in American politics of non-intervention by higher levels of government (Norris 1997). Thus, the uptake of performance management by local government is highly variable and has been described as ‘evolutionary’ rather than ‘revolutionary’ (Bernstein 2001). Notwithstanding, there is no doubt that governments at all levels in the United States, local governments included, have been leaders in the field of NPM development. While Canadian reforms at the national level have been ‘middling’ (Hood, 1996), Canadian municipalities have not embraced NPM as have their Anglo speaking cousins. Where reform has happened it has been a local response to a particular problem such as in service delivery. The city of Montreal’s ‘single window’ initiative for example, while improving customer relations, was not part of a wider NPM style ‘clientalism’ (Seidle 1995). Quite dramatic reforms have occurred in Canada’s local government sector of late, but these have been jurisdictional changes, for example, the return in force of the unicity, combined with municipal consolidations (Collin et al. 2002; Sancton 2002).

J A PA N Japanese local government presents a quite different case, which, in NPM terms, cannot be considered a leader of reform. Nonetheless it

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deserves a mention here a) because it is experiencing for the first time some genuine reform effort to strengthen the sector, and b) it reflects a pattern not dissimilar to its Asian neighbours, especially Korea. Despite a long history of a centralist state, decentralisation reforms in recent times have facilitated an entrepreneurial spirit at the local level and greater citizen involvement in policy appraisal processes (Akizuki 2000). Although Japan’s local government has constitutional recognition which, in theory, guarantees it political independence and administrative autonomy, it has been tightly controlled by central government since 1947, both in a legal (national law over-rides) and financial sense (58 per cent of the local budget comes in the form of a direct grant) (OECD 1999b). What are known locally as ‘agency delegated functions’, where central government ministers have a mandate to direct local government action, have characterised Japanese post-war local government (Koike 1998). Global shifts and economic pressures in the late 1980s and early 1990s led to a number of national enquiries that resulted in the enactment of The Law for the Promotion of Decentralisation. Currently local governments in Japan are responsible for more than half of total government services (Nakamura 2002). Financial arrangements in the intergovernmental system, however, remain largely unreformed, leading some analysts to scepticism about the decentralisation efforts (Kitahara 1998; Dairokuno 1998). Continuing fiscal pressures and local budget deficits, especially in large city governments, have been the major influences on a grass-roots search for new ways of managing. The Mie Prefectural government led the way in introducing NPM type reforms that were locally interpreted as ‘client centred’. Key strategies in the reforms were to create a more transparent and responsive administration based on freedom of information and performance review (Nakamura 2002). Other reform ideas, including performance pay, benchmarking and outsourcing, have entered the discourse in Japan’s local government but are yet to be developed. Mie remains the exceptional case in Japanese local government reform.

OT H E R O E C D C O U N T R I E S France, Spain, Belgium, Italy, Norway and Finland are countries in which NPM reforms have either not been developed, or have been developed in a minimal way, being looked on with either scepticism or caution (Schedler and Proeller 2002; Larsen and Offerdal 2000).6 Belgium’s pattern of development is more variable wherein the Flemish

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speaking part has been more enthusiastic about NPM reform than has the Walloon (French speaking) area. In the Nordic countries some attention has been given to ideas of ‘total quality management’ and there has been development at the local level in this direction. More recent development towards the use of internal markets and adoption of purchaser-provider models has also been a feature, but one that has developed unevenly across municipalities. While efforts have been made to encourage greater participation by citizens in local government, clientalism is not favoured because of the widespread belief that it undermines representative democracy (Kleven et al. 2000).

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T H E D ATA Measuring local government fiscal autonomy must rely on the simple measure of local government tax used by the OECD although, as discussed earlier, some work has been done by the OECD on a more sophisticated interpretation of local tax. In figures 2.1 and 2.2, I have combined ‘tax’ with ‘non-tax’ sources of income (e.g. fees and charges) as these are locally generated and represent a residual power of local government to act autonomously. The combined values are represented thus as ‘own-source’ revenue. Figure 2.2 compares this category with ‘total revenue’ for local government country by country for the year 1995, measured as a per cent of GDP. The difference between the two categories, that is, ‘total’ and ‘own-source’ represents the proportion of central government grants in the budget, and thereby each country’s level of fiscal dependence. This dependency is more starkly portrayed in Figure 2.1, which shows own-source revenue as a per cent of total local revenue. Figure 2.1 also shows the degree of change in own-source revenue for each country over the fifteen-year period 1980 to 19957. It should be noted that the variation between countries in terms of their relative income (Figure 2.2) reflects variation in functional responsibilities. For example, the Nordic countries’ much larger budgets reflect their vastly greater responsibility for welfare provision. Variation in budget size is not of particular interest here8, but rather the level of fiscal autonomy, or ‘own-source’ revenue as a percentage of ‘total income’ on the one hand, and on the other, changes that occurred over the period. In Table 2.2, these indicators of autonomy are combined with each country’s level of NPM development. Countries whose own-source revenue is above seventy-five per cent are rated as having ‘high’ fiscal autonomy, while countries whose own-source revenue is less than fifty per cent are rated as having ‘low’ fiscal autonomy. Countries that fall between these values are given a rating of ‘medium’ autonomy.

A N A LY S I S The cross-variable data presented in Table 2.2 shows patterns that may be consistent with the proposition that the level of fiscal autonomy a country’s local government has is a significant factor in the development of NPM strategies. The data from the United Kingdom, Ireland, The Netherlands and Belgium and to a lesser extent, Germany and the United States, suggest that countries with low fiscal autonomy are more inclined to search for strategies to alleviate stress from fiscal dependency. All of

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FIGURE 2.1 LOCAL GOVERNMENT OWN SOURCE, 1980 AND 1995 (AS A PERCENTAGE OF TOTAL REVENUE)

SOURCE

OECD Revenue Statistics (selected years).

FIGURE 2.2 LOCAL GOVERNMENT OWN SOURCE AND TOTAL REVENUE, 1995 (AS A PERCENTAGE OF GDP)

OECD Revenue Statistics (various years). Japan’s ‘total revenue’ is a missing value in the OECD data but see discussion on Japan in this chapter.

SOURCE NOTE

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these countries are leaders in NPM reforms. It can therefore be argued that low levels of autonomy, combined with country-specific externalities, work in favour of reform. In The Netherlands, it was severe economic recession in the 1980s (together with economic doctrine) that drove the momentum for change both nationally and locally. The United Kingdom’s reforms, also public sector wide, were driven largely by political ideology. Even under New Labour the reform program has been no less doctrinal or pervasive, except that the current government apparently has no objection to the public sector per se. In both Germany and the United States, reform has been driven by local entrepreneurial managers whose perceptions of their local governments as rigid, inefficient and unresponsive lead to change. In the United States, however, NPM reforms began much earlier and have consistently been promoted by the federal government with special purpose grants, technical guidance and the like. Canada and Spain are the notable exceptions to the pattern where relatively low levels of autonomy have not resulted in the embrace of NPM style reform. It is probable that in Canada’s case, the reform emphasis on amalgamations (imposed by provincial governments) has provided a substitute or alternative reform path. Spain’s fiscal dependency is a new phenomenon (in 1980 Spain had a high level of autonomy), brought on by the introduction of a multi-level system of government and a corresponding increase in central government funding. The inverse of the argument, that high fiscal autonomy will equate with low NPM development, is not, however, supported by the data. In Australia, New Zealand and Sweden (and to a lesser extent Switzerland), high fiscal autonomy coexists with an active program of reform. The difference between the Anglo and Continental countries in this group is that the latter were, for the most part, grass roots initiatives in response to, in Sweden’s case, economic crisis and fiscal stress in the municipalities, and in Switzerland by entrepreneurial local managers keen to free up rigidities in the system. By contrast, Australian and New Zealand reforms were driven from the centre, in New Zealand, by an economic doctrine which was systematic in its application both nationally and locally. In Australia, the NPM reforms were top-down and public sector wide, but mediated by a federal system that allowed for considerable variation. Like Sweden, an economic crisis in New Zealand was the critical influencing factor. The Australian reforms are better characterised as being influenced by policy fashion at the national level (e.g. national competition policy), and a combination of concerns at state level (see Chapter 7).

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To summarise, looking across the spectrum from low to high local government autonomy, the picture presents one of extremes, that is, it is in countries whose local governments have either high or low levels of autonomy where NPM has been most keenly developed. The trend in fiscal autonomy in OECD countries from 1980 to 1995 is predominantly one of improvement. Of the sixteen countries represented in Table 2.2, five lost ground but only two, the United Kingdom and Spain, are of any real import. As described above, the Spanish data presents a somewhat distorted picture resulting from the introduction of regional-level governance. In the United Kingdom, central government take-over of the business tax and forced privatisations of local enterprises during the period of the reforms explain this country’s dramatic fall in local fiscal autonomy. Norway, Germany and Switzerland experienced a slight decline in autonomy over the period, but with the exception of the United Kingdom, perhaps not a lot can be read into the trend data for these countries. There is the possibility that a weakened fiscal position may have made them more vulnerable to directions from central government to reform. Certainly evidence drawn from the case studies would support this notion. Even in Germany’s case where reform was initiated at the grass roots, pressure from above is evident in the literature (Wollmann 2002). On the other hand, many countries with high to medium NPM development show a strengthening of their fiscal autonomy. This may be a direct result of the reforms and/or including the introduction or extension of user-pays services. Certainly, the dominant trend indicates there was concern in many countries at the start of the 1980s about the status of local government and the need to reform. Simple measures of fiscality are perhaps limited in explaining reform variation. The type and mix of taxes used, and the degree of freedom a local government has to decide the base and rate of the tax are important factors which may need further clarification before any real claims can be made about autonomy. The Anglo countries, for example, rely heavily for their revenue on property taxes and experience, at times, quite severe, rate capping by central governments. The Continental countries rely primarily on income tax (with the exception of The Netherlands whose main tax is also from property), which has the advantage of being elastic and progressive, except in times of high unemployment (as was the case in Sweden during the reform period), when it can have severe impacts on local government revenue.

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TABLE 2.2 NPM DEVELOPMENT BY COUNTRY BY FISCAL AUTONOMY BY CHANGE 1980–1995

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The numbers in parentheses in column 3 ‘Fiscal Autonomy’ refer back to the OECD qualifications of tax autonomy in the earlier part of the chapter. In Germany and France, tax autonomy varies between types of authority and explains two separate values. This data was not available for all OECD countries, including Australia and North America.

NOTE

CONCLUSION This chapter has not attempted to evaluate whether the aims of the reformers have been achieved in countries where New Public Management has been developed. There is evidence, especially as NPM reforms have been implemented at the national level, that there have been numerous unintended consequences, paradoxes, contradictions and the like (Christensen and Laegrid 2001). Increasingly, evidence from the local government reform experience has revealed similar problems of inconsistency (the reversal of CCT policy in Britain and Victoria is one example).

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On the other hand, these problems do not appear to have diminished NPM’s appeal as a solution to making governments more transparent, client oriented, and generally more efficient in their operations. In an environment of resource constraints the reforms have had a particular appeal for local governments. We should remember that NPM is just another wave of reform, albeit a very profound one. Those elements which are likely to endure are ones that are successfully welded onto previous reform effort. Administrative reform is a dynamic process and new ideas of a post-managerial nature have already begun to emerge, for example ideas of ‘new governance’, voluntarism and the like. The chapter has attempted to put NPM reforms as they have occurred in Australia, in a global context. To do so, however, required an analytical framework that sets some benchmarks against which countries could be measured. Fiscal autonomy was the one chosen for this exercise. A somewhat mixed pattern has emerged to explain the uptake of NPM cross-nationally in these terms. The proposition was put that countries which have low levels of autonomy would be more likely to be leaders in NPM reform. This was found to be generally true, with the exception of Canada’s local government, which has followed an alternative path to reform. The inverse proposition that countries whose local government sectors have high fiscal autonomy would be ‘laggards’ in NPM reforms was found generally not to be true. Countries with high fiscal autonomy (including Australia) were also found to be leaders in NPM reforms. However, with the exception of Sweden, the initiators of reform in these countries have been central governments. The ‘leaders’ in NPM reform thus measure both high and low on fiscal autonomy, in other words, it is a pattern of extremes. The chapter raised a number of methodological problems associated with cross-country comparisons. How fiscal autonomy is measured was raised as an issue requiring further research and clarification. For example, the absence of data using more sophisticated measures such as levels of tax autonomy will be a problem for future research. It may be the case that other dimensions of autonomy, such as constitutional autonomy, need also to be taken into account. The context in which administrative reform takes place is critical too, especially the intergovernmental environment and its various dimensions (two which emerged in this chapter are resource constraints, and whether central governments can direct local governments to reform their administrations). Work would need to be

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done to develop ways in which these more qualitative considerations might be usefully measured. Better data is certainly called for if a multidimensional picture of local government reform trends internationally is to be more fully explained. E N D N OT E S 1 2

3 4 5 6 7 8

The transition to NPM has been described as a ‘paradigm shift’ from public administration and its traditional doctrines to public management which relies on notions of public choice and individualism (Ingraham 1996). Alternative descriptors perhaps more appropriate for local government are ‘beacons’ and ‘coasters’. This terminology was adopted by the United Kingdom National Audit Office to describe variation in development of NPM within the United Kingdom local government system. ‘Leaders’ and ‘laggards’ is used by Hood (1996) to describe national governments but is also derived from NAO usage. Swedish local government has a constitutional right to set tax rates. The German variant of NPM was called ‘New Steering Model’ or NSM. Indeed, an extremely influential book, Osborne and Gaibler’s Reinventing Government (1991), which is often attributed with starting the NPM revolution, gives most attention to individual local government reform initiatives. Of the Nordic countries, Denmark is higher up the NPM scale than either Norway or Finland but not as high as Sweden (Kleven et al. 2000). Italy and Japan are missing from Figure 2.1 because of unavailable data for this category in the Revenue Statistics. For a broader discussion on fiscal variation between OECD member states’ local governments see Caulfield 2002.

PA R T B FINANCE

3 FINANCING LOCAL GOVERNMENT IN AUSTRALIA Andrew Johnson

Local authorities, through the services they provide, impinge directly or indirectly on the lives of most of their citizens, whether by setting housing standards, providing water, disposing of effluent and garbage, or maintaining roads. Local government plays a key role in delivering these and many other services. Australian local government is currently under financial pressure from all sides. Councils are facing increased expectations from their communities to deliver more services, including those beyond the traditional focus of local government. State and federal governments’ expectations of local government have also never been greater, with municipal authorities being used increasingly to implement the policy objectives of these higher tiers of government. At the same time as councils are confronting these increased expectations, they are finding that they have limited means of raising sufficient income to meet the higher expectations. Community expectations of local government are increasing at an alarming rate while at the same time councils are battling with increased costs and restrictions over their revenue-raising ability. This has resulted in a ‘gap’ between the community’s expectations of municipal authorities and the amount of funds available to meet these expectations, which we may call ‘the community expectation/funding gap’. This chapter seeks to outline the economic dilemma confronting contemporary Australian municipal government by considering how local government can use its limited resources to meet the relatively unlimited demands of the public it serves. The objective of this chapter is thus to discuss some of the financial pressures facing local govern-

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ments in Australia and how they may best be overcome. It is not the intention of this chapter to debate the merits or otherwise of these increased public expectations, but rather to focus on the limited resources available to councils and the restrictions that they face in attempting to meet these expectations. The chapter itself is divided into five parts. The first considers the nature of the financial problems facing contemporary local government in Australia; in particular, their aging infrastructure and increased community expectations. The second discusses some of the constraints facing local government, including the devolution of responsibility, ‘raising the bar’, cost shifting, increased community expectations and various other problems within the sector. Part three provides an overview of the Commonwealth Financial Assistance Grant and its role in funding the operations of local government while part four puts forward some recommendations for managing the funding situation facing local government. Some brief conclusions are then drawn in the final section.

T H E N AT U R E O F T H E P R O B L E M The nature of the problem facing local government is analogous to the basic economic dilemma confronting society: That is, how can local government reconcile the difference between the unlimited wants or demands that are placed on it by the community and other levels of governments, and the limited resources that it has available to meet these unlimited demands. The position of local government, as we will see below, is further complicated by its limited and restrictive revenueraising options and the increase in the magnitude of costs that are ‘passed down’ to local government (from the higher tiers of government) without matching (or indeed any) corresponding revenue. In essence, local government is currently facing strong financial pressures in which it is unable to meet the increasing needs of the community it serves as well as controlling large amounts of infrastructure that will need replacing or renewing in the near future. Thus the gap between what the community and other levels of government demand from councils, together with councils’ assets renewal requirements, when compared to the funds that local government has to meet these demand, is growing at an alarming rate. A significant proportion of council-controlled infrastructure was constructed by local government during the post-World War II era from grants provided by state and federal governments. Very little of this infra-

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structure was developed from council-generated funds. At present many of these assets are in poor condition and require replacement from councils’ existing revenue stream, including swimming pools, bridges, halls, roads, etc. However, local government does not have the financial capacity to replace these assets or bring them up to a satisfactory standard, without the sustained assistance of state and federal governments. There are a number of studies available that seek to quantify the cost of renewing council assets. For instance, a 1998 Victorian government report titled Facing the Renewal Challenge, which considered current replacement cost and long-term consumption of roads, bridges, footpaths, drains, parks, recreation facilities and public buildings, estimated that there was an annual infrastructure deficit, on these assets, of $233 million per year. This situation is highlighted in Figure 3.1, which shows the current and anticipated expenditure on asset renewal, the amount that councils can actually fund, and the resultant funding gap. FIGURE 3.1 VICTORIAN COUNCILS ASSET RENEWAL EXPENDITURE PROFILE

SOURCE

Adapted from AMQ Int. Dec 1998, p.9, Figure 1.1.

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In a similar vein, another report, commissioned by the South Australia Local Government Infrastructure Management Group in 2001, entitled A Wealth of Opportunity, indicated that South Australian councils’ infrastructure maintenance was being under-funded by $105 million (or 19 per cent of revenue). The report found that the situation was far worse for rural councils, which needed to quadruple their current expenditure on infrastructure maintenance. These councils currently spend less than $20 million a year on asset maintenance, but require some $64 million to be sustainable in the long term. In much the same way, in 1999–2000 Western Australian councils recorded a road infrastructure deficit of $59.8 million per year. Community expectations of local government are also increasing at an exponential rate. Communities are increasingly looking towards local government to meet their expectations of government, even in areas that councils have traditionally not tackled. This may be a result of a widespread view that local government is the best vehicle to implement community requirements and the most accessible form of government for the community to be able to provide direct input into the services provided, and enable them to have more of a ‘say’ in how things are run in their area. It may also be a result of the centralisation policies of most state and federal government agencies that have seen many public agencies leave rural regions for consolidation in metropolitan areas. Local government is in the unique position of being located in over 720 communities throughout Australia. It is the level of government that is the ‘closest to the people’; it is most directly influenced by, and has the most interaction with, its constituents. Due to the centralisation of most state and federal agencies, these higher levels of government have regarded councils as the most efficacious vehicle for implementing their policies, particularly when they require ‘on the ground’ implementation. In particular, there has been a myriad of legislation deriving from state and federal parliaments which local government has been required to implement on behalf of these governments, usually with no additional finances being provided to assist councils. Local government is struggling to fund its basic services, let alone implement the policies of other levels of government and is increasingly examining cost reduction measures. The questions that should be asked are: Why is local government facing this problem? How did this situation arise? These and other questions will be considered in the next section.

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THE GENESIS OF THE PROBLEM In broad terms, there are four main reasons for the current financial dilemma of Australian local government. As outlined by the Commonwealth Grants Commission (CGC 2001, pp.52–53) they are: •

Devolution — where a higher sphere of government gives local government responsibility for new functions;

•

‘Raising the Bar’ — where higher tier of government, through legislative or other changes, increases the complexity of, or standard at which, local government services must be provided, and hence increases the cost;

•

Cost Shifting — characterised by two types of intergovernmental conduct. Firstly, where local government agrees to provide a service on behalf of another sphere of government, but funding is subsequently reduced or stopped, and local government is thereafter unable to withdraw from service provision because of community demand for the service. Secondly, where some other sphere of government ceases to provide a service and local government is obliged to take over; and finally

•

Increased Community Expectations — where the community demands improvements in existing local government services.

In addition to these imposed problems, local governments themselves are also partly responsible for their own plight. A majority of councils are perceived to be inefficient, they often lack scale in their operations, a large number have deteriorated into an extremely poor financial position, and strategic and long-term planning is generally lacking. A number of councils are also reluctant to set their rates and other charges at realistic and sustainable levels. Public services need to be delivered at the most appropriate level of government, taking into account the scale of operations and the differential level of services required by specific circumstances. In many cases local government is the most appropriate body to implement these services. However, in most situations, the service (and its cost) is shifted from other levels of government onto local authorities, without any corresponding transfer of income to provide the required service. To overcome these additional costs, local government has tended to initially reduce reserve funds, then decrease the amount of infrastructure maintenance, and finally diminish the services that they provide. In general, there tends to be little scope to maintain existing service levels, let alone provide further services in order to meet expanding community needs.

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‘ R A I S I N G T H E B A R ’ A N D D E VO L U T I O N O F R E S P O N S I B I L I T I E S

We have argued that state and federal governments are increasingly using local government as a vehicle for implementing their own policies and political objectives. This is typically achieved by introducing new legislation and/or regulations that local government is required to implement on behalf of the higher tiers of government, or where the requirements of existing legislation, which local government administers, are changed to provide for more strenuous compliance. In both cases, the costs associated with the increased legislation are usually met from existing council revenue. By way of example, Table 3.1 provides a summary of the expanded role that councils are being asked to play in meeting the requirements of various acts and regulations in New South Wales. In most cases, no additional funds have been provided. From this example, it seems clear that state agencies are continuing to respond to pressures on their own resources, and to community demands for action on issues of concern, by devolving responsibilities to local government. This is a worldwide phenomenon at a time when central governments are seeking to do ‘more with less’ (LGSA 2001, p.10). What steps can be taken to remedy this increasingly untenable state of affairs? It can be argued that in a society in which public accountability of elected representatives is paramount, all bills introduced into parliament should, prior to being introduced, be required to have a mandatory cost and benefit analysis prepared as part of the Bill. The cost and benefit analysis should be made available for public comment. At least the following issues should be addressed: The costs involved in implementing the requirements of the Bill (once off and recurrent costs); responsibility assigned for meeting the costs associated with the Bill; identification of the beneficiaries of the Bill; and an estimate of the magnitude of the benefit of the Bill. A cost and benefit analysis along these lines should improve the accountability and transparency of proposed policies and lead to better decision-making. It would enable the community to appreciate the ‘true’ cost of legislation as well as the incidence of the burden of these costs and benefits. COST SHIFTING

In principle, cost shifting can take a number of different forms. In the first place, a higher tier of government can provide local government with grants to undertake a new function. Over time, through lack of adequate indexation of the grant, municipalities receive reduced grant

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TABLE 3.1 RECENT ADDITIONAL IMPOST ON NSW LOCAL GOVERNMENT

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funding in real terms, thus forcing councils to use their own revenue to allow them to continue to provide the service in question. Secondly, councils have been obliged to provide a service which would normally be offered by a higher tier of government (such as law and order or health services), but where that higher tier is either reluctant or unwilling to provide the required service. The final situation involving cost shifting occurs where government agencies, facing financial pressures, seek to recover an increasing array of fees, charges, licence contributions and other monies from councils in order to fund the agency’s operations. COST SHIFTING IN GRANT INCOME

Councils receive around 13 per cent of their income from current grants and subsidies as well as a substantial amount of grant funding for capital projects. Grant funding thus forms a significant proportion of the total income of municipal authorities and is accordingly critical to their ability to provide a number of services. Figure 3.2 indicates that since the introduction of Commonwealth Financial Assistance Grants to local government in 1974–75, Australian local government revenue from all sources has grown by around 10 per cent per annum. More specifically, the revenue from user charges has grown most rapidly (13 per cent per annum), followed by other revenue (11 per cent), financial assistance grants (10.8 per cent), municipal rates (9.4 per cent), and (with the least growth) revenue received from the state government (6.6 per cent). These trends indicate that there has been a greater reliance on user charges and other income to fill the gap left by reduced grant funding and, to a lesser extent, reduced dependence on rate income. A common characteristic of most grants is their lack of adequate indexation. In cases where indexation is applicable, the method of indexation used has tended to bear little relationship to the increase in the cost of providing the actual service. Table 3.2 serves as a salient example of the problem. Table 3.2 indicates that out of the forty-eight categories of special grants received by Victorian local government, only sewage and aged/disabled housing grants have increased as a proportion of councils’ expenditure. This trend points towards a general decrease on the cost coverage of grants, which have been provided to municipal authorities to enable them to perform specific functions on behalf of the granting body. The reduced cost coverage of the grants generally results in

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FIGURE 3.2 LOCAL GOVERNMENT REVENUE SOURCES 1974–75 TO 1997–98

SOURCE

Adapted from Commonwealth Grants Commission June 2001, p.51.

the municipalities being required to fund more of the service from their general revenue, thus leaving fewer funds available to meet other legitimate community expectations. This represents a cost shift from the granting body (usually the state government) to local government. The reduction in cost coverage of grants illustrated in Table 3.2 is not a result of increased costs of councils in providing the service, but rather a reduction in grant funding provided in real terms. The special purpose grant funding to Victorian local government has fallen substantially in real terms from 1995–96 to 1999–2000, with over half the functions experiencing double-digit declines. This situation is common to local government across Australia. Moreover, these reductions in grants have not led to a commensurate reduction in expenses for these functions. [Victorian] councils’ expenditure for libraries fell from $99.6 million to $97.8 million and childcare fell from $146.0 million to $135.6 million in the same years (MAV 2001, p.12). Successive [Victorian] state governments have not demonstrated a penchant for maintaining equity in the distribution of specific purpose programs where local government is a major recipient and service provider. State government funding programs affecting local government

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TABLE 3.2 VICTORIAN SPECIAL PURPOSE GRANTS AS PERCENTAGE OF EXPENDITURE (EX DEPRECIATION)

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• 47

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Municipal Association of Victoria (MAV) May 2001, p.13.

have been characterised by a lack of transparency concerning either or both the quantum of funding and the relative levels of funding provided to various recipients (MAV 2001, p.3). Perhaps more importantly, they have been marked by a lack of indexation. While the state government has, over recent years, revamped its funding approaches (such as from grants to output-based purchasing), it has nevertheless been loath to explicitly introduce indexation into funding formulae. It is difficult to comprehend a situation in which a state government would passively accept similar treatment from the Commonwealth regarding transparency and indexation (MAV 2001, p.3).

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As a result, the funding position of local government has been eroded by both reductions in the real value of grants and subsidies and an unequal sharing of any growth funding between funding recipients. This deterioration of the local government funding position has occurred across the range of programs from ‘Home and Community Care’ (HACC) to ‘Beach Cleaning’. There appears to be an expectation that local government has the capacity to absorb these effects (MAV 2001, p.3). COST SHIFTING IN EXPENDITURE

We have argued that state agencies are continuing to respond to pressures on their own resources, and to community demands for action on issues of concern, by devolving responsibilities to local government and increasing fees and contributions payable by local government. This seems to be a ‘solution’ to the agency’s dilemma and has the additional advantage of having relatively low ‘voter backlash’, since citizens are only paying indirectly for the increases in the fees and charges. Australian local government is also faced with increased expectations on it to perform functions that are traditionally undertaken by other tiers of government. This seems to have been caused by the withdrawal and centralisation of most state and federal services. One rural council in northern NSW contends that cost shifting accounts for some 26 per cent of their rate income. In their submission to the Commonwealth’s Inquiry into local government and cost shifting, they provided the following examples of cost shifting (Guyra Shire Council 2002, pp.6–9). Provision of doctors: Health care is generally considered the responsibility of the state and federal governments. However, rural local government is now being asked, at their own expense, to find medical doctors for their community; State government fees and charges: Fees in this category include EPA load base licensing for sewer schemes, general increase in EPA licences, amounts payable to the state under the Companion Animals Act, contribution to the NSW Fire Brigade (in addition to amount paid to the Rural Fire Service which has doubled in four years), increases in registration costs for heavy vehicles and amounts payable for lease fees as a result of council ‘beautifying’ unsightly land owned by Rail Estate; Community safety and policing: Local government is being asked by the state government to set up committees to act as a communications channel between residents and the NSW Police Force, a task

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historically assigned to police officers. Further, the State Attorney General’s Department offers grants to specific communities to overcome some law and order issues, provided that the council prepares a community safety plan for their area; and Pensioner concessions: In NSW, councils themselves have to make up around 45 per cent of this ‘welfare’ payment. If pensioner concessions are a legislated welfare entitlement to assist the aged, then that tier of government responsible for welfare payments should meet the cost. The Commonwealth government is saving $59m annually from its welfare budget in NSW alone by having local government absorb these welfare payments (based on pensioner rebates made during 2000–01: see DLG 2001, p.137). C O M M U N I T Y E X P E C TAT I O N S

The public appears to want the municipal authorities to provide more ‘services to the person’ and be involved in services that depart from the traditional ‘services to the property’ focus of Australian local government. This is reflected in Table 3.3, which provides details of the changing spending patterns of local government over the past twenty years. Table 3.3 shows that expenditure by councils in the area of social services, sanitation and protection of environment, and recreation and cultural services has increased significantly as a proportion of councils’ total expenditure. This increase in expenditure has come at the expense of spending less, as a proportion of total expenditure, on fuel and energy (most of these functions have been transferred to state-run agencies), transport and communication, and public debt. These figures confirm that there has been a general trend away from ‘services to the property’ and more involvement in ‘services to the person’, together with a greater focus on environmental issues, as a percentage of local government total budget. The Commonwealths Grant Commission’s (2001, p.53) analysis of local government expenditure over the period 1961–62 to 1997–98 appears to support this view. An examination of the expenditure data embodied in Figure 3.3 indicates that the following trends are evident: •

A move away from property-based services to human services.

•

A decline in the relative importance of road expenditure (although it remains the largest function, its level of importance has declined from about half of total expenditure in the 1960s to a little more than a quarter in the 1990s). Councils have tended to defer road expenditure rather than reduce human services.

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TABLE 3.3 CHANGE IN COUNCILS EXPENDITURE (AUSTRALIA WIDE) 1977–78 TO 1997–98

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ABS Year Book 2000, p.711 and 1980, p.629.

•

An increase in the relative importance of recreation and culture, and housing and community amenities (these are now a large area of local government expenditure, each approaching 20 per cent of total).

•

An expansion of education, health, welfare and public safety services (which has increased from 4 per cent of total expenditure in 1977–78 to about 12 per cent in 1997–98).

Local government was originally set up to provide ‘services to the property’ with the higher levels of government being responsible for the provision of ‘services to the person’. Much has changed since many local authorities were constituted. Amongst other things, it seems that contemporary communities expect a great deal more from their municipality than simply the traditional provision of ‘services to the property’. Indeed, it appears that many communities expect the local authority to

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FIGURE 3.3 COMPOSITION OF LOCAL GOVERNMENT EXPENDITURE 1961–62 TO 1997–98

SOURCE

Commonwealth Grants Commission June 2001, p.54.

be involved in the provision of social services or ‘services to the person’. It may be possible to explain the genesis of this change on fairly obvious socioeconomic grounds. For instance, Adolph Wagner (1883) determined, over a hundred years ago, that there was a positive correlation between the level of economic development and the proportion of public expenditure directed at public goods: the so-called ‘Wagner’s law’ holds that public expenditure increases at a faster rate than national output. It also infers that as per capita income rises in advanced nations, so their public sector will grow in relative importance. This may explain heightened popular demands on Australian government, including local government. P R O B L E M S W I T H I N T H E S E C TO R

Rate revenue is the single largest source of revenue for most Australian local governments, comprising approximately 37 per cent of total local government revenue. Rate revenue is also the only source of taxation directly available to local government. Local government, as a sector, has generally been reluctant to set its rates at higher levels that would allow it to be more sustainable in the long term. Elected municipal representatives have been under consider-

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able political pressure from voters to keep rate increases to a minimum. NSW local government has the added complication of rate pegging legislation that prevents councils from increasing their rates to a level that will provide them with the financial capacity to meet the increased expectations of the community as well as fund the replacement of their aging infrastructure. It is also interesting to note that NSW local government has not had the lowest increase in rates in Australia despite being subject to rate pegging legislation that is designed to remove councils’ ability to set rates. Ernst and Young (1990, p.8) in their report into NSW local government rating argued that it has been possible for local government to ‘make room’ for the state government through the rate pegging arrangements. However, they contended that the reluctance of the local government sector to increase rates will (in the long term) provide a greater opportunity for the state government to exploit what has traditionally been seen as a local government tax base. These arguments could be applied equally across Australia. This is illustrated in Table 3.4, which shows absolute volume of funds raised from property taxes by both state and local governments across Australia. Table 3.4 also provides a comparison of the increase in property taxes across Australia by both tiers of government. These figures indicate that the states have, on average, increased the percentage of land tax collected (in all but six of the last sixteen years) by more than the respective increases in local government rates. While setting rates at a realistic and sustainable level to fund the demands facing local government should be given a priority, it will not solve the funding constraints faced by local government in its entirety. Nevertheless, it will greatly assist councils in reaching these goals. For this to be politically feasible, the community will need to be involved in the setting of rates and determine if they are prepared to pay more for their increasing demands on local government. Local government in contemporary Australia seems to be held in somewhat low esteem by both the general public and higher tiers of government. This is believed to be in part a result of local government being reluctant to promote itself and its achievements, leaving the media to highlight only the ‘bad’ side of local government when some adverse event occurs. Local government is always in the public eye as a result of the fact that most of its services are provided where the community can readily see them. This has led to a situation, arising over many years, where the

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sector is perceived as being inefficient, wasteful, with staff lacking adequate skills and supervision, and decisions being made for political gain. In sum, it does not provide value for money and does not adequately consult with its constituency. These factors may have been partially true ten years ago, but are not accurate of local government in the twenty-first century. Nonetheless, past community attitudes still prevail, and until this perception is changed local government will have significant problems in building its capacity. While these negative attitudes continue, the community will be reluctant to contribute more taxes for fear of wastefulness, and the state and federal governments will be reluctant to provide greater autonomy, more revenue and greater powers to the sector. Local government needs to ensure that its performance is at least within community expectations, reform those councils who bring disrepute to the sector, promote its successes, and then seek to improve the perceptions about its operations. Local government must seek to improve its efficiency and generate savings that can be used to provide additional services.

C O M M O N W E A LT H F I N A N C I A L A S S I S TA N C E G R A N T S The single largest grant received by local government is the Commonwealth’s financial assistant grant (FAG). The local government sector has received untied assistance from the Commonwealth for over a quarter of a century. When first introduced in 1974–75, Commonwealth funding to local government was an application-based program. In 1976, income tax-sharing arrangements were introduced. In 1985–86, tax sharing was replaced with the level of funding being capped and only allowed to increase by 2 per cent more than inflation for that year. Funding was then maintained in real terms through to 1989–90 (Access Economics 2001, p.3). Apart from a reduction in 1996–97 associated with a budgetary savings exercise following a change in Commonwealth government, local government FAGs have been maintained in real per capita terms since then, rising annually in line with an escalation factor taking into account changes in population as well as inflation, as determined annually by the Commonwealth Treasury (Access Economics 2001, p.3). The ostensible objective of general-purpose financial assistance from the federal government to local government is to strengthen local government to enable it to provide a wider range of services and to promote equity between councils and certainty of funding (NOLG 2001, p.25).

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TABLE 3.4 STATE AND LOCAL GOVERNMENT REVENUE FROM LAND TAXES

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ABS Taxation Revenue Australia Cat No. 5506.0 1982–83 to 1999–2000.





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The FAG is a general-purpose grant: thus local government can use it in the manner it sees fit and faces no restriction in spending the grant funds. The grant has two components, a general-purpose component and an identified local roads component. In 2000–01 the general-purpose component amounted to some $920m and the identified local roads component equalled about $408m. Table 3.5 provides details of the magnitude of the financial assistance grants received by councils since its inception. The distribution of these funds to local government is determined by the Local Government (Financial Assistance) Act 1995. In formulating the distribution of grants to councils, the current arrangements can be summarised as follows (NOLG 2001, pp.25–26): •

At the beginning of each financial year, the federal government determines the quantum of general purpose and local road grants estimated to be available for local government nationally. This is equal to the quantum of the grants received nationally in the previous financial year adjusted by an estimated escalation factor (the escalation factor should reflect changes in population and the consumer price index);

•

The estimated quantum of the general purpose and local roads grant for each state is then calculated according to requirements of the federal legislation and these amounts are advised to states;

•

Local government grant commissions in each state determine the allocation of general purpose and local road grants among local government bodies in the state;

•

The local government grants commission recommendations are then sent to the federal minister for approval;

•

Once these grants have been approved by the federal minister, quarterly payments are made by the federal government to the states and, without undue delay, these are passed on to local government bodies as untied grants;

•

Towards the end of the financial year, the escalation factor is revised and the final quantum of the grants for the financial year is recalculated;

•

An adjustment to the allocation to local government bodies is made and their payments in the following year are adjusted.

•

The grant is distributed from the Commonwealth to the individual state local government grant commissions on a per capita basis. It is then up to the individual state-run local government grant commission to determine the method of dividing the grant between the local government bodies in their state. The method must be approved by the federal government and have regard to the following principles:

•

Horizontal equalisation — Horizontal equalisation is achieved if each council in the state is able to provide the average range, level, and quality

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• 57

of services by reasonable effort, taking into account differences in the capacity to raise revenue and in their expenditure needed to provide average services (NOLG 2001, p.32) •

Effort neutrality — The grant is distributed without regard for the policies of the individual councils.

•

Minimum grant — Each Council must receive at least a minimum level of the general-purpose grant.

•

Other grant support — Government grants (and all other revenue of the council) are considered when determining the revenue raising capacity of a council, in order to ensure the grant is distributed according to the principles of horizontal equalisation.

•

The Aboriginal people and Torres Strait Islanders — The grant should reflect the number of Aboriginal People and Torres Strait Islanders in the council jurisdiction and the differences in the range of services required by this group.

•

Identified road component — The national principles require that the road component of the FAG be distributed according to road expenditure needs, including consideration of factors such as length, type and use of roads.

Local government has long argued for the amount of funds received under the government FAG to be increased. Based on the calculations of the NSW Local Government Grants Commission, the Commission only has sufficient funds to distribute approximately 58 per cent of what they have determined that councils should require under their funding formula. At the same time, Figure 3.4 indicates that the grant has decreased substantially as a portion of total Commonwealth taxation income. This situation can be compared with the current arrangements in regard to the Commonwealth’s financial assistance ‘grant’ provided to the state governments. Following the introduction of the goods and services tax on 1 July 2000, the Commonwealth agreed to provide the states with the entire proceeds of this new tax in place of the current payment. The Commonwealth also provided a guarantee to the states that they would be no worse off under the new arrangements and agreed to provide additional funds to make up any shortfall in payments. This left the states with greater financial independence since they did not have to attend their annual ‘begging sessions’ (the Premier’s conference) to fight for their share of federal revenue. The GST also provided the states with access to a growth tax that is considered fundamental to the sustainability of governments. Local government lost this opportunity for a share of this revenue and therefore access to a growth tax. This would have provided additional autonomy by reducing the reliance on another sphere of government for funding.

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TABLE 3.5 FAG PAYMENTS TO LOCAL GOVERNMENT



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FIGURE 3.4 GROWTH IN TAXATION AND LOCAL GOVERNMENT ASSISTANCE 1986–87 TO 2003–04

SOURCE

ALGA May 2001.

MANAGING THE PROBLEM It can be argued that ameliorating the problem of increased financial pressures on local government involves a two-pronged solution. The first step incorporates managing public expectations of local government, and the second step requires additional resources from both internal and external sources. This process will require cooperation between all parties concerned: local government, the private sector, other levels of government, and the public at large. Local government must manage the voter’s expectations and work with the constituents to determine what should be provided. Community involvement and education are considered to be a vital element in allowing councils to meet the expectation of its residents. Local government should first educate the people in their operations and the challenges they face, the expectation/funding gap, and then involve residents in the decision-making process of the council. A society educated in the challenges facing local authorities and their communities would be more open to any proposed changes and will also look favourably towards to any proposed price/rate rises in

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order to tackle these challenges. Public education can assist with the reluctance to change, which is prevalent in most communities. It can demonstrate why change is necessary, the benefit of the proposed alterations to the status quo, and what would happen if the proposed changes were not undertaken. In turn, local government should determine the community’s needs, prioritise these needs, and work towards closing the expectation gap. While all needs identified cannot be fulfilled immediately, given the council’s limited resources and the possible short-term commitment of existing resources, it needs to consider planning to meet these needs in the longer term. It is considered beneficial for local authorities to undertake forward/strategic planning to set about addressing the community’s needs and expectations and ultimately reducing the expectation gap. We contend that the Management Plans of council should provide details on public expectations, factors affecting council’s ability to meet these expectations, why council does not (in the short term) intend to meet some of these expectations, and what would be required in order to meet any unfilled expectations. This may involve providing details of the costs involved to council in providing the service, together with funding options. The funding options may include the amount of an appropriate user charge or what other services would need to be forgone to fund the new service. Councils’ Management Plans and Annual Reports should also provide details on the condition of councils’ infrastructure and the councils’ infrastructure deficit. Council should also consider reporting on how they intend to overcome the deficit and meet the needs of the community. It is also in the interests of local governments to spell out in their Management Plans and their Annual Reports the restrictions imposed on their revenues and expenditure (such as cost shifting, devolution, etc.) and to quantify the effect of these restrictions on their finances. Municipal authorities should illustrate the effect of these restrictions by providing tangible details on what this reduced funding means to the community. These actions will assist in bringing to the public attention the problems and constraints facing local government in meeting community expectations. On its part, local government must make every effort to raise additional funds to enable it to meet the increasing community needs. The additional funding should be found from all sources, including service users, the community, internal efficiency gains, and from the state and federal governments. External funding will require that local government can demonstrate

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itself worthy of the additional finance. This will involve councils reviewing their operations to ensure that they are providing ‘best value’ in their operations, continually looking for efficiency savings, and ensuring that they are operating in an accountable and transparent manner. Local government should also ensure that it is making the most of the limited resources it currently enjoys. It needs to determine that it is delivering value for money to its community and that it is producing services in the most efficient way possible. It should be noted that an average efficiency saving of 5 per cent annually throughout Australian local government would produce savings of $846 million each financial year. This represents an appropriate incentive to review the current way services are provided and to look at new and innovative methods of providing services. Councils ought to consider all service provision options and determine if services can be done better and embark on a continuous improvement program to ensure that they are operating efficiently as possible considering its objectives. One of the highest priorities of local authority surely resides in improving its efficiency to be able to create savings that can be applied to the provision of additional or better quality services. Local authorities should be required to set efficiency improvement targets, define how they intend to meet these targets, report the efficacy of achieving these targets, as well as how the savings generated from the efficiency gains have been applied (like increasing services or reducing fees). Councils cannot expect to manage the funding gap alone. Solving the expectation/funding gap will involve a cooperative approach from the community, local government, the private sector and other levels of government. Municipal governments ought to consider all available external funding options to increase the amount of expectations that they can meet. This includes seeking additional government funding, wider employment of user charges, and the extensive use of the private sector in the provision of services and funds. Moreover, intergovernmental cooperation and partnerships between the public and the private sectors are perceived to be essential if the pursuit of successful strategies in dealing with issues, such as infrastructure management, sustainability, affordable housing and appropriate transport systems, are to be achieved (Sproats 2001, p.37). The financial pressures being faced by councils are not due to any single dominant factor. It is therefore unlikely that a single response would be reasonable or appropriate (Commonwealths Grant Commissions 2001, p.55). Where a source of financial pressure is a result of the discretionary

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actions of the council itself (because the council has chosen to respond to particular needs of their residents), it would be appropriate for the council to meet these pressures from their own revenue sources. Where the source of the pressure is the result of changing policies or actions of other spheres of government (the state or the Commonwealth), it would be appropriate for that sphere to acknowledge local government’s need for greater financial assistance. Given that municipal authorities are the best placed to implement other governments’ policy, they must be suitably resourced (both with qualified staff and financially) to implement the policies. The measures outlined above will assist municipal authorities in meeting community expectations and ensure a more open, transparent, and accountable method of providing financial assistance to local government. A more open, accountable, responsive and performance-orientated local government, which involves the community in its decision-making process, will be more inclined to gain the trust of other levels of government and its residents. This trust is required before either of these parties will provide additional funding to local government. Put differently, unless the community and other governments see that local government is providing the best value for the dollars they provide, they will not be prepared to provide more grant funding, or increase contributions through higher user charges and taxation.

CONCLUSION Local government is far from perfect. Sometimes wrong decisions are taken, inefficiencies are allowed to persist, customer service falls short of the standards required, and so on. Shortcomings are well documented: operating under legislation requiring highly transparent procedures and vigorous public perusal, local councils are subject to intense scrutiny. They are also liable to the pitfalls facing any democratic institution (LGSA 2001, p.27). Local government requires autonomy in its revenue raising activities in order to meet the needs of its community. But this autonomy must be balanced by improving accountability of local government. Community demands are likely to increase over time. People will always strive to increase their quality of life, thus will always expect more from governments. State and federal governments will also continue to use local government as a vehicle to implement their own policy objectives. The result of all of these factors is that councils should be proactive and anticipate changing and heightened demands from

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their respective communities and be in a position to provide these needs as and when required. The increased resources now required to meet these responsibilities, as a result of increased expectation from the states, are affecting local governments’ ability to provide other services to its community. The combination of increased resources required to implement the growing legislative requirements of the state, and severe restrictions over local governments’ revenue-raising ability, has led to a reduction in services being provided in other areas. Few of the additional responsibilities conferred on local government over the past few decades have been matched by adequate, ongoing funding, or new sources of revenue (LGSA 2001, p.14). Local government resources can only be stretched so far before a crisis point is reached. We are already seeing evidence of this with the deterioration in local infrastructure, particularly roads, the running down of reserve funds, the lack of provisions being made for future assets replacement, and a reduction in the provisions made for major maintenance items. Local government is under considerable pressure to change its traditional character and procedures in many ways. It faces the prospect of financial cuts in both state and federal grants and is expected to ‘do more with less’ by improving its managerial and economic efficiency (Self 1997, p.297).

4 LOCAL GOVERNMENT FINANCIAL REPORTING Christine Ryan

Since the 1970s the Australian public sector has been under constant review. Changes have occurred at all levels of government, and they follow international trends in other western democracies (Olson et al. 1998). Financial reforms have been one aspect of the reform package. The financial reforms have emphasised the efficient and effective use of resources, greater accountability for the outcomes of resource usage, and enhanced transparency of decision-making processes and operations (Bishop 1996; Parker and Guthrie 1993; Gray and Jenkins 1993). The promotion of accrual reporting was the purported cornerstone of these reforms, and during the 1990s local governments in Australia have been primarily ‘busy’ implementing these techniques. However, since the techniques have become established, it is now timely for local governments to assess their external reporting mechanisms, particularly in light of the unresolved accounting issues. This chapter looks at the current state of external reporting in local governments in Australia and suggests appropriate future refinements.

EXTERNAL REPORTING P U B L I C S E C TO R R E P O RT I N G F R A M E WO R K

Since the early 1980s the public sector annual report has gained increasing prominence as the most comprehensive document that reports on the achievements of Australian local government authorities. Regulators have tightened guidelines governing specific aspects of the production of annual reports, particularly in relation to the content and timeliness of reports. Historically, most Australian local government authorities have

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had poor records in terms of the timeliness of reports (Carnegie 1990). As a general rule, Australian local government authorities are currently required to produce an annual report within five months of the end of the financial year. However, as the focus falls on local government accountability, pressure is exerted to decrease this five-month requirement (see, for example, Queensland Public Accounts Committee 2001). A significant component of the annual report is the annual audited general purpose financial statements. Local government regulators in the various state and territory jurisdictions have the authority to set accounting arrangements for the general purpose financial statements for the local authorities under their control. Parallel to this, the accounting profession through its Australian Accounting Standards Board (AASB),1 issues accounting standards on particular issues or for specific segments of business and the public sector. The accounting standard pertaining to local governments, AAS 27 Financial Reporting by Governments, was introduced in 1990 for adoption by local governments in reporting periods ending after 30 June 1994.2 Most local government regulators around Australia have mandated AAS 27 as the basis for local government general purpose financial reporting. AAS 27 recommends that local authorities report on an accrual accounting basis, and that all assets be valued using a current cost value. Accrual reporting was promoted as an essential tool for local government authorities for a variety of reasons. However, one of the main purported advantages was that it would improve the poor levels of financial management in many local government authorities. In other words, the introduction of accrual reporting was used as a mechanism to promote sound internal financial practices. Anecdotal evidence suggests this is not happening in many local government authorities, especially smaller municipalities. The production of end of year financial reports is merely an accounting exercise and day-to-day management is still done on the basis of cash information (see, for instance, Local Government Association of Queensland 2002). One of the major assumptions of the accounting regulators in drafting AAS 27 was that local government authorities have generalpurpose users; that is, users who wish to know about the financial affairs of the local government and who would not normally have access to financial information. Moreover, the accounting regulators then used the same framework to develop private and public sector accounting standards. However, the initial assumption that the information needs of users of general purpose financial reports (GPFRs)

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and the operating environments of organisations in both the private and public sector were similar has recently been challenged (see for example, Barton 1999a, English 1999; English and Guthrie 2000; Carnegie and Wolnizer 1995; Guthrie 1998; Walker 1989). Indeed, it could be argued that many of the unresolved issues in local government financial reporting came about because of this assumption and an unwillingness of the PSASB to adequately explore the ‘unique’ circumstances of the public sector (Walker 1989). Further, Walker (2001, 2002) argues that in Australia, while there is limited demand for general purpose financial reports, which fail to meet even the most basic information needs of external readers of public sector financial reports, there is nevertheless a strong demand for performance information. Walker (2002, p.53) is critical of the efforts of Australian standard setters in this vein, arguing they pay only lip service to the importance of performance indicators, and provide little information on how agencies have actually delivered services to the community. He argues further that the accounting profession has ‘overstated its claims that sets of financial statements unaccompanied by performance indicators will meet the information need of external stakeholders’. Compounding the problems imposed by the adoption of the private sector financial reporting framework for the public sector is the aggravating factor that there has been no differentiation between the various types of public sector agencies with respect to their financial reporting obligations. Local governments, government departments, statutory bodies, and government-owned corporations, irrespective of their size and geographic location, have all been considered to have stakeholders with similar information preferences. It is argued by the opponents to this ‘one size fits all’ approach that the consequence of this assumption can be felt in the continuing asset valuation problems that are apparent in the public sector. Barton (1999a, p.22) contends that a differentiated approach is needed and the public sector environment is so highly heterogeneous ‘that it cannot be treated as one for accounting purposes’. He maintains that the markets in which the services are provided are very different. In particular, AAS 27 takes no account of the great differentiation in the size of local governments or in their geographic positions. Numerous commentators have argued that the motivations and behaviours of these municipal authorities might differ significantly, depending on these factors of size and location, and these differences may indicate the need for alternative accounting treatments (see, for example, Kloot and Martin 2001, Mack et al. 2001; LGAQ 2002).

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While these arguments and empirical evidence are canvassed in the academic literature, accounting regulators are currently reviewing whether there is a need for a separate standard for local government authorities. However, this review does not encompass the basic ‘appropriateness’ of the premises underlying the standard or its provisions. Some practitioners in local government have argued that the implementation of AAS 27 has been so successful that there is a debate about whether a separate standard on local governments is still necessary (see, for instance, AASB 2002a). The argument proposed by those in favour of a repeal of AAS 27 is that the reporting elements are adequately accomplished by the more general series of Accounting Standards. At present, no final decision had been made, but the position put to the AASB by the Australian Council of Auditors-General was that AAS 27 needed to be retained.3 Nevertheless, there are still two major unresolved issues which have the capacity to impede one of the chief purported advantages of the introduction of accrual information; namely, the comparability of information between different local authorities throughout Australia. The first of these is the issue of the valuation of assets and the associated depreciation of assets and the second is the issue of revenue recognition. A S S E T VA L UAT I O N

Assets in the private sector are usually classified as either current assets (those that will be converted into cash within the next year) or non-current assets (including intangible assets). In the public sector the most common types of assets are current assets; non-current assets (such as buildings and furniture); infrastructure assets (such as roads, bridges, and reticulation systems); heritage assets (such as galleries, museums and other collections and heritage buildings); and community assets (such as monuments and parks, gardens and recreational reserves).4 Indeed, some scholars (see, for instance, Barton 1999a) would add environmental assets and many natural capital assets to this list. It is these latter classes of assets (infrastructure assets, heritage assets and community assets) that have been described as the ‘problem assets’ for the public sector (McGregor 1999). Three phases can be identified in asset valuation for local government.5 The first phase occurred prior to the introduction of AAS 27. There was no ‘uniform’ method of asset valuation. In fact, many assets were not recorded at all. The second phase came when accrual accounting began to be promoted, and the issue of the ‘appropriate’ value to

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place on assets was raised. A current cost methodology was originally promoted for local governments in the Exposure Draft to AAS 27. Assets were to be valued at written down current cost. As other sectors of the public sector began to value assets (in particular the public trading enterprises), a variant of CCA, so-called ‘deprival value’, was promoted and obtained widespread acceptance. ‘Deprival value’ is defined as the value that the owner would suffer if deprived of the asset. The third phase of asset valuation occurred in December 1999, with the release of a new accounting standard — AAS 38 (Revaluation of NonCurrent Assets). This essentially meant that all reporting entities had to decide whether to value assets on an historical cost basis or a fair value basis. Fair value is defined as the price that would be exchanged between a knowledgeable willing buyer and a knowledgeable willing seller in an arms-length transaction. Once the decision was made to value at fair value, then the entity could not move back to the cost basis. This essentially meant that the public sector would move its asset valuation from deprival value to fair value. Because of many requests from public sector entities for further guidance on measuring fair value, the Board has decided to undertake a project to develop further guidance on measuring an asset’s fair value. There is a three-year transitional period for not-for-profit entities while the AASB conducts an investigation into the relationship between fair value and current cost. During this time, public sector entities can continue to use their existing revaluation basis to measure non-current assets while the Board progresses the project (AAS 38, para.55). Although the accounting standard setters have viewed public sector asset valuation as a relatively straightforward and technical issue, the implications of valuing assets are nonetheless vast and have recently been highlighted in the literature. A central issue that needs to be considered, which is at the heart of much of the discussion about asset valuation in the public sector, is whether or not putting a value on these assets serves any useful purpose. The two reasons most commonly advocated for valuing the assets of public sector entities are first, that unless assets are valued they cannot be managed, and secondly, asset valuation is needed, so assets can be depreciated, and thus the full cost of services obtained. The proponents of accrual accounting argued consistently that its adoption would result in a better quality of information about the operations and finances of the public sector, and in particular, it would enable governments to know the ‘full’ cost (including the depreciation on assets) of the services provided.

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Depreciation of assets relies on the method of asset valuation. Any move to a ‘current cost’ based methodology leads to increased depreciation charges, which has a material impact on the cost of government services.6 Carlin (2000) and Walker et al. (2000) argue that the use of a current cost methodology in the public sector was ‘ideologically based’. The methodology was advocated in the specific public sector accounting standards and promulgated by the regulators in both Treasuries and Departments of Local Government. These writers have argued that this methodology has no empirical basis, since there are few studies that examine the usefulness of current cost or replacement cost data in a public-sector context (but see, for example, Van Daniker and Kwiatkowski 1986). However, the implications of using a current cost methodology are dramatic. Depreciation costs based on current cost valuations are higher than depreciation based on historical-cost valuations. Consequently, the cost of public services rises because of depreciation based on current cost, and any cost comparisons with the private sector, especially in the instance of competition through outsourcing, will accordingly make the public sector seem inefficient (Carlin 2000; Walker et al. 2000). They argue that contracting out decisions and statements about the perceived efficiency of the public sector may thus be made on erroneous grounds. While some commentators have highlighted the unintended consequences of asset valuation, others have contended that some public sector assets are ‘unique’, and hence financial valuations should not be attempted. In general, they argue that in the private sector financial values are placed on assets to enable their good management. However, in the public sector, financial valuation of these ‘unique’ assets is not often possible, and even where it is possible, valuation is not necessary to the good management of the assets. They recommend the reporting of these assets separately outside the financial statements: thus treating them as ‘stewardship assets’, ‘trust assets’ or ‘facilities’ rather than assets reported on the Statement of Financial Position (see, for example, Pallot 1990, 1992; Barton 1999a, 1999b; Mautz 1988). There are two specific asset groups that are currently at the heart of the public sector asset valuation debate — the value of heritage and community assets and the value to be placed on land under roads. Barton (2000) argues that ‘community assets’ should not be accounted for in the general-purpose reports of government agencies. Moreover, a financial value should not be placed on them. He bases his position on the fact that these assets are maintained by the government

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for social purposes rather than for purposes of public administration or income generation; they are not to be sold; they are open to the public for enjoyment; their benefits flow to public users rather than the managing entity; and they are to be maintained in good condition in perpetuity for the enjoyment of current and future generations because of their special and appreciated attributes. As such, they should not be included in a general-purpose statement of financial position of the managing entity, but rather be reported separately for management and accountability purposes. Carnegie and Wolnizer (1995, 1996, 1997, 1999) make similar assertions in the context of publicly held collections such as those held by art galleries. These authors recognise the need for the managers of such collections to be accountable for the physical safekeeping, proper use, effective display, efficient and proper expenditure. However, they argue that there are more effective ways of holding managers accountable than the application of financial values and accrual accounting techniques to assets which are primarily important because of their cultural, heritage, scientific and educative qualities. Carnegie and Wolnizer (1999) maintain that these qualities cannot be quantified in financial terms. They thus endorse the practice in both the United States and Canada where collections are not valued. They argue there ‘are more effective, sensible and intelligible measures of accountability … than the assigning of spurious and interpretable financial values to collections’ (p.20). Pallot (1990) extends this argument by adding that in many cases in relation to these assets, managers cannot dispose of them and so should not be held accountable for what they do not control. The valuation of ‘land under roads’ has also been beset by controversy. ‘Land under roads’ refers to land under roadways and road reserves, including land under footpaths, nature strips and median strips (para.12). When AAS 27 was originally issued it assumed that all assets would be valued. As local government authorities began to implement the standard, the valuation of land under roads became controversial with most local authorities opposing it. Not only was the legal question of the controlling of roads uncertain, but also how the valuation was to occur (Barton 1999c). The issue is an important one, because in those authorities that have implemented the valuation, land under roads dominates their assets (Rowles et al. 1998). Consequently, if the financial statements are being used for economic decision-making, then resolution of this issue is of paramount importance. Until 2002, the Board issued transitional arrangements that held that local government

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authorities had the option of not valuing land under roads until further research had been completed by the Board. The AASB at its February 2002 meeting ‘tentatively’ decided that in respect of local government authorities the option of not valuing land under roads should be extended indefinitely (AASB 2002b). The continuing controversy surrounding this issue and the variation in practice seems to undermine one of the purported advantages of accrual reporting; namely, enhancing the financial comparability of authorities. While the issue of asset valuation has proved contentious, so too have the associated issues of the concept of depreciation, what is an adequate depreciation charge in relation to long lived assets, and the recording and treatment of maintenance expenditure. We will now examine these questions. D E P R E C I AT I O N A N D M A I N T E N A N C E O F A S S E T S

The concept of depreciation as it is currently understood in the accounting profession means that the cost of the asset is allocated over its useful life in recognition of the decline in service potential of the asset due to its continued use. This depreciation concept means that there is an inherent assumption that the life of the asset is not indefinite. The charging of depreciation does not cover the maintenance requirement to keep the asset in its normal condition. Thus, in addition to the charging of depreciation, any maintenance expenditure should be charged as an expense of the period in which it is incurred. However, any expenditure to increase the service potential of an asset is a ‘capital expenditure’ and should be added to the asset value. In relation to local government authorities, there was some resistance to providing depreciation in this manner, specifically for long-lived assets. It came from a number of quarters — those who had been using and recommending renewals accounting and those recommending condition-based depreciation. Under a cash accounting system, the concept of depreciation is not an essential element. However, even under a cash accounting system, there was still the recognition that long-lived assets did require maintenance to operate at their peak capacity. One such method that had some long acceptance in relation to the accounting for infrastructure was that of ‘renewals’. Renewals accounting identifies an entire network or system as an asset and recognises that these assets must be maintained indefinitely. The concept of renewals accounting is based on the notion that large infrastructure systems tend to be in a steady state of opertion, and the annual cost of maintenance tends to approximately equal the

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annual consumption of the benefits from the asset. Hence, these assets are not depreciated annually since the cost of maintenance is taken as the expense for the period. The problem with renewals accounting is that it often does not differentiate between ordinary maintenance expenditure and those amounts that may be considered to be of a ‘capital’ nature; that is, that expenditure that leads to asset enhancement. The distinction between operating expenditure and capital expenditure are key concepts of an accrual system. While debate on the appropriateness of these concepts continued during the 1990s, the use of renewals accounting has been prevented by the accounting profession through the issue of Abstract 30 (UIG 2000).7 Closely related to this concept of renewals accounting is the notion of condition-based depreciation. In fact, the term ‘condition-based depreciation’ has been used to cover renewals accounting, deferred maintenance accounting and other methods applied to complex infrastructure assets or systems with very long economic lives (UIG 1999b). Condition-based depreciation is held to be an alternative to formulaebased depreciation. It avoids the difficult task of estimating the future life of the infrastructure asset. Moreover, it directly observes the deterioration of the asset (Burns 1992) and considers all the costs that need to be incurred to maintain the operating capacity of the asset by way of major maintenance, replacement or rehabilitation. The UIG in Abstract 30 (UIG 1999a) has argued that these methods do not comply with the Accounting Standard on Depreciation where it assumes that all assets have definite lives, and it may be necessary to separate the ‘network of assets’ into individual components if each has a different life. Thus, each of the components can be depreciated based on their estimated life. The debates focusing on the concepts of ‘maintenance’, ‘deferred maintenance’, and ‘cyclical maintenance’ are related to the controversy surrounding depreciation. Local government authorities have made substantial investments in infrastructure assets. It has only been recently that attention has been paid to the myriad of ways of both reporting on the condition of those assets and quantifying and reporting on the maintenance of those assets. These are important issues, because there is anecdotal evidence that much of the nation’s infrastructure has not been maintained optimally, and for many public sector agencies it is the condition of their infrastructure assets that is a key indicator of their operational performance (Walker et al. 2000). ‘Maintenance’ is defined as regular expenditure on repairs and the like that keep an asset in its original operating capacity and condition.

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‘Deferred maintenance’ represents maintenance that was not performed when it should have been, but was delayed for a future period. ‘Cyclical maintenance’ arises from the planned cyclical or seasonal maintenance programs that are undertaken periodically and deliberately to ensure that the asset network is maintained in its original condition. It was common practice in local government for authorities to raise a liability for deferred maintenance and for cyclical maintenance. However, in June 1999 the accounting profession issued UIG 26 ‘Accounting for Major Cyclical Maintenance’ (UIG 1999a), in which it prohibited the practice of having these provisions for maintenance. It argued that they did not meet the characteristics of a liability; that is, there was no present obligation to pay for this maintenance. The result was that the information on management’s intentions with respect to these major assets and their maintenance is not reported. Although data is scant, there is nonetheless evidence that local government authorities have significant amounts of either deferred maintenance expenditure or projected expenditure on proposed infrastructure upgrading, and that this information would be of interest to stakeholders (Walker et al. 1999a). Walker et al. (2000) argue that much of the work of the standard setters on the depreciation issue has been misplaced because it has concentrated on ‘technical definitions’ rather than considering the issue from the point of view of the users. It should thus ask the question ‘What information about infrastructure assets is likely to be of use to users of the reports?’ Walker et al. (2000) argue that financial data alone will not meet these information needs, but rather a combination of financial data and non-financial quantitative and qualitative data is optimal. Stakeholders are really concerned with the physical condition of assets, whether governments have adequately maintained these assets, and what the ‘costs of bringing assets to a satisfactory condition’ are (Walker 1999, p.456). The financial values placed on infrastructure by accountants, and the discussion relating to balance sheet presentation and valuation, have little relevance to these questions. This data gives no indication about whether the assets have been adequately maintained. Indeed, it is argued that it is impossible to tell from our current reporting regimes whether any of the infrastructure assets are at a ‘suboptimal’ level and hence providing less than efficient levels of service (Walker et al. 2000). This question obviously also relates to the problem of intergenerational equity. Consequently, if information is not being provided that allows an assessment of the condition of the asset, then appropriate decisions cannot be taken. This is a matter which has

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not been fully resolved and which will continue to be debated in the future. It is nevertheless of key importance to accounting standard setters as they consider the most appropriate form of financial statements. REVENUE RECOGNITION

It has been argued that the unresolved problem of revenue recognition further undermines the comparability of financial statements. In essence, this problem revolves around what revenue to recognise in each financial year (Ryan et al. 2000; Barton 1999a). The introduction of accrual accounting in the public sector has been a cause for a reconsideration of what constitutes revenue in the public sector. Under cash accounting there is no distinction made between the different types of cash receipt. However, accrual accounting requires that the concept of revenue be considered. For instance, AAS 27 (para.24) states that: The operating statement reports the revenues and expenses of a local government for the reporting period, and thereby provides information relevant to an assessment of its performance for that reporting period. It enables users to identify the cost of goods and services provided, and the extent to which that cost was recovered from revenues, during the reporting period. While AAS 27 does not identify types of revenue, the several types of revenue commonly recognised by local governments include rates revenue, user charges, fines and fees, and other contributions, such as grants and gifts.8 AAS 27 further states that revenue should be recognised when: (a) it is probable that the inflow or other enhancement or saving in outflows of future economic benefits has occurred; and (b) the inflow or other enhancement or saving in outflows of future economic benefits can be measured reliably.

The major issue in revenue recognition is how to deal with contributions such as grants, donations and gifts that are not contributions by owners. For all local government authorities, AAS 27 makes a distinction between reciprocal and non-reciprocal transfers. A reciprocal transfer occurs when the transferor and transferee receive and sacrifice approximately equal value. A non-reciprocal transfer occurs when voluntary contributions, such as grants and donations, and involuntary

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transfers, like rates, taxes, fees and fines, are made to an entity and there is no value given in exchange for these contributions. The treatment of reciprocal transfers is not at issue, but there are questions surrounding the treatment of non-reciprocal transfers. In general, the private sector does not have the equivalent of non-reciprocal transfers. However, in the public sector, these transfers make up the bulk of the revenue of local government authorities, and thus any ‘inconsistencies’ in their treatment have the potential to severely affect the accuracy of the resultant financial statements, both as an explanation of the results for the period under consideration and for comparability purposes. The debate surrounding the issue of revenue recognition (i.e., when to put the revenue in the accounts) essentially arises because revenue (such as a grant) may be received in one year and yet not expended until future years. This is particularly common for large projects that extend over more than one financial year. In the main, there are two alternate treatments for revenue that is received and yet not expended in the year in which it is received. The first is to recognise it as revenue in the year in which the local government authorities has control over it (or the year in which it is received), the second is to recognise it as revenue only when it is earned (in the periods in which the benefits accrue). The first approach, adopted by the Australian standard setters in AAS 27, is that revenue is earned when the authority has control over that revenue. Thus, in the case of grants received in advance of expenditure, the standard would dictate that the grants are recognised as revenue in the period in which they are received. This period will not necessarily be the same as the period in which expenditure to provide the asset or service is incurred. Further, the standard does not require a liability to be raised at the end of the period in which the asset is received and the services have not as yet been provided. What the standard does require is that if revenue has been recognised and yet the associated expenditure has not been made (and there are thus conditions attaching to the revenue), then this fact must be disclosed in the notes to the financial statements (see para.92). Further, if the local government fails to meet the specific conditions attaching to the contribution and the amount is required to be repaid, it is only then that the local government has a present obligation to a creditor that has arisen as a result of a past event: namely, the failure of the local government to meet the conditions for retention of the contribution. If revenue was recognised and the conditions are not met, then an expense and a liability must be raised (see para.69).9

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The support for this approach, whereby revenue is recognised immediately and no liability is raised immediately, is based on three main propositions. Firstly, the transfer of funds/assets to the recipients is not the causal link between the obligation and a past event necessary for the transaction to be defined as a liability. Secondly, the obligation component of the definition of liability may be independent of the nature of the right held by the recipient. Finally, a liability can only be recognised if it subsequently becomes probable that a refund will be required (Westwood and MacKenzie 1999). The alternate treatment on revenue recognition, adopted by the G4 +110 is that a liability should be recognised for the obligation to repay all or part of a non-reciprocal transfer, with revenue only being recognised when the related conditions are met (Westwood and MacKenzie 1999). The arguments in support of this position are fivefold. In the first place, revenue should not be recognised until it is clear that there is no obligation to return the funds to the contributor. This will occur when the condition is satisfied. Secondly, until the condition is satisfied the recipient does not have an unconditional right to the funds/asset. Thirdly, IASC framework principles are breached if revenue is recognised immediately as there can be no guaranteed increase in equity until there is no possibility of a liability. Fourthly, an obligation exists until the condition is met in a similar manner to the obligation to repay a loan exists until it is repaid. Finally, this treatment is consistent with the treatment for reciprocal transfers. Under this approach, a transfer with a condition attached is described as an ‘obligating event’, whereby the condition is an obstacle that must be overcome before the transfer can be recognised as revenue.11 The G4+1 recognises the conflicting views with respect to accounting for non-reciprocal transfers with conditions attached, and whilst the majority of the members favour the second approach, the G4+1 allows for either approach to be adopted. The implications of the divided opinion and unresolved controversy surrounding the revenue recognition debate have been evident recently in the Australian standard setting process. The UIG has also been dealing with this same area of controversy albeit with regard to the recognition of university operating grants. The UIG issued an abstract on this issue that was subsequently vetoed by the AASB.12 The UIG in the vetoed paper took the view that university grants are reciprocal transfers not non-reciprocal transfers. The UIG in part based this view on the notion that ‘value can be given directly by a transferee to the

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transferor when goods or services are distributed to third parties on behalf of the transferor’. The critical distinction in classifying the grants as reciprocal as opposed to non-reciprocal is that reciprocal transfers can give rise to a liability whereas non-reciprocal ones cannot. While the specific issue has been ‘resolved’ at the moment by the political processes, the ambiguity of the matter has been highlighted and the AASB will ultimately need to address the matter more holistically. The issue of revenue recognition is an important one for local government authorities (and indeed for all public sector agencies) since it has the capacity to impact on the financial statements and their usefulness both in the short term and in the longer term in terms of comparability of results.

CONCLUSION This chapter has focused on the current state of financial reporting by local government authorities. In the last decade local government authorities have changed their financial reporting paradigm from a cash basis to an accrual basis. While these changes have been incorporated, various conceptual and practical problems have become more visible. Existing empirical research seems to suggest that the ‘one-size fits all’ financial reporting model may not be appropriate for local governments. It may be timely for regulators to assess the general-purpose financial reporting model in light of the diversity in size, asset base and geographic location of local government. Moreover, there is still considerable controversy surrounding the valuation of particular community and infrastructure assets, and also the recognition of revenue. However, the larger picture revolves around the development and reporting of performance information for Australian local government, including both financial and non-financial information. There is a continuing need to present information to users that will be relevant to their particular needs. The development of meaningful and relevant performance information will represent a major challenge in the discharge of the accountability obligations of local government officers to their stakeholders. E N D N OT E S 1 2

From 1983 until 2000 the Public Sector Accounting Standards Board (PSASB) set public sector accounting standards. In 2000 the PSASB was merged with the AASB and now the AASB sets standards for both sectors. AAS 27 was issued in July 1990 by the PSASB to be operative for accounting periods ending on or after 1/7/93. This followed the publication of Discussion Paper No 12 ‘Financial Reporting by Local Government’ in 1988 and ED 50

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‘Financial Reporting by Local Government’ in 1989. In September 1993 AAS 27 was amended and re-issued to take into account implementation issues identified by local government practitioners and regulators. The re-issued standard was effective from 1/1/94. 3 Queensland presented a dissenting view arguing that the majority of accounting requirements in AAS 27 were contained in other AASs, and the retention of AAS 27 was not warranted. 4 Some (for example Barton 2000) would place heritage assets under the heading of community assets. 5 Some (for example Barton 2000) would place heritage assets under the heading of community assets. 6 The ‘current cost’ methodology has been largely abandoned in the private sector. Tweedie and Whittington (1997) give 5 factors as to why current cost methodology has virtually disappeared from the private sector. 7 The Urgent Issues Group is a committee of the AASB comprised of 16 voting members and 2 observers. Its role is to provide timely guidance on urgent financial reporting issues. 8 This is to be contrasted to the approach taken in AAS 29 ‘Financial Reporting by Government Departments’ which does list several types of revenue for government departments. This difference in orientation may be due to the fact that AAS 29 was issued later than AAS 27. The sources identified are: user charges, fines and fees; recurrent capital and other appropriations; resources transferred from other entities; amounts equivalent to liabilities assumed by other entities; contributions such as grants or gifts; payments for providing agreed outputs, services or facilities. 9 There are dissenting views particularly with regard to voluntary contributions that have conditions attaching to them. Some believe that contributions that have a condition attached to them should be recognised as a liability until such time as the condition is fulfilled. The position taken by AAS 27/29/31 is that contributions of this nature be regarded as revenue irrespective of whether there are any conditions imposed on the use of those contributions. The rationale behind this treatment is that the receipt of a contribution by an entity imposes a fiduciary responsibility on that entity to use the contribution for the pursuit of the objectives of the entity. This fiduciary responsibility is seen to be part of the normal operations of public sector entities and so even where specific conditions are imposed the view is taken that a liability is only recognised in the event that the condition is not satisfied. 10 The G4+1 is a group of national standard setting bodies from Australia, Canada, New Zealand, United Kingdom and United States and a representative of the ISAC as an observer. It was disbanded in January 2001 following the reorganisation of the IASC creating the IASB. The G4+1 felt that the creation of the IASB obviated the need for the G4+1 and its continued existence might divert resources that could be used by the IASB (G4+1 2001). 11 Although the G4+1 favoured the approach whereby a liability is recognised (the position that has been adopted by US standards) it was divided in its support for the two methods of dealing with contributions of this nature. With either approach, full disclosure in the notes about the existence of conditions was recommended. 12 As the UIG is a committee of the AASB it is controlled by it. The charter for the UIG in par 25 states that the AASB has the power of veto over any abstracts issued by the UIG.

5 A M A L G A M AT I O N A N D V I R T U A L LOCAL GOVERNMENT Paul May

It is often argued that there are two key motivators underlying local government amalgamation in Australia. The first is the achievement of economies of scale stemming from larger size that facilitates the efficient provision of services. The second derives from the proposition that the present system of local government formed in the nineteenth century is inadequate for the challenges of the twenty-first century (Kiss 1996; Self 1997; Soul and Dollery 1999; Stilwell and Troy 2000; Witherby et al. 1997). Public sector reform has permeated through to local government from both the federal and state spheres of governance. As a consequence, a renewed preoccupation with structural reform and efficiency evolved in Australian local government in the 1990s. The subsequent debate surrounding the appropriateness and efficacy of these reforms was characterised by philosophical polarity. Thus Aulich (1999) has argued that differences in emphasis with regard to implementation of National Competition Policy have resulted in a divergence in the nature of local government systems in Australia. On the one hand, some municipal systems place heavy emphasis on democratic notions — the so-called ‘local democracy model’. On the other hand, a ‘structural efficiency model’ prioritises the efficient administration of services to local communities (Allen 2001). These philosophical tensions gave rise to two broad generic approaches to the implementation of local government structural reform through amalgamation. Dollery (1997) has termed these schools of thought the ‘voluntary’ model and the involuntary or ‘compulsory’ model. The actual choice of approach resides at the level of the

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state rather than local government in Australia. A variety of forms of amalgamation are evolving. They range from the rather simplistic approach of wholesale amalgamation of two or more existing council areas through to a recasting of local government boundaries based upon social, economic or geographical units and to a more recent mutation known as ‘virtual councils’. The virtual council approach is to amalgamate and perhaps even privatise administrative functions in order to achieve of economies of scale and therefore more efficient service delivery without compromising democratic representation (Allen 2001). Evidence of the achievement of economies of scale and associated efficiency resulting from larger amalgamated administrative units is mixed (Byrnes and Dollery 2002). Indeed, Chapman (1997) contends that structural changes to local government do not appear to have been monitored very thoroughly by any level of government in Australia. Nevertheless, attempts have been made to determine the relationship between population size and economic and political performance: in other words, to try and nominate an optimum size for local government jurisdictions. This work has contributed to the debate on municipal consolidation, but has yet to provide convincing empirical arguments in favour of the notion that amalgamation necessarily achieves economies of scale and thus enhances economic efficiency. This chapter examines both sides of the debate and weighs the empirical evidence available in the Australian context. Discussion looks initially at the broad characteristics that underpin local government in this country, and considers the reasoning which has driven the amalgamation process across the various states. The third section explores the tensions that can arise between efficiency and democracy. Section four evaluates the question of optimal size, while the fifth section tackles the issue of virtual local government. Finally, data relating to merger outcomes in New South Wales, Victoria, Tasmania and South Australia are reviewed. The chapter concludes that firm evidence to support the presumed financial benefits accruing from amalgamation is lacking.

CHARACTERISTICS OF AUSTRALIAN GOVERNMENT SIZE AND DIVERSITY

Local government’s role in the Australian economy is small but nonetheless significant. In 1999–2000 revenue for the sector was over $16 billion or about 2.5 per cent of GDP. Just over a third of income

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was derived from taxes (mainly property rates). The sale of goods and services contributed about a third of accrued incomes whilst approximately an eighth of revenue was received in the form of grants and subsidies. The remaining one fifth of income derived from interest and other sources. It is estimated that local government is responsible for infrastructure worth more than $130 billion (NOLG 2001, p.5). The sector expends less than five per cent of total public revenue and employs approximately one tenth of the public sector workforce (Chapman 1997, p.1; Soul 2000, p.1). Local government jurisdictions in Australia exhibit diverse characteristics in respect of: population size; geographic area; range and scale of functions; income and expenditure; the skills of employees; physical, economic, social and cultural environments; representation ratios of elected members to constituent population; and state legislative frameworks for local government (NOLG 2001, pp.5-6). Table 5.1 provides a summary of the diversity in local government in respect of population size and ratios of elected representatives relative to constituent population. Available evidence suggests that municipal amalgamations do not necessarily significantly reduce diversity. For instance, Kiss (1996, p.119) has demonstrated that after the amalgamations in Victoria in the early 1990s, populations within the newly created local government units varied from less than 10 000 to in excess of 150 000. Moreover, after an analysis of the 1994 Grants Commission data, she concluded that there were also wide variations in matters such as property valua-

TABLE 5.1 LOCAL GOVERNMENT AVERAGE COUNCIL POPULATION PER STATE/RATIO OF COUNCILLOR TO CONSTITUENTS 2001

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tions on a per capita basis and household incomes within and between local government areas. More generally, Soul and Dollery (1999, p.39) have lampooned these extreme variations in the size and expenditure patterns of Australian local government when all jurisdictions have similar or even identical administrative responsibilities. CONSTITUTIONAL RECOGNITION

Constitutional responsibility for local government rests with the states and territories rather than the Australian Commonwealth Government. Local government has been formally entrenched in the Victorian and Western Australian State Constitutions since 1979. South Australian local government received recognition in the State Constitution in 1980, with New South Wales following in 1986 (NOLG 2001, p.5; Chapman 1997, p.6). Councils are thus a statutory creature of state legislatures and accordingly amenable to change at the whim of state governments. FUNCTIONS

Local government in Australia tends to have narrower responsibilities than its counterparts in other advanced countries. For example, Australian local government is not directly responsible for health, education and policing. In essence, the core services provided by Australian local government include: construction and maintenance of physical infrastructure, such as roads, bridges, drainage and waste management facilities; regulatory roles in respect of construction of buildings, operation of food premises and animal and noise control; environmental management and planning; provision of community and recreational facilities and services; the coordination of government services delivered at the local level; and information brokerage (NOLG 2001, p.8; Tucker 1997, p.88). Australian states are not entirely consistent in terms of responsibilities devolved to local government. Local government in Queensland, rural New South Wales and Tasmania has responsibility for water and sewerage, but this is not the case for other states. Local government is not responsible for planning in the Northern Territory whereas in the other states it takes significant charge of that function. Over the past few decades local government’s role has expanded considerably. Factors contributing to this include devolution of functions to local government by higher spheres of governance, evolving community expectations, market deregulation, competition policy, technological change, privatisation and industrial relations reform (NOLG 2001, pp.6–8).

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TABLE 5.2 NUMBERS OF COUNCILS IN AUSTRALIA 1910–2001

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Adapted from NOLG 2001, p.55.

STRUCTURAL REFORM

Structural reform refers to initiatives involving cooperative service provision, resource sharing or joint-service delivery enterprises. Amalgamation may thus be construed as the most decisive form of structural reform. In general, the Commonwealth Government has supported structural reform initiatives either adopted by local government or imposed upon councils by a state government (NOLG 2001, pp.53–54). It would not be unreasonable to generalise and espouse the notion that local government has been more inclined to embrace the softer options of structural reform relating to cooperative arrangements. State governments have shown an inclination to utilise the more dramatic options associated with amalgamations. Structural reform has resulted in a considerable reduction in the absolute number of councils within Australian between 1910 and 2001 as shown in Table 5.2. DRIVERS OF STRUCTURAL REFORM

Motivating factors triggering structural reform can be categorised as being either primary or secondary factors. The primary motivating factors tend to be given greater credence and are regularly highlighted in Australian literature on the subject of structural reform and amalgamation. The secondary motivating factors seem not to be as widely acknowledged and/or are considered to be spin-off benefits of the primary factors. The most important primary and secondary factors are outlined in Table 5.3.

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TABLE 5.3 DRIVERS OF STRUCTURAL REFORM

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SOURCES Dollery 1997; Howell 1997; Kiss 1996 and 1997; NOLG 2001; Soul and Dollery 1999; and Stilwell and Troy 2000.

The National Office of Local Government (2001, pp.53–54) makes it clear that the Commonwealth Government has supported the structural reform initiatives of the states in respect of local government generally for the reasons listed in Table 5.3. Dollery (1997, p.448) observes that Warwick Smith, the Minister for Local Government in 1996, not only supported structural reform, but also trenchantly argued that amalgamation of local government units was the most effective way to enhance the efficiency of councils. A similar view was evident in New Zealand where 691 territorial and ad hoc authorities were replaced with 13 regional councils. In addition, 73 city and district local government bodies and one unitary organisation were also established. Apparently the New Zealand Government’s reasoning for implementing such extensive structural reform was to maximise the efficiency of government functions that remained after government trading operations were sold to private owners, and all subsidies and barriers to international competition had been removed (Howell 1997, p.107). In Victoria, Kiss (1997, p.49) contends that the primary objective of the radical restructure through amalgamation in Victoria was to make the sector cost less in an effort to stimulate growth.

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TENSIONS BETWEEN EFFICIENCY AND D E M O C R AT I C R E P R E S E N TAT I O N Aulich (1999, pp.17–20) has argued that two significant roles for local government, democracy and efficient delivery of services, are often found to be in tension. He observed that approaches to structural reform in New South Wales, Queensland and Western Australian tended to work collaboratively with councils, thus demonstrating a high commitment to local democracy. By contrast, the key value driving structural reform in Victoria, South Australia and Tasmania appeared to be economic efficiency. These developments led to the identification of the local democracy and structural efficiency models outlined earlier. In essence, the local democracy model emphasises the democratic notions of responsiveness, representativeness, accountability and access. The structural efficiency model underscores the efficient administration of services to local communities and is therefore more of a minimalist view of the role of local government (Allen 2001, p.15). Dollery (1997, p.449) has argued that policymakers, like former Minister Warwick Smith, were well aware of some perceived negatives associated with structural reform, including diminished communities of interest and therefore voter representation and some loss of identity. This concern with the purported loss of community representation has sparked considerable debate ever since. Soul (2000, pp.108–109) has suggested that too much weight has been given to arguments relating to the perceived loss of political representation. He argues that since the Australian Constitution does not explicitly provide a specific standard of political representation for local government constituents, there is thus a lack of substance and legal foundation to the arguments surrounding representation. Without constitutional backing, Australian local government institutions cannot be truly regarded as legitimate democratic entities. In order to provide empirical support for his argument, Soul (2000) sought to examine whether there was indeed any relationship between population size and the political performance of local government in New South Wales. In examining this issue he found that the ratio of councillor representation to constituents varied from one councillor to 74 constituents through to one councillor to 15 666 constituents in different municipal jurisdictions. Soul’s questionnaire survey of citizens within four diverse local government areas led him to the conclusion that ‘the analysis of the data found that population size does not signif-

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icantly affect constituent perceptions of political performance’ on the part of the electoral population (Soul 2000, pp.194–227). However, empirical research undertaken in two small Victorian rural communities appears to contradict Soul’s findings. An examination of voter’s perceptions of the accumulative impacts on their wellbeing of policy changes, especially local government amalgamations, appears to have demonstrated that residents experienced a loss of local government focus and community representation (Hallebone et al. 2000, pp.214–221). Howell (1997, pp.107–108) has observed that the principle of subsidiarity was not evidenced in the New Zealand reforms of local government. Principles such as subsidiarity, transparency, accountability, efficiency, effectiveness, and democracy should all be taken into account when reforming local government. He argued that concentration on one or two of the principles to the needless exclusion of others is a valuable lesson that should be heeded from the New Zealand experience. The dominance given to transparency hampered the possibility of identifying appropriate options to consider the role of regional and territorial government. A further important aspect of the debate over the tension between economic efficiency and political representation relates to whether amalgamation actually strengthens local government. Kiss (1997, pp.63–67) has suggested that the Victorian amalgamations prioritised cost savings, thus precluding the opportunity to discover the most productive structure of local government. The problem of the widely varying administrative capacity of councils in Victoria to fulfil their responsibilities and meet community needs was not addressed. In fact, amalgamations may not have strengthened local government in Victoria but simply exacerbated the varying capacities of local government jurisdictions to fulfil local needs. Self (1997, pp.229–300) has argued that it is not necessarily correct to assume that stronger local government authorities formed as a result of amalgamations would gain more effective autonomy. His analysis of what happened in England may indicate that the higher levels of government had fewer municipalities to deal with post amalgamations; it was therefore easier to impose stronger controls and reforms. He also makes the point that the Australian geographical scale also adds to tensions since it sets limits to the desirability of amalgamation. Geographical scale can detrimentally affect accessibility and local sentiment with respect to local government.

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Witherby et al. (1997, p.119) acknowledge that the relationship between council size and democratic representation may present contentious tradeoffs. Further, the hypothesis that systems that facilitate citizens’ participation and access can uphold democratic principles in larger councils is not yet proven. Ultimately, there appears to be a need for balance. The Inquiry into the structure of local government in eight council areas in the inner city and eastern suburbs of Sydney commissioned by the NSW Government in October 2000 is a recent example exemplifying tensions between efficiency and democratic representation. The Inquiry conducted by Professor Kevin Sproats was the first major review into council boundaries in inner Sydney for over a quarter of a century. Empirical research conducted as part of the Inquiry ascertained that there was a wide ratio of representation across the Sydney metropolitan area. It was concluded that there was no definitive ideal representation ratio. Opportunities need to be pursued that enhance democracy and facilitate community participation in information sharing and decision making (Sproats 2001, pp.36–37). The Inquiry identified further tension. It was suggested that restructuring had to involve more than simply achieving a larger scale of operations. There was a need to be strategically focused so that the characteristics and aspirations of suburbs at one level and the broader region at another were properly represented (Sproats 2001, p.48). In a similar vein, Chapman, Haward and Ryan (1997, p.210) suggest that the important point is that all agree that economy, efficiency and effectiveness must not overshadow the capacity to govern, not just manage. Amalgamation alone is not seen as necessary, or enough, to promote modernisation (original italics).

P U R S U I N G T H E E C O N O M I C PA N AC E A : OPTIMUM SIZE Attempts to determine the optimum size of local government jurisdictions have been motivated by efficiency considerations and the theoretical prospect of economies of scale. Kiss (1996, p.119) has argued that research undertaken by Manning in Victoria in 1990 has demonstrated that economies of scale were at that time achievable by local government authorities with populations of around 10 000, if the range of services offered were minimal. The full range of services could be delivered at populations within local government jurisdictions of around 60 000. Larger units were not necessarily more efficient.

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Soul (2000, p.57) maintained that work undertaken by both Manning and Moore in Australia demonstrated that unit costs and total expenditure per capita were found to be significantly lower in larger local government jurisdictions. Soul (2000, pp.81–82) contended that research in the United Kingdom did not allow definitive conclusions to be made in respect of the relationship between population size and lower cost or greater effectiveness. A slightly more settled conclusion was reached in respect of Germany. In order to test the economic performance of local government jurisdictions in New South Wales, Soul examined data held by the Australian Bureau of Statistics (1996 census), the NSW Department of Local Government and the NSW Grants Commission for the years 1995–96 and 1997–98. He found evidence of a statistical relationship between population size, economic performance and the existence of economies of scale. Trends derived from this research suggested that larger local government jurisdictions generally tended to have lower unit or per capita costs than smaller ones. ‘Optimum utility’, defined as the best range and quality of local public goods for the least cost, could be achieved in non-urban jurisdictions with a population size of about 50 000. For urban jurisdictions a fairly ideal population size was ascertained to be in the order of 250 000 (Soul 2000, pp.128–130, 192). In reaching those conclusions it was emphasised that the ‘analysis finds empirical evidence of a weak but positive relationship between increasing technical economic performance and increasing population size using data on New South Wales jurisdictions’. It was nevertheless conceded that this does not necessarily imply a causal relationship between greater population size and increasing economic performance amongst NSW local government jurisdictions (Soul 2000, p.193). Percy Allen (2001, pp.vii–ix) has provided a counter argument. He has argued that available comparative data on unit cost per service does not support the conclusion that larger councils are more efficient than smaller ones. This is further reinforced by the fact that there is little actual correlation between size and the average rates charged by local governments in NSW. It was thus suggested that a reasonable interpretation of the NSW data is that larger councils have the critical mass to provide the broader range of services expected of a modern local government without the need to impose higher rates. They are therefore more efficient only because they can respond to diverse demands for the same unit cost per resident. Ronald Oakerson, an American researcher into local government,

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argued that increasing size does not necessarily achieve greater efficiency. Fragmentation could enhance efficiency as it creates potential competition amongst local governments along Tiebout-type lines. Moreover, Oakerson suggested that smaller local government units are less able to hide the relationship between taxes and services: demand is thus curtailed by communities unwilling to fund costly services. Large councils can contribute to efficiency because they are geared for functions that have economies of scale. However, most services provided by local government exhibit diseconomies of scale (Allen 2001, pp.28–29). Soul (2000, p.28) makes the point that there is limited empirical evidence on the efficiency of local government with respect to size. Soul also recognised that some researchers abroad have claimed that jurisdictions in the range of 50 000 to 250 000 in population can be the least efficient. The point is surely that these divergent views arise in part due to the different nature of local public services provided and the wide variation in jurisdictions researched (Soul 2000, pp.72–73). Witherby et al. (1997, p.118) concluded that literature appears to suggest that in metropolitan areas economies of scale can be achieved in administrative costs up to a certain point. However, determining the point of diminishing returns is difficult. Including considerations of geographical size further complicates the question of whether economies of scale can be achieved.

VIRTUAL GOVERNMENTS Those wishing to circumvent the somewhat simplistic approach to local government structural reform of utilising amalgamation of existing local government jurisdictions propose the creation of virtual councils. Virtual councils may well be based on Thornton’s urban parish concept. Vince (1997, p.170) describes John Thornton’s urban parish concept as a process where staff of several small councils are merged into a single employing body to facilitate economic efficiency. The electoral structure of the pre-existing councils is maintained. Similarly, Allen (2001, p.x) contends that the creation of a virtual council facilitates the harnessing of economies of scale in service production whilst retaining the representational benefits that smaller local government units can offer. Economies of scale are created by establishing a shared services centre. This is basically an amalgamation of a number of councils’ administrative arms and services are outsourced to the larger shared services centre. The shared services centre is owned and controlled by the participating councils. Services may be also outsourced to other

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providers in the public sector, voluntary sector and private sector. Existing political functions are retained by the requisite smaller local government units. In essence, municipalities separate the production of services from their provision. Virtual councils thus offer the potential to achieve the ‘best of both worlds’ by localising decision making whilst agglomerating administration. Put differently, the political apex of a council is organised on a smaller geographical basis than is the administrative arm (Allen 2001, pp.29–31). The virtual council approach makes it possible for small organisations to contract out services that are capital intensive, logistically complex or require specialist skills. These types of services, such as road construction, street cleaning and maintenance, and legal advice, are contracted out to producers that capture economies of scale by servicing a number of client municipalities. Indeed, organisations far larger than even the largest local government unit could be contracted to undertake services. Public utilities might also be able to manage rate collections. Larger councils providing a greater range of specialist services could be contracted by smaller municipalities unable to provide these services economically ‘in-house’. For example, a large council employing specialist planning and design expertise could be contracted by smaller local authorities to provide these services (Allen 2001, pp.29–31). Allen (2001, p.31) suggests that the term virtual council is appropriate because the organisation in question would be small in terms of councillors and directly employed staff numbers, but still be responsible for all of the normal functions of a local government authority. Indirect delivery mechanisms are predominantly utilised to undertake these normal functions. It becomes crucial that virtual councils develop expertise in designing, implementing and monitoring contracts. It would also be necessary to devise an appropriate list of services that could be outsourced (Allen 2001, p.33). Allen (2001) utilised the virtual council approach to support the proposition that the Balmain Peninsula should secede from the Leichhardt Council in inner Sydney. He also suggested that there was a wider implication of the general argument: smaller councils could be structured in such a way as to be more democratic, effective and efficient than larger scale local government jurisdictions. Politically smaller councils have a comparative advantage in their ability to deal with micro-site specific complaints on matters such as development, litter, potholes, broken gutters and dead trees. Council agendas could deal with issues at a street rather than precinct or ward level. This seems

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appropriate since councillors are often ill-equipped to deal with ‘big picture’ strategic policy issues. They are more adept at dealing with ‘parish pump’ questions and being responsive to local opinion. Small councils allow council meetings to be concerned with micro-local service delivery problems rather than exclusively the strategic issues (Allen 2001, pp.vii–ix, 13–14). Secession of the suburb of Balmain from Leichhardt Council was placed before the Inner Sydney Inquiry as a structural reform option. Ultimately, Commissioner Sproats was not prepared to recommend the secession, but he did acknowledged many of the issues raised in the manifesto. These were incorporated into his findings and recommendations on local democracy in the suburbs. It was suggested that, provided there was substantial community support, it may be worth pursuing by way of innovative experimentation (Sproats 2001, p.41). Indeed, small councils, such as Manly, a beachside location in Sydney, are moving towards the virtual council model. Needless to add, there are ardent opponents of virtual councils, such as the former City of Sydney Lord Mayor Frank Sartor. He argued that virtual councils would have insufficient revenue to provide major infrastructure. Where adjoining larger councils provided major infrastructure, such as aquatic centres, there would be an issue of cost shifting because residents from the smaller virtual council use those facilities without meeting their full costs. Moreover, the accountability problem exacerbated due to the larger number of administrative entities involved in the provision of services. Major problems, such as traffic management, tend to be regional questions: solving them could become intractable where local interests might prevail over regional ones (NOLG 2001, p.60).

C H A S I N G T H E P OT O F G O L D Establishing adequate empirical evidence in support of the economic justification for amalgamation is somewhat akin to chasing the elusive pot of gold. In common with much of the debate on structural reform, dichotomised positions emerge. Assessments made internationally suggest that the local government reform undertaken in the United Kingdom during the early years of the Thatcher Government produced little visible benefits after more than a decade. There were few enduring amalgamations and no rate cuts. American evidence suggests that larger local government jurisdictions appear to be associated with proportionately higher spending than smaller ones (Blacher 1999, p.12; Dollery 1997, p.446).

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A number of Australian commentators are not yet clearly convinced that amalgamation of small councils necessarily creates substantial economies of scale. Hard data is not easily obtained and reform of Australian government is so multi-faceted that the effect of any one change, such as amalgamation, is difficult to measure. Whilst there may be some evidence available on the actual benefits of economies of scale, the wider question of the effectiveness of amalgamations remains unresolved (Chapman 1997, p.15; Kiss 1996, p119; Witherby et al. 1997, p.118). There are documented figures for a smattering of examples within some of the Australian states. Many of these figures are ambit claims or projected estimates of savings created through amalgamation. Nevertheless, we will examine some of this data, on a state-by-state basis. N E W S O U T H WA L E S

Allen (2001, p.27) examined the NSW Department of Local Government Comparative Information on Councils. He concluded that the data does not confirm that large councils are more efficient than smaller ones if rates and fees and charges are included in the analysis. The comparative information demonstrates that it is not unusual for councils in smaller to medium regional centres, and non-urban areas, to have lower rates and charges than Sydney metropolitan councils. It is acknowledged that this could reflect a more minimalist approach by those councils with lower rates, fees and charges. Sydney City Council in its submission to the Inner Sydney Inquiry undertook an analysis as to whether large councils could provide significant economies of scale. It was calculated that the average saving per capita for 20 principal local government function classes utilised by the NSW Local Government Grants Commission was 18.6 per cent. In extrapolating this figure, the City of Sydney suggested that total expenditure of a council with a population of 65 000 people would be reduced by about $9 million if the population was increased to 100 000 That figure would increase to $27 million if the population were to grow to 200 000 (City of Sydney 2001, p55). Randwick City Council made the point to the Inner Sydney Inquiry that it had 24 per cent of total residents and 30 per cent of the physical area of all the councils that were the subject of the Inquiry but only 17 per cent of total revenue. Randwick City Council believed that its revenue raising ability was hampered by the rating base and mix which restricted its potential to significantly increase income. Randwick argued that it would be better off if there was a higher mix of commercial and/or

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industrial rates. The interesting point raised by Randwick was that it may not just necessarily be scale that achieves economic benefit in terms of council viability. The mix of rate base may also be a factor (Sproats 2001, p34; Randwick City Council 2000, p.33). On the other hand, the City of Botany Bay (another council within the Inner Sydney Inquiry area) disagreed with Randwick that industrial or commercial land may be a cash cow for councils in terms of rate income. The submission made to the Inner Sydney Inquiry by the Australian Institute of Urban Studies (2000, p.9) pointed out that work done by KPMG on behalf of the Property Council demonstrated that savings could be made through amalgamation options. Four options for NSW were assessed: •

20 amalgamations based on Regional Organisations of Councils

•

the creation of two super councils in the Sydney metropolitan area

•

the option of reducing the number of councils in New South Wales to 100

•

the option of reducing the number of councils in New South Wales to 50.

The first option was predicted to produce a saving of $845 million, or $350 per household. The second was predicted to produce savings of $255 million. The creation of 100 councils would produce savings of somewhere between $162 and $486 million. The creation of 50 councils throughout NSW produced an indicative saving of $600 million. The Tourism Task Force agreed with the broad thrust of the KPMG findings (2000, pp.19–22). Its submission to the Inner Sydney Inquiry suggested that if the eight councils being examined were amalgamated there would be a saving of $42.5. million. If the eight were reduced to three there would be a saving of $7.3 million. V I C TO R I A

Moore’s analysis of Victorian local government (1966) appears to have contributed to that State’s radical reform program of enforced amalgamations. He argued that larger councils tended to have significantly lower levels of expenditure per resident. Urban metropolitan councils with populations of 100 000 or more achieved a 25 per cent reduction in per capita expenditure levels when compared with other urban councils. Local government jurisdictions in the rest of the State with populations of more than 20 000 had per capita expenditure levels in the order of 15 per cent lower than other councils. It was predicted that by restructuring metropolitan councils to an average population size of

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100 000, and the remainder of Victorian local government jurisdictions to 20 000, savings of up to $440 million could be achieved within the State (Kiss 1997, p.50; Moore 1996, pp.64–66). Maclellan (1996, p.10), then Victorian Minister for Planning and Local Government, suggested that savings identified by the structural reform in Victorian local government for the 1995–96 financial year amounted to $323 million. This figure constituted a reduced rate income of $263 million and efficiency gains of $59 million. Debt reduction was estimated to have improved by $78 million. It was claimed that these savings were largely made as a result of amalgamations. In a broader sense Maclellan also postulated that the local government reform in Victoria at the time was credited with playing a major part in reduction of Australia’s rate of inflation. Further, he argued, the reform program contributed to Melbourne being the only city to post a drop in the cost of living for the first three months of 1996. It is difficult to determine, however, whether such claims are genuine. Vann Gramberg and Teicher (2000, p.479) point out that in Victoria the government imposed a requirement on the newly amalgamated councils that they achieve $400 million in savings over the financial years between 1995–96 and 1998–99. $300 million of this was to be set aside for rate reductions. Savery (1997, pp.163–64) in analysing circumstances at Geelong suggests that the amalgamation outcome may not have been quite so sanguine. Geelong was the first amalgamation to occur in the radical restructure of Victorian local government in the 1990s. The restructured Geelong local government jurisdiction has a population of about 190 000. Prior to the amalgamation consultants KMPG estimated savings of $26 million could be achieved as a result of restructuring. To ensure this happened the state government set legislative targets for rate reductions and imposed a rates freeze. Claims are made that Geelong realised $21 million of savings within 18 months. To achieve the figure, reserves had to be drastically reduced. Savery’s analysis concludes that changes in Victoria may have actually contributed to declining local government capacity to sustain core functions due to the loss of critical mass of human and financial resources. It is presumed that this loss of mass had to occur due to the legislative targets set for rate reductions combined with the imposition of a rates freeze. In a similar vein, Hallebone, Townsend and Mahoney (2000, p.220) looked at the impact of amalgamations on two Victorian rural communities and found that local government mergers resulted in a loss

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of 30 jobs in one town and seven in the other. This in turn triggered a migration of families and local business so that there was a loss of economic and social capital. The loss of population had negative flow-on effects that included downgrading of schools and banking facilities. TA S M A N I A

Dollery (1997, p.448) points out that Chapman examined the outcomes of amalgamations in Tasmania in 1995 and concluded that administration costs had been lowered considerably. However, Chapman advised that interpretation of his findings should err on the side of caution as his study did not deal with the issue of effectiveness. In addition to Chapman, Haward and Zwart examined four of the councils arising out of the 1993 amalgamations in Tasmania. Two of the newly created councils were the result of substantial amalgamations. One was an insubstantial amalgamation in so far as it was an existing municipality combined with a small island municipality. The other council area was not altered as a result of the 1993 amalgamations. Haward and Zwart found that administrative costs for the two councils formed out of the substantial amalgamation fell significantly from around 18 per cent to 12 per cent of current payments. There were also significant reductions on a per capita basis. The other two councils revealed no real improvement in respect of administrative costs. The two councils formed from substantial amalgamation did not display a great reduction in staff numbers, but did indicate increased capacity by employing a greater range of professional staff. All four councils increased rates on a per capita basis (Haward and Zwart 2000, pp.39–40). SOUTH AUSTRALIA

It was predicted in the 1998–99 Local Government National Report that sustainable annual savings from the South Australian amalgamations would amount to between $19 million and $33 million. This was equivalent to some three to five per cent of council expenditure (NOLG 2001, p.57). Llewellyn-Smith (1998, pp.20–24) subsequently examined amalgamations in a number of South Australian regions. One amalgamation involving two metropolitan councils to form a new council area with a population of 101 000 created $2 million of savings in the 1996–97 financial year. These were passed on to constituents through rate reductions. The two existing councils on Kangaroo Island were amalgamated and it has been claimed that this merger would realise annual net savings of $180 000. South Australia’s largest amalgamation involved three

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councils forming one entity that would service around 150 000 residents and cover an area of 570 kilometres. Economic analysis predicted that annual savings of $3.5 million would be gained through cost efficiencies as a result of this restructure. An interesting form of merger in South Australia has been the creation of a federation of councils. Two newly created councils formed out of amalgamations established a combined administration arm to service the two organisations. Each council retained political independence. The federation was formed to achieve maximum economic benefit in a sparsely populated area whilst retaining local accountability, decision making and planning. Overall, in South Australia it has been asserted that amalgamations that reduced the number of councils from 118 to 69 would achieve total recurrent savings of $13 million for metropolitan areas over the period 1995 to 1997. A further $6.3 million of recurrent savings would be achieved amongst country councils.

CONCLUSION Evidence concerning the achievement of economies of scale and financial efficiency appears to be grounded far more in prediction rather than actuality. This perhaps reflects an agenda where the potential justification for proceeding down the amalgamation path has been given greater priority than ascertaining actual proof of financial success. Economic efficiency, while important, constitutes only one dimension of the broader objectives of effective local government. It may well be that an over-emphasis on economic efficiency would be at the cost of reducing local government capacity. There is also the temporal dimension. Savings may well be a shortterm phenomenon as individual council priorities evolve. The determination of the optimal size for a particular council may also be difficult as so many variables come into play over a period of time. It has been acknowledged that there may be varying optimal sizes, depending upon council type adopted, the priorities involved, and location. The optimum size for a metropolitan council would most likely be different to that for a rural one. Some of Allen’s arguments justifying the creation of virtual councils appear a little curious. He contends that local democratic representation enhances councillors’ abilities to be involved in day-to-day small-scale service delivery issues. This involvement enables elected local government representatives to better understand community needs and reflect

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community values. Thus councillors become more responsive. On the other hand, Allen also asserts that councillors are often ill-equipped to deal with strategic and big picture issues. The dilemma is that local government reform has tended to pursue the notion that councillors should be concerned with policy, strategic and big picture issues and have less to do with day-to-day operational matters. Generally, it appears that in terms of local government structural reform the majority of state governments, and perhaps the Federal Government as well, tend to prefer amalgamation. The range of choices for implementation range across a broad spectrum from enforced amalgamation to encouragement of a voluntary approach. Dramatic structural reform sends a clear message to local government that things need to change. The recent Inner Sydney Inquiry talks about structural recasting rather than amalgamation. In the Inquiry’s view, the enhancement of capacity took a far higher priority than the achievement of economies of scale. The object of the recasting was to provide strategically focused councils that would be better resourced to enhance capacity to deal not only with local issues at the place and suburban level but also regional problems. The recommendations of the Inquiry also attempted to resolve at least some of the tensions created between the achievement of economic efficiency and democratic representation. It is apparent that the debate arising out of amalgamation options and structural reform has generated the need to deal with some fundamental questions. A discussion about what local government should be and do ideally needs to precede structural reform. The various approaches to, and forms of, amalgamation fundamentally inform perceptions of what local government is about. Action to date suggests that local government basically exists to facilitate service provision at the local level. If local government is just about service provision then why have it at all? As Sproats (2002, p.14) suggests, if local government is exclusively concerned with service provision then why structure it the way it is at present? If society’s aspiration is to have local government that balances economics with equity and local democracy then the focus should be on appropriate structural reform to enhance local government’s capacity to function in that manner.

PA R T C GOVERNANCE AND M A N AG E M E N T

6 REASSERTING LOCAL DEMOCRACY? Rosemary Kiss

During the last decades of the twentieth century, neo-liberal ideas, fuelled by economic crises, technology and globalisation, dominated public policy. While the period saw a range of attempts to bring about smaller government, free up the global market and enhance individual choice, there were also some side effects. The collapse of communism in Eastern Europe not only increased the range of the capitalist market but also led to an interest in creating democratic conditions and democracy. Local governments became one focus of this interest (Coulson 1999; Gibson and Hanson 1996) Similarly, the development of the European Union, in which national governments more or less cooperatively conceded elements of their independence, also raised questions about democracy or popular control of the new Europe-wide institutions. Localism and regionalism benefited from these currents also, as, for example, in the United Kingdom where Scotland, Wales and Northern Ireland gained degrees of self-government. Along with the emphasis on the market and individualism came a debate about civil society and community. Communitarian ideas, in particular, were reasserted as political theorists and politicians proclaimed the need to bring society back in. Social connectedness and community were declared to be the answer to selfish individualism and irresponsibility: References to communitarianism and invocations of the value of community reflect a widespread fear, to the left, right and centre of the political spectrum, that market individualism threatens to atomise society (Frazer 1996, p.89) Australia, needless, to say did not escape untouched by these currents

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(Pusey 1991; Weller and Davis 1998). Neither did Australian local governments, which, at the behest of state governments, arguably underwent more comprehensive change than the other spheres of government in Australia. New Local Government Acts were promulgated in Victoria (1989), New South Wales (1993), Queensland (1993) Tasmania (1993) Western Australia (1995) and South Australia (1999). These legislative changes were considered to have brought about ‘the transformation of local government’ (Dollery and Marshall 1997, p.vi). Marshall and Sproats (2002) observed that strategic management was at the core of the Australian states’ local government reforms. Yet strategic management tools such as annual reports, corporate management plans, customer surveys and performance indicators, accompanied other arguably more profound changes, chief amongst these being the privatisation of the provision of many local government services and the amalgamation of municipalities into larger units. Larger local government areas, while the product of a long-held view that they promised economies of scale over smaller ones, sat well with the other managerialist and neo-liberal imperatives. Alongside an overriding emphasis on the role of local government as an efficient manager of local services for price-focussed customers came a reduction in the number of elected representatives, who were pressed to see themselves as company directors whose role was to steer not row, and to make policy not to manage, that responsibility belonging to chief executives. This trend was most clearly articulated in Victoria, where the number of councils was reduced from 210 to 78 and the number of councillors from just over 2196 to 589 (Johnstone and Kiss 1996; Kiss 1999a; Galligan 1998). In the same decade, however, other types of influences were also felt, leading some local government practitioners and commentators to believe that the general thrust of change would set local government in Australia on a path of renewal and enhanced importance. The detailed prescriptive and proscriptive local government legislation of the past (built on the principle of ultra vires), which resulted in huge acts covering every aspect of councils’ operations, was replaced by more streamlined acts. Local governments in all the states except New South Wales were given the authority to provide generally for the good government of their districts. It was held that this new legislative approach resulted in Australian local governments acquiring powers of general competence, or the power to take any action not expressly forbidden by other legislation, giving them greater autonomy and scope to exercise initiative (Wensing 1997). The accord between the Keating government and

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local governments represented by the ALGA, which was followed by the admission of local government representatives to executive intergovernmental forums such as the Council of Australian Governments (COAG) and included a Commonwealth commitment to constitutional recognition for local government, was also thought to herald a new era in which the importance of local government would be acknowledged (Wensing 1997; Chapman 1997) A wide-ranging interest in the relationship between local governments and community also surfaced in Australia. The term ‘community’ became commonplace in local government discourse. Following the European Charter of Local Self-Government and the International Union of Local Authorities (IULA) Worldwide Declaration of Local Self-Government, Australian local governments, at their National General Assembly in 1997, proclaimed their democratic community governance role: Local governments are elected to represent their local communities; to be a responsible and accountable sphere of democratic governance; to be a focus for community identity and civic spirit; to provide appropriate services to meet community needs in an efficient and effective manner; and to facilitate and coordinate local efforts and resources in pursuit of community goals (ALGA 1997). This self-description by local governments had some support in legislation. Every Australian Local Government Act contained reference to the local government/community nexus. Queensland’s Act conferred autonomous responsibility on local governments for the good rule and government of their areas, provided for community participation in the local government system and promised a minimum of intervention by the State. Victoria enacted legislation intended to provide an accountable system of democratic, efficient and effective local government, giving councils powers to enable them to meet the needs of their communities. Tasmania’s Act expected councils to plan for, develop and manage municipal areas in the interests of their communities. In New South Wales, the Act required effective participation of local communities in the affairs of local government and expected councils to carry out activities appropriate to the current and future needs of local communities and the wider public. Western Australia expected its local government legislation to achieve community participation in the decisions and affairs of local governments and better decision-making by and

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greater accountability of local governments to their communities. South Australia’s Act proposed to encourage participation of local communities in the affairs of local government and to provide local communities, through their councils, with sufficient autonomy to manage the local affairs of their area. Thus, state governments, like local governments themselves, decreed that local governments were to be closely linked to their communities. On the surface, therefore, it might appear that the 1990s were years of progress for local governments in Australia. On the one hand, neoliberally-inspired reforms would make the system more efficient and, on the other hand, community aspirations, reinforced by accountability to a participatory community, would provide the system with purpose and legitimacy. Local government could thus aspire to gaining full recognition as a partner in the Australian federal system. In this chapter, however, I argue that despite the considerable interventions and adjustments of the last decade of the twentieth century, local governments in Australia have not been effectively reformed or positioned to meet the needs of the new millennium. There are many reasons for this, some of which I have dealt with elsewhere (Kiss 2002a; 2002b) and others are discussed in this volume. This paper will concentrate on only one issue, legitimacy. I argue that local government’s legitimacy has been weakened instead of strengthened during the 1990s, firstly because of the way local governments have been locked into the nebulous phenomenon of community and secondly because this has taken attention away from the need for local governments to stake their claims for legitimacy on being the democratic representatives of their local area, by which I mean the resident citizens of the locality.1 My first point is made through an examination of the meaning and usage of the term ‘community’. I show that the concept is confused and contentious, is not regarded by other spheres of government as the special domain of local government and has actually provided the basis for attacking and bypassing local governments and weakening their representative capacity. My second point is made by examining the local government franchise. I show that it still contains significant elements of property voting (strengthened by the innovation of universal postal voting2 in Tasmania, South Australia and Victoria) with the consequence that local governments continue to fail to satisfy the test of representative local democracy. This, I conclude, remains a fundamental problem of Australian local government and continues to hamper its ability to achieve the status it aspires to as a recognised partner in the Australian federal system.

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W H AT I S C O M M U N I T Y ? 3 In 1955 a survey identified 94 different ways in which the term ‘community’ was used. The only common feature was that they all dealt with people in some way (Hillery 1955). A key element of the idea of community comes from the discipline of sociology and, more particularly, the work of Ferdinand Tonnies, who, in the latter part of the nineteenth century, used the words Gemeinschaft (community) and Gesellschaft to differentiate two abstract or ideal forms of human association. Gemeinschaft was based on mutual allegiance, harmony, kinship, common identity and tradition, while its antithesis, Gesellschaft, was a way of life, increasingly common in the modern urbanised and industrialised societies of the later nineteenth century, in which impersonal relationships were held together by contractual and formal ties based only on shared self-interest and organised by various administrative or bureaucratic means (Tonnies 1963). The crises of world wars, movement of peoples and industrialisation, which marked the first half of the twentieth century, reinforced sociological attempts to understand community. Studies were carried out in places as far removed from one another as Australia, where the subject was the aboriginal peoples, through rural populations in Mexico and southern Italy to urban settlements in the United States. Bell and Newby identified, within community studies, six different approaches. These were to view communities as organisms (ecological), as organisations, as microcosms, as types, as networks and simply as a source of observable data (community studies as method). Their judgement on these studies was that: They are, at one and the same time, some of the most appealing and infuriating products of modern sociology. They are appealing because they present in an easily accessible and readable way, descriptions and analyses of the very stuff of sociology, the social organisation of human beings; and infuriating because they are so idiosyncratic and diverse as to steadfastly resist most attempts to synthesise their findings … [O]ut of community studies, there has never developed a theory of community, nor even a satisfactory definition of what community is (Bell and Newby 1974). Amongst the areas of confusion was the fact that community could be used to describe anything from small, fairly homogenous groups or it could be applied to very large and diverse populations. Especially but not only in urban areas, it was also apparent that networks were found

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to spread well beyond local boundaries, there being no correlation between proximity and the strength of private, business, or other relationships (Suttles 1972, p.8). Moreover, local communities might be defined not by their internal coherence but by their difference from their neighbours (Suttles 1972, p.21). By the mid 1970s, therefore, there had been a substantial retreat from the original idea of community, with Tonnies himself being accused of having offered a romanticised view of community. A workable way to theorise community, therefore, might be to eliminate the romantic elements and simply regard it objectively as the sometimes friendly, sometimes conflict-ridden, sometimes strong, sometimes weak set of relationships amongst people living in any given area. People in such an area might well find that external associations and bonds might be both stronger and more numerous outside their local area than in it. Community could now be used to describe virtually any place — small or large — with some form of separate but by no means exclusive organised existence (Elias 1974). Not surprisingly, this opened the door to the argument that such concepts of community were so vague as to be useless (Stacey 1974). The idea of community persisted, however, and the term has continued to be used widely and loosely. There are community arts, community policing, community housing, community-based organisations, community development, community workers and, more recently, community building. There is also an unlimited variety of communities, ranging from the small to the large and the particular to the universal, embracing communities of religion, language, profession, values, place or, simply, common humanity, as for example: ‘the university community, the scholarly community, the Jewish community, the Aboriginal community, the medical community, the scientific community, the business community, and even the international community’ (Kukathas 1996, p.83). Governments and non-government organisations have also been pursuing the community agenda, running departments of community services and seeking, for example, community indicators, sustainable communities, healthy communities, equitable communities and community strength (Wills 2001; Raysmith 2001). Underpinning this continued usage was a resurgence in communitarian and community-inspired writings which, once more, sought to offer a way to recover social solidarity, the loss or absence of which had brought about dysfunctional people and societies. Some emphasised the centrality of shared meanings, symbols or values, leading to theories

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about the relationship between community and identity, social structures, legal frameworks, citizenship and the polity. This could take the form of a direct attack on liberal individualism by asserting the need for political theory to acknowledge the social construction of the individual and for policy to build on it (Lerner 1996, pp.3–86; Etzioni 1995). Alternatively, as for Etzioni, communitarianism could constitute an active political agenda calling for the restoration of civic virtues and the moral foundations of society so that people would live up to their responsibilities and not merely focus on their entitlements (Etzioni 1995, p.ix). This also opened the door to those who embraced the idea of community as a means of justifying smaller government, more voluntarism and non-government responsibility.4 The idea of community, therefore, has continued to be both vague and problematic. While communitarian ideas which emphasise various formative interconnections and interdependencies amongst people have been an essential corrective to the extremes of liberal individualism and the primacy of market relations, they present several major problems as a basis for the legitimacy of local government.5 Firstly, no local government area exists as a single, coherent community, except in the most meaningless or loosest usage of the word. Secondly, once the term community is used as a loose description, it can be applied in many contexts and can be claimed by any sphere of government as its representational base.

COMMUNITY AND LOC AL GOVERNMENT LEGITIMACY Tasmania experienced two exercises in local government restructure in the 1990s. The first state government appointed board reported in 1992. This board actually developed a useful description of a local community as one in which each citizen would feel able to be politically effective by having his or her views given proper consideration (TLGAB 1990, p.24). Nevertheless, the board concluded that the number of councils should be reduced from 46 to 29, reasoning that modern local authorities could use technology to bind people together and offer services over larger geographic areas. Thus ‘larger’ could still remain ‘local’ (TLGAB 1992, p.43). The board added that it had undertaken studies to examine the possibility of greater reductions but had come to the conclusion that this would be politically unacceptable and the resulting structure would be unable to be seen to be local in nature (TLGAB 1992, p.46).

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Four years later, however, a new board was appointed to carry out further amalgamations. This board, which reported finally in 1998, challenged the relationship between community and locality: The concept of community of interest has changed over time and many people no longer relate exclusively, or even very strongly, to the locality in which they reside. Social changes requiring families to relocate and ‘spread out’, limited options in relation to employment, changes in entertainment options and provision of new leisure facilities all result in a series of changing and expanding communities of interest. This is much more so in urban areas where the evidence suggests that the demarcation of communities of interest is much more blurred and ill-defined (LGB 1997, p.26). There was ‘little agreement’, they claimed, about what the term community of interest actually meant. Besides, although they had found that many people related very closely to the immediate area in which they lived, this did not translate to identification with their municipal boundaries.6 Since these boundaries had only recently been created, this was hardly surprising. So it was that the board was able to recommend that the number of councils in Tasmania should be reduced to 11. Only a change of government prevented the implementation of the recommendations. The restructure of Victorian local government in the 1990s similarly touched upon this question of the relationship between local government and community. The Victorian board was constituted to advise the Minister on matters relating to the efficiency and effectiveness of the system of local government and on financial issues relating to local government. It was also to conduct reviews and report to the minister on matters of local government restructuring. In carrying out its reviews, the board was given discretion to have regard to all or any of a large number of considerations, of which community or diversity of interest, including community identity, formed only a small part (Victorian Local Government Act 1989, Parts 10A, 10B) It was understood, however, that, as part of its efficiency and effectiveness remit, the board’s central objective was to achieve a reduction in the number of municipalities (Kiss 1997). Consequently, the board’s approach was heavily weighted towards issues of economic development, rate reduction and related operational matters. In less than 18 months, 210 municipalities had been amalgamated to 78. It was quite clear that boundaries could have been drawn in any number of ways, in

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large part because community of interest was not a meaningful concept, except where it could be used to argue that existing local government boundaries divided communities or, more precisely, commercial areas (Burke and Walsh 1998). If we consider the effects of this type of reasoning, we can see that local governments throughout the country have been, and continue to be subject to restructuring and amalgamation or dismemberment. Community provides no defence. As well, let us not forget that amalgamations have also reduced the number and increased the remoteness of elected representatives. During the period of amalgamations in the 1990s, for example, Tasmania reduced its number of councils from 46 to 29, and its councillor numbers from 460 to 288, a decline of 37 per cent. South Australia went from 118 councils to 76 and from 1100 elected members to 760, a fall of 31 per cent. Victoria’s council reduction program took the 210 councils to 78, and the elected representatives from 2196 to 589, a massive fall of 73 per cent. Measured against population, the average ratio of elected local representatives, though an indicative measure only, is presented in Table 6.1. Ratios of this magnitude may be compared with the countries of Europe, such as France (1:116), Germany (1:250), Sweden (1:667) or Portugal (1:1125). Even in the United Kingdom, where municipalities are much larger after several decades of reorganisation, the ratio is 1:2700, thanks in large part to the fact that there is some relationship between the population of a local authority and the number of elected

TABLE 6.1 AVERAGE RATIO OF COUNCILLORS TO POPULATION X STATE (2000)

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NOTE

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representatives (Wilson and Game, p.228). Local governments with large populations make it more not less difficult to achieve participation and an active citizenry, notwithstanding efforts to practise ‘community consultation’ and to carry out satisfaction surveys (Oliver 2001, pp.33–67). In addition, despite legislating about local government and community, other spheres of government fail to take seriously local government claims to be the voice of the community. This was clearly articulated by the Victorian Minister for Planning and Local Government in 1996, just after the first round of local government elections following the period of local government rule by state-appointed commissioners: I am sometimes bemused when I meet with councillors who preface their comments by saying: ‘The community objects to this, or the community demands that’. What precisely are they referring to? At best, their legitimacy derives from that small part of Victoria which elects them. This, of course, provides them with a seat at the table, but not a right to dictate outcomes in relation to issues of state significance, because when it comes to “legitimacy” to represent the community, there is no doubt that the State Parliament reflects more accurately the will of the Victorian community than do any number of councillors of councils…. [Moreover] residents and ratepayers of our municipalities are more concerned with the services they receive from their councils, and what they pay for those services, than with having a somewhat intangible “sense of community” supposedly provided by a council chamber… What emerges from a consideration of this issue is the broad range of ideas about what constitutes a community and what provides a sense of community… So it is at the least misguided, and at the worst conceited, for some of our civic leaders to believe that they are the sole custodians of the sense of community (Maclellan 1997, pp.11–13). Any sphere of government, therefore, can lay claim to representing the community. Furthermore, the claim to community voice entitlements extends also to non-government agencies. As has also been apparent in more recent ‘community building’ exercises, local governments need not figure at all in the community equation. The Commonwealth government, for example, announced

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its Stronger Families and Communities Strategy in April 2000 and based that strategy on initiatives aimed at achieving strong leadership, private-public partnerships and helping voluntary workers build skills so that local solutions could be found to local problems. Local government did not seem to be important to the strategy. State governments, too, as in Victoria have engaged in similar programmes. In 2001, the Bracks government announced that the Community Support Fund (derived from gambling revenue) would be used to support community building. This would involve funding one project focusing on ‘the indigenous community’ and others ‘based on the particular concerns of the community and partners involved (sic)’. Communities could decide to ‘find new people to play a role in local organisations or form new groups to address community issues; identify new employment activities [to] benefit residents and businesses; request new resources to meet emerging needs; and make services more appropriate for people from different cultural backgrounds’. There were, it was said, non-government agencies and church, business and philanthropic organisations keen to participate and the fund could make grants ‘to partnerships involving community organisations, as well as local governments seeking to undertake community building initiatives’ (Black and Hughes 2001, p.7).

L O C A L G O V E R N M E N T, D E M O C R AT I C R E P R E S E N TAT I O N A N D T H E F R A N C H I S E During the 1990s, one of the effects of the community discourse has been for local governments, in particular, to be expected to engage in community participation. There is virtue in all governments being open, consultative and accessible. Public consultation and participation, however, are a supplement to, not a substitute for, representative democracy (Kane and Bishop 2002). It is the elected who must make the final decisions or delegate decision-making. For local governments (as for others) this requires clarity about precisely who they represent and on what basis. Other spheres of government in Australia, and local governments in all the other advanced western democracies, represent people on the basis of citizenship and residence in an electoral district and in fulfilment of the democratic principle of one vote, one value.7 This is not true of local governments in Australia, except in Queensland, which is the only state to have eliminated property entitlements from the local government franchise. Except in Queensland, eligibility to

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vote is conferred upon non-resident owners of rateable property and, subject to qualifications about tenure, to occupiers. Corporations are treated as owners. The local government franchise is hardly ever discussed in Australia. The property element is left over from the nineteenth century before the democratic principle became established. While the property basis of voting was gradually eliminated for other spheres of government over the course of the twentieth century, this did not happen for local government. The only development in Australia, except for Queensland, has been to admit resident citizen voting alongside but not in place of property voting. One reason for this is likely to be that local governments have traditionally been responsible for property-based services — roads, rates and rubbish — and property taxes (rates) provide over half of the average income of local governments (ABS 1998). This leads some to argue that there should be ‘no taxation without representation’, the catchcry of the American war of independence.8 This, however, is not justified. Americans wanted their own government, not rule from Britain. Furthermore, there are many people, such as, for example, unnaturalised foreigners living and working in Australia, who pay taxes but are not entitled to vote. Unfortunately, local governments, which continue to be elected by a constituency that includes propertybased voters, cannot claim democratic legitimacy. Moreover, where property-based voters are permitted and encouraged, election outcomes will not reflect the will of the people of the local area.9 The central criterion of local government is that it is the representative decision-making body of a locality. What flows from this is that each local government must represent and reflect the will of the people who live in its local area. Visitors, people who work or run businesses in the area, and even those who own property but live elsewhere, will certainly need consideration and even have certain entitlements such as, for example, safe roads and streets as well as various forms of access to the decision-making processes of the local government. They do not need, nor should they be entitled, however, to vote for that local government. Only the local ‘citizen’ who is tied to the area by virtue of living in it should have the right to vote in local government elections. Only on this basis can the local citizen participate actively. Only on this basis can local government fulfil its role of voice of the local people. As well, the local citizen’s participation needs to take place on an equal or equitable basis of equality of voting. No person should vote more than once in a local government election, not just in a municipality or a subdivision.

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Each person should only vote in her or his place of residence. This is the essence of democracy. Whether we are dealing with representative or participatory democracy, popular control and political equality are the key democratic principles (Beetham 1996, p.30). How does Australian local government measure up then? In New South Wales, the principle of one person, one vote is technically observed by allowing a person only one vote in each municipal area (though not the State, as a whole). As well, only one owner or occupier of property held jointly can vote in a municipal district. In other words, no matter how many properties may be owned, only one vote can be exercised. An additional requirement is that non-residents (persons wishing to exercise their vote on the basis of property-based eligibility) must apply for the vote. In a similar arrangement, South Australia also allows residents, ratepayers who own property solely, and one nominee from a body corporate or from a ‘group’ of joint-owners or occupiers of a rateable property, to vote. In Western Australia, the treatment of property is more generous: property-based eligibility entitlements allow two joint owners or occupiers to vote where multiple ownership/occupation exists. As in NSW, both South Australia and Western Australia stipulate that a person may only exercise one vote in a municipal area. Tasmania and Victoria are the states which still allow the possibility of property-based plural voting. In Tasmania, although those eligible to vote on a property franchise must apply to be enrolled, it is possible for a person to exercise two votes in a municipality, one in their own right, and one as the nominee of a body corporate. The Act does not address the issue of the voting rights of joint owners/occupiers. Victoria is the most extreme case. It was not until 1982 that residents gained the right to vote. Previous property-based entitlements continued to be recognised, however. Since the ‘reforms’ of the 1990s, the nature of which I have discussed elsewhere (Kiss 1999a), these property-based entitlements have been reinforced in a number of ways. A key feature of Victoria’s local government voting provisions is that the relevant sections of the Local Government Act 1989 refer to municipal subdivisions (wards or ridings) not to municipal units. As a result, the stipulation that only one vote can be exercised by an individual applies only to the subdivision, not to the municipality. While this does not affect those with a residential voting qualification, it means that property owners with several properties dispersed throughout a municipality may vote once in each ward where these properties are

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located. Since most Victorian municipalities are subdivided, there is a clear potential for multiple voting. A further multiplier of the property vote arises where property is jointly-owned or occupied. In such cases, two persons are eligible to vote and are automatically enrolled. Additional joint owners/occupiers may also vote but must actually apply to be enrolled.10 Corporations are another category of municipal voters. While generally they are able to nominate one person to vote on their behalf, in the City of Melbourne, special provisions exist requiring them to nominate two persons. In the City of Melbourne where, as in other financially important Australian capital cities such as Sydney, the property and business lobbies are both strong and active, property-eligible voters are compelled to vote. This is not true of the rest of Victoria where voting in municipal elections is only compulsory for residents. This support for non-resident, property-based voting has been reinforced by the growing practice of universal postal voting for local government elections that was introduced to Australia by Tasmania, following the example of New Zealand. The main argument presented in its favour was that, in systems where voting is voluntary and turnout figures can be embarrassingly low, it increases the vote (Herr 1995). There are some grounds for arguing that this is only partly true and, in any case, there may be other and better ways to achieve this objective (Kiss 1999b) Nevertheless, whatever its putative merits, its use has become quite widespread in Australia. In Tasmania, where voting in local government elections is voluntary, and half-elections occur every two years, universal postal voting was introduced on a trial basis in 1993, and used for the first time in the 1994 and 1996 elections. Thereafter, the Tasmanian state government legislated to make it compulsory to use postal voting in local government elections. Western Australia and South Australia have both given councils the option to conduct elections by universal postal voting and, especially in South Australia, where there has been considerable encouragement for them to do so, most councils have adopted it. In the states where voting in local government elections is compulsory — Queensland, New South Wales and Victoria — a divergent pattern has emerged. In New South Wales, universal postal voting is not allowed. In Queensland, it is allowed, subject to conditions, only in shires or towns covering large rural areas. In Victoria, although universal postal voting is optional, almost all municipalities (about 85 per cent) have adopted it, predominantly during the period of administration

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by state government-appointed commissioners. Its use was strongly advocated by the previous government and is supported by the Victorian and Australian Electoral Commissions, which compete for contracts to run elections and have invested considerable amounts in the necessary technology. In a democratic electoral system, based on the principles of universal adult suffrage and one vote, one value, there may be a case for the use of postal voting.11 Where non-resident property-based voting is part of the electoral system, however, universal postal voting makes it easier for those property-based voters to vote. Evidence that this has happened is available in the case of Victoria, where the Victorian Electoral Commission has drawn attention to the higher rate of participation achieved amongst non-resident voters. Similarly, in the City of Melbourne’s 1996 post-election review, it was noted that the participation rates amongst all categories of voters had become similar (residents — 66 per cent; absentee owners — 61 per cent; business occupiers — 61 per cent; corporation representatives — 67 per cent), ‘representing a major turnaround on previous elections where non-resident participation was extremely low’ (Kiss 2000, pp.13–16). Universal postal voting, unlike postal voting as a supplement for people who find it difficult to vote at polling booths, is more likely to assist non-residents than residents to participate and, in consequence, further strengthens the property rather than the democratic underpinnings of the system.12

CONCLUSION Local government in Australia, as in other parts of the world, is under pressure to perform. The pressures come from all directions — global, national, state and local. State governments, because of their law-making powers over local governments, have continuously intervened in the local arena, often introducing the current administrative, management or ideological fashions. The communitarian concepts that came with the interventions of the 1990s, like so many other changes of this period, have not been beneficial for local governments. Rather, they have continued to weaken the democratic legitimacy of local governments and left them in a position where they cannot properly represent the people of their local areas. Local government in Australia, therefore, is not a sphere of democratic government nor is it likely, unless Australians assert their right to local representative democracy, that local governments will gain the respect of other spheres of government.

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E N D N OT E S 1

My argument is consistent with although it differs considerably in its focus from that of Elizabeth Frazer whose work is cited above. She does not engage with the issue of democracy, this being a given in the local government system with which she is concerned. Her view is well summed up in the following: a prescriptive argument for local government needs only to emphasise the value of care for localities, and the needs of people living and working in and using localities. To invoke community muddies the normative argument with specious sociological reasoning, and will lead to policy mistakes (Frazer 1996, p.89). 2 A system where elections are conducted by postal votes, not one where postal voting is used to supplement voting at polling booths as an aid to those who cannot get to the booth. 3 I would like to acknowledge here some work on the literature concerning community — especially the sociological literature — carried out for me by John Parkinson, who was employed as my research assistant. 4 This seems to be a key driver in the present Australian Commonwealth government’s policy concerning community and is probably not far from the thoughts of many governmental policy-makers or their advisers (see Green 1996). 5 There is an interesting relationship, for example, between the literature on community and that on social capital, which also seeks to analyse social connectedness, including with regard to civic-mindedness and democracy. The most well known exponent is Putnam (1993; 2002) whose works have been widely influential. A more complex theoretical approach, which may be read as challenging some of Putnam’s assumptions, is offered by Bourdieu, whose ideas are well expounded in Webb et al. (2002, pp.21–44). 6 This should be compared with the way similar conclusions nevertheless wisely stayed the hand of the Local Government Commission and the Major government in the U.K. (Lowndes 1996, pp.81–83). 7 Some, myself included, would argue that the bicameral system, in particular the use of rotated elections for the ‘upper house’, is a check on the democratic principle. Queensland is the only unicameral state parliament. Nevertheless, in all other respects, the other Australian states and the Commonwealth satisfy democratic criteria with respect to the franchise. 8 This has been the main argument I have heard when raising this question in local government circles. 9 It may also mean that voters are non-Australians living overseas and that the people elected do not live in the local area. 10 The Bill to amend the Local Government Act currently before the Victorian parliament proposes to change voter eligibility only by limiting the number of joint owners entitled to vote to two, still automatically enrolled, and requiring property occupiers to apply for enrolment. 11 I do not accept this case, mainly because of my belief in the importance of active citizenship and the need to maintain meaningful political rituals as part of the vital set of linkages between local governments, elected representatives and the people in a municipality. 12 It should be noted that postal voting had been available before universal postal voting was introduced. Persons who were absent or would otherwise find it difficult to present at a polling booth on election day could apply for a postal vote.

7 MANAGEMENT REFORM IN LOCAL GOVERNMENT Geoff Baker

The new public management reforms that have transformed the Commonwealth and state public sectors since the 1980s have also been applied to the local government sector, although in varying ways. This has generally occurred through public sector-wide reform processes, rather than any specific reform process focused solely on local government. The extent of management reform in local government has varied from state to state because of the constitutional role the states play in establishing local government systems. Some states have taken a topdown approach to reform while other states have tried to work cooperatively with local government. The Commonwealth has also played a major role in facilitating local government reform, often working in cooperation with the states and with local government. In addition, many authorities have undertaken their own management reforms and this has contributed to a diversity of outcomes across the sector. At September 2000 there were 622 councils and an additional 104 Aboriginal and Torres Strait Islander councils (DOTARS 2001, p.54). While the main differences in reform are between the larger urban councils and smaller rural councils, there are also differences within councils. This reflects the fact that different management reforms have been applied to different services within local government. For example, regulatory services such as town planning and building have received different treatment compared to reforms targeted at infrastructure services. A number of individual councils have taken an innovative approach to management and been at the leading edge of change in the public sector. The circumstances of particular councils reflect their

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environment. Economic, social and environmental pressures, the interests of key local stakeholders, and the capacity of local government leaders to initiate and implement change are critical factors influencing organisational outcomes. Declining revenues and changing community expectations have also been catalysts for local initiatives in management reform (Caulfield and Larsen 2002, p.14). The diversity of management reform initiatives means that there will be exceptions to any generalisations about reform in local government. Nevertheless, since the late 1980s there have been explicit agendas to apply public sector-wide reform processes to local government, reflecting new public management reforms at state and Commonwealth levels (Aulich 1999, p.13). The first part of this chapter deals with the role of the states and the Commonwealth, and their approaches to reform. This is followed by an analysis of the new public management, particularly the application of corporate management to local government, the application of national competition policy, and the attempts to integrate efficiency reforms with customer-focused approaches to service delivery.

TO P - D OW N M A N AG E M E N T R E F O R M — T H E R O L E O F T H E S TAT E S A N D T H E C O M M O N W E A LT H T H E R O L E O F T H E S TAT E S

State legislation setting local governance frameworks has been the primary mechanism for applying the new public management reforms to local government. All the states developed new local government acts between 1989 and 1995 (Aulich, 1999 p.14). At the very least this removed some of the legislative barriers holding back change in local government (Aulich 1999, p.12). The wider economic environment has undoubtedly influenced the approach taken by the states. The three states that experienced economic crises in the early 1990s because of a structural shift away from their traditional manufacturing base — Victoria, South Australia and Tasmania — have implemented the most far-reaching local government reforms (Aulich, 1999 p.20). Victoria has had the most radical program with amalgamations and the introduction of compulsory competitive tendering, while South Australia and Tasmania have mainly focused on amalgamation. A common theme in the reform approaches in these states is the focus on efficiency and cost-cutting.

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The three states with the stronger economies during the 1990s — New South Wales, Western Australia and Queensland — have not had such radical reforms. The focus in these states has been on the application of corporate management and the introduction of new accountability measures as part of a wider corruption prevention agenda. The Independent Commission Against Corruption in New South Wales, and the Crime and Misconduct Commission in Queensland have played leading roles in setting the agenda in their respective states. These bodies have had a significant impact on organisational culture in local government. The WA Inc Royal Commission in Western Australia has also made a similar impression in that state. In all these three jurisdictions efficiency-focused reforms came later in the decade with the application of national competition policy. Other state initiatives have indirectly contributed to management reform in local government. Rural councils in Queensland are agents for the state in maintaining state roads. Efficiency reforms in road management required councils to adopt quality assurance and other processes to improve quality. Efficiency gains of 17 per cent were achieved during the 1990s (LGAQ 2002, p.16). A particular issue in some states has been the emergence of local governing bodies for Aboriginal and Torres Strait Islander communities. Since the 1970s the states have created 104 new councils for these communities. This has mainly occurred in the Northern Territory and Queensland as part of delegating autonomy to local people (DOTARS 2001, p.96). The introduction of local self-government appears to have been generally supported by the people living in the affected locations (Perkins 1992, p.27). However, the geographical isolation and small size of these communities creates special problems in terms of delivering services efficiently and effectively. State and Commonwealth funding is vital for these councils because they have no ability to levy rates (DOTARS 2001, p.95). Cultural factors will also have an impact on the take-up of the new public management reforms in such councils. The isolation of these communities raises additional barriers to the recruitment of skilled employees. L O C A L G OV E R N M E N T A M A L G A M AT I O N S

Management reform in local government has also occurred as a result of the drive to achieve efficiency through the amalgamation of councils. In Victoria, South Australia and Tasmania, state governments initiated a dramatic reduction in the number of councils, with economies of scale

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providing the primary rationale. However, not all amalgamations have been driven by this efficiency objective. The amalgamations in Queensland in the 1990s were focused on a small number of large regional urban centres experiencing rapid population growth. The objective was to achieve better management of growth rather than to achieve economies of scale. The Victorian amalgamations proved to be the most extensive, with the number of councils reduced from 210 to 78. They were also accompanied by other efficiency reforms designed to cut costs in service delivery. These reforms are dealt with in detail later in this chapter. In Tasmania a major restructuring of local government took place during the early 1990s. Amalgamations reduced the number of councils from 46 to 29 (Haward and Zwart 2000, p.34). While factors such as community of interest and representative democracy influenced the process, achieving cost reductions through economies of scale was a critical factor (Haward and Zwart 2000, p.40). Scale economies were also seen as a means of providing resources to employ professionals across a wide range of traditional and emerging local government activities, including management (Haward and Zwart 2000, p.36). A further attempt to reduce the number of councils from 29 to 14 was initiated following a joint Commonwealth-State assessment of the Tasmanian economy (Haward and Zwart 2000, p.40). These new proposals were again based in part on achieving greater efficiency in local government through capturing economies of scale. However, they were stymied by legal action and subsequently dropped following a change of government in 1998. While the amalgamations of the early 1990s had significant local government support and generated some efficiencies, the later reform proposals were developed without adequate engagement with local government to justify the need for further efficiency gains (Haward and Zwart 2000, p.44). The South Australian restructuring of local government began in the second half of the 1990s, following the amalgamation programs in Tasmania and Victoria. The result was a reduction in the number of councils from 118 to 69. The efficiency gains from the South Australian reforms have been estimated at between $19 million and $33 million, or between 3 and 5 per cent of council expenditure (DOTARS 2001, p.57). The State Government used a cooperative reform process and left it to councils to decide whether to pass these savings on to ratepayers through reduced rates, or to improve the provision of services (SALGBRB 1998, p.2). While greater efficiencies resulted from the

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amalgamations, this outcome was assisted by the fact that councils had already implemented extensive management reforms under the new local government legislation introduced in the early 1990s. These reforms included the adoption of corporate planning, development of performance measures and reporting to the public on performance, adoption of enterprise bargaining, and the introduction of accrual accounting (LGASA 1995, p.9). While there have been savings from economies of scale, other benefits have included better planning of council activities, greater access to professional expertise and a stronger customer focus. However, there were also disadvantages identified. These included the loss of experienced staff through retrenchments, more job insecurity, and a drop in the number of outside staff, despite the greater geographic areas to be serviced (DOTARS 2001, p.56f). Major reductions in employment do not appear to have resulted from the South Australian amalgamations, with the number of local government employees staying at about 7,900 between 1996 and 2001 (DOTARS 2001, p.57). Amalgamations on their own do not necessarily generate efficiencies, but can make it easier to achieve efficiency gains if combined with other reforms that provide additional direction. In Tasmania, for example, the amalgamations were seen as an essential precondition of councils being able to effectively apply the later national competition reforms (NCC 1998, p.11). They can also make it easier to facilitate the cultural change needed to effectively implement reform. Amalgamations are a controversial way to achieve efficiencies; other reform options are available that do not necessarily create the same risks. T H E R O L E O F T H E C O M M O N W E A LT H

Since the mid-1980s, the Commonwealth has played a major role in facilitating management reform in local government. While the Commonwealth has no direct legislative control over local government, it has used its financial power to secure the states’ agreement to apply a wide range of economic reforms to local authorities, the most important of which has been national competition policy. Commonwealth initiatives in regulatory reform have also affected local government through Commonwealth/state agreements, particularly in areas such as town planning and environmental management. Federal agencies also worked directly with local government to facilitate reform, in some cases by-passing the states. The Commonwealth’s jurisdiction over industrial relations matters

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has played an indirect but important role in management reform in local government. The introduction of structural efficiency in the late 1980s (with its emphasis on simplifying industrial awards and providing more flexibility in workplace arrangements) and enterprise bargaining has removed some of the institutional rigidities that prevented more efficient workplace arrangements being developed in local government (Martin 1997, p.220). The Commonwealth also used the Local Government Ministers’ Conference (LGMC) to explore how specific issues in the local government labour market could be addressed to contribute to the wider national objectives in this area. The Commonwealth provided the LGMC with funds to run a National Review of Local Government Labour Markets (NRLGLM), which had a major impact on removing state legislative barriers to management reform in local government. The NRLGLM put pressure on the states to repeal legislation that established statutory positions in local government and which required people to hold a certificate of competence from the state before being employed in such positions. This system was a major barrier to management reform in local government and provided protection to key professions such as engineering, town planning and public health. It also required councils to employ a state-certified town or shire clerk as the senior administrative officer in a council. The problem with the regulated system was that it created a closed culture that emphasised the differences rather than the similarities between local government management and management elsewhere in the public sector (NRLGLM 1998, p.39f). The initial response from the states was slow, because the various professional bodies saw this as a threat to their members and opposed the changes. It took a number of years for the states to repeal requirements for statutory positions in local government, along with the accompanying certification requirements. The Commonwealth’s training initiatives over the past decade have also played a role in helping employees to adapt to a new operating environment. The Commonwealth funds the National Local Government Training Board to assess the training needs of the local government workforce, in conjunction with Commonwealth funded bodies operating at state level. A key element of the training focus is on skills development for local government management (DOTARS 2001, p.15). The other role the Commonwealth has played has been to overcome problems with innovation diffusion in local government by

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establishing national innovation awards that have helped to advance management reform (DOTARS 2001, p.68). In addition, since the mid-1980s, the Commonwealth has funded projects and initiatives designed to provide examples of best practice in local government (Aulich et al. 1991, p.122). This has covered management reform as well as projects designed to facilitate local government’s contribution to national objectives in relation to economic development and environmental management. While the funds involved are relatively small (about four million dollars per annum), they have been targeted at small to medium sized councils to overcome some of the organisational and cultural barriers to reform (DOTARS 2001, p.68). A further area in which the Commonwealth has been involved has been the provision of about $1.3 million to South Australia, Tasmania, Western Australia and New South Wales to facilitate structural reform. This has included consideration of council amalgamations (DOTARS 2001, p.53). Finally, Commonwealth funding has also been used to facilitate the introduction of electronic service delivery and electronic commerce to local government, with $45 million allocated through the Networking the Nation program over five years from 1998–99 (DOTARS 2001, p.67). The Federal Government has not always taken such a cooperative approach. It has used its role in the provision of financial assistance grants to local government as a means of promoting greater efficiency in local government operations. In the mid-1990s the Commonwealth undertook a review of the Local Government (Financial Assistance) Act 1986, with the aim of incorporating efficiency principles alongside horizontal fiscal equalisation as the basis for distributing general purpose grants among councils. This met with strong resistance from the states, with the result that a cooperative approach was adopted in relation to the development of performance measures of local government efficiency and effectiveness across the full range of local government services (DOTARS 2001, p.62). The Commonwealth has also provided funds to facilitate the development of performance measures. Overall, management reform in local government would not have happened to the same extent without the involvement of the Commonwealth. While there are constitutional limits to its role, its financial power and its willingness to work cooperatively with the states and local government have enabled it to influence the scope and pace of reform.

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LOC AL GOVERNMENT AND THE NEW PUBLIC MANAGEMENT Prior to the reforms of the 1990s, local government broadly reflected the legal-rational model of bureaucracy. This involved a focus on process and inputs rather than outcomes, hierarchical structures, promotion on seniority rather than merit, the exercise of authority based on the holding of an office, and specialisation of labour (Albrow 1970, p.44f). As in the Commonwealth and state public sectors, the sector embraced the conventional notion of a separation between politics and administration (Hughes 1992, p.288). Parts of the local government bureaucracy reflected Mintzberg’s concept of a professional bureaucracy, with reliance on specialised professional expertise in decision-making and service delivery. Other parts reflected Mintzberg’s machine bureaucracy, based on a specialisation of tasks and standardised operating procedures (Stewart and Kimber 1996, p.39). Management in local government reflected the dominant paradigm described in the Karpin Report on management in Australia (1995, p.21), with a focus on organisational discipline rather than organisational learning. It also included inflexible structures, hierarchies rather than networks, disempowered employees and strategic learning at the apex rather than spread throughout the organisation. In addition, there was a strong organisational culture supported by the power of professional institutions and the associated state certification systems. Departments were structured with a product or production orientation, rather than having a customer or marketing perspective. To a considerable extent councils were closed entities, with limited mobility from the private sector or other parts of the public sector. Movement between an authority’s divisions and departments was similarly constricted because of the strong professional affiliations of the personnel involved. Senior management was based on technical expertise rather than generalist management skills. Very few senior executives from professions such as town planning, engineering or environmental health were appointed to the town/shire clerk position prior to deregulation of statutory positions. State legislation on statutory positions provided the legal framework with which to limit mobility. It also acted as a barrier to women, people from non-English speaking backgrounds, and Aborigines and Torres Strait Islanders in local government employment. Despite these constraints, town and shire clerks had opportunities to provide leadership rather than focus on compliance with established procedures. This was particularly the case in the 1950s and 1960s,

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where there were opportunities to expand the provision of local infrastructure — often supported by state funding as part of post-war economic growth. This local leadership sometimes overcame the problem of unresponsiveness characteristic of traditional local government bureaucracy. The traditional model, and the state legislation that supported it, also helped reduce the risk of nepotism in local government employment and corruption in financial management. However, the ‘closed shop’ and the barriers to responsiveness it created meant that change in the longer term was inevitable. Similar issues had begun to be addressed in the state and Commonwealth public sectors with the application of the new public management. This began at the Commonwealth level in the 1970s, following the Royal Commission on Australian Government Administration. However, the pace of change in the public sector quickened in the early 1980s (as part of reforms to open up the Australian economy) following the publication of the White paper, Reforming the Australian Public Service (Stewart and Kimber 1996, p.41). The new public management at this stage was about corporate management: an emphasis on management by objectives, a focus on outputs rather than inputs, corporate planning, devolution of operational autonomy to business units run by generalist managers, and the use of performance measurement to hold managers accountable (Considine 1988, p.5). It also had a strong outcomes focus rather than a concern with legal process. The model was derived from the private sector, where it had become the dominant approach utilised by diversified firms (Alford 1993, p.142). It began to be applied to the state public sectors in the 1980s. A key element of corporate management was the role of the general manager, with a primary focus on management skills rather than professional technical expertise in a particular discipline such as engineering or town planning. This aspect of corporate management had been adopted in the Commonwealth public sector through the introduction of the Senior Executive Service in 1984, with the states subsequently following the lead. It enabled generalist managers to be moved across the public sector, working in management in organisations where the person may not have had a professional background (Stewart and Kimber 1996, p.41). It was an approach that proved difficult to apply in local government because even though municipalities are multi-purpose organisations, most were too small and had insufficient resources to enable this strategy to work. The amalgamations in Tasmania and

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South Australia were driven in part by the need to remove these barriers. In fact, local government generally did not pick up the corporate management reforms that occurred in the Commonwealth and state public sectors in the 1980s, because the states’ local government legislation was a major obstacle to enabling councils to operate within this framework (NRLGLM 1998, p.vif). The states not only removed these barriers as an initial step, but also explicitly incorporated corporate management reforms in the development of their new local government acts. While the larger urban councils were ready to take the opportunities that legislative reform provided, there were concerns from smaller rural councils that the corporate management approach was not appropriate in a stable rural context where councils had a small number of staff and undertook a limited range of services. C O R P O R AT E M A N AG E M E N T R E F O R M S

The introduction of corporate management to local government through new state legislation was structured around corporate planning, financial management and performance reporting (Aulich 1999, p.13). While councils had always been required to prepare annual budgets, there was no coordinated long-term strategy to guide resource allocation. Budgeting was an incremental process with resources allocated on the basis of the previous year’s allocation to line items, with an adjustment at the margin. Corporate management was concerned with allocating resources to achieve long-term objectives. In the Commonwealth and state public sectors, this was achieved through the introduction in the 1980s of program management and budgeting, with corporate plans used to set objectives to guide resource allocation (Stewart and Kimber 1996, p.41). Program management and budgeting involves allocating resources to achieve objectives over multiple financial years. It contrasts with traditional line-item budgeting, which is concerned with controlling expenditure in a financial year to fit within defined limits. The introduction of corporate planning and program budgeting usually resulted in organisational restructuring, with a shift away from input and professionally based structures to structures based on programs. The approach taken in state legislation was to require councils to develop a plan to set out long-term objectives for the community. This in turn was to be used as the basis for allocating resources through the annual budget. Councils would then report on performance in achieving those

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objectives through an annual report. State legislative provisions also required councils to establish a corporate structure. With the abolition of statutory positions, councils were provided with the opportunity to shift from profession-based structures to structures based on outputs or programs, and even structures with a customer or marketing orientation. It also provided scope to increase staff mobility between administrative units within a council, using the flexibility that industrial relations reform provided to break free of some of the barriers to job and workplace redesign. Despite the thrust of state legislation, it still depended on the initiative of individual councils to take advantage of deregulation to reform their organisations. Such a development tended to occur in councils where the mayor and the chief executive officer (and in some cases the senior executive team) were well positioned to provide leadership. Scope to exercise such leadership was provided by a further key element underpinning the legislative reforms. This involved replacing the traditional town/shire clerk with a new position, which was responsible for injecting corporate direction into council management. Operational authority was devolved to output or program based administrative units. The new role was intended to be similar to that of the chief executive officer in companies established under corporations legislation. The creation of this new position, in turn, required the states to choose whether to legislate to transform existing town/shire clerks into CEOs, or to allow councils to undertake an entirely fresh appointment process. New South Wales chose to open the position up, while Queensland took a more conservative approach of legislating to transfer existing town/shire clerks. Despite the different approaches, the practical outcome in most states was that there was significant turnover (in the first two years in particular) after the creation of the new chief executive positions. In New South Wales there was a 40 per cent turnover of general managers in the period 1995–98 (Marshall and Sproats 2002, p.53). The situation in Queensland was similar. There were new chief executives appointed in 60 of the State’s 125 local governments over the five years following the introduction of the revised Local Government Act of 1993 (LGAQ 2002, p.19). Clearly, the new sets of skills involved meant that not all existing town/shire clerks were suited to this role. When combined with deregulation, the redesignated position provided councils with an opportunity to recruit a new chief executive from outside local government. In practice few such people came in from the

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private sector, though there were recruits from state and Commonwealth agencies. Research undertaken by Gerritsen and Whyard (1998, p.12) estimates that about 40 per cent of the new chief executive officers began their careers in local government, with the rest coming from outside the sector. There was some recruitment of local government engineers into the new chief executive role, but this practice was not extensive. In addition, there was limited recruitment of local government professionals from other backgrounds such as town planning. Very few women were appointed to the new chief executive role. Gerritsen and Whyard estimate that by 1998 only four per cent of chief executives were women, with most of these from a human services background (1998, p.7). Some states also used legislative reform to introduce requirements for time-limited performance based contracts for senior executives. This helped with the cultural shift for senior executives to move from a focus on compliance to a focus on results, as well as providing leadership to achieve objectives set through council corporate plans. A related aspect of the reforms was to shift the role of councillors to a strategic focus on setting objectives rather than focusing on the detail of implementation. However, this meant councils would need to develop systems to measure performance so that management could be held accountable for their effectiveness in implementing council strategies. It was mainly urban councils which took the opportunity to adjust from profession-based structures to program structures. A study by Kluvers of Victorian local government in 1993 (prior to the Kennett Government reforms) found that program planning and budgeting had been introduced by 41 per cent of metropolitan but only 22 per cent of non-metropolitan councils (Kluvers 1999, p.72f). Kluvers also found that the introduction of program planning and budgeting was strongly supported by local government management (1999, p.75). Managers recommended its adoption in 79 per cent of cases, compared with only 10 per cent of cases where the initiative came from the councillors, and 15 per cent where the initiative came from external sources. However, there was only a limited shift from professionals in senior executive positions (appointed on the basis of technical expertise) to general managers. In addition, there was also restricted mobility between administrative units. As a consequence, the professions maintained their dominance in the new corporate structures. The major changes in this area were to come later with the more targeted microeconomic reforms. The introduction of corporate management was accompanied by

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the reform of employment practices. The merit principle was introduced, along with the application of equal employment opportunity legislation, to bring local government into line with the rest of the public sector (Gerritsen and Whyard 1998, p.8). Anti-discrimination law was introduced into the local government arena at the same time it was applied to the private sector and the rest of the public sector. The cultural change in organisations that the new employment practices required was facilitated by the Commonwealth, the states and the local government peak bodies. In relation to equal employment opportunity, the Commonwealth has provided funding to help increase the employment of Aborigines and Torres Strait Islanders in local government (DTRS 2001, p.93). The Commonwealth has also played a role in helping to increase the number of women in senior management in local government (DTRS 2001, p.107). While the most progressive councils embraced these reforms and used them to create new corporate cultures and improve efficiency and effectiveness, the extent of the shift across the sector as a whole was limited. Leadership within local government varied in its response to the reforms. Despite support from peak associations, the pace of change was slow. The capacity of councils to implement reforms was also seen as a major barrier; for example, a criticism of the New South Wales legislation was that many councils were too small to deal with the level of sophistication required to develop meaningful objectives and strategies for their management plans (Marshall and Sproats 2002, p.53). It was not until economic pressures increased that a more directed and heightened reform effort within councils eventuated. This was especially in the case of Victoria. Amalgamations and legislative change introducing corporate management did not of themselves generate significant shifts in local government efficiency. The focus of reform had to shift to internal financial matters before significant efficiency gains were achieved (Jones 1991, p.11). In Aulich’s view, there was convergence between the states during this first legislative phase of the reforms in the 1990s, but the second wave, with its stronger emphasis on efficiency, led to divergence (Aulich 1999, p.16). E F F I C I E N C Y R E F O R M S — T H E V I C TO R I A N E X P E R I E N C E

The process of major restructuring of the Australian economy began in the 1980s as a response to changes in the international economy. At the Commonwealth level there was bipartisan recognition that microeconomic reform was needed to enable the Australian economy to make

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the transition away from unsustainable industries supported by government regulation and protectionist policies to an economy that was able to grow in response to the global environment. Economic restructuring was to have varying regional impacts in Australia. New South Wales, Western Australia and Queensland benefited from an expansion of the mining and resources sectors. By contrast, the three States that had relied heavily on protected manufacturing (Victoria, South Australia and Tasmania) experienced economic crises in the late 1980s and early 1990s. As a consequence, their economic base went through a sharp structural decline (Aulich 1999, p.20). The newly elected Kennett Government in Victoria in 1992 embarked on a process of radical reforms, using the economic crisis as justification. These reforms reflected a fresh phase in the development of the new public management, with privatisation of government services, deregulation and a reduction in taxation to provide incentives for expansion of private sector investment (Sturgess 1996, p.60). It was an approach that was based on the policies implemented by the Thatcher Government in the United Kingdom. The United Kingdom reforms had included privatisation of utilities, contracting out of service delivery to the private sector, and the use of purchaser/provider arrangements to achieve a quasi-market structure. They also attempted to reduce recurrent expenditure by a range of means (Rhodes 1997, pp.44–46). Agency theory was an important part of the theoretical basis for these reforms (Ryan 1997, p.157). In this context it suggests that asymmetric information can arise between the council as principal, and council employees as agents, because of different attitudes to risk, and differences in motivation. This situation can lead to moral hazard. One way to address the problem is through the use of contracts (Milgrom and Roberts 1992, p.167f). While local government is only a small part of the Victorian public sector, it was nevertheless viewed as a critical dimension of the wider reform process. One of the architects of the reforms was Des Moore, who developed a detailed blueprint for the local government sector. His plan was subsequently funded by the private sector and adopted by the Victorian Government in 1993 (Moore 1996, p.1). The reforms were designed to achieve a 20 per cent reduction in the cost of providing local government services. Efficiency data showed that Victorian local government had current expenditure per capita that was about 23 per cent higher than the average for local government across all the states, with local government taxation about 12 per cent higher per capita (Moore 1996, p.2).

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The mechanisms used to reduce costs were achieving economies of scale through the amalgamation of councils, and the introduction of compulsory competitive tendering (CCT). Up to 50 per cent of council expenditure was to be put out to competitive tender. CCT required councils to introduce purchaser/provider arrangements (State Government of Victoria 1996, p.25). Time-limited performance contracts were also to be introduced for senior municipal executives. Rates were cut by 20 per cent in order to provide a tangible and immediate benefit to ratepayers, and to compensate for the disruption caused by the reforms (Moore 1996, p.1). The overall goal was a more efficient local government sector operating with modern management practices (Digby 2002, p.2). Amalgamation of councils was achieved by dismissing the sitting councils, reducing the number of councils from 210 to 78, and appointing commissioners to run the new entities. The commissioners were also responsible for appointing new chief executives for the 78 new councils. CCT was implemented in the meantime. While the economies of scale that resulted from amalgamation enabled a corporate management approach to be more effectively implemented, the other reforms dramatically increased the pressure on the system of local government to achieve efficiency gains. This process reflected the trend in the private sector where a shift in management focus to shareholder value was leading to cost cutting and significant downsizing, often accompanied by a move away from vertical integration to vertical fragmentation. The CCT reforms were openly recognised as the reform element that would have the most impact on improving efficiency in local government (Hallam 1995, p.9). The primary objective for management in the reforms was to achieve efficiency in service provision by cutting costs rather than by adopting a more strategic business approach (Martin 1999, p.29). In many respects this ran counter to the corporate management reforms, which were based on the management by objectives approach. The implementation of the Victorian reforms, however, was accompanied by a number of difficulties. Though some new chief executives may have had private sector experience, chief executives and senior managers with a background in local government had limited familiarity with managing an extensive process of contracting out (Martin 1999, p.28). Consequently, senior executives gave priority to introducing CCT with as few problems as possible, as opposed to adopting a strategic business approach (Martin 1999, p.28). Compliance with CCT requirements

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overrode a focus on achieving better outcomes. There were also mixed results from the reforms in relation to organisational culture and performance. Martin (1999) undertook a survey of local government employees in 1997 to assess perceptions of organisational culture in local government during the reform process. He found that employees viewed the reforms as emphasising planning, leadership and job performance, but failed to address communication, structure and socialisation of entry to local government for new employees (1999 p.30). The organisational downsizing that resulted from the Victorian reforms proved unsustainable in the medium to long term. For example, while employment dropped during the reform process in 1999, by 2001 it had risen again (DOTAR 2001, p.54). The 20 per cent across-the-board reduction in rates was also unsustainable, as shown by the Government’s decision to bring in rate capping when elected local government was restored. The savings could not be achieved without a reduction in services to the public. The restoration of elected local government led to pressure to increase rates to finance local public services. The blanket application of CCT was poorly targeted. Purchasing decisions need to be based on an assessment of the costs and benefits of using the market rather than relying on an in-house provider (Besanko et al. 2000, p.112). Efficiency gains are unlikely to result from public enterprises contracting out activities that would normally be undertaken in-house by private sector firms carrying on a similar business (Quiggin 1996, p.179). Even Moore, as an architect of the reforms, has argued it would have been more effective for the Government to focus on contracting out particular types of services rather than a proportion of the expenditure involved (Moore 1996, p.5). CCT was subsequently replaced by a new framework of Best Value Principles, which provides councils with flexibility to assess on a case by case basis the costs and benefits of contracting out (DTRS 2001, p.240). Aulich suggests the Victorian exercise reflects a structural efficiency model of reform where local government’s role is focused on service delivery rather than incorporating a broader public policy role (1999, p.19). Local government’s function should be much more that delivering services. It should also involve a governance role in the community. Such a role is essential in a deregulated environment where globalisation can have powerful effects on local economies. Local government in this context needs to maximise opportunities, and mitigate negative impacts if communities are to be sustainable.

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E F F I C I E N C Y R E F O R M S — N AT I O N A L C O M P E T I T I O N P O L I C Y

While the Victorian Government chose this particular path to reform, other states pursued a different approach, which was driven by the Commonwealth. This direction came in the form of the National Competition Policy (NCP) reforms introduced by the Commonwealth as part of its economic restructuring package. They provided an alternative to the Victorian strategy in so far as extensive cost cutting was not required. Rather, managers were encouraged to develop a commercial outlook that embraced broader public policy objectives, as well as accommodating community service obligations. NCP reflected the international trend away from government regulation of the economy to the use of competition to achieve efficiency (Felmingham and Page 1996, p.27). The NCP reforms did not require a reduction in the size and role of government, as had occurred in other jurisdictions. Nor did they require privatisation, or that public services be contracted out. The primary focus of NCP was on how to maximise the use of competition (or to find substitutes for competition) to maximise allocative efficiency (Felmingham and Page 1996, p.27). The reforms were adopted by both the Commonwealth and the states in April 1995. As signatories to the NCP Agreements, implementation of the policy (including its application to local government) is a requirement if the states are to be eligible for competition payments from the Commonwealth. However, the NCP Agreements provided each state with discretion to decide how various elements would be applied to local government. The key element in this respect that has had the greatest impact on management reform in local government is competitive neutrality. Competitive neutrality requires that government business activities should not have advantages or disadvantages that arise purely because of their public ownership. For government business activities that are monopolies, the application of competitive neutrality essentially means operating the business on a commercial basis. Three options have emerged for applying competitive neutrality to local government business activities: full cost pricing, commercialisation, or corporatisation. Full cost pricing means setting prices to cover the full cost of operating a business activity, including tax equivalents where the business activity is exempt from taxes by virtue of its public ownership. Commercialisation comprises setting up the business activity as a commercial business unit within the council, providing it with a commercial objective and applying full cost pricing. Corporatisation

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involves setting up a business activity as a separate legal entity with a board of directors and a commercial objective. The council would have the role of shareholder. The NCP Agreements required that competitive neutrality should be mainly applied to significant business activities. However, the Agreement does not define what is significant. Each state had to decide where to draw the line between significant and other business activities. T H E S TAT E S ’ A P P R OAC H

The Victorian Government took the view that its reform program largely achieved the objectives of NCP, even though it used mechanisms such as CCT that the Hilmer Committee did not specifically endorse (State Government of Victoria 1996, p.11). Queensland, on the other hand, was one of the first states to develop a framework for application of competitive neutrality to local government because of the considerable size of council business activities such as water and sewerage. This initiative established the model for other states to follow. The Queensland approach to NCP was to use the reforms not to rationalise local government services and cut costs but to modernise the management of local government services through a commercial focus that also allows councils to pursue public policy objectives. A common misconception among local government unions in the early stages of the NCP reform process was that authorities would have to introduce CCT (as in Victoria) or privatise their services. Councils were afraid that it would result in a Victorian style reform process. Once it became clear that this was not the case, local governments were generally supportive of this approach to the implementation of the NCP reforms. The strategy in Queensland was to focus reform on the largest councils with significant business activities (Queensland Government 1996). The state also decided to pass on to local government up to $150 million of Queensland’s potential competition payments from the Commonwealth. This was designed to encourage all councils to participate in the reform process. There have been 18 councils with significant business activities targeted by the state (Trembath 2002, p.45). Most of the business activities involve water, sewerage, or garbage services. They account for a very high proportion (around 80 per cent) of overall local government business activity expenditure in Queensland. By focusing reform on the larger local governments, those areas with the most potential for gain were captured. At the same time, opposition from the smaller local governments (where potential gains to the overall economy are

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least) was avoided. All the 18 councils decided to apply competitive neutrality through either commercialisation or full cost pricing. The State Government further decided to direct all councils to consider reforming business activities that competed directly with the private sector, but were too small to be treated as significant business activities. Councils were required to identify if they had any business activities of this kind and to decide whether or not to apply full cost pricing. Councils that reformed these activities have received a share of the competition payments. While the application of competitive neutrality was intended to ensure that a commercial objective was set for business activities, the framework took account of legitimate public policy objectives that councils might also want to pursue. However, this was to be done through a transparent process of applying community service obligations. All but a very small number of Queensland’s 125 councils indicated their intention to reform their business activities. Some councils have also decided to reform their other services where there is no external paying customer (roadworks for example). This has been achieved by the introduction of a purchaser/provider arrangement, where the council is the purchaser of services (such as roadworks) and a separate unit within the council is the provider. This has enabled councils to address the inefficiencies that were the focus of the Victorian CCT reforms, without necessarily engaging in the same cost cutting and reduction in the labour force. There were related reforms of regulatory regimes administered by local government that complemented the reform of business activities — town planning, building, environmental management and, to a lesser extent health, have changed the roles of these professions in local government management structures. The trend is towards integrating regulatory professionals in one administrative unit, with town planners often emerging in dominant roles because of the growing significance of town planning as a regulatory function. While the reform process has not involved concentrated costs for some stakeholders — as occurred in Victoria — it also has not generated the same kind of significant benefits that the Victorian process was able to deliver. At the least it has helped to change organisational culture in local government by injecting a stronger commercial focus. At best it has enabled senior managers to adopt a strategic business perspective that utilises the same economic, financial and performance management tools of leading-edge private sector firms.

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While councils have been forced by the states to apply reforms, the pace of the process has varied. In Queensland, only an additional 16 councils beyond the 18 targeted by the state had reformed their business activities by 2001 — four years after the reform process commenced. This is despite the fact that councils in Queensland have access to competition payments for applying the reforms (Trembath 2002 p.45). The NCP reforms occurred over a longer time frame than the Victorian reforms. While this has the benefit of making the changes more sustainable, there is the risk that the process is too slow to effectively change organisational culture. I N T E G R AT I N G E F F I C I E N C Y R E F O R M S W I T H A PUBLIC POLICY ROLE

Despite pressure to pursue efficiency reforms in local government, the Commonwealth has acknowledged that a key issue facing local government is whether it is primarily a deliverer of services, or whether it also has a broader public policy role (DTRS 2001, p.111). Aulich (1999) has suggested that the structural efficiency model of reform (implemented through CCT and NCP) has been at the expense of a local democracy model. This latter model emphasises local democratic principles such as responsiveness, accountability to the local community and advocacy on behalf of the local community; reform is a political rather than a technocratic process (Aulich 1999, p.19). The structural efficiency model, on the other hand, is concerned with the efficient delivery of services to consumers, which may be at the expense of legitimate public policy objectives designed to benefit citizens rather than consumers (Aulich 1999, p.19). The reform process in Brisbane City Council (BCC) is an example of how councils can integrate Aulich’s structural efficiency and local democracy reform models. The BCC reforms draw on the new public management model developed by Osborne and Gaebler (1992), which involves integration of public and private management concepts. It retains the emphasis on citizens and the legitimate role of government in pursuing public policy objectives, but uses private sector management practices to achieve them. BCC is the largest local government in Australia and, as the local government with the most extensive range of business activities, has been at the forefront of applying competitive neutrality. BCC combined the NCP reforms with a purchaser/provider arrangement, a new focus on service delivery, and the use of technology to improve the quality of customer services whilst at the same time

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improving efficiency. It also involved using marketing technology to focus on customers and community participation techniques to address governance issues. Though this has involved a reduction in its workforce from about 7000 in the mid-1990s to about 5500 today, the process has occurred through an orderly process negotiated with the relevant unions. The restructuring went beyond cutting costs; it involved reskilling, and changing the organisational culture from a product orientation to a customer orientation. New technologies have also created opportunities to reduce costs. They are transforming the way business is done and services are delivered, creating new opportunities for dramatic improvements in the quality of services. BCC provides an example of what councils can do on their own initiative, combining top-down reforms that are not overly prescriptive with strong local leadership to maximise efficiency gains but also achieve local public policy objectives. It used its size to negotiate a partnership relationship with the state and is committed to working regionally with other councils.

CONCLUSION Sector-wide reforms initiated by the Commonwealth or the states are blunt instruments. The strength of local government is its responsiveness to its immediate context. Top-down reforms can lead to negative outcomes if they do not allow councils to respond to their environment. On the other hand, these processes can break the capture of local government by interest groups or agents. Aulich argues the states will continue to struggle with their current approaches to local government reform (Aulich 1999, p.21f), and suggests that the environment for management reform in local government will remain dynamic for some time to come. While it is possible that local government reform could disappear off the states’ policy agenda — as happened for long periods in the twentieth century — this seems unlikely. Local authorities offer benefits to state governments, with opportunities to use partnership relationships to deliver state services through local government more efficiently than the state can do itself. This role is expanding as the states recognise the contribution local government can make in addressing emerging issues, such as natural resource management and crime prevention. The Commonwealth has also recognised the potential role local government can play in addressing issues of national significance.

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Achieving sustainable benefits from reform may also depend on the capacity of leaders to manage the process. Martin’s assessment of the Victorian reforms is that while senior management is crucial to effective organisational change, many senior local government managers have not been able to provide strategic direction through the change process, focusing more on regulatory compliance rather than on achieving outcomes. This exacerbates conflict in the change process (Martin 1999, p.34). Developments in the wider economic environment will also be a key determinant of future reform initiatives. Local government structures prior to the 1990s reflected the dominant multi-divisional form used in the private sector until the 1960s. This was based on economies of scale, particularly through the utilisation of new technology. Over the past 40 years, however, the private sector has moved away from hierarchical structures to less vertically integrated organisational forms. The role of managers has shifted from exercising control over resources to responsiveness to the market. Reduction in transport and communication costs has reduced risks in coordinating the factors of production. Efficiency gains have increasingly come from vertical fragmentation of production. Consequently, future efficiency-focused reforms in local government may be driven less by top-down public sector reform processes than by developments in the competitive markets in which local governments operate. As Martin has argued, this will mean that senior executives in local government will need to develop new skills. Such skills will encompass understanding core business, identifying markets and developing competitive strategy, aligning organisational design with business strategy and fostering a performance management approach to managing human resources (Martin 1999, p.33). This situation does not mean the Commonwealth and the states will not initiate local government reforms, but it suggests they are more likely to be driven by public policy issues other than efficiency. The use of transparency and other organisational systems to prevent corruption is a significant emerging issue in the context of a globalised economy. It will be critical in this environment to maintain public and investor confidence in the integrity of government, including local government. As with the top-down efficiency reforms, any future reforms will need to be based on a cooperative relationship with local government, if they are to be effectively implemented.

8 THE ROLES AND RESPONSIBILITIES OF CHIEF EXECUTIVE OFFICERS AND COUNCILLORS IN AUSTRALIAN LOCAL G O V E R N M E N T: A C O R P O R AT E GOVERNANCE PERSPECTIVE Neil Marshall During the 1980s the respective functions of elected members and appointed officials became an increasingly problematic issue across the Australian local government sector. The expected roles and responsibilities attached to each group were vague in intent and often not adhered to. This situation had significant implications for the quality of local governance. Senior managers who exercised too much influence weakened the democratic legitimacy of the decision-making process, while councillors who interfered too readily in the details of administration undermined the overall efficiency of the organisation. Ongoing power struggles between councillors and management, and within the management arm itself, tended to exacerbate both problems. All six states sought to resolve this issue in the course of the 1990s by introducing revised local government legislation that was intended to clarify the roles and functions of councillors and senior management. A decade or so after this legislation was introduced, however, the definition of roles and responsibilities continues to be a contentious matter for a number of councils. Uncertainty and misunderstanding about duties, or refusal to adhere to expectations, can lead to disagreement and conflict within authorities, and reduced operational effectiveness. In extreme forms they can result in corrupt behaviour and dysfunctional municipalities. The purpose of this chapter is to explore the roles and responsibilities of elected members and chief executives as they have emerged in the wake of the states’ revised local government legislation. It does so in terms of a corporate governance perspective. The notion of ‘corporate governance’, until recently, has largely been confined to private sector

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usage. It describes the fundamental principles, operational structures, and desirable codes of conduct that should underpin and drive responsible company management. By the early 2000s the concept had also come to be strongly embraced by public organisations in Australia. Though the term has been less widely used in relation to the local government sector, the argument here is that it does have particular relevance to the operation of councils The following discussion looks first at the meaning of corporate governance as it has evolved in the business context, and the manner in which it has since been applied in the public domain. This provides the broader framework for the analysis of the local government arena. The background to the local government reform legislation of the 1990s is considered, along with the intention of the acts in terms of the roles and responsibilities of elected members and management. The organisational environment in which councillors and chief executive officers (CEOs) function and interact is then assessed in some detail. The remainder of the discussion provides some suggestions as to how the adoption of a corporate governance perspective might enhance the performance of the sector as a whole.

T H E C O N T E X T O F C O R P O R AT E GOVERNANCE The term ‘corporate governance’ only became widely used during the late 1980s following the collapse of a number of major businesses across Anglo-based economies. In the United Kingdom the Cadbury Committee was appointed to make recommendations on how to improve the governance of companies with a view to reducing the incidence of failure. The Committee, which reported in 1992, defined corporate governance simply as ‘the system by which companies are directed and controlled’ (Cadbury 1992, para.2.5). Central to the success of this system is the board of directors who determine the strategic direction of the organisation, supervise the implementation of policy by the executive, and provide accurate reporting on outcomes to shareholders. Effective governance by the board depends upon ensuring that power is dispersed within the organisation through appropriate checks and balances. These include such measures as the separation of executive and non-executive functions; a clear definition of the roles and relationships involved; and the election of genuinely independent non-executive directors to provide objectivity and expertise in policy

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development and supervision. A further mechanism critical to the promotion of sound governance is the creation of structures and procedures for internal auditing and financial reporting. As a whole, the system must be informed by the values of integrity, openness and accountability. From Cadbury’s perspective, a commitment to genuine transparency of a company’s activities is indicative of capable and purposeful leadership. Confident leadership, in turn, stems from a clear understanding of individual functions and a willingness to accept responsibility for decisions made. Though Cadbury’s recommendations have been refined and expended upon by other committees of inquiry over the last decade, in particular the Hampel Committee of 1998, the Report nevertheless continues to stand as the international benchmark on the subject.

T H E P U B L I C S E C TO R The contents of the Cadbury report drew the attention of public sector reformers in Australia as well as the United Kingdom during the late 1990s. The concept of corporate governance was seen as increasingly relevant to an arena where the traditional forms of public sector activity were in decline and being replaced by such procedures as contestability, outsourcing, and an emphasis on commercial management practices. Moreover, this structural change was accompanied by growing intolerance on the part of the electorate at instances of mismanagement and fraud from public servants and members of parliament (Hodges et al. 1996, p.9; Barrett 2001). The private sector framework established by Cadbury, however, could not simply be relocated to the public domain. Certainly, there are some obvious institutional similarities between governments and companies shareholders may be equated with constituents, boards of directors with legislatures, and executive officers with public servants (Bottomley 1997, p.296). The notion of the separation of powers is also shared between the two. Yet there are obvious differences. In companies, voting power is normally attached to the proportion of shares rather than the individual, and membership is optional and changing. Citizenship, on the other hand, is compulsory and permanent. Governments must also take into account the range of concerns of all constituents, not just the financial interests of a few. In addition, public sector agencies operate in a policy arena where aims and objectives are the result of political choices and are often

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multifaceted in nature. For companies, the single overriding goal is longterm profitability. A further issue is that the outputs produced by government agencies are frequently qualitative and may be difficult to measure. The financial returns generated by commercial businesses, by contrast, are relatively easy to identify. Finally, public sector bodies are required to treat all clients impartially and equitably; values that receive much less emphasis in the commercial world. Despite these differences, there has been widespread agreement among practitioners in the United Kingdom and Australia that the underlying principles of corporate governance can, and should, be adapted for use in the public arena. There appears to be a general consensus that the essence of these principles involves establishing sound strategic direction at the top of the agency. Such direction ensures both effective and efficient performance in terms of the organisation’s mandate, and compliance with statutory accountabilities. Further critical components underpinning this framework include clearly articulating the roles and responsibilities of key players, understanding the nature of relationships between officials, constructing clear channels of communication with stakeholders, the promotion of ethical behaviour, setting in place internal control mechanisms, and providing comprehensive reporting procedures (ANAO 1997; CIPFA 1995).

C O R P O R AT E S T R U C T U R E I N L O C A L GOVERNMENT Corporate governance would seem a particularly suitable concept to introduce into the local government arena in Australia because many of the necessary elements have already been set in place. When the states introduced their revised local government acts during the 1990s they required all councils to establish corporate management structures. There was a high degree of commonality in this regard. In each case local authorities were instructed to prepare management plans which set out the council’s major activities, and identified objectives and performance targets, over a three to five year period. The functions of elected members and appointed officials were given greater elaboration and sharper focus. More stringent accountability procedures were imposed through the preparation of comprehensive financial and annual reporting. In addition, codes of conduct relating to pecuniary interests and meeting practices were laid down. To complement the corporate framework, the majority of states also introduced provisions to promote openness and

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transparency of operation. Such procedures included public meetings, access to documents, and requirements for community consultation. Across all jurisdictions the rationale driving the legislation was to ensure councils were better managed. Two factors in particular lay behind the substance and thrust of the changes. First, there had been growing concerns from the 1970s onwards at the ongoing interference of elected members in the day-to-day running of councils, particularly from mayors who viewed themselves as CEOs. To counteract this problem, inquiries in New South Wales and Victoria during this period recommended moving to a managerialist framework which placed elected members in charge of policy determination and employees for implementation (ACIR 1983, p.19; Tucker 1997, p.85). Second, towards the end of the 1980s the major features of the New Public Management — which included corporate structures — had been introduced into all state public services. By the early 1990s it was widely perceived to be local government’s turn for similar reforms. Lying at the core of the new corporate regime are the respective roles and responsibilities of elected members and appointed chief executives, and the way they interact with each other. Councillors have three separate but overlapping functions: representing the interests of residents, leadership and strategic policy formulation, and monitoring and reviewing the performance of the council. The appointed chief executive manages the day-to-day activities of the council and ensures that the organisation is run efficiently and effectively (under New South Wales legislation CEOs are referred to as ‘general managers’). In attributing these functions, the designers of the state acts drew heavily on private sector models. The duties of elected members now involve combining the traditional political requirements of the position with the business framework within which company directors work. The division of roles between councillor and manager is intended to ensure that power is divided between them, and clear lines of accountability established. Most importantly, purposeful policy development and decision-making can only take place if there is a productive relationship between management and elected members; there must be a merging of governance and executive roles. The Municipal Association of Victoria (1996, p.13) depicts the dynamics as in Figure 8.1. The quality of this relationship is therefore a crucial factor in creating successful community leadership. Without such strategic direction the other components that are part of the system — objectives, financial plans, evaluation and so on — will be much less viable.

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FIGURE 8.1 THE OVERLAP IN THE FUNCTIONS OF COUNCILLORS AND CEOS

NOTE

From Municipal Association of Victoria, From Citizen to Councillor, 1996, p.13.

THE ROLE OF COUNCILLORS This section looks at the three roles of councillors in detail — what they are expected to do, and the constraints within which they must function. The traditional representative role of councillors involves making sure that the views of constituents are properly considered by the council and that the substance of council’s deliberations and directions are conveyed back to them. It is essentially a process of advocacy and communication. However, this role has been considerably diminished over the last decade as a result of the much larger areas created by widespread local government amalgamations in several states. In South Australia the number of elected local government members dropped by almost one-third in the mid 1990s, and by almost three-quarters in Victoria over the same period. There are now far fewer councillors to cater for the same — or a growing — number of constituents. In an attempt to compensate for the reduced quality of representation, most states have encouraged councils to establish consultative mechanisms, which allow greater community involvement in decision-making processes (e.g., MAGLGR 1995, p.7.11). The second role councillors are expected to fulfil involves formulating

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policy, and making decisions that will benefit the community as a whole. This is a difficult task for all elected members, though more so for those representing highly populated, ethnically diverse urban constituencies. Usually between six and fifteen councillors are confronted with a policy environment that can sometimes be volatile and uncertain. At one level they must make decisions about a range of disparate issues that are of immediate concern to residents. At another, they are expected to understand the dynamics of interaction with state and federal governments and, in particular, to be able to coordinate effectively with other agencies which possess overlapping regional jurisdiction. Finally, elected members must confront a situation where the functions of their council have expanded considerably in recent decades, but without a commensurate increase in funding. The imposition of additional state legislative requirements, and continuing devolution of responsibilities by state departments have resulted in the ‘unfunded mandate’ — simply, authorities must now do lot more with a lot less (LGSANSW 2001, p.14). This all amounts to a complicated policy milieu. Councillors are expected to possess a working knowledge of both the local and intergovernmental arenas, identify problem issues, negotiate acceptable solutions, and then formulate policies which will maximise outcomes for the majority of the municipality’s constituents. In reality, being able to participate productively in policy deliberations is a problematic exercise for a good proportion of elected members. Some will have been elected for the sole purpose of pursuing a narrow agenda of a few issues. Others will constitute the well-known ‘pot hole councillors’ whose focus is limited to minor matters (MAV 1996, p.13). Certainly, many elected members are unable or unwilling to confront the larger picture. In some frustration, one Victorian CEO observed that, ‘councillors generally find it easier to deal with service delivery issues rather than grappling with strategic or intellectual questions. They prefer answering questions about traffic in residential streets rather than engaging in debate about economic prosperity’ (Dore 1998, p.98). The third role required of an elected member is that he or she ensure the effective governance of their authority by overseeing the implementation of policy proposals and reviewing the ongoing performance of the organisation as a whole. Most state legislation refers explicitly to the need for elected members to monitor planning and budgetary activities. In this regard each of the acts assumes that councillors already understand, or will be able to come to grips with, the detailed internal processes of the authority’s organisational structure.

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Elected members are expected to possess the skills to interpret and digest financial reports and performance outcomes, and participate in the strategic management cycle. Just how well elected members can actually fulfil this task is open to question. A 2000 survey undertaken in New South Wales found that 64 per cent of metropolitan councillors listed their occupation as professional or managerial. These individuals presumably do have the qualifications and/or experience which enable them to evaluate their authority’s strategic performance. In regional districts, however, the figure was much lower; just 41 per cent of councillors came from similar backgrounds (primary producer/farmer was the most commonly listed occupation in these areas) (NSWDLG 2000, p.24). It can be argued, of course, that those who do not have appropriate experience or qualifications can master the more abstruse aspects of council’s financial activities with due application and effort. A factor working against the accumulation of such skills, though, is the regular rotation of elected members following elections. In New South Wales, an average 43 per cent of councillors who were successful in the 1999 election had not stood at the 1995 election (48 per cent in the city and 40 per cent in the regions) (NSWDLG 2000, p.26). These figures suggest a reasonably high turnover rate of councillors every four years. Consequently, continuity of office is reduced, and the opportunity to build substantive managerial expertise over a period of time is weakened Separately, the three roles required of councillors — if pursued seriously — require hard work and diligence. Taken together they involve a high degree of dedication, and a willingness to acquire a quite complex mix of skills. Arguably, the commitment expected from councillors, and the role expectations imposed upon them, are more demanding than those of their business counterparts, the non-executive director. Directors do not have to accommodate a spectrum of disparate and often conflicting interests. Their commercial backgrounds equip them with the experience and insights needed to address largely market-oriented policy issues. They will also usually be highly knowledgeable when it comes to preparing strategic plans and understanding financial statements. This is hardly surprising; non-executive directors, unlike councillors, are chosen specifically for their expertise. Moreover, such personnel are offered lucrative financial incentives to perform well. Many elected members, of course, carry out their duties very competently. The most capable inject vision and a real sense of purpose into their communities. It is clear, nonetheless, that many struggle to cope

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with the breadth and depth of the functions required of them. It is a situation that is not helped by the part-time status of the position. Moreover, unlike ministers — or even members of parliament — councillors do not have policy advisors or personal assistants to provide information and advice, or help them handle the general demands of office. Consequently, the role of the CEO, and the nature of his/her relationship with elected representatives, becomes a very important one in the life of any council. This issue is the focus of the following section.

THE ROLE OF CHIEF EXECUTIVE OFFICERS CEOs and their senior management have been confronted with the same order of change as councillors over the last decade or so. The complexity and scope of their functions has been transformed. In part this has resulted from the corporate structures imposed by state governments, and in part from the introduction of federal initiatives such as accrual accounting practices (AAS 27) and National Competition Policy. However, the expansion in the role of CEOs has been relatively gradual with he or she receiving more assistance along the way than elected representatives. Local authorities across Australia had been subjected to ongoing pressures to upgrade and improve their management practices since the mid 1980s. The evident deficiencies in the organisational functions of councils were targeted by a number of external bodies. In 1986 the National Review of Local Government Labour Markets recommended measures to improve training opportunities for municipal employees (Martin 1997, p.216). At about the same time the Local Government Development Program was established by the National Office of Local Government. Over the following decade this program made funding available to enable individual councils to build their capabilities in areas such as performance measurement, best practice and continuous improvement (for example, NOLG 1995). Further support to upgrade management practices was to come from within the local government sector itself. In the early 1990s the Australian Local Government Association launched its Integrated Local Area Planning scheme, which was intended to strengthen the capacity of councils in such areas as strategic and corporate planning, inter-governmental relations, and community consultation (ALGA 1993). The Local Government Managers Association, too, played an important role by introducing professional development courses through its state branches, and facilitating access to university level studies designed for aspiring council officials.

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The cumulative impact of these developments was that by the late 1990s the great majority of local governments in Australia had developed sound management practices. Many, particularly large metropolitan authorities, created sophisticated systems to deal with strategic and financial planning, service delivery, and outsourcing. Employees, too, are significantly better educated than they were two decades ago (Jones 1981). A growing number possess specialist bachelors and masters degrees. By 1998 one commentator was able to state confidently that, ‘We have devoted immense resources to become better local government managers, and the dividends are evident’ (Sproats 1998, p.6). CEOs who have established an effective strategic management structure, and are supported by competent staff, will be well informed about all aspects of the activities of their domain. Indeed, they are likely to have a much more detailed understanding of the critical policy issues facing the authority than any (perhaps all) of the elected members. Clearly, with such knowledge at their fingertips, the chief executive’s views will carry considerable weight in the course of council’s deliberations. This authority derived from policy expertise is further strengthened by the fact that the CEO possesses substantial control over both staffing and organisational structure. In all six states the revised local government acts give the CEO responsibility for the appointment, supervision and dismissal of employees; staff carry out their duties in accordance with the directions of the chief executive. Only in Queensland do elected members have the right to by-pass the chief executive and appoint senior managers. In Western Australia councils may accept or reject the chief executive’s recommendation for senior appointments, but are unable to substitute a selection of their own. Victorian CEOs are required only to consult with the council in relation to senior staffing issues. Tasmania, South Australia and New South Wales give CEOs a largely free rein to hire and fire as they see fit. The intention of the local government acts to distance the elected members from the managerial arm of the authority is reinforced in New South Wales, Queensland and Tasmania. In these states councillors are expressly prohibited from attempting to give individual direction to particular employees (though they may seek advice about issues). In addition to the above measures, legislation in each state allows CEOs almost unfettered scope to shape the organisational structure of the authority along the lines that they wish. The South Australian Local Government Act alone requires ‘a reasonable degree’ of consultation

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with elected members before the chief executive embarks on significant structural change (s.99.2). These provisions in the local government acts give CEOs substantial discretion for determining the organisation’s staffing profile, and how the work environment is arranged. When these powers are combined with specialist expertise, it places them in a very strong position to influence both the direction of council decision-making, and the manner in which policies are subsequently implemented. Such dominance, of course, may threaten traditional local governance values. In 1996 the Australian Local Government Association was concerned enough about the possible dangers of this situation to point out that, ‘We must take care to maintain the right balance between effective democratic control and the role of managers in ensuring efficient administration’ (1996, p.7) To a considerable extent, however, the potential power of general managers is counterbalanced by the fact that they no longer hold a permanent position. In all states the chief executive is appointed on a contract basis for a period of up to five years, and subject to annual performance appraisal. CEOs now need to demonstrate to council that they have performed satisfactorily over a sustained period if they wish to have their contract renewed. Just what ‘satisfactory performance’ involves, however, can be difficult to pinpoint. It is a question that can become problematic for senior managers. To explore more fully the nature of chief executive/councillor relationships at this point, it is helpful to draw on some of the related debates dealing with senior public executives discussed in the public sector management literature. There are a number of similarities in the functions of local government CEOs and those of departmental secretaries at state and federal level In relation to the broad attributes that public sector senior executives require, Hughes (1998, p.69) suggests that ‘The major skill needed of a public manager is how to be a bureaucratic politician, to be able to interact with politicians and with the outside in a way which is beneficial to both oneself and the organization…an effective manager is one who is a good political player’ (original emphasis). Developing an understanding of the political milieu in which councillors operate is clearly a vital exercise for any chief executive. Being able to interact comfortably in this situation, in turn, necessitates building productive and cooperative relationships with elected representatives. This may be a far from easy task. Recent studies of the behaviour and careers of

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departmental secretaries in the Commonwealth public sector provide useful insights into the dynamics and attributes involved (Mulgan 1998; Keating 1999; Weller 2001). Critical elements include loyalty and trust. So too is competence in providing sound advice, prioritising policy intentions, and making judgements about the timing and substance of implementation strategies. However, in Keating’s view, ‘What ministers who survive most value is a capacity to respond creatively to a minister’s concerns, combined with critical and expert appraisal so that they can be warned in advance of any potential problems’ (1999, p.44). The manner in which these activities are undertaken, of course, must be tailored to the personal characteristics, capabilities and expectations of individual political masters. On occasions, perhaps through lack of interest or effort, a relationship cannot be developed: ‘Sometimes it is just the chemistry that does not work’ (Weller 2001, p.108). Certainly, given the growing complexity of issues involved, and the increasingly rapid timeframe required for resolution, building relationships between officials and elected members has never been more intense and stressful. These observations have considerable relevance for the local government arena. This is particularly the case where a CEO is able to work closely with a popularly elected mayor for four years or so. Here the context of the relationship will be similar to that of a minister and departmental secretary; the potential exists to build a stable and constructive partnership. A less secure environment, but one in which a acceptable alliance may evolve, is in councils where a majority of elected members are politically aligned and subject to party discipline. The most difficult situation for a CEO to find him or herself in is facing a council which consists of a politically unstable group of independents. Clearly, in this instance, the demands placed on the chief executive may well exceed those of state and federal departmental secretaries. The CEO must accommodate up to 15 different personalities with varying degrees of ability, knowledge, enthusiasm and commitment, as well as diverging values. Dealing purposefully with such an eclectic group of individuals — and keeping at least a majority onside for most of the time — calls for very high levels of inter-personal skills. The need to successfully juggle so many interests over a four year term may well leave senior managers more vulnerable to accusations of ‘unsatisfactory performance’ than their counterparts at state and federal levels. This raises the question as to what extent general managers are prepared to offer ‘frank and fearless’ advice if they feel that their position

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is under threat. It is a situation that can arise especially in the last year of a contract when the incumbent may be concerned about offending elected representatives. In relation to the federal sphere, there is undoubtedly a perception in some quarters that the integrity of senior officials has been compromised (Behm 2002; Grattan 2002). Mulgan (1998, p.9), on the other hand, makes this point: the argument that insecure tenure reduces the independence of advice is far from uncontested. Much depends on what ministers value. If they prefer reassurance and flattery, then secretaries dependent on their goodwill will certainly tend to oblige accordingly. On the other hand, if ministers look for robust advice that will save them from political trouble, insecure public servants may face greater incentives to be independent and objective. The problem for chief executives is that they may be called upon to both flatter and provide ‘robust advice’ at the same time. One New South Wales local government CEO, at least, has no doubts that the current system has had a detrimental impact overall, ‘Contracts of employment for senior staff have resulted in a less independent bureaucracy with less certainty for the future which can effect the long term strategy, planning and vision of the organisation’ (Barnes 2002, p.12). T E N S I O N AT T H E I N T E R FAC E

Clearly, from the above discussion, there are many factors — and combinations of factors — that can lead to tension at the interface between councillors and CEOs. Some of these include an unfavourable balance of power, misinformation, underperformance, personality clashes, poor communication, and disagreements over values. Each of these alone can cause a deterioration in relations. An additional problem which has been quite salient across most states is the tension caused by a reluctance to adhere to prescribed roles and responsibilities. Cetinic-Dorol comments that ‘role ambiguity’ in Western Australia ‘is still an issue’ (2000, p.42), with both councillors and management failing to acknowledge the limitations of their positions. In Queensland the Local Government Association has noted that many councillors are reluctant to relinquish their involvement in the internal affairs of the council and leave the CEO free to handle management issues (LGAQ 1998). It has been a similar story in New South Wales. An ICAC survey of 156 councils in 2001 discovered that about ten per cent of staff had felt pressured by councillors to do something

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they were not supposed to do, or provide information that was confidential (2001, p.18). Generally, the Commission found high levels of ignorance among municipal officers about expected roles and relationships. This was perhaps not surprising given that a large majority of employees had received very little training in appropriate codes of conduct (ICAC 2001, pp.16–17). That confrontation between elected members and chief executives does arise is indicated by surveys undertaken in New South Wales and Queensland during 1998. It was discovered that since 1994 there had been an annual turnover in local government CEOs of 13 per cent and 12 per cent, respectively (NSWDLG1998, p.34; LGAQ 1998, p.4). Though death, retirement and promotion accounted for a proportion of the figures in each state, the New South Wales Department of Local Government, and the Queensland Local Government Association were sufficiently concerned to mount a review to identify causes. Both bodies reported problems with conflict between senior management and elected representatives. The Queensland Association identified a number of instances where hostile relations had developed (LGAQ 1998, pp.28–30). In New South Wales it was found that ‘where there has been a breakdown in the relationship, the situation has not been well managed by all parties’ (1997a, p.31). In an attempt to rectify this problem, the New South Wales Department distributed a document which contained procedures directed at reducing antagonism (DLG 1997b). Termination of the CEO’s contract is usually a last resort for councils. There will be occasions where the working relationship has deteriorated substantially, but the cost of paying out the chief executive’s contract is prohibitively expensive, or even beyond the resources of the council. In such a situation the authority must stagger along under the weight of an ineffective — even destructive — governance structure until such time as a fresh CEO can be appointed and a new relationship developed.

S O M E C O R P O R AT E G O V E R N A N C E PERSPECTIVES The significance of the relationship between non-executive directors and management was recognised by the private sector during the late eighties. Dominant CEOs and weak directors were perceived as factors which contributed to ineffective leadership and, ultimately, business failure (Percy 1994, p.1; Pease and McMillan 1993, p.35). In its report,

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the Cadbury Committee emphasised that, ‘the calibre of the non-executive members of the board is of special importance in setting and maintaining standards of corporate governance’ (para 4.10). Their critical role, it continued, was to bring ‘an independent judgment’ to matters of strategy, performance and resources (para 4.11). The 1998 Hampel Report on corporate governance also affirmed the importance of companies selecting competent and experienced individuals (Hampel 1998, paras 3.7–3.10). These observations are particularly pertinent to the function of councils. They beg the question as to whether local government, having already embraced a comprehensive corporate framework, should not also offer similar inducements and support to their councillors as company directors receive. First, should elected members be paid a more substantive sum for their services? At present, in all states except Queensland, representatives are paid an annual allowance (only the Queensland Local Government Act allows municipalities to pay salaries, with a small proportion of councils taking up this option). The broad issue of providing salaries to councillors was first raised by the Australian Council for Intergovernmental Relations in 1983. The Council suggested that payment would ensure a better choice of candidates at elections (ACIR 1983, s.28). Given the increased demands of office in the 2000s, this point would seem to hold even greater weight today. It can also be argued that salaried members are more likely to fulfil their roles with an added sense of commitment and professionalism. The amount of remuneration involved could vary from municipality to municipality according to circumstance and budgetary constraints. Salaries offered may be sufficient to enable individual councillors to reduce their regular day-to-day work commitments, or even perhaps be employed as fulltime representatives.1 The expense involved might be offset to some degree by reducing the number of elected members to seven for larger authorities, and perhaps three in small constituencies. Consultative mechanisms have already been used as a means to compensate for diminished representation. There is no reason why this process cannot be extended further and developed in sophistication (see below). A second issue relates to education. Both the Cadbury and Hampel reports recommended that when first-time company directors take up their position, they should receive special training in the responsibilities of the role. This was to be followed by further training from time to time as the broader commercial environment changed. In Australia such courses are mounted by the Institute of Company Directors. The local

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government associations in each state offer similar types of modules for beginning councillors. Many individual authorities also provide some form of instruction for their new members. Though important, this training does not go far enough. A large proportion of citizens, unlike company directors, have had little relevant practical experience with municipal activities. Specialised programs designed by the universities to impart such skills as policy analysis, financial management, interpersonal communication and ethical behaviour would help to build a professional approach. Higher order training for councillors will contribute to a better understanding of their role, and that of the general manager. This, in turn, will help to foster a more inclusive organisational culture within councils. The Hampel Report pointed out that ‘Good corporate governance is not just a matter of prescribing particular corporate structures and complying with a number of hard and fast rules. There is a need for broad principles’ (Hampel 1997, para.1.11). The appropriate principles — which have been overwhelmingly endorsed by both the private and public sectors — are those of the Cadbury Report: integrity, openness and accountability. It is only when structures are driven by these principles that sound corporate governance unfolds. As the New South Wales Department of Local Government has indicated in relation to role conflict, ‘it is not possible to legislate for the nature of the relationship between mayors and general managers’ (1990, p.12). Similarly, with codes of conduct; ‘it is easy to stick them on the wall, but hard to make them stick in practice’ (Nelson 2000, p.138). Nor can such behaviour be written into the CEO’s contract. Rather, the application of principles to structure requires goodwill, commitment and professionalism from all parties. The adoption of corporate governance principles within local authorities must begin by reaching a clear understanding of the roles and responsibilities of elected members and general managers, and the nature of the relationship between them. The scope and outcomes of this activity will be unique to each regional area (though it must obviously be consistent with that state’s legislation). Participants may well use documents like the NSW Department of Local Government’s Guidelines to Reduce Conflict of Interest in Councils (1997) as a starting point. However, the substance of this activity will be greatly influenced by the particular requirements and characteristics of the locality. The protocol that emerges should be renewed after each election, and perhaps revisited from time to time in between. The process should also be

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transparent to both employees and the broader community. A commitment to openness and integrity at the top makes it much easier to integrate such principles into the strategic structure and performance of the council. Finally, a critical aspect of the exercise of defining roles and responsibilities needs to be an honest appraisal of the contribution made by elected members. If they reside in an amalgamated municipality, councillors have to understand and recognise the limitations of their representative duties. Part of the corporate governance process should be the establishment of a citizens consultative committee that supplements the representative function of councillors. The committee’s recommendations will feed directly into the council’s deliberative process and become integrated into the organisation’s strategic cycle. Sound corporate governance at the local level should embrace and promote participatory democracy.

CONCLUSION The local government reform legislation of the 1990s was designed to instil corporate discipline into council activity across the states. It was envisaged that the business framework would ensure a much greater sense of strategic direction and improved efficiency of operation. There is no doubt that these intentions have been met to a considerable extent; local authorities are, by and large, much better managed than they were in the late 1980s. However, in the course of the decade following the introduction of the local government acts, problems have emerged. The current role expectations of councillors are beyond the capacity of many — perhaps even the majority — of elected citizens to fulfil. The operational environment of local government has become much more complex and demanding, and constituents increasingly sophisticated in the level of service they expect. The spate of amalgamations in several states has also undoubtedly weakened the capability of members to represent the needs of residents. In addition, the proposed greater clarity in definition of the roles of CEOs and councillors has clearly not been realised. In short, many councils do not function as effectively as they could. The suggestion here is that the responsibilities and functions of both councillors and CEOs would be significantly enhanced by embracing more fully the spirit and substance of corporate governance. With the exception of government business enterprises, the structures and

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principles put forward by the Cadbury and Hampel Committees have greater relevance and applicability to local authorities than almost any other public sector institution. A smaller number of salaried (and possibly full-time) councillors, with appropriate training, would almost certainly inject an enhanced degree of professionalism into the conduct of municipal affairs. Operating more closely along the lines of a hybrid board of directors, councillors and the CEO would be well-positioned to offer improved levels of performance in policy formulation and community leadership. Integrated into each council’s strategic framework would be provisions to ensure citizen consultation and public participation in decision-making. Corporate governance offers the prospect of not only improved management practices, but also reinforcement of the sector’s democratic values. E N D N OT E 1

In Queensland, a small proportion of councillors — less than 10 per cent — are employed on a full-time basis in some of the largest local government authorities. In other states, such full-time status is limited to a few mayors of major urban municipalities.

PA R T D POLICY REFORM

9 POLICY NETWORKS AND LOCAL GOVERNMENT Joe Wallis

The study of networks has been very much in vogue in recent years. According to Kenis and Schneider (1991), the network concept seems to have become ‘the new paradigm for the architecture of complexity’. The widespread use of network concepts across a variety of disciplines and the ‘Babylonian’ variety of different understandings and applications of the policy network concept in policy studies has been highlighted by Borzel (1998). She proposes to bring order by delineating two schools of analysis. The first one is the ‘interest intermediation school’ that analyses the inter-relationship between state and societal actors (mainly interest groups) in the formulation, implementation and evaluation of public policy. In this chapter we will focus on the core concern of the second policy network school identified by Borzel. This is the ‘governance school’ that views policy networks as an alternative form of governance to hierarchy and market and analyses network mechanisms for mobilising resources that are widely dispersed between public and private actors. The chapter naturally divides itself into three main sections. The next section will examine the ways in which local authorities can be involved in multi-organisational partnerships (MOPs). The problems involved in co-ordinating these implementation structures are then considered before a comparative institutional analysis of markets, hierarchies and networks as alternative governance mechanisms is undertaken. The issue of whether local government has the capacity to deploy each of these mechanisms is then addressed before the chapter concludes with some brief remarks.

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L O C A L G OV E R N M E N T I N VO LV E M E N T I N M U LT I - O R G A N I S AT I O N A L PA R T N E R S H I P S (MOPs) There would seem to be two main ways in which local authorities can be involved in MOPs. Firstly, central and/or state government may coopt local bodies, along with other organisations, into policy initiatives that are targeted at local communities. The engagement of local authorities, along with other government agencies, neighbourhood associations, voluntary organisations and community groups in the community policing initiatives followed by many Australian states is a salient example of this form of MOP. Secondly, local authorities may exercise their own initiative in establishing collaborative partnership arrangements with other organisations. Typical examples of this would be where local governments join with local business leaders and tertiary institutions to facilitate small business development or develop a strategy to make the local area more attractive for new investment. Similarly, in many countries, including Australia, local authorities have been active in establishing collaborative relationships with businesses, voluntary organisations and community associations in the fields of urban and rural regeneration as well as in social care, education, environmental and other policy sectors (Lowndes and Skelcher, 1998, p.314). Regional Organisations of Councils (ROCs) represent a further Australian example (that is discussed further in Chapter 12). These tendencies appear to have gained momentum in the last two decades as ‘decrementalist’ fiscal policies have placed resource-constrained local bodies under more pressure to develop new sources of finance. In this MOPs can enable local bodies to gain access to grant regimes that require financial and in-kind contributions from the private and voluntary/community sectors. They can also use their private sector partners to overcome public sector constraints on access to capital markets (Mackintosh, 1992). Over the same period, the organisational and management changes that have been undertaken at all levels of government in Australia and other English-speaking nations have also expanded the scope for MOPs. In particular, the restructuring of large bureaucratic structures into single goal agencies (Hood, 1991) that, in some cases, have been sold off to the private sector, and, in other cases, been kept at ‘arms length’ from each other through quasi-market arrangements, such as the ‘purchaserprovider split’, has tended to increase the fragmentation of the public sector. As the range of different agencies responsible for shaping and

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delivering policy has increased dramatically, the problems of horizontal co-ordination that arise in this ‘polycentric terrain’ (Rhodes, 1997, p.xii) have often been addressed at the local level where partnerships provide a means of developing strategic direction and sustaining coordination. The possible benefits of partnership arrangements have been summed up by Lowndes and Skelcher (1998, p.315) as follows: ‘Partnerships have the potential to increase resource efficiency, making better use of existing resources by reducing duplication and sharing overheads. They can add value by bringing together complementary services and fostering innovation and synergy.’ The central feature of multi-organisational partnerships is their underlying ‘structures of resource dependency’ (Rhodes, 1988). This arises because the groups and organisations that could potentially belong to them control different amounts and types of resources: authority, legitimacy, money, information, and so on. They could therefore benefit from engaging in processes of deliberation, compromise and negotiation that produce a system of horizontal co-ordination through which dispersed resources can be mobilised and pooled so that ‘collective (or parallel) action can be orchestrated towards the solution of a common policy’ (Kenis and Schneider, 1991, p.36). The next section will consider the problems involved in achieving horizontal coordination before conducting a comparative institutional analysis of alternative governance mechanisms.

O V E R C O M I N G C O - O R D I N AT I O N P R O B L E M S T H R O U G H A LT E R N AT I V E G O V E R N A N C E MECHANISMS Two major problems would appear to stand in the way of the emergence of a system of horizontal co-ordination within MOPs. The first is the ‘prisoners’ dilemma’ or bargaining dilemma that arises in situations where defection from co-operation is more rewarding for opportunistically rational actors than compliance, due to the risk of being cheated (Scharpf, 1992). Some actors may withhold the resources they have agreed to contribute to partnerships and attempt to ‘free-ride’ on the contributions other parties make to the advancement of common goals. Secondly, there is what Borzel (1998, p.261) terms the ‘structural dilemma’ that arises because the actors that engage in partnership decisions are often agents of the groups they claim to represent. This agency problem is likely to become particularly acute when the issue of whether collaborative arrangements should be extended to include the purported

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‘leaders’ of community groups. A number of doubts are likely to be expressed by the representatives of more formal organisations. Thus: ‘Do they really speak for the groups or organisations they claim to lead?’ Similarly: ‘Can they bind these groups or organisations to the agreements or understandings we reach together?’ These attitudes can, in turn, be a source of frustration to the community leaders concerned. Markets, hierarchies and networks can each be viewed as alternative institutional responses to these co-ordination problems. Attempts by economists to differentiate alternative modes of governance often take as their point of departure the emphasis seminal thinkers in the ‘new institutional economics’ (NIE) tradition (Coase, 1937; Williamson, 1985) gave to markets and hierarchies as distinct governance structures associated with specific types of transaction costs. Subsequent developments in this tradition have added a third category to this scheme. Different triads of terms have thus emerged: markets, hierarchies and networks (Thompson et al., 1991); community, market and state (Streek and Schmitter, 1985); markets, bureaucracies and clans (Ouchi, 1991); price, authority and trust (Bradrach and Eccles, 1991); and markets, politics and solidarity (Mayntz, 1993). All these hark back, in a sense, to Boulding’s (1978) distinction between exchange, threat and integrative relationships. Although there are different emphases in these schemes, they can be viewed as three ideal types (Powell, 1991). It should be borne in mind, though, that no feasible system of governance is likely to conform exactly to any pure ideal type. As Bradrach and Eccles (1991, p.289) point out: ‘Price, authority and trust are combined with each other in assorted ways in the empirical world’. T H E M A R K E T M E C H A N I S M O F G OV E R N A N C E

One possible solution to horizontal co-ordination problems in MOPs may be through a market system of governance in terms of which the resource contributions of the various partners would be specified through a series of legally binding contracts. At least some measure of hierarchy may be required to operate this contractualist mode of governance. This could take the form of an organisational structure, such as a contract management agency with the authority to enter into and manage contracts with the various partners. The property rights implications and key features of this predominantly market mode of governance have been succinctly summarised by Lowndes and Skelcher (1998, p.318):

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Price mechanisms are the means by which the relationships are mediated and where conflicts emerge there may be haggling or recourse to law in order to determine the liabilities of the parties involved. Markets provide a high degree of flexibility to actors in determining their willingness to form alliances, although the competitive nature of the environment and the parties’ underlying suspicion may limit the degree of commitment to any collaborative venture. This mode of governance may give rise to particular transaction costs that render it incomplete in the case of MOPs. Hindmoor (1998, p.30) has identified four different sources of transactions costs that could have this effect: ‘complexity’; ‘power asymmetries’; ‘information asymmetries’; and ‘thinness’. With respect to complexity he argues that ‘a proposed exchange is more complex the larger the number of contingencies that have to be considered ex ante by both parties before being able to specify what will ex post constitute satisfactory performance of an agreement’ (p.30). The number of contingencies that arise in MOPs may simply be too large to be governed by a complete system of contracts. Moreover, the qualities of ‘consummate co-operation’— the use of judgment, enthusiasm and initiative— that may be expected of the parties involved in these collaborative arrangements may simply be too difficult to define in contractual terms. Apart from these complexities, the potential effect of power asymmetries may discourage some groups and organisations from participating in these arrangements. In this regard, Hindmoor (1998) suggests that some parties may be reluctant to engage in contractual arrangements with central government agencies since they may fear that they will be unable to enforce compliance or achieve compensation through the courts because of the unique capacity the government has to ‘overturn or ignore judgments against it’ (p.31). Lowndes and Skelcher (1998) have found that where contractualist arrangements are used to govern program delivery by MOPs, power asymmetries may work to the detriment of voluntary and community organisations. For example, despite ‘official insistence’ on community involvement in the urban regeneration projects they studied, these organisations were often excluded. A third (and very familiar) source of transactions costs in contractualist arrangements resides in information asymmetries. These ‘occur and complicate exchange when the underlying circumstances relevant to a

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trade are known by one or more but not all parties to that exchange’ (Hindmoor, 1998, p.31). The tendency by actors in market modes to treat information as a type of property to be used to gain an advantage over their collaborators, as well as their competitors, may inhibit the free flow of information and cause information asymmetries to persist to a degree greater than that observed with network modes of governance. The fourth source of transaction costs mentioned by Hindmoor (1998) arises when transactions are ‘thin’ since ‘the smaller the number of trading partners an actor can deal with to achieve their desired objectives’, the more likely it is that ‘the very consummation of an exchange can leave one or both actors more reliant upon the other’ (p.32). This appears to be a general formulation of the problem of asset specificity analysed by Williamson (1985). In the context of multi-organisational partnerships, Hindmoor (1998) essentially argues that the more complex the system of contracts becomes in terms of the contingencies it covers, and the more specific tasks are contractually allocated to different partners, the greater the dependence these partners will have on one another and therefore the greater the risk they face of being opportunistically exploited by each other. When these factors cause the transactions costs associated with market modes of governance to be high, other modes such as hierarchies or networks may be more efficient. Consideration does need to be given, though, to the types of transaction cost they generate. The next section will do this with regard to the hierarchical mode of governance. T H E H I E R A R C H I C A L M E C H A N I S M O F G OV E R N A N C E

A hierarchical solution to the problems of horizontal co-ordination in a MOP could involve the establishment of a bureaucratic structure with clear roles, responsibilities and reporting lines to co-ordinate the inputs of the different organisations. This could be overseen by a partnership board in which the number of votes held by the representatives of the different organisations could be clearly established. This may overcome some of the problems of co-ordination and collaboration found with market modes. As Lowndes and Skelcher (1998) put it: The imposition of an authoritative, integrating and supervisory structure enables bureaucratic routines to be established. Coordination can be undertaken by administrative fiat, and the employment relationships pertaining within the organisation encourage at least a certain level of commitment by staff (p.318).

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Significant transaction costs could, however, be involved in establishing such a hierarchical structure and maintaining its authority over time. Lowndes and Skelcher (1998) refer to the potentially high negotiation costs that could be involved in establishing a partnership board: Partnership creation involved negotiation and contest over ‘who’s in and who’s out’, a significant shift to hierarchical structures compared with the relatively fluid memberships and indistinct boundaries in pre-partnership collaborations ... Different representatives within a partnership drew their legitimacy from different sources (from election, appointment, common experience, professional expertise, leadership skills) but these various mandates were not mutually recognised and there was a lack of clarity about their relative value (p.325). The transactions costs associated with establishing a hierarchy would thus appear to be related to the degree to which a contest for authority arises between the potential partners. This may explain why hierarchical structures can emerge with relative ease in cases where the vertical line of authority is largely uncontested. Hindmoor (1998, pp.33–34) thus observes that ‘in the case of the employee-employer relationship, hierarchy is attractive to both parties because it is assumed that the employee has no particular preference over the nature of the tasks they are called upon to perform’. Unfortunately, this is unlikely to be the case with a multi-organisational partnership since the potential partners ‘cannot remain indifferent to the direction in which authority is exercised as it is precisely this that they seek to influence’ (Hindmoor, 1998, p.34). Indeed, it is possible that the contest for authority between these actors may be unresolved and a hierarchical structure may fail to form. Alternatively, it may only be possible to form a partnership board by deliberately excluding groups or organisations that cannot accept its authority. The MOP may thus have to function without their co-operation. However, even if a reasonably inclusive structure can emerge from this contest for authority, it is likely to have a tendency toward formalisation and ‘routinisation’ that may result in further transactions costs in terms of reduced flexibility and innovation. It would seem, then, that both market and hierarchical modes of governance may be incomplete or subject to high transactions costs. Questions must then be raised about the relative desirability of networks as a mode of governance for MOPs. Can they form and function

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with lower transaction costs than markets or hierarchies? Are they more flexible or inclusive? Can they elicit greater commitment from potential partners? It is to these questions that we now turn. T H E N E T WO R K M E C H A N I S M O F G OV E R N A N C E

Networks cannot be simply distinguished from other governance mechanisms by the presence of trust and absence of rules in network-like relationships. Although most writers on networks would agree with Hindmoor (1998, p.25) that to understand how these governance mechanisms develop ‘it is necessary to understand how and why trust emerges’, this does not imply that trust is not also an important factor reducing the transactions costs of markets and hierarchies. The essential difference is that while ‘markets and hierarchies generate trust by providing institutional safeguards ... the defining characteristic of a network is a trust that does not depend on the presence of formal and exogenous safeguards’ (p.34). Moreover, this trust is based on a confidence that the actors in a network will not break the rules that circumscribe the boundaries of their co-operative behaviour. These rules have been conceived in a variety of ways. Rhodes (1988, pp.42–43) finds the differences between various types of ‘policy networks’ residing in the ‘operating codes’, ‘underlying philosophies’ and ‘rules of the game’ that govern relations within them. Wilks and Wright (1987, p.305) refer in a similar vein to how the avoidance of disputes within such networks is tantamount to ‘an unwritten constitution’ governing relationships. In a corresponding manner Jordan and Richardson (1979, pp.100–101) have sought to identify the ‘operation understandings’ that influence ‘the process by which and the atmosphere within which ... policy-making is resolved’. They highlight the importance of rules that allow actors to achieve ‘understandings which benefit all participants’ (p.472). According to this view, such rules are constitutive of policy networks since they give each actor information about how others can be expected to act and thereby enable collaborative activity to be undertaken ‘in a context where participants already have mutual needs, expectations and experiences’ (Jordan, 1990, p.326). The main difference between the rules and understandings that govern network relationships and those that characterise markets and hierarchies would thus seem to lie in the informality. As Hindmoor (1998, p.35) has pointed out: ‘It is trust that makes the emergence and survival of such rules possible.’ The main problem facing network

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theorists would therefore seem to be to explain how the collaborative activities within the context of ‘interdependent relationships based on trust, loyalty and reciprocity’ that they typically associate with networks can be developed and sustained. Over the last two decades game theorists have made considerable progress in developing their understanding of the conditions under which it is rational for agents to trust and co-operate with one another (Axelrod, 1984; Coleman, 1990; Kreps, 1990). The following factors differentiate the games modelled by these theorists from the ‘prisoners’ dilemma’ situations that render socially sub-optimal non-co-operative strategies rational from an individual perspective: the number of actors is relatively small; contact with those outside the network is limited; interaction between actors is expected to be frequent; and co-operation in one area can be made contingent upon co-operation in other areas. Under these conditions actors will calculate the impact their non-compliance with network rules will have on their reputation within, and future access to, the network. Where each member holds a mutual expectation that the costs of non-compliance will exceed the benefits, trust and co-operation can develop since, as Gambetta (1988, p.10) puts it, ‘actors will trust since they have reason to trust’. The resulting interest-based network (IBN) can thus be expected to function as a stable governance mechanism despite the absence of formal sanctions against non-compliance with its ‘rules’. Hindmoor (1998) has suggested that the IBNs that emerge from these repeated games are likely to take the form of ‘policy communities’ rather than ‘issue networks’. Some of the distinctions between these two types of ‘policy network’ are depicted in Table 9.1 (adapted from Marsh and Rhodes, 1992, p.251). For governance within a MOP to take the IBN form of a policy community it would seem that the complementarity of interests between partners should arise from a relatively balanced structure of resource dependencies. Access to the MOP must therefore be limited to those partners who can make significant resource contributions. Moreover, these contributions would not be limited to a particular project but would occur in the context of an ongoing policy issue, or series of interconnected issues, in respect of which the actors share the same tacit or paradigmatic understanding. Their need to engage in ‘frequent, high-quality interaction’ with respect to this issue or issues would have the effect of transforming a ‘one-off’ game into an iterated relationship. As negotiations become embedded within other negotiations, trust and

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TABLE 9.1 DIFFERENCES BETWEEN POLICY COMMUNITIES AND NETWORKS

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co-operation can develop since actors will realise that defection in any one area can lead to the unraveling of co-operation in other areas. This characteristic of what Granovetter (1985) termed ‘embeddedness’ would seem to save the transactions costs of setting in place more formal safeguards against non-compliance with network rules. The institutional disadvantages of IBNs do, however, become clearer the more they conform to the ideal type of a policy community. In the first place, these governance mechanisms can become as elitist and exclusive in their own way as hierarchies. Moreover, their informality can make it difficult to hold them publicly accountable in the same way as hierarchical structures that function under the aegis of elected public bodies such as Australian local governments. In their survey of the urban regeneration activities of MOPs, Lowndes and Skelcher (1998, p.328) found that: The importance of informality, personal relationships and trust ... was regarded negatively by some of our informants. Networkstyle relationships were viewed by those who felt excluded or marginalised as ‘cosy’, ‘cliquey’ or ‘sewn-up’. The reliance on social contact, friendship and personal trust made it hard for new actors to ‘break in’ to networks.

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These observations have recently been echoed by writers such as Krugman (1998) in the critical reappraisals they have made of those features of ‘croney capitalism’ in East Asian developmental states that lay behind the recent outbreak of ‘Asian contagion’. Not only were the financial initiatives of elite policy communities in these countries lacking in the transparency that characterised arms-length financial transactions in Western countries but, in many cases, they involved an implicit government guarantee of business solvency that encouraged the kind of risky investment decisions that contributed to the speculative ‘bubbles’ that preceded the eventual ‘crash’ in asset values in these countries. More specifically, it would seem that IBNs may ossify into ‘iron triangles’. These associations of local government standing committee councillors, professional managers and ‘insider’ interest groups can collude to keep in place programs that confer benefits on each party while spreading costs over the local rate-paying or national tax-paying population while, at the same time, denying other groups access to the local policy process. Policy communities have also been portrayed as sources of resistance to change. In Britain, case studies based on the ‘Rhodes model’ have been made of policy networks in agriculture, civil nuclear power, youth employment, smoking, heart disease and health services, information technology and exchange rate policy (Marsh and Rhodes 1992). Most of these networks were found to exhibit, to a varying degree, the properties of policy communities so that ‘in each area a limited number of groups enjoyed privileged access to policymaking shaping both the policy agenda and policy outcomes’ (Rhodes and Marsh 1992, p.199). Significantly, Rhodes and Marsh (1992) conclude that such policy networks can act as a major constraint on policy change. These writers point out that such networks ‘do not necessarily seek to frustrate any and all change but to contain, redirect and ride-out such change, thereby materially affecting its speed and direction’ (pp.196–97). There are also opportunity costs associated with the time and effort involved in networking activities. In this regard Lowndes and Skelcher (1998, pp.322–23) make the following comment: Getting to know key individuals and building relationships took time and could distract organisations from their ‘core business’. As one informant noted: ‘You could pack your week with interagency meetings, but what would you drop then?’

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Less obviously, from a perspective that focuses narrowly on transactions costs, there may be what Borzel (1998) terms ‘redundant possibilities’ in such apparently wasteful networking activities. More generally, network interaction would seem to provide the basis for the formation of ‘social capital’. During the last decade there has been an extraordinary outburst of research by mainstream economists, political scientists and sociologists into the link between various definitions and indicators of social capital and regional and national variations in economic, social and political performance. The emerging body of theory has been hailed as providing a critical link between the fields of economics, sociology and political science, signifying their convergence toward the view that economic activity does not occur in a vacuum, but rather within a broader social and institutional environment. Most of these social scientists take as their point of departure the work Robert Putnam (1993) did on regional variations in associational activity in Italy. He highlighted the long tradition of civic engagement that had distinguished Northern from Southern Italy. Although this tradition had its modern expression in the form of high levels of participation in sports clubs, voluntary associations and choral societies, he pointed out that these patterns of social co-operation go back to the thirteenth century. His main thesis was that this tradition of civic engagement had produced larger stocks of ‘social capital’ that significantly accounted for the long-term historic gap between Northern and Southern Italy in terms of measures of both economic performance and governmental effectiveness. In identifying the key components of social capital as ‘networks of civic engagement’, ‘norms of generalised reciprocity’ and ‘relations of social trust’, Putnam begged the question of which components are ‘epiphenomenal, arising as a result of social capital but not constituting social capital itself ’ (Fukuyama, 2001, p.7). Putnam’s (1993) analysis suggested that norms and trust were derived from networks. His argument was that through repeated interaction in networks that ‘are primarily horizontal bringing together agents of equivalent status and power’, norms are ‘inculcated and sustained by modeling and socialisation (including civic education) and by sanctions’ (Putnam, 1993, pp.171–72). The most important of these norms is a generalised reciprocity which ‘refers to a continuing relationship of exchange that is at any time unrequited or imbalanced, but that involves mutual expectations that a benefit granted now should be

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repaid in the future’ (p.172). The establishment of this norm will allow ‘dense networks of social exchange’ to form in which ‘people can be confident that trusting will be requited, not exploited’ (p.172). Higher levels of social trust forged through repeated interaction will thus not just lower the transactions costs associated with networks but those with markets and hierarchies as well. Thus while networks may be seen as an institutional alternative to these alternative governance mechanisms, social capital theory suggests that it may complement and reinforce them as well. The wealth of empirical and case study material (recently surveyed by Woolcock and Narayan, 2000) that followed Putnam’s work, has tended to emphasise the importance of the bridging social capital that forms across group and agency boundaries as compared to the ‘bonding’ social capital that forms within cohesive social groups or communities. The question of whether local authorities can function as effective ‘bridging organisations’ will be considered in the next section. The comparative institutional analysis undertaken in this section of markets, hierarchies and networks would suggest that no mechanism can a priori be argued to be a superior mode of governance for multiorganisational partnerships. The importance of the role that local governments can play in these structures needs, however, to be explored in more detail. Are they uniquely placed to bring potential partners together? Do they have the capacity to select which governance mechanism is the most efficient and effective in a particular situation and the flexibility to adapt the mix of modes to changing circumstances? And, in particular, can they deploy the facilitation skills required to take full advantage of the possibilities for networking within a local governance system?

T H E C A PA C I T Y O F C O U N C I L S TO S U P P LY LOC AL GOVERNANCE The comparative analysis of markets, hierarchies and networks in the previous section seemed to suggest a potentially important role for local government in the implementation structures that deploy these governance mechanisms at the local level. This section will focus on the special resources local governments can contribute to these structures and will then turn its attention to factors that can determine whether they play a ‘minimalist’ or ‘activist’ role in the supply of local governance.

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T H E P OT E N T I A L C ATA LY T I C F U N C T I O N S O F L O C A L G OV E R N M E N T

In many countries, including Australia, local governments can make use of unique institutional resources that can enable them to play a catalytic role in the formation and development MOPs. Their multi-purpose structure and the discretion they typically have over the range of community services they seek to provide and the delivery mechanisms they use in providing them has been a concern to government failure theorists since these characteristics of local authorities make it difficult to subject them to vertical lines of authority within which they can be made accountable for clearly specified outputs. However, it is these same characteristics that make local authorities particularly suited to their role of being suppliers of community governance. As they seek to develop this role they are also likely to expand their institutional memory as a result of having to learn how to cope with, and adapt to, the range of pressures that can be traced to the drive by both central government and citizen ratepayers to make local governments deliver more for less. To cope with these pressures, local authorities have had to restructure themselves to both retain an ‘in-house’ capacity to supply strategic direction to the range of organisations and groups they collaborate with, and to develop a capacity to manage the mix of governance mechanisms they deploy in serving their ‘communities of interest’. An intraorganisational structure that separates advice from implementation, regulation from service delivery and commercial from non-commercial functions can enable local authorities to contract-out those services and functions in respect of which the transactions costs of market governance are lower than those associated with hierarchical in-house provision. At the same time the pressure on local authorities to deliver more for less may induce them to engage in the type of networking activities that Lowndes and Skelcher (1998) suggest can constitute necessary preparation for the formation of MOPs. Local governments can position themselves at the centre of these networks. They can bring key resources of democratic legitimacy and the informational advantages they may have developed where they have a history of working with local groups and agencies to solve problems that cross-organisational boundaries generate. The potential for local authorities to exploit the integrative possibilities of their facilitative role in IBNs will depend on their political and administrative capacity. The relationship between the relative ‘activism’ of the role local authorities

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can play in their communities of interest and the various dimensions of local governmental capacity must now be considered. M AT C H I N G T H E R O L E O F L O C A L G OV E R N M E N T TO I T S C A PAC I T Y

Two opposing principles are commonly proposed to guide the devolution of government functions to the local level. The first is the residuality principle that holds ‘that local government should be selected only where the benefits of such an option exceed all other institutional arrangements’. One rationale for the application of this principle is the view that local authorities are even more prone to government failure than other forms of public organisation (a proposition argued in Chapter 11). As a result local governments should play a minimalist role in the local economy that restricts them to the provision of those local public goods in respects of which the benefits from decentralisation significantly exceed the costs associated with potential government failure. A second principle that is the logical antithesis of the residuality principle in that it implies a presumption for, rather than against, the devolution of responsibilities to local government is the subsidiarity principle which holds that ‘no organisation should be bigger than necessary and nothing should be done by a larger and higher unit than can be done a lower and smaller unit’. The most notable international application of this principle is by the European Union in its relations with individual nation states. It appears to legitimise a highly activist role for local government in the local economy since it would not only appear to be based on an optimistic assessment of the benefits of decentralisation relative to the costs of local government failure, but also an appreciation of the comparative institutional advantage local bodies can play in the partnership-forming and networking activities described in this chapter. Reid (1999) argues that the subsidiarity principle can be used to formulate a checklist of the key criteria for determining the location of accountability — not only between different spheres of government but also between governments and communities. More specifically, he contends that any such checklist ‘needs to address the distribution of benefit; information needs and complexity; the relative importance of local knowledge and national consistency; the degree of national significance; the importance of critical mass and value of local discretion’ (1999, p.180). In practice, the application of this principle would seem to require an empirical assessment of the capability of different levels of government to undertake particular activities.

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This pragmatic approach is reflected in some recent contributions by the World Bank to the problem of defining an appropriate role for government in a way that takes account the significant variations in ‘state capacity’ that were highlighted as ‘considerable evidence accumulated during the 1980s to suggest that states varied widely in their ability to set the terms for economic and political interactions and to carry out the functions assigned to them’ (Grindle, 1996, p.4). These contributions express a growing awareness that although governments cannot create wealth per se, they nevertheless can play a key role in the process of economic development. Indeed, the World Bank (1997) now tends to refer to the ‘enabling state’ as a crucial ingredient in achieving higher rates of economic growth. At the very least the state must provide various fundamentally important functions, including the creation and maintenance of law and order, the provision of basic social services and physical infrastructure, and the establishment of a stable and coherent policy environment. But apart from these minimalist functions, the state can enhance economic activity in other ways too. There are three basic levels at which local governments can intervene, depending on their institutional capacity. To undertake even ‘minimal functions’, local governments must have both the revenue-raising and institutional capacity to administer necessary local regulations and provide genuinely local public goods such as library services and rubbish collection whose benefits do not extend significantly beyond a particular community. The demands on local government capacity will be much greater where they seek to provide intermediate functions. The World Bank (1997, p.27) has described the role of government in the provision of intermediate functions as follows: ‘Here, too, the government cannot choose whether, but only how best to intervene, and government can work in partnership with markets and civil society to ensure that these public goods are provided.’ While these remarks are directed toward an assessment of the capacity of national states, they are also clearly relevant to local government, as the discussion of different governance mechanisms in this chapter has sought to make clear. Finally, it would appear that ‘activist functions’, like intervention to generate increased co-ordination and develop ‘social capital’ should only be undertaken by local authorities with a highly sophisticated capacity for governance and even then only with great care. The issue of how to address the gap between the functions local authorities can be called upon to perform, either by central gov-

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ernment or by their local electors, and their capacity to perform them must now be considered by way of conclusion to this chapter.

CONCLUSION The 1997 World Bank Development Report identifies two generic approaches to the problem of closing the gaps that exist between the functions and capacity of government bodies. Firstly, policymakers can attempt to match the agency’s role ‘to its existing capability, to improve the effectiveness and efficiency of public resource use’ (World Bank Development Report, 1997, p.25). In the case of local government reform this may involve recognition of the high propensity for government failure at this level that leads to a ‘minimalist’ approach to downsize local government so that it can focus on maintaining its administrative capacity to engage in the core business of supplying local public goods. Secondly, policymakers can seek ways of enhancing government ‘capacity by reinvigorating public institutions’ (p.3). This quest may involve both a comprehensive reform of the structure and management of local authorities to reduce the scope for government failure and an exploration by the management of these authorities of the range of mechanisms discussed in this chapter that can enhance their capacity to play a more activist, catalytic role in local governance. This quest may therefore have to embrace elements of the ‘possibilism’ that Hirschman (1971) argued could counter and balance the ‘fracasmania’ — an exclusive focus on the potential for government failure — that could blind development analysts to the possibilities of forming ‘linkages’ or networks to address the unexpected problems that arise during the course of implementing development programs. Hirschman famously favoured an ‘unbalanced’ growth strategy that encouraged governments to set up disequilibria that would stimulate effort and mobilise hidden and under-utilised resources. It is an approach to development problems that embodies respect for complexity and an openness to the possibility of genuine novelty: what Hirschman (1971, p.27) once called ‘the discovery of an entirely new way of turning a historical corner’. It is submitted that the comparative institutional approach discussed in this chapter can be applied in a way that embodies a similar openness to the possibilities of alternative local governance mechanisms in general, and networking in particular.

10 LOCAL GOVERNMENT EFFICIENCY MEASUREMENT Andrew Worthington

There is a longstanding interest in Australia in assessing the performance of the local public sector, and in identifying the likely determinants of performance variation, both across jurisdictions and through time. Such interest is well placed since the performance of the local public sector has a significant impact on the overall performance of the economy in at least two ways. First, Australian local government is an important provider of final outputs in the form of environmental management and health services, recreation and leisure services, and community services, amongst others. Second, a number of intermediate outputs provided by local government are also relied upon as inputs or resources in private production. These include waste management and recycling services, planning and development services and the provision of essential infrastructure such as water supplies and local roads. Performance information, particularly measures of comparative performance, have been seen as a means by which interested parties can gauge the provision of local government services in this regard. The potential users of this information are threefold. Firstly, the recipients (clients, users, customers or consumers) of these services can use this publicly available information to exercise choice more effectively, and ensure the transparency and accountability of service providers for taxpayer funds. Secondly, the providers or purchasers of services, governments, departments and service providers, can also make use of performance measures. Possible uses include the stimulation of policy development by highlighting influences on the operating environment, facilitating the monitoring of public sector managerial performance,

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and the promotion of ‘yardstick’ or benchmark competition for improving performance in areas where there is little competition in markets for resources (or inputs) and/or services (or outputs). These measures can also be used as an analytical tool in examining relationships between alternative agencies and programs and as a means of assisting resource allocation by way of linking allocated funding with agency and/or program objectives. Finally, performance measurement can be used as a managerial decision-making tool. Attention can thereby be focused on practices in similar organisations that may assist the attainment of agency/program objectives, and thus facilitate programs of performance improvement. One of the most popular concepts in local public sector performance measurement is the notion of productivity. In a singleresource, single-service sector, productivity is simply measured as the ratio of a service provided to the resource consumed. The larger the ratio, the better the performance. And as a relative measure of performance it can be used to make useful comparisons across the same or different local governments at a point in time and points through time. For example, the performance of a given local government (as measured by productivity) in 2002 could be measured relative to its own performance in 2001 or it could be measured relative to other local governments in 2002. But while this appears simple, local governments, like most public sector entities, provide multiple services (or outputs) and use multiple resources (or inputs) and the complexities of calculating multi-dimensional measures means that many parties interested in productivity comparisons rely upon partial measures of productivity. Common partial measures of productivity include the quantity of a single service provided per employee or the dollar costs per service provided. The comparative performance indicators provided by the various state departments of local government in Australia are almost exclusively partial measures of productivity [see, for example New South Wales’ Department of Local Government (2001) and Victoria’s Department of Infrastructure (2002)]. These can, and do, provide insights into local government performance but they do not accurately reflect the complexity of local government decision-making regarding both the use of resources and the provision of services. For example, one measure of service or output used in assessing the performance of library services is the number of library issues divided by the number of library staff. While informative, this measure does not

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reflect the fact that people also use libraries to read newspapers/magazines, access the Internet or CD-ROMS, use word processors and make reference desk inquires. Likewise, the measure does not reflect the choice of a library to use capital (such as automated lending, computers or mobile-libraries) over labour in providing these services. Notwithstanding these obvious limitations of partial productivity measures, productivity itself can be problematic because it depends upon the structure of the service provision technology used, the efficiency with which the technology is implemented, and the characteristics of the operating environment in which service provision occurs. Accordingly, productivity may vary across different local public sector providers because new technologies change the way services are provided or because the operating environment makes it inherently more difficult (and costly) to provide these services. This type of thinking underlies the way in which local government performance comparisons are usually made among local governments in similar sorts of operating environments (say, rural, regional and urban local governments), rather than across all local government jurisdictions. The key here is efficiency measurement, which involves a comparison between the observed and theoretically optimal values of services and resources given the available technology, and which may or may not take allowance of the differences in operating environments. In other words, efficiency describes how well organisations use their resources in producing services and can take the manner of an absolute measure of performance. This can take a variety of forms, including comparisons in terms of service and resource quantities (such as maximising the quantity and/or quality of services and minimising the quantity and/or quality of resources) or economic goals or constraints (such as minimising the dollar cost of services or maximising revenues associated with services), and these can provide another useful tool for evaluating local public sector performance. In fact, efficiency measurement has already attracted the attention of a growing number of Australian reviews, reports and inquiries concerned with improving public sector performance [see, for instance, Industry Commission (1997), Steering Committee for the Review of Commonwealth/State Service Provision (1997; 1998), Independent Pricing and Regulatory Tribunal (1998) and Local Government Public Inquiry (2001)]. This chapter presents a discussion of some of the important issues likely to arise in calculating efficiency measures for local government and a representative sampling of some of the

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more recent evidence regarding local public sector performance assessment in this regard. The chapter itself is divided into six main areas. The first section briefly outlines the theory of efficiency measurement. The second section provides a synoptic review of the different techniques for the measurement of local public sector efficiency. The third section describes the ways in which the public sector provision of services differs from the private sector and the implications for efficiency measurement, and the fourth section deals with the literature on the empirical measurement of inefficiency in local public services. The fifth section discusses the determinants of local government efficiency. The chapter ends with some concluding remarks.

THE THEORY OF EFFICIENCY MEASUREMENT There are three main measures of efficiency. Firstly, technical or productive efficiency refers to the use of productive resources in the most technologically efficient manner. Put differently, technical efficiency implies the maximum possible output from a given set of inputs or the minimum possible inputs for a given level of output. Secondly, allocative efficiency involves selecting that mix of inputs (e.g. labour and capital) that produces a given quantity of output at minimum cost. That is, allocative efficiency chooses between the different ways in which a technically efficient level of output can be produced, and by taking into account the different prices of these inputs reflects the least costly combination. If a given local government uses its resources completely allocatively and technically efficiently, then it can be said to have achieved total or overall economic efficiency. Alternatively, to the extent that either allocative or technical inefficiency is present, then the organisation will be operating at less than total economic efficiency. It is important to realise that efficiency and productivity have both short run and long run interpretations. For instance, a particular local government may be technically efficient in the short-run, but may still be able to improve productivity by exploiting scale economies in the long run: that is, changing the scale of operations to achieve maximum possible productivity. Likewise, the technology employed to provide services will also change and this may also permit improvements in productivity. Accordingly, in the long run productivity gains can normally be decomposed into improvements in productivity associated with technical change, improvements associated with technical

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efficiency and improvements associated with increasing scale efficiency. Nevertheless, it is often difficult to quickly alter the scale of operations, especially in local government when the scale of operations is determined exogenously by its jurisdictional characteristics. The empirical measurement of economic efficiency then usually centres on determining the extent of either allocative efficiency or technical efficiency or both in a given local government or a given group of local governments. Depending upon the technique used, both interjurisdictional and intrajurisdictional comparisons can usually be made. Researchers have employed production possibility frontiers, production functions and cost functions in their attempts to measure efficiency in actual organisations and industries. Production possibility frontiers map a locus of potentially technically efficient output combinations an organisation is capable of producing at any point in time. To the extent an organisation fails to achieve an output combination on its production possibility frontier, and falls beneath this frontier, it can be said to be technically inefficient. Similarly, to the extent to which it produces some combination of goods and services on its production frontier, but which do not coincide with the wants of its clients (usually expressed in terms of the prices they are willing to pay), it can be said to be allocatively inefficient. Production functions provide an analogous means of relating inputs to outputs in a production process by including input prices. Cost functions transform the quantitative physical information in production frontiers into monetary values. Cost functions can thus convey information about the allocative and technical efficiencies of organisations in pecuniary terms. Accordingly, if we can determine production frontiers, production functions, or cost functions that represent total economic efficiency using the best currently known production techniques, then we can use this idealised yardstick to evaluate the economic performance of actual organisations and industries. By comparing the actual behaviour of organisations against the idealised benchmark of economic efficiency we can determine the degree of economic efficiency exhibited by some realworld agency such as a local government. One approach to establishing this benchmark is the use of least squares econometric techniques (LS) whereby a line of best fit establishes an average level of performance. Another is to use only organisations that are operating at the frontier as the standard of performance. This general approach to efficiency measurement has been termed the ‘deterministic frontier approach’ (DFA).

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However, it may well be that deviation away from a given efficiency frontier may be due not to inefficiency by the organisation in question but rather to external factors beyond its control. This has led to the development of the ‘stochastic frontier approach’ (SFA), which seeks to take these external factors into account when estimating the efficiency of a given real-world organisation. In contrast to both the DFA and SFA techniques, which attempt to determine the absolute economic efficiency of organisations against some given benchmark of efficiency, the ‘data envelopment analysis’ (DEA) approach seeks to evaluate the efficiency of an organisation relative to other organisations in the same industry. DEA thus calculates the economic efficiency of a given organisation relative to the performance of other organisations producing the same good or service rather than against an idealised standard of performance. An important variant of the DEA methodology sometimes employed in the analysis of economic efficiency in the public sector is known as the ‘free-disposal hull’ (FDH) approach. This technique has the advantage of being able to determine existing best-practice in an industry on the basis of fewer observations and it does not assume the existence of many different ways of producing some good or service. We will return to these five different methods of measuring efficiency in our discussion of the empirical measurement of inefficiency in local public services. More detailed analyses of the theoretical foundations of microeconomic efficiency measurement may be found in Fare, Grosskopf and Lovell (1994), Coelli et al. (1997) and Blank (2000).

EFFICIENCY MEASUREMENT TECHNIQUES As discussed, at least five principal methods have been used to measure efficiency in local government. These are: (i) least squares (LS) econometric production models; (ii) the deterministic frontier approach (DFA); (iii) the stochastic frontier approach (SFA); (iv) the data envelopment analysis approach (DEA); and (v) free-disposal hull approach (FDH). To start with, for much of the history of production analysis, one focus of analysis has been on traditional least squares (LS) econometric production models by which estimated functions of interest pass through the data. For example, in a cost function, costs are specified as the dependent variable in a regression against output quantities and input prices, while for a profit function approach profits are regressed against input and output prices. While no strict behavioural

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assumptions are made in regard to production functions, the behavioural assumption underlying the specification of a cost function is cost minimisation, while an assumption of profit maximisation is made for profit functions. Irrespective of the model actually specified, the line of best fit always defines the standard of performance against which all organisations within a sample are compared. For example, most studies use a simple Cobb-Douglas or translog cost function to estimate the efficiency of local authorities. The efficiency measures themselves are calculated from the residuals of the regression equations, with positive and negative residuals indicating authorities with costs that were higher or lower than the predictions associated with the cost function. Unfortunately, while least squares econometric production models (LS) are well within the computational abilities of most researchers and all statistical programs, for the purposes of efficiency measurement the resulting average function can be a misleading indicator of efficient production possibilities in both theory and practice. In practice, the emphasis on average performance serves to institutionalise inefficiency: that is, the average standard acts as a disincentive to improvements in performance. And in theory the concept of an average production function is largely inconsistent with the notion of any form of maximising behaviour that may be expected to hold within most, if not all, production processes. As a result of this fundamental limitation, the focus of the more recent development of efficiency measurement has been on the evocative term ‘frontier’. That is, interest is now placed upon extreme values and bounding functions, rather than those of central tendency and best fit. Thus, production may take place below or on the frontier, but at no points beyond it. This is the primary departure point from the LS approach to efficiency measurement and has been manifested in both the statistical (DFA and SFA) and non-statistical (DEA and FDH) approaches to efficiency measurement. It is also a logical extension since frontier performance comparison flows directly from the definition of a production function itself. Put simply, if production is a process of physical transformation whereby inputs are translated into outputs, then the production function should be interpreted as a purely technical relationship that defines efficient transformation possibilities, given the feasible set of technology. Specified rates of output thereby correspond to given factor inputs and they may be said to represent solutions to a technical maximisation problem.

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In the process of econometric analysis being brought to bear on the investigation of the structure of economic frontiers, a number of broad distinctions or approaches have also been made. The first fundamental distinction is between statistical and nonstatistical approaches to production frontiers. Following Schmidt (1985, p.295), ‘... a statistical approach depends on assumptions about the stochastic properties of the data, while a non-statistical approach does not’. Within this distinction, Schmidt (1985, p.295) argues that differences may be reflected in: [W]ays that are trivial (e.g. an econometrician speaks of ‘estimating’ inefficiency while a management scientist speaks of ‘measuring’ it) and in some ways that are not (e.g. a statistical analysis should yield standard errors for its estimates, while a non-statistical analysis cannot). The second fundamental distinction is between the econometric approach to the construction of frontiers (DFA and SFA) and what may be termed the mathematical programming approach (DEA and FDH). As a general rule, the econometric approach represents a significant modification to conventional econometrics, whilst the mathematical programming approach as an inherently bounding technique requires little or no modification in the analysis of production frontiers. The two approaches also use different techniques to envelop data, and therefore make different accommodations for random noise and for flexibility in the structure of the production technology. And all other things being equal, the econometric approach is stochastic, attempting to distinguish the effects of random noise from the effect of inefficiency, and parametric, combining the effects of a misspecified functional form with inefficiency, whilst the mathematical approach is nonstochastic and nonparametric. These differences between the two approaches serve as a suitable framework for future discussion, although, as we shall see, attempts have been made to make the econometric approach more flexible in its parametric structure, and the programming approach more stochastic. First, the econometric approach is stochastic and thus noise can be separated from the inefficiency measure while the mathematical approach is non-stochastic (or deterministic) and it is impossible to clearly distinguish between noise and inefficiency. The exception to the stochastic properties of the econometric approach (as epitomised in the SFA) is the earlier work encompassed in the deterministic

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frontier approach (DFA). In that instance, all deviation from the estimated frontier is interpreted as inefficiency, and no allowance is made for either measurement or misspecification error. However, apart from this distinction the DFA and SFA are remarkably similar since as econometric techniques both can be employed to conduct conventional tests of hypotheses. Second, the econometric approach is parametric, thus suggesting that a functional form is required, and thereby risks the problem of specification error. This holds for both the DFA and SFA methods. This is an important consideration because in many contexts the normal axioms of productive activity (i.e. cost minimisation, profit maximisation, etc.) may break down. Contrary to this, the mathematical approaches (namely DEA and FDH) are non-parametric, and thus largely avoid the problem of mispecification [FDH differs from DEA only in that it has even less restrictive assumptions]. This has widened their appeal in public sector applications. However, to compute this a large amount of data is required to ensure that the majority of efficiency points are considered and, as nonstochastic techniques, both of these methods are particularly susceptible to measurement error and the presence of outliers. With the exception of the largely obsolete least squares (LS) and deterministic frontier (DFA) econometric methods, the present section has addressed two separate, though conceptually similar, theoretical approaches to the assessment of efficiency. These are the stochastic frontier approach (SFA) and the mathematical programming DEA approach (including FDH). Whilst the selection of any particular approach is likely to be subject to both theoretical and empirical considerations, it may be useful to summarise the strengths and weaknesses of each technique. The emphasis here is not on selecting a superior theoretical approach, rather it should be emphasised that the SFA and DEA approaches address different questions, serve different purposes and have different informational requirements. The most commonly used approach, namely data envelopment analysis, differs from the econometric approaches to efficiency measurement in that it is both nonparametric and nonstochastic. Thus, no accommodation is made for the types of bias resulting from environmental heterogeneity, external shocks, measurement error, omitted variables, etc. Consequently, the entire deviation from the frontier is assessed as being the result of inefficiency. This may lead to either an under or over-statement of the level of inefficiency, and

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as a nonstochastic technique there is no possible way in which probability statements of the shape and placement of this frontier can be made. In view of erroneous or misleading data, some critics of DEA have questioned the validity and stability of measures of DEA efficiency. However, there a number of benefits implicit in the mathematical programming approach that makes it attractive on a theoretical level. Given its nonparametric basis, it is possible to considerably vary the specification of inputs and outputs, the formulation of the production correspondence relating inputs to outputs, and so on. Thus, in cases where the usual axioms of production activity break down (i.e. profit maximisation) then the programming approach may offer useful insights into the efficiency of these types of industries. This is especially the case with local public sector activities. Similarly, it is entirely possible that the types of data necessary for the statistical approaches are neither available nor desirable, and therefore the imposition of as few as possible restrictions on the data is likely to be most attractive. The second approach examined, namely the stochastic frontier (SFA), removes some of the limitations of DEA. Its biggest advantage lies in the fact that it introduces a disturbance term representing noise, measurement error, and exogenous shocks beyond the control of the production unit. This in turn permits the decomposition of deviations from the efficient frontier into two components, inefficiency and noise. However, in common with other econometric approaches, an assumption regarding the distribution (usually normal) of this noise must be made along with those required for the inefficiency term and the production technology. The main effect here is that, when using the stochastic frontier approach, considerable structure is imposed upon the data from stringent parametric form and distributional assumptions. Notwithstanding these comments, stochastic frontiers and DEA should be thought of as complementary tools in the analysis of local public sector efficiency. In both cases it is possible to think of the calculated and estimated production frontiers as being the maximal output that can be obtained given a set of input quantities and prices. But it is also possible to think of the maximum as being taken with respect to either those local governments in the sample (as with DEA), or with respect to all local governments that could conceivably exist and still embody the current technology (as with the stochastic frontier).

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In the first instance, the frontier adheres closely to the notion of bestpractice efficiency, whereas in the second it refers to an absolute measure of efficiency. Clear advantages thereby accrue to DEA in identifying benchmark local governments and peer groups for comparison, while the stochastic frontier permits the opportunity for direct comparison with other institutional milieus.

PROBLEMS IN MEASURING LOCAL GOVERNMENT EFFICIENCY There are several distinguishing characteristics that set public sector service provision apart from private sector service provision. These present a problem for efficiency measurement in two regards. First, most of the efficiency measurement techniques discussed in this chapter were originally developed in the context of private sector provision and later adapted for use in the public sector. Accordingly, some of the behavioural assumptions underlying these techniques may be inappropriate or difficult to interpret in a public sector context. Second, some of the inherent characteristics of local public sector provision make interjurisdictional and/or intertemporal performance comparisons difficult. To start with, it goes without saying that the public sector differs from the private sector. In the private sector it has long been assumed that, in the long run, the discipline imposed by the marketplace motivates firms to strive for cost efficiency and profit maximisation, facilitated by feedback from the markets for capital, corporate control and managerial labour. These include measures derived from profits, rates of return on assets, investment and invested capital, market share and market power. In contrast, the public sector is generally seen to lack both an analogue for profit-seeking behaviour and an adequate feedback system to assess the quality of decisions. It is argued that there are five main aspects of government services that may make it difficult to develop and implement performance measures, including measures of efficiency. First, the outputs of a service provider may be complex and/or multiple (Mark 1986; Hatry and Fisk 1992). Furthermore, there may be difficulty in establishing cause and effect between the activities of a service and the final outcomes it seeks to influence, and these may be evident only after considerable time (SCRCSSP, 1997 p.7). Second, government organisations may encounter problems in identifying the cost of producing and delivering services (Ammons

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1986, 1992; Ganley and Cubbin 1992). For example, there may be difficulty apportioning costs across different services or the costs of a given program over long periods of time. Certainly, this problem has been mitigated by the introduction of systems of management accounting and accrual accounting (SCRCSSP 1997 p.7). Third, complexity in government services may exist due to the interplay of related services and programs (Epstein 1992; Carter, Klein and Day 1995). For instance, performance indicators may need to capture the positive and negative spillover effects of service provision (SCRCSSP 1997, p.16). Fourth, there are potentially many users of governmental performance information. Different lines of accountability and the disparate informational requirements of government, taxpayers, employers, staff, consumers and contractors create additional complications in performance measurement (SCRCSSP, 1997 p.16). For example, the Industry Commission’s (1997 p.58) report on Australian local government performance indicators received a number of submissions suggesting that the ‘most relevant measure for the Commonwealth and state governments may be a financial measure, but for local government and its community stakeholders it is [the focus] on outcome measurements and the effectiveness of resource inputs’. Finally, a number of restrictions placed by these stakeholders may impinge upon the theoretical ability of government entities to improve efficiency, and therefore bring the orientation of performance information into question. For example, Ammons (1986 p.191) argued that the intergovernmental mandating of expenditures and intergovernmental grant provisions may restrict the ability of government bodies to modify behaviour, whereas Miller (1992) maintains that the budget process itself has an important contribution to the notion of performance. These characteristics almost invariably manifest themselves in the data available to researchers in order to conduct performance measurement in general and efficiency measurement in particular. This is important because the confidence we have in the findings of such assessments depends, or should depend, on the quality of the underlying data. One major data problem is that it is difficult to define, and therefore measure, the services being provided. For example, should local public sector output encompass the final public service it provides such as health and wellbeing, cultural and intellectual development, sense of community, economic development and overall community satisfaction? Or, as is more commonly the case, should it rely upon the

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intermediate public services that are generally more measurable such as the number of users of community health and library services, the area of parks and gardens, the number of development and building applications processed and the length of sealed roads? A second data problem is that the input and output prices that are frequently employed as weights to construct aggregate resource or service indices in the private sector are frequently missing in the public sector. The prices of particular local services may be obscured in general expenditure or it may be difficult to elicit the community’s preferences for one type of services over another and therefore determine the optimal mix of output. Ideally, data collection would include not only the quantities of services provided and resources consumed, an operating budget or both, but also service prices if charged along with resource prices. Finally, for most local public services quality, as well as quantity, matters. Not only is quality inherently difficult to define, let alone measure, but also many aspects of quality, while valued by users, are unpriced. For example, the quality of a library’s collection will indeed vary and could be measured, but additional aspects of quality such as waiting times for reference services, pleasant surroundings and opening hours may be less tangible. Two or more measures indicators of service provision quality are then required.

STUDIES MEASURING EFFICIENCY IN LOC AL PUBLIC SERVICES As we have seen, at least five different approaches have been employed in the analysis of local public sector efficiency. These are: (i) least squares econometric production models (LS); the deterministic frontier approach (DFA); (ii) the stochastic frontier approach (SFA); (iii) the data envelopment analysis approach (DEA); and (iv) the Free Disposal Hull approach (FDH). Details of some of these approaches are provided in Table 10.1. Firstly, as observed earlier, some of the earliest work undertaken concerning local government efficiency measurement is within the context of the long-established least squares econometric techniques. In this approach, negative deviations from the line of best fit are interpreted as representing entities that are less-efficient than average, while positive deviations represent entities that are more-efficient than average. Examples of work in this area include Cubbin et al. (1987), Domberger et al. (1988), Deller, Chicoine and Walzer (1988) and Deller and Rudnicki (1992). Secondly, the deterministic frontier approach is an

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econometric technique that assumes that all deviations from the frontier are the result of inefficiency: that is, inefficiencies are embedded in a strictly one-sided disturbance term. Studies by Bjurek, Hjalmarsson and Forsund (1990) and De Borger and Kerstens (1996a) have used this approach. Thirdly, as we have seen, the stochastic frontier approach is also an econometric technique, though it assumes a two-component error structure so that the inefficiencies usually follow an asymmetric halfnormal distribution and the random errors are normally distributed. Examples of work in this area include Viton (1992), Deller and Halstead (1994) and Vitaliano (1997). Fourthly, in line with our earlier comments, the DEA approach is a mathematical programming technique which assumes that all deviations from the estimated frontier represent inefficiency. This approach has been applied to local governments by Cook, Roll and Kazakov (1990), Rouse, Putterill and Ryan (1995), Worthington (1999) and Worthington and Dollery (2002). Finally, as we have noted earlier, the FDH approach is a variant of DEA that allows the assumptions concerning the production technology to be kept to a minimum. Examples of work using this approach include Tulkens (1993), De Borger, Kerstens, Moesen and Vanneste (1994) and De Borger and Kerstens (1996b). Firstly, a number of studies have used stochastic frontiers (either cost or production) to analyse the efficiency of the local public sector. For example, Hayes and Chang (1990) used a sample of 191 U.S. municipalities to test efficiency differences between ‘city manager’ and ‘mayor-council’ forms of government. Formulating a cost frontier, they obtained total costs for three categories of local public sector output (i.e. fire, police and refuse collection) and specified outputs in terms of the number of respective employees. The price of capital was proxied by the municipalities’ bond rating and the price of labour by the average municipal employee’s salary. They found that the mean cost efficiency of mayor-council municipalities (84.78 per cent) was higher than that of city-manager type councils (81.21 per cent). Put differently, mayor-council municipalities could reduce costs by 15.22 per cent and produce the same level of output, while city-manager councils would need to reduce total costs by 18.79 per cent to become purely cost efficient. Subsequent to Hayes and Chang (1990) a number of studies also examined municipal service efficiency employing stochastic frontiers. Using this approach, Steven Deller made an extended inquiry into the

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efficiency of municipal road services in both Illinois, Minnesota and Wisconsin (Deller and Nelson 1991; Deller 1992; Deller, Nelson and Walzer 1992) and Maine, New Hampshire and Vermont (Deller and Halstead 1994). In the latter study a cost frontier was used, with the cost of capital proxied by the weighted average of new capital items, the price of labour by wages, and output by the length of roads under municipal jurisdiction. In the former studies, standard production frontiers were employed. In these cases there was an attempt to incorporate quality considerations into municipal output, with roads defined as being gravel, or low or high-volume bituminous roads. Regional cost-of-living indices were also included. The resultant empirical evidence indicated mutatis mutandis that current expenditures on rural low-volume road service were unnecessarily high because of managerial inefficiencies: in particular, ‘efficiency measurements suggested that costs could be reduced, on average, to 45 per cent of current levels’ (Deller, Nelson and Walzer 1992, p.364). Secondly, an increasing number of studies have employed the nonparametric technique of data envelopment analysis to investigate local public sector efficiency. Cook, Roll and Kazakov (1990) used DEA to measure the relative efficiency of Ontario’s highway maintenance patrols. The inputs in this case were patrol maintenance and capital expenditures (along with an allowance for environmental factors) and the outputs were stipulated in terms of the characteristics of the roads serviced and an accident prevention factor. The resulting efficiency scores were then used to classify maintenance patrols into a number of classes for analytical purposes. One finding was that the technical efficiency of patrols where the proportion of ‘privatised’ work was 20 per cent or more was higher than those patrols with less than 20 per cent of privatised work. An identical theoretical framework and sample was subsequently employed in Cook, Kazakov, Roll and Seiford (1991), and Cook, Kazakov and Roll (1993). Bjurek, Kjulin and Gustafsson (1992) examined the technical and scale efficiency of Swedish public day-care centres. Inputs were defined in terms of the number of hours worked by pre-school teachers, nurses and cooking and cleaning staff, and outputs denominated by the capacity of children, aged up to two years, and from 3 to 6 years. Hjalmarsson and Veiderpass (1992) examined the efficiency of 285 Swedish public electricity distributors. Inputs included the discretionary levels of labour, and the non-discretionary length of transmission lines and transformer capacity, and the outputs were

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specified in terms of both volume of kilowatts and the number of customers. Hjalmarsson and Veiderpass (1992) found only modest efficiency differences between public and private electricity distributors. Rouse, Putterill and Ryan (1995) also used DEA in a study of New Zealand local authority road maintenance. Conceptually very similar to the earlier stochastic frontier work of Deller (1992) and the nonparametric approaches of Cook, Roll and Kazakov (1990) and Cook, Kazakov, Roll and Seiford (1991), the study incorporated environmental factors as major cost and process drivers. The empirical analysis contained an index of road surface defects and a measure of ‘roughness’ for both urban and rural roads. For the measures obtained under the assumption of variable returns-to-scale, 39 of a possible 62 transport local authorities were judged to be 100 per cent technically efficient, with 12 below 70 per cent, and the remainder between 70 and 100 per cent efficiency. Finally, more recent work has employed the FDH approach to efficiency measurement, and has been based largely on studies of Belgian municipalities, with a focus on cost efficiency. De Borger and Kerstens (1996, p.149) argue that this approach is closely related to the nature of the data: A consequence of the Belgian institutional framework is that the sample does not contain input price variability. There is no wage flexibility as salary scales of municipal personnel are completely fixed. Moreover, all municipalities have access to the same capital market, and in fact obtain most of their funds from one and the same specialised financial institution. Therefore, the assumption of identical input prices across municipalities may not be too unreasonable. Consequently, throughout the analysis we focus on the measurement of cost efficiency. Within this approach, and those followed by Vanden Eeckaut, Tulkens and Jamar (1993) and De Borger and Kerstens (1996a, 1996b), the inputs into the FDH model are total municipal expenditures. The outputs are denoted in terms of variables intended to reflect the responsibilities of Belgian municipal governments. These include total population, length of roads, number of persons aged over 65 years, those living on subsistence grants, the number of students enrolled in local public schools, and the maintenance of recreational facilities. The results indicate that mean relative cost efficiency

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scores range from 0.57 to 0.94. Put simply, inputs (and therefore costs) could be reduced anywhere from 6 per cent to 43 per cent across Belgian councils. Moreover by using FDH, the measure of performance is drawn from the actual sample so that cost-efficient councils can easily be identified for benchmarking. In addition, productive efficiency frameworks have also been used to test the relative efficiency of the same sample of Belgian municipalities. De Borger, Kerstens, Moesen and Vanneste (1994) employed an analogous conceptualisation of outputs, although inputs were measured in terms of white and blue-collar employee and capital stock (proxied by the surface area of municipal-owned buildings). Significantly, De Borger and Kerstens (1996a; 1996b), amongst others, attempt to incorporate the multiple outputs produced by Belgian municipal governments into a single measure of efficiency. This stands in stark contrast to the other work on public sector efficiency which focused on specific aspects of service provision, such as roads, schools, welfare services and transportation [see, for example, Bjurek, Kjulin and Gustafsson (1992), Tulkens (1993), Rouse, Putterill and Ryan (1995)]. At least three aspects of the efficiency measurement of local public services deserve further attention. These are (i) the appropriateness and sensitivity of efficiency measures to the postulated reference technology, (ii) the appropriate treatment of non-discretionary inputs/outputs in local public services, and (iii) the choice of input or output orientation in efficiency measures. First, several studies have analysed the efficiency of local governments using a broad variety of reference technologies [see, for instance, Bjurek, Hjalmarsson and Førsund (1990), Vanden Eeckaut, Tulkens and Jamar (1993), and De Borger and Kerstens (1996a)]. In a study of Belgian municipalities, De Borger and Kerstens (1996a) used both parametric (deterministic and stochastic frontiers) and non-parametric (FDH and DEA) methods to evaluate the sensitivity of the rankings of municipalities with respect to the underlying reference technology. They observed that not only may the shape of the efficiency distribution be affected by the use of different approaches, but that they can also alter the implied rankings of individual observations. Using Spearman rank correlation and Pearson product moment correlation coefficients, they demonstrated that statistically significant differences existed between FDH and DEA, whilst ‘DEA has a slightly higher similarity in ranking relative to the [parametric approaches]’ (De Borger and Kerstens 1996a, p.159). The estimated range of

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mean efficiency scores also was quite large, with cost efficiency measures between 0.59 and 0.83. Using these observations, De Borger and Kerstens (1996a, p.167) concluded, ‘it would seem prudent to analyse efficiency questions using a broad variety of methods to check the robustness of the results’. Vanden Eeckaut, Tulkens and Jamar (1993) undertook a similar comparison. However, their results were disaggregated on the basis of expenditure classifications, and thereby indicate how consistency between rankings may vary over the sample. Comparing FDH and DEA under variable returns-to-scale, constant returns-to-scale and non-increasing returns-to-scale assumptions, they found that all three DEA methods yielded similar results for large expenditure class municipalities. Some 15 to 22 per cent were found to be cost efficient. For the second expenditure class some divergence between the methods was found, and accordingly, concordant rankings and mean efficiency scores were once again established. Second, the standard Charnes, Cooper and Rhodes (1978) and Banker, Charnes and Cooper (1984) model formulations implicitly assumed that all inputs and outputs are discretionary (i.e. controlled by the management of each municipality and varied at its discretion). In most circumstances we would expect that this assumption would not hold for the local public sector. For example, in a technical efficiency formulation the geographic, environmental and demographic characteristics of a given municipal area are important inputs into the process of providing local public services, yet they are also exogenously fixed and thereby nondiscretionary. Alternatively, in a cost efficiency model [such as those employed by De Borger and Kerstens (1996a)] the outputs of the local public sector relate directly to the demographic and socioeconomic characteristics of the municipality. The usual case is that these outputs, both quantitatively and qualitatively, are largely imposed by some minimum state or national legislation. Two approaches are available to purge efficiency measures of these exogenously fixed nondiscretionary inputs and/or outputs. The first method is to incorporate these assumptions into a single-stage procedure following Banker and Morey (1986) and Golany and Roll (1993). Efficiency measures thus obtained are based on the premise that for an input(output)-oriented model, it is not relevant to maximise the proportional decrease (increase) in the entire input (output) vector. Rather, maximisations should only be determined with

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reference to the sub-vector that is composed of discretionary inputs (outputs). Examples of this approach include Worthington’s (1999) analysis of local government libraries, where the nondiscretionary inputs include socioeconomic, demographic and geographic characteristics and Worthington and Dollery’s (2002) study of local government’s planning and development function. In this instance, the non-discretionary inputs included the population growth and distribution and an index for heritage and environmental sensitivity. The second method uses a ‘two-stage approach’. In the first stage, a frontier model in which only factors under a municipality’s control are included as inputs is used to compute efficiency scores. In the second stage, those efficiency scores obtained are regressed on factors beyond a municipality’s control. The difference between the computed efficiency score from the first stage and its predicted value forms the second stage. The residual is used as an index for measuring ‘pure’ technical efficiency, which could be attributable to management. Examples of this kind of work include De Borger and Kerstens (1996a) and Worthington and Dollery (2002). In their analysis of Australian local government’s planning and regulatory function, Worthington and Dollery (2002) conclude that while there is overwhelming theoretical evidence that all inputs and outputs, both discretionary and nondiscretionary, should be included in efficiency analyses, reconciling the two approaches is more difficult. Rouse et al. (1996, p.22), for example, argues that ‘…policymaker’s attitudes [to environmental factors must be clearly understood] before any firm conclusion is reached on the choice of methodology and interpretation of results’. Accordingly, there is considerable variation in the existing literature as to how nondiscretionary factors are incorporated in efficiency measures. The final issue revolves around the selection of an input or output orientation in efficiency models. For instance, in an input orientation, focus falls on the proportional reduction of inputs to achieve efficiency, whereas in an output orientation, emphasis is placed on the proportional augmentation of outputs. Although many contributions to the performance literature on the local public sector have focused on input efficiency measures [see Hayes and Chang (1990) and Vanden Eeckaut, Tulkens and Jamar (1993)], the use of the output orientation is not unknown [see, for example, Deller (1992)]. Whilst the exact formulation will depend on a particular empirical context, De Borger and Kerstens (1996b, p.11) reason as follows:

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In principle, the choice of orientation should be inspired by the postulated underlying behavioural mode. If one assumes that local governments take outputs as exogenous (for example, determined by citizen’s demand) and have substantial control over inputs, then an input orientated measure seems appropriate. Input measures can then detect failures to minimise costs resulting from discretionary power and incomplete monitoring, and provide an indication of possible cost reductions. If on the other hand municipalities have limited control over inputs and face fixed budgets, then an output-oriented approach may be quite informative. Output measurement can then identify municipalities that fail to maximise the quantity of the local public services subject to the budget they face, and provide indications of the increase in outputs that could potentially be realised.

DETERMINANTS OF LOCAL PUBLIC S E C TO R E F F I C I E N C Y In contrast to other areas where frontier efficiency measurement techniques have been employed, hypotheses to explain variation in local public sector efficiency are relatively underdeveloped. However, three exceptions should be noted. These include empirical research relating to the impact of political factors, community characteristics, and the impact of financial structure on local public sector efficiency. Firstly, a number of studies have postulated a relationship between the political composition of the municipal council and the level of efficiency. For example, Vanden Eeckaut, Tulkens and Jamar (1993) generate evidence for the case that political majorities are an explanatory factor for observed inefficiencies. Using municipalities in the (Frenchspeaking) Région Wallone area of Belgium, they obtained data on the three major national political parties (Parti Socialiste, Parti Social Chrétian, and Parti Réformateur Liberal) and local parties, and categorised municipalities in terms of coalition composition, party majority and strength and mayoral affiliation. Their results indicate that the proportion of inefficient municipalities is lowest for liberals and socialists, followed by anti-socialist (majorities obviously formed to exclude socialists), local parties, and finally tripartite coalitions. However, municipalities with liberals and socialists in the majority also have the highest proportion of efficient municipalities ‘by default’:

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that is, whilst they do constitute the frontier, they do not dominate any interior municipality. Vanden Eeckaut, Tulkens and Jamar (1993, p.317) note that ‘this finding qualifies somewhat the superiority of their performance relative to other parties’. De Borger, Kerstens, Moesen and Vanneste (1994) further emphasised the contention that a politician’s emphasis on political rather than economic rationality is likely to contribute to inefficiency. They postulate that the influence of political agents on bureaucratic selection and the use of explicit and implicit log-rolling may be an important factor in this process, which in turn is construed to be a function of the size of political coalitions. Expounding no compelling a priori argument for party-related inefficiency, they incorporate a qualitative variable for liberal and socialist party coalitions, and a quantitative variable for the number of coalition partners in a tobit censored regression model. The results indicate that the number of coalition partners does not exert an influence on municipal efficiency, although the presence of liberals tends to decrease technical efficiency, while the presence of a socialist party does not seem to have any statistically significant effect. Secondly, several studies have incorporated community characteristics in two-stage efficiency models. For example, De Borger and Kerstens (1996a) incorporate the use of per capita income on the grounds that ‘bureaucratic slack’ increases with organisational income. In other studies they also include the proportion of the population with a primary (De Borger, Kerstens, Moesen and Vanneste 1993) or higher (De Borger and Kerstens 1996b) education qualification to quantify political participation. Only in the case of the latter is their hypothesis (i.e. that education increases efficiency) confirmed. In the analysis of a specific local government function, namely library services, Worthington (1999) specified municipal population and area, the proportion of the population from various groups (non-English speaking background, aged and students) and an index of socioeconomic disadvantage as relevant community characteristics. Worthington (1999, p.41) concluded, ‘the study reinforces the importance of taking into account the imposed conditions that impinge upon a given local government’s ability to perform efficiently’. Vitaliano (1997) used a stochastic cost frontier to analyse the technical efficiency of U.S. public libraries with an expanded set of public choice-type determinants. These included the percentages of total funding derived from local sources, gifts and investments. His

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study concluded that ‘government-run libraries are 2.7 per cent more inefficient than private not-for-profits. And donated resources and greater reliance on local taxation are linked to less inefficiency’ (Vitaliano 1997, p.640). Lastly, a number of studies use a broad demographic indicator, either total population (De Borger, Kerstens, Moesen and Vanneste 1994) or population density (De Borger and Kerstens 1996a). The basic argument is that a low population level may inhibit exploiting economies of scale in some or all of the production processes. Equivalently, the cost of provision will rise with lower population density. Both of these studies concluded that increases in actual population and population density are associated with improvements in efficiency. The final set of explanatory variables employed relates to the fiscal parameters of the local public sector. For example, high tax prices may enhance the monitoring process of constituents. Likewise, the well-established and extensively surveyed fiscal illusion literature indicates that misperceived fiscal parameters, like total per capita tax burdens or total expenditure outlay, may increase local expenditure, and accordingly be associated with inefficiency [see Dollery and Worthington (1996a)]. De Borger, Kerstens, Moesen and Vanneste (1994) and De Borger and Kerstens (1996a) use the size of intergovernmental grants to present a case for the influence of the flypaper effect in particular. The results in both cases are generally similar to those of De Borger, Kerstens, Moesen and Vanneste (1994, p.353) where ‘grants may not only encourage local service provision, but that they also lead to some additional technical inefficiency…the local tax rates that we experimented with failed to produce significant estimates’. Lastly, Worthington and Dollery (2000b) provide evidence concerning the interplay between the productive performance of local governments and the revenue-raising system under which they operate. While this paper only addressed the issue of intergovernmental grants, it suggested that it was possible that other revenue-raising devices may also exert an influence on local government efficiency. For example, while rate revenue is subject to rate-pegging and other controls, fewer restrictions are placed on local governments’ use of user charges and fees and contributions. The growing importance of alternative sources of revenue means that local governments may be able to prop up inefficient operations from sources other than grants. Alternatively, the use of user pays systems such as these may actively

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promote efficient outcomes in local government services. Whether the level and composition of own-source non-rate revenue has a systematic influence on productive efficiency is an empirical question that needs to be addressed.

CONCLUSION Whilst relatively underdeveloped, especially when compared to the extensive financial services literature, a good foundation for the measurement of local public sector efficiency has nevertheless been laid. Problems do remain. For example, issues concerning the appropriate behavioural specifications to employ, problems with unmeasured inputs and outputs, and the choice between alternative computational techniques have yet to be resolved. However, these are no more insurmountable than related issues that have arisen in the fields of financial services, health and education, amongst others, where similar identical efficiency measurement techniques have been gainfully applied. To some extent, the lessons learned from these areas serve as useful pointers to solutions in the analysis of local public sector efficiency. That said, empirical analysis of local public sector efficiency suggests that it is a unique product of complex non-discretionary inputs and outputs and constraints, multiple inputs and outputs, and inherently complicated political, institutional and cultural factors. What implication can then be drawn from the preceding discussion of efficiency measurement for practitioners and researchers in local government? In the first place, despite significant technical advances in the application of efficiency measurement techniques to the local public sector, as we have seen there are important caveats in the manner in which their results should be treated. For example, most efficient measurement methodologies embody both discretionary variables (i.e. those variables which can be controlled by management) and non-discretionary variables (i.e. those variables which are exogenously determined and cannot be influenced by management). Obviously the spatial distribution of local government (with attendant differences in climatic conditions, socioeconomic characteristics of the jurisdictional population, regional input price variations, etc.) and structural constraints imposed by higher levels of government (competitive tendering procedures, accounting methodologies, ratecapping, etc.) can greatly influence the efficiency of local government operations. Likewise, the idiosyncrasies arising from elected municipal

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councils (political interference with operational matters, special interest considerations, etc.) imply that local government managers are once again constrained by a host of non-discretionary factors in arriving at efficient outcomes. Accordingly, frontier efficiency measurement techniques that do not explicitly acknowledge the significance of these factors should be treated with caution. Secondly, the complex politicised milieu of local government implies that the effectiveness of services is at least as important as economic efficiency in gauging the success of specific municipalities facing different demands. Efficiency measurement is concerned only with the dimensions of economic efficiency and takes no account of the effectiveness of service provision. It is thus, in itself, only a partial view of the operations of councils. Notwithstanding these caveats, efficiency measurement techniques are increasingly applied to local governments throughout the developed world. The results of these statistical exercises will surely continue to show differences in efficiency within and between local authorities. Moreover, critics of local government will doubtless seize on results of this kind as a means of attacking existing service provision and its management. Clearly, familiarity with efficiency measurement techniques and their drawbacks will assist local government practitioners in dealing with this kind of criticism.

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11 LOCAL GOVERNMENT FAILURE Brian Dollery

The phenomenon of government failure, defined here as the inability of a government agency or agencies in a given tier of government or in a federal system of multi-tiered governments to intervene optimally in a market economy, is now a familiar area in policy analysis. In this chapter I advance the argument that not only is government failure an essential dimension of policy making at all levels of government, but that cogent reasons exist for believing that the problem of government failure may be much more acute in local government than at higher tiers of governance. This argument runs counter to conventional wisdom amongst commentators on municipal policymaking, most notably the views of authoritative British scholars Bailey (1999) and Boyne (1998). Moreover, I develop a new taxonomy of government failure in support of this thesis. The application of the public choice approach to the public sector has generated various taxonomic systems of government failure. For example, perhaps the earliest typology of government failure was developed by O’Dowd (1978, p.360) who argued that all forms of government failure fell into a generic tripartite classification containing ‘inherent impossibilities’, ‘political failures’ and ‘bureaucratic failures’. A somewhat more recent and closely related taxonomy of government failure has been advanced by Dollery and Wallis (1997) who argue that it is possible to identify three main forms of government failure: legislative failure, bureaucratic failure, and rent-seeking. But possibly the most comprehensive typology of government failure has been developed by Weisbrod (1978), who has advanced a fourfold classification which comprises legislative failure, administrative failure, judicial failure and enforcement failure.

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The chapter itself is divided into three main parts. Section one focuses on the typologies of government failure, which have been especially constructed for local government by Boyne (1998) and Bailey (1999). A new fivefold taxonomy of local government failure is developed in part two, which attempts to highlight the peculiar susceptibility of this tier of governance to government failure. The chapter ends with some brief concluding remarks in section three.

TA X O N O M I E S O F L O C A L GOVERNMENT FAILURE The literature contains comparatively few instances of the application of public choice theory to a specifically local government context in the sense of developing a taxonomic theoretical system of government failure, with some exceptions, most notably Boyne (1998) and Bailey (1999). In his Public Choice Theory and Local Government, Boyne (1998) develops a taxonomy of competitive categories in local government which can influence the degree of government failure at this level of government. He distinguishes between ‘three distinct forms of competition’ in the local government arena. Firstly, there is ‘competition between public organisations for a share of tax revenues and service responsibilities’ (p.1). Secondly, political parties should compete for the power to determine policy choices in local government jurisdictions. The final form of competition which can prevail in local government has been described by Boyne (1998, p.1) as ‘competition between governmental and private organisations for control over the production of public services’. Boyne argues that for effective Tiebout-style competition to occur in the local government various conditions must be met to ensure that nature of this competition results in efficient outcomes, which are often ignored by public choice theorists. These conditions include ‘horizontal fragmentation’ or a large number of local governments at a given level of government, ‘vertical fragmentation’ in which several tiers of government compete, and ‘substantial local autonomy’, where ‘local communities should have the discretion to innovate, experiment and develop distinctive policies’ (p.22). Drawing on the work of Albert Hirschman (1970), Bailey (1999) approaches the question of government failure at the municipal level from a somewhat different perspective. Hirschman (1970) developed the concepts of ‘exit’ and ‘voice’ as alternative means by which consumers of public services can influence the provision of these services and thereby decrease the degree of government failure they experience. In generic

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terms exit refers to the capacity of citizens to choose between alternative producers of some specified service. By contrast, voice refers to the ability of consumers to express their preferences for a different mix or quality of public services through various administrative mechanisms, like electoral voting, complaints to public service managers and customer surveys, without migrating away from their municipal jurisdictions. As methods by which citizens can influence the extent of government failure at the local government level, both exit and voice have various limitations. Bailey (1999, pp.47–48) identifies five main characteristics of local public services which can inhibit the effectiveness of voice in municipal affairs. ‘Legal and institutional barriers’ in the form of diluted political representation, electoral and procedural irregularities, inadequate public hearings, and so forth, can all serve to impede political attempts aimed at improving public services. ‘Information asymmetries’ between public bureaucrats and citizens concerning the nature and costs of public service delivery can also constrain the efficacy of voice. Where services are highly differentiated as, say, in the case of the quality of education provided by different schools, voice by some citizens may only influence the behaviour of a particular school rather than the whole school system, in contrast to undifferentiated services where voice will have more general effects. The socioeconomic characteristics of the population in a particular jurisdiction may be a decisive factor, with bettereducated, affluent groups more likely to express voice than their poorer, less educated counterparts. Finally, the greater the relative importance of some public service to the perceived welfare of a population, the more important voice will be as a means of addressing government failure. Exit is also subject to a number of constraints which are spelt out by Bailey (1999, p.48). The non-excludability characteristic of public goods may preclude exit altogether when these are national public goods, and even for some local public goods like poor environmental protection legislation may involve expensive relocation. Natural monopolies similarly preclude exit where they cover large geographical areas. Legislative impediments to entry by alternative suppliers of a service may negate exit possibilities, as in the case of national telecommunication providers. In large countries with uneven concentrations of population, such as Australia, Canada and the United States, large local government jurisdictions with small numbers of people may generate spatial barriers to exit. And lastly, imperfect information available to consumers may mean they are unaware of the relatively unattractive service provision they are currently receiving, and thus induce them to underestimate the benefits of exit.

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A N E W TA X O N O M Y O F LOC AL GOVERNMENT FAILURE The various taxonomic systems of government failure which I have highlighted shed considerable light on the numerous ways in which this phenomenon can manifest itself in market economies characterised by representative democracy. Moreover, it would appear that not only are the generic forms of government failure ubiquitous in the sense that they apply to governance systems in all advanced countries, but that they also occur at all levels of governance in these countries. Needless to add, the weight of evidence suggests that government failure is much more severe in developing societies than in their developed counterparts (Grindle, 1997), but either the fragility or absence of democratic institutions in these nations would seem to imply that the origins of government failure in the developing world are due to institutional incapacity and dictatorship rather than the functioning of a sophisticated democratic process. Nevertheless, with the significant exceptions of Boyne (1998) and Bailey (1999), the extant taxonomies of government failure discussed earlier are designed to apply to all tiers of governance and contain no explicit suggestion that some levels of government may be more susceptible to government failure than others. Moreover, even though both Boyne (1998) and Bailey (1999) direct their attention exclusively at municipal governance, there is no indication that they believe local governments are especially predisposed towards government failure in comparison with higher levels of government. Indeed, both authors seem to think the relative ease of exit from local government jurisdictions should make municipalities rather less prone to government failure than their more august counterparts. In contrast to this literature, I contend that cogent reasons exist which suggest that local governments are much more susceptible to government failure than higher levels of government. Furthermore, drawing on the existing taxonomic literature contributed by public choice theorists, I develop a new fivefold typology of government failure in order to sustain this claim. In essence, I argue that at the level of municipal governance, it is possible to identify five main forms of government failure which, although they might also afflict federal and state governments, are nonetheless especially evident in the operations of local government. These kinds of government failure can be termed ‘voter apathy’, ‘asymmetric information and councillor capture’, ‘iron triangles’, ‘fiscal illusion’ and ‘political entrepreneurship’. I shall examine each of these proposed taxonomic categories in turn.

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VOT E R A PAT H Y

A fundamental proposition of public choice theory holds that, in general, voting by citizens in political elections is an irrational activity since the process of voting is costly whereas the benefits associated with voting are negligible (Aldrich, 1997). Yet obviously in the real world people do vote, although in many instances participation rates are low. This so-called ‘paradox of voting’ can be resolved if voting is viewed as a consumption activity. Moreover, in western societies the socialisation process strongly emphasises the civic virtues associated with political participation. Although the conception of voting as a consumption activity may thus explain why people vote in elections, it cannot predict how voters will choose between alternative options once they are inside the polling booth. The conventional analysis of this question focuses on the economic dimensions of the choice; voters weigh up the costs and benefits of competing policy options and select the policy which maximises their net benefit in terms of outcomes (Mueller, 1989). However, more recent literature on ‘expressive voting’ seems to indicate that the actual choice of electors depends more on preferences for options rather than outcomes, where options do not consider the costs involved in outcomes (Brennan and Buchanan, 1984; Faith and Tollison, 1993). Despite the undeniable fact that the right to vote plays a decisive role in democracy, together with related constitutional rights, including free speech and freedom of association, the act of voting in democratic elections is fraught with ambiguities. For instance, the substantial costs of gathering and digesting information on competing candidates, alternative policies, the costs and benefits of policy platforms, and the like, together with the fact the vote of an individual elector cannot realistically influence electoral outcomes, means that most voters choose to remain ‘rationally ignorant’ on many of the issues involved. Similarly, voters typically play dual roles in the political process, acting both as potential beneficiaries of public policies and as prospective financiers of these policies in their capacities as taxpayers. Despite the centrality of voting in the democratic process, it is by no means the only element in collective decision making. Numerous other mechanisms exist, some of which I noted earlier in the discussion on Hirschman’s (1970) ‘voice’ concept, which range from formal voting procedures to opinion polls, protest meetings, petitions, ‘talkback’ radio shows and the like. These alternatives to voting serve to diminish its significance in electors’ eyes and contribute towards low political

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participation rates, ill-informed voters, and the various other problems associated with elections under representative democracy. Although the difficulties arising from voter apathy undoubtedly afflict both the electoral process and its subsequent ‘responsiveness’ to the preferences of citizens at all levels of government, the problem seems to be most acute local government. It is possible to identify several factors that may account for this observation. Firstly, and perhaps most importantly, in many local government systems, voters do not perceive periodic municipal elections as politically significant events because the behaviour of local governments is severely constrained and manipulated by state and national governments. Local governments simply ‘don’t matter in the scheme of things’. For example, Bailey (1999, p.265) notes that in Britain ‘by the early 1990s, central government directly controlled about two-thirds of local government income and also had powers to cap local rates as well as having a significant influence on other revenue sources such as rents for municipal housing’. It is thus hardly surprising that not only were voter turnouts low in British local government elections, but voters also seemed to view them ‘…as little more than opinion polls on the popularity of central government’ (Boyne, 1998, p.69). Similarly, with respect to New Zealand local government, Kerr (1999, p.4) has observed that ‘there is a low turnout at elections, usually no more than 50 per cent, despite postal voting’. Even in the United States, where local governments enjoy considerable autonomy, voter apathy is most pronounced at the local level. By comparison, in state and national elections voter participation rates have generally been substantially higher (Loughlin, 1986), except in countries with compulsory voting, like Australia. A second reason for greater voter apathy in local government elections resides in the fact that in many countries these elections are not contested along party political lines, and even in those nations where political parties do participate, many candidates do not have party affiliation and party affiliations may in any event be much weaker than at the state or federal levels of government. Accordingly, voters do not have the informational benefits of party platforms to assist them in making informed choices. For instance, in the United States, political parties often play little formal role in municipal elections largely because in many jurisdictions they are debarred from participation as a consequence of the earlier ‘reform movement’ aimed at removing corruption from American urban politics (Hawley, 1973). Along similar lines, in many parts of Australia, including regional and rural New South Wales, longstanding convention usually precludes municipal candidates from adopting explicit partisan platforms.

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Media reporting of local government elections is typically much less comprehensive and unquestioning than for comparable federal and state ballots and consequently affords voters much less opportunity to become well-acquainted with the policy platforms of individual candidates standing for election. Whether this is a cause or simply an effect of voter apathy is a moot point, but it nevertheless surely accounts for a greater degree of ill-informed voting in municipal elections than their counterparts at higher levels of government. Because of their lower public profiles and complicated interface, governance and management roles in municipal government are often confused in the eyes of many citizens, who cannot readily distinguish between elected representatives and professional public servants. Thus, perceived responsibility for past policy successes and failures is difficult to assign between the councillors and managers. Moreover, the committee systems characteristic of numerous local governments serve to further confuse the question of responsibility (Kerr, 1998). Finally, the nature of local government activities itself makes any evaluation difficult. Municipalities typically deliver a vast range of services, even where their focus is on the relatively narrow ‘services to property’ dimension of delivery. Under these circumstances, not only is monitoring of service delivery an onerous task, but accountability is extremely difficult to establish. It is thus little wonder that citizens remain apathetic about the operations of local government. The relatively high degree of voter apathy in local government, in comparison with its national and provincial counterparts, provides greater scope for government failure at this level of governance. In general, it can be argued that apathetic voters might not only elect inadequate representatives, but also fail to scrutinise their performance with a sufficient degree of rigour. For example, where voters are comparatively ill informed about the election platforms of councillors they are in a poor position to judge whether subsequently elected candidates have indeed met expectations or carried out their mandates. Similarly, given accountability and monitoring difficulties, citizens may experience difficulties in ascertaining how well municipalities are performing and who is responsible for any noteworthy problems that may arise. This seems to provide local government legislators with greater scope for opportunistic behaviour than their colleagues at higher levels of government and accordingly makes local government more prone to what both Dollery and Wallis (1997) and Weisbrod (1978) classify as legislative failure. This may explain why in many real-world jurisdictions, state and

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federal governments sometimes retain statutory powers to override the decisions of local governments or even suspend local governments and arrange new elections. A S Y M M E T R I C I N F O R M AT I O N A N D C O U N C I L L O R C A P T U R E

Given the comparative lack of scrutiny afforded elected local government representatives by apathetic municipal voters, relationships between these councillors and senior professional managers in the local government bureaucracies take on even greater significance than comparable relationships between politicians and public servants at higher levels of government. Ronald Wintrobe (1997, p.430) has posed the central question in this context by asking ‘how much influence does the bureaucracy have over what (and how much) governments do?’ One way of understanding the nature of these relationships is through agency theory. If we conceive of the public sector in a representative democracy as being constituted by an interlocking series of principal-agent relationships, then the importance of agency failure becomes apparent. For example, Moe (1984, p.765) observes that ‘the whole of politics can be seen as a chain of principal-agent relationships, from citizen to politician to bureaucratic superior to bureaucratic subordinate and on down the hierarchy of government to the lowest-level bureaucrats who actually deliver services directly to citizens’. This view leads to an approach to public sector reform that seeks to reduce the scope for agency failure in these relationships. I contend that the agent/principal problems between elected representatives and professional bureaucrats in the local government milieu are likely to be much more acute than in their federal and state counterparts. Various arguments can be advanced in support of this contention. For instance, outside large metropolitan local governments, elected municipal representatives typically hold part-time positions and are remunerated accordingly. In the majority of cases they are thus obliged to have alternative full-time employment not only to sustain themselves economically in the short run, but also as a form of longer-term insurance against the possible failure of re-election in the future. They are thus unable to devote their full attention to the duties of their elected office. One consequence is often an inability to master the complexities and minutiae of local government finances and service delivery. This leads to a strong reliance on the advice and information provided by professional mangers. Following the economic theory of bureaucracy, these managers may be motivated to pursue objectives in conflict with those espoused by elected representatives. Moreover, in accordance with

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agency theory and the lack of capacity for elected representatives to monitor principal/agent relationships with managers adequately, managers are well placed to exploit the resultant agency failure. Put differently, since the ‘hands-on’ nature of their jobs means managers are bound to be much better informed than councillors, and since managers are the chief policy advisers to councillors, it seems likely that by manipulating the asymmetry of information to their advantage, managers can ‘capture’ councillors and thereby the policy outcomes they desire. Although analogous problems clearly exist at higher levels of government, because elected representatives in national and state governments serve in a full-time capacity, they can devote much more time and energy to mastering the complexities of the bureaux they oversee and are thus not as badly disadvantaged by problems of asymmetrical information and attendant capture as their colleagues in local government. A similar and related argument derives from the fact that elected municipal councillors seldom have access to policy advisers at all, never mind advisers with a detailed knowledge of the workings of local government. By contrast, it is commonplace in state and federal governments for elected representatives to have constant access to professional advisers and researchers well versed in the intricacies of policy formulation and implementation who can assist them in evaluating and ‘filtering’ information from public service managers. Whilst the presence of such policy advisers and researchers obviously cannot completely nullify the problem of asymmetric behaviour in the interactions between politicians and public sector executives and thus altogether remove capture, it surely goes some way towards overcoming these problems. Agenda control represents an additional means by which wellinformed bureaucrats hold a comparative advantage over their relatively ill-informed political masters and can thus out-manoeuvre them in agent/principal terms. In their ‘setter model’, Romer and Rosenthal (1978) have shown how bureaucrats can control the outcomes of votes by elected councillors (or actual citizens in referenda) by specifying the alternatives which are voted upon. More specifically, councillors may be called to vote on a particular budget proposal. If a majority favour the proposal, then it is accepted. If a majority reject the proposal, then expenditure is set at a predetermined ‘reversionary level’. In essence, ‘the higher the reversion level, the higher the budget the bureaucratic setter is able to extract from voters’, (Wintrobe, 1997, p.438), and if the reversionary level of expenditure is set higher than the pre-vote expenditure, then this also allows for budget growth.

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Finally, strategies of ‘selective behaviour’ (Breton and Wintrobe, 1982), especially ‘selective efficiency’ (Wintrobe, 1997) can be embarked upon by bureaucrats using their advantage of asymmetric information. Wintrobe (1997, p.431) describes selective efficiency as a means by which ‘…bureaucrats control their masters’ choices by being efficient at the things they want to do, and inefficient at those they do not’. Thus when elected representatives oblige public managers to implement policies against their will, these can be confounded by deliberate inefficiency until they are withdrawn. Conversely, in areas where bureaucrats wish to expand operations, they can ensure efficient delivery and bring this to the attention of politicians. Given the greater degree of asymmetric information in municipal governance, it can be argued that selective efficiency is likely to prove a more potent weapon than at higher levels of government. IRON TRIANGLES

Whereas some of the earlier taxonomies of government failure I noted made explicit reference to citizens attempting to divert scarce resources from governments to themselves, like Dollery and Wallis’ (1997) rentseeking category, most of these typologies nevertheless at least implicitly recognised that individuals and interest groups seek to influence both policy formulation and implementation in self-interested ways. The analysis of interest groups in redistributing wealth and power through the political process has been approached by economists from at least three main theoretical directions. Firstly, and perhaps most importantly, the theory of rent-seeking tries to explain the ways in which citizens as wealth maximisers seek to use government intervention to create economic rents for themselves. The resultant burgeoning literature has provided fascinating insights into the interplay between state intervention and maximising economic agents (Buchanan, Tollison and Tullock 1980). A second theoretical perspective on the role of interest groups in the political process derives from Mancur Olson’s (1965) pioneering work on distributional coalitions. Olson sought to provide a generalised analysis of ‘…the problem of collective choice, the prisoner’s dilemma, the free-rider problem and the conditions of common fate, depending on the context (or discipline) in which it arises’ (Barry and Hardin 1982, p.19) by invoking the economic paradigm of rational choice in group or collective behaviour. Finally, endogenous policy theory, first developed by Magee, Brock and Young (1989), can also shed light on the manner in which interest

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groups can manipulate the political process to secure their desired distributional outcomes. In essence, this theoretical perspective investigates the nature of economic and social policy formulation and tries to explain why welfare-reducing policy distortions exist since they are not rational from the point of view of society as a whole. Magee, Brock and Young (1989) distinguish between the concepts of economic efficiency and political efficiency. They argue that ‘economically efficient policies create greater gains than losses whereas inefficient policies do the reverse’ (Magee, Brock and Young, 1989, p.1). By contrast, politically efficient policies are those which increase the probability of election of parties and candidates. Moreover, a trade-off generally exists between economic efficiency and political efficiency. Although policy formulation and implementation at all levels of government will be characterised by rent-seeking distributional coalitions maximising self interest in a process of endogenous policy development, it seems likely that powerful interest groups may be particularly successful in the local government sphere. I have argued earlier that municipal politicians generally without strong party affiliations are often elected on ill-defined policy platforms by apathetic and ill-informed voters and their activities are typically not subject to the same degree of media and other scrutiny as their colleagues at higher levels of government. Similarly, professional bureaucrats enjoy far greater discretion as a consequence of the acute asymmetry of information between them and their part-time political masters. Moreover, outside of the American political system, with its strong emphasis on congressional committees and other delegated powers, and in contrast to Westminster-style parliamentary democracy, local government relies much more on standing committees to oversee its operations. For instance, municipal councils usually have ‘parks and gardens’ committees to run its public open spaces programs, ‘roads and maintenance’ committees to direct its public thoroughfare operations, and so forth. Interest groups can thus readily identify specific politicians with powers over particular aspects of municipal activity and target these individuals accordingly. They can also form alliances with municipal managers in charge of the various programs and attempt to influence the advice these bureaucrats give to committee members. In this way ‘iron triangles’ made up of elected committee councillors, professional managers and interest groups can arise which dominate policy making in specific areas. Often these interest groups will be made up of sub-contractors who undertake operations for municipalities, suppliers who provide goods and services to councils, property developers who

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build and renovate residential and other areas, and businesses that enjoy preferential zoning arrangements and licensing agreements. The tripartite composition of these confluent colluding associations — or ‘triangles’ — and the difficulty of penetrating into them — or their ‘iron’ nature — mean that these iron triangles will tend not only to be dominant for considerable periods, but also stable through time. Rent-seeking in this situation will aim at the formation and protection of iron triangles and countervailing rent-seeking by individuals and groups outside of triangles will consist of attempts to join existing triangles or replace extant triangles with new ones. Olson’s (1965) categorisation of interest groups as either potentially successful (‘privileged’) or inherently unsuccessful (‘latent’) will determine the outcome of rent-seeking activity. Resultant policy formulation and implementation can be characterised as endogenous in the sense that it represents the interplay of the interests of the politicians, bureaucrats and interest groups who form the iron triangle in question. Bailey (1999) argues that distributional coalitions are likely to have a greater deleterious effect on resource allocation in local government than at higher levels of government in a federation. He contends that a high proportion of local tax payments are fixed by various rules, not least property taxes which depend on land value, and do not vary significantly with the consumption of local government services. Under these circumstances, distributional coalitions have an incentive to attempt to change the level of service provision in their favour or to modify the distribution of service provision with a given and largely exogenously determined fixed total municipal budget. Accordingly, the activities of interest groups will focus heavily ‘…on the distribution of incremental expenditures and much attention is paid to annual budget changes which are small in relation to the overall budget’ (Bailey, 1999, p.97). No distributional coalition will be willing to accept a fall in the services it receives because no corresponding change in its tax liability could occur, given the structure of municipal finances. Since opposing interest groups may tend to neutralise each other’s influence, existing expenditure regimes would tend to remain fixed. This means inter alia that local governments experience great difficulties in meeting ‘changed socioeconomic conditions’, with the result that allocative inefficiencies would inevitably intensify. Boyne (1998) believes that the degree of ‘fragmentation’ or decentralisation of local government might affect the demand for ‘spatially divisible’ public goods as opposed to ‘spatially indivisible’ public goods. Spatially divisible goods benefit particular localities rather than encompass-

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ing neighbouring zones whereas spatially indivisible goods benefit much greater areas. Thus residents of a given jurisdiction will prefer relatively more spatially divisible goods on grounds that the benefits of these goods will fall exclusively on them and adjacent jurisdictions will not be able to ‘free ride’ on the fruits of their rates and taxes. A similar argument can be advanced with respect to the power and enduring nature of iron triangles. I would expect that the greater the degree of fragmentation, the more significant would be the impact of iron triangles on policy making. After all, small local governments will attract less voter interest, enjoy minimal oversight by elected politicians, and draw little media attention in comparison to larger municipal entities where the ‘stakes are higher’. Accordingly, iron triangles are probably easier to form in fragmented systems. The possibility of corruption within iron triangles also appears to be greater at the local government level than at higher tiers of governance. For example, Rodden and Rose-Ackerman (1997) point out that the ‘smallness’ and ‘intimacy’ of municipal jurisdictions makes them especially susceptible to corruption. Similarly, after reviewing the evidence, Susan Rose-Ackerman (1999, p.149) observes that ‘the most corrupt and patronage-ridden governments seem to be at the local level in most countries, including developed countries such as the United States and Germany’. FISC AL ILLUSION

In advanced modern economies governments undertake a bewildering array of expenditure and regulatory functions and finance these activities through a myriad taxes and charges on their citizens. Measuring the size and cost of government has thus proved both conceptually and empirically difficult even for professional economists (see, for example, Dollery and Singh, 1998), let alone participants in the political process, especially voters. One consequence of the size and complexity of contemporary government in industrialised societies resides in the phenomenon of fiscal illusion. In essence, the concept of fiscal illusion revolves around the proposition that the actual costs and benefits of government may be consistently misconstrued by the citizenry of a given fiscal jurisdiction. Five specific forms of fiscal illusion can be identified (Dollery and Worthington, 1996), two of which are especially important in the context of local government. Firstly, the ‘flypaper effect’, so-called since ‘money sticks where it hits’, refers to the hypothesised tendency for categorical lump-sum grants from federal to state and local governments to increase public

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expenditure by more than an equivalent increase in income from other sources. This proposition contravenes the ‘equivalence theorem’, a central proposition of the traditional theory of inter-governmental grants (Oates, 1972), which holds that a lump-sum grant to a fiscal jurisdiction will stimulate the same increase in expenditure that would flow from an equivalent increase in the private incomes of people who comprise the population of the jurisdiction. It would seem that voters misperceive grants as ‘gifts’ to their jurisdictions and overlook the fact that their tax liability rises at higher levels of government. Despite some reservations about the methodologies employed to investigate the realworld prevalence of the flypaper effect in local government, it appears that empirical evidence exists in support of the model, although this conclusion should be qualified by noting that institutional structures underlying the grants process in any country (or the problem of ‘endogeneity’) obviously play a major role in determining the strength of the flypaper effect (Worthington and Dollery, 1999). Notwithstanding theoretical difficulties in explaining the flypaper effect (Bailey, 1999), it seems clear that the stimulatory effects of intergovernmental grants on local government expenditure might prove to be a major source of government failure at this level of government. After all, around 35 per cent of American and 30 per cent of Australian local government revenues derive from grants from higher levels of government (Worthington and Dollery, 1999, p.4/5), whereas in the United Kingdom the corresponding figure is almost 80 per cent (Bailey, 1999, p.87). Gramlich (1977) has estimated that in the United States, lump sum grants from the federal government appeared to generate a fourfold increase in public expenditure in comparison to an equivalent increase in the income of local residents. Although the framework within which the intergovernmental grant process occurs differs in other advanced countries, and will obviously influence the expansionary effects of these grants accordingly, the resulting allocative inefficiencies are also likely to be substantial. Secondly, ‘renter illusion’ has quintessential significance in the local government milieu. This form of fiscal illusion holds that an increase in the proportion of property renters in a given municipal jurisdiction will increase the level of public expenditures ceteris paribus. The presumption is that since the primary revenue of local government derives from property taxes, only those voters who own property and are thus directly levied will correctly estimate the tax-price of local public goods. Although we could expect that higher property taxes will be

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passed on to renters through higher rents, the renters’ illusion hypothesis contends that a disjunction exists between a rental voter’s perception of the level of municipal services and the value of rents paid. Accordingly, renters will vote for higher levels of local public good expenditure than property owners. A considerable body of empirical evidence has been amassed on the renters’ illusion hypothesis and the weight of this evidence appears to support the hypothesis (see, for example, Dollery and Worthington, 1996, Table 4). However, several scholars have argued that ‘renter rationality’ might better explain the ostensible propensity of renters to support higher levels of local expenditure. According to this view, in the short-run property rentals are not affected by property taxes and so increases in taxes will not be passed on to renters (Barr and Davis, 1996). From the perspective of local government policymakers, whether or not renter rationality explains some or all of renter illusion seems less important than the putative fact that a greater proportion of renters in a jurisdiction will tend to bias expenditure upwards. Renter illusion makes local government especially susceptible to government failure for the obvious reason that higher levels of government are much less reliant on property taxes as a source of revenue. Moreover, rate-capping, rent controls and other factors which influence the nexus between rentals, property taxes and municipal income are typically exogenously imposed on local jurisdictions by state and federal governments. This means that allocative inefficiencies stemming from this source cannot easily be remedied by municipal policies themselves without the assistance of higher tiers of government. POLITIC AL ENTREPRENEURSHIP

Continuing in the tradition of Anthony Downs (1957) and many others, Olson (1965) sought to provide a generalised analysis of ‘…the problem of collective action, the prisoner’s dilemma, the free-rider problem, and the conditions of common fate, depending on the context (or discipline) in which it arises’ (Barry and Hardin 1982, p.19) by invoking the economic paradigm of rational choice in the context of group or collective behaviour. In its simplest form, Olson (1965) postulates the logic of collective action as an equation of cost (C), gross benefits to individual i (Vi), and net benefits to individual i (Ai) from their contribution to the collective effort of some group in the following form: Ai = Vi–C

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If Ai > 0 for any i, then the group in question is termed ‘privileged’, and will in general succeed in collective action. Alternatively, if Ai < 0 for all i, then the group is ‘latent’, and will fail in collective action unless additional individual incentives can be brought to bear. Firstly, selective incentives may exist which induce successful collective action as a byproduct of private incentives. In these cases, groups or organisations supplying collective goods simultaneously provide separate negative or positive incentives to group members or intended group members. And secondly, political entrepreneurship may be present where some individual or subset of a group finds it in their larger self-interest to provide collective goods to groups. Typically, politicians at the higher levels of government have worked their way through the party political ranks, as it were, to attain their level of office. A potted survey of politicians who have recently held high office in Australia provides support for this proposition. For example, Kim Beazley, Peter Costello, Tony Abbott, John Howard and Bob Hawke, to mention a few, all began their political careers in student politics. The behaviour of local government politicians can be analysed fruitfully using the concept of political entrepreneurship. Councils can be conceived of as breeding grounds for political entrepreneurs to not only capture the attention of political party officials at higher levels of government, but also of prospective voters in federal and state seats. The actions of political entrepreneurs in themselves cannot necessarily be seen as a cause of government failure. A political entrepreneur, by working toward the collective goals of a council, may induce the efficient delivery of public services. However, since ‘allocative inefficiency arises from the excessive provision of public goods as politicians pursue strategies designed to maximise their chances of re-election rather than policies which would further the common good’ (Dollery and Wallis 1997, p.37), we can hypothesise that if a municipal political entrepreneur seeks to advance her political career at higher levels of governance, her actions regarding public expenditure are likely to be correlated with capturing the attention of voters and party officials rather than the allocatively efficient provision of public goods. It can be argued that the problem of political entrepreneurship is likely to be felt more acutely at the local government level for at least three reasons. Firstly, since local government is typically the lowest level of government in a federation, with a large number of elected representatives, the proportion of political entrepreneurs is likely to be higher at this level than any other. Secondly, due to the high degree of voter apathy, and

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comparative lack of interest by the media in local government, a politician will need to embark on grandiose and eye-catching projects to become known by voters. Similarly, a local government political entrepreneur may find it expedient to deliver ‘change’ even if the current policy stance is efficient. Finally, since state and federal jurisdictions are typically larger in area and population than local government wards, political entrepreneurs may need to provide public goods that have a benefit region much larger than that of the local government they represent.

CONCLUSION I have presented a taxonomic view of government failure in local government which draws strongly on the generic typologies which have been developed by theorists operating in the broad public choice tradition. Moreover, I have sought to argue that cogent reasons exist which suggest that government failure in general, and agency failure in particular, are likely to be more acute in municipal government than its counterparts at higher tiers in a federalism. This conclusion is in contrast to views of both Bailey (1999) and Boyne (1999), who seem to believe that since inter-governmental competition is greater at the local government level it may be less susceptible to government failure. If local government failure is indeed more pronounced, then we should inquire as to whether it can be differentiated in kind from government failure at federal and state levels; that is, does it consist of a different mix of allocative inefficiency, productive inefficiency and distributional inequity. Without a detailed empirical examination of this problem, it is difficult to speculate with any degree of precision. However, it does seem likely that allocative inefficiencies may well be more evident since the relatively small size of municipal budgets makes trade-offs between alternative bundles of local public goods more acute. If local government is indeed more prone to government failure than state and federal governments, then this also raises interesting questions about the design of appropriate governance mechanisms for municipalities. For example, the amalgamation of small local government structures into larger units could moderate the extent of local government failure. Similarly, the case for competitive tendering and ‘out-sourcing’ may be stronger at the municipal level of government than its higher counterparts. Moreover, uniform national standards of service delivery could be imposed on local governments to oblige them to provide minimal levels of local public goods.

PA R T E FUTURE DIRECTIONS

12 FUTURE DIRECTIONS FOR AUSTRALIAN LOCAL GOVERNMENT Brian Dollery and Neil Marshall

This volume set out to examine some of the major contemporary issues confronting Australian municipalities at the start of the twenty-first century. Preceding chapters have considered various dimensions of Australian local government from several disciplinary perspectives, with individual contributions examining a range of concerns and policy dilemmas in some detail. Whereas these contributions offer specialist analyses of particular areas, the collection as a whole also provides a useful review of the transformation of the local government sector in recent years. This final chapter now attempts to draw together some of these insights and place them in the broader thematic context of future local governance in Australia. The chapter itself is divided into two main parts. In the next section we seek to assess the achievements of Australian local government over the recent past, especially in the areas of management, democracy and finance. By contrast, the final section concludes this volume by considering future directions that might assist in overcoming some of the problems raised. In particular, we discuss the potential significance of developing sound intergovernmental consultative bodies, encouraging the growth of regional organisations, enhancing the efficiency and effectiveness of local government service delivery by entrenching the principle of comparative advantage in all of its operations, and stimulating more discourse and inquiry into local governance.

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THE ACHIEVEMENTS OF AUSTRALIAN LOC AL GOVERNMENT M A N AG E M E N T

One of the most conspicuous achievements of local government over the past decade lies in the manner in which it has reformed its internal functions and processes. Councils have restructured their organisational frameworks to cater for the outsourcing of services, developed commercial capabilities to compete in the business arena, adopted an orientation towards outcomes as opposed to inputs, and introduced a range of corporate strategic practices. These activities, of course, are all features of the New Public Management (NPM) that has substantially influenced the operation of public agencies around the world. In Australia, the impact has been particularly comprehensive. So much so, in fact, that Caulfield (Chapter 2) suggests that Australian local government has emerged as an international leader in the extent to which it has adopted and implemented the new managerial style. To a considerable degree, the NPM was thrust upon councils by state legislation, and subsequently encouraged by both Commonwealth and state agencies. However, the exercise amounted to far more than a top-down imposition by higher levels of government. As Geoff Baker observes in Chapter 7, many local authorities were willing recipients of the new strategies and viewed them as critical tools with which to cope with rising community expectations and declining sources of revenue. Indeed, a number of councils across all states have used the precepts and techniques of NPM to respond creatively to the particular needs of their communities. Indicative of this situation is the nature of the awards made annually by the National Office for Local Government for innovative approaches in such areas as information technology, entrepreneurship and economic development (NOLG 2001, Appendix J). This is by no means a surprising result; Australian municipalities have a long history of being at the forefront of management in the public sector arena (Wettenhall 1988). In essence, the changes adopted by many councils appear to have been well-targeted and effective. In Queensland, for example, community attitude tracking surveys taken over the course of the 1990s reveal high levels of public satisfaction with local government’s activities. Significantly, respondents expressed greater confidence in the role of councils as service provider than the other spheres of government (LGAQ 2002, p.23). There are undoubtedly large variations in the

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effectiveness and efficiency of the performances of individual municipalities, both within and between states, as Baker notes (Chapter 7). Nevertheless, it would seem that overall the sector has performed well. While local authorities will doubtless continue to refine their internal structures and seek to improve outcomes, such gains are likely to be marginal in the foreseeable future. Further significant increases in efficiency will probably only eventuate when there is much improved coordination and alignment of activities between state agencies and councils. This will involve rethinking the nature of intergovernmental mechanisms. In particular, it will necessitate attention being given to the principle of subsidiarity — that is, each function of government should be devolved (where possible) to the lowest level of government, where such action best serves the interests of the community. Another challenge facing local government will involve the continuing shift away from traditional hierarchical administrative structures that have characterised councils in the past. Increasingly, as Joe Wallis indicates (Chapter 9), managers will have to adjust to operating environments based on market competition and the interaction of policy networks. Change of this order will require the acquisition of fresh skills and expertise. How both the above issues might be addressed is taken up later. D E M O C R AC Y

The reform spotlight has fallen so heavily on management in recent years that the democratic dimension of local government has, to a considerable extent, been overshadowed. Some commentators would put the even stronger view that a strident preoccupation with obtaining improved economic performance has had a detrimental affect on civic values. In this volume, Rosemary Kiss (Chapter 6) argues in part that state reform programs — and particularly the impact of amalgamations — have substantially weakened the democratic legitimacy of municipalities. The concerns raised by Kiss certainly emphasise the need for serious and sustained debate about the functions of local government within the broader Australian polity. At one level this process should involve an examination of the constitutional status of the sector, its roles and responsibilities vis-à-vis the state, and the nature of its relationships with higher spheres of government. In common with issues of service provision, such questions need to be tackled in the context of a formal intergovernmental structure and supported by highly developed protocols. At a broader level, wide-ranging dialogue surrounding the nature of the democratic mechanisms which underpin the function of local

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authorities is surely also necessary. One of the salient features of the reform processes across all the states in the 1990s was the absence of serious discussion about the theoretical principles on which local government should be based. The whole question of representative and participatory democracy, and the linkage between the two concepts, needs to be properly explored. Dynamic communities require sophisticated political structures that involve elements of both representative and participatory democracy. The appropriate mix of measures necessary to achieve the constructive involvement of constituents will vary both between localities and between states. The question of governance, however, needs to move beyond traditional notions of representation and participation to embrace consideration of a wider range of issues. These will include corporate governance perspectives (which Marshall examines in Chapter 8) and matters that pertain to local government failure, such as ‘voter apathy’ and ‘iron triangles’ (discussed by Dollery in Chapter 11). Equally important is an understanding of the wider fragmented and fluid environment in which municipalities now operate. Councils share their regional space and responsibilities with a range of autonomous bodies, whose actions, either directly or indirectly, have a significant bearing on the cultural, economic, social life of the community. Such bodies comprise boards and committees appointed by state authorities, state and Commonwealth government departments, adjoining councils, as well as regional organisations. The ability of elected members and officials to achieve strategic goals will depend upon their capacity to interact, and negotiate successfully, with these agencies. Such activity further reinforces Wallis’ argument in his chapter: it will be necessary for participants to build sustainable policy networks across diverse interests in order to secure appropriate policy outcomes. The final section of this chapter examines ways in which dialogue of this kind might be fostered. L O C A L G OV E R N M E N T E C O N O M I C S

Considerable progress has also occurred over the past decade in economics of local government. In common with higher tiers of government in the Australian federation, public sector reform has drastically changed the way in which local government approaches its core functions. Moreover, microeconomic reform, and especially National Competition Policy, with its key ingredients of competitive neutrality and deregulation, has transformed the operation of the Australian economy. Local governments have thus had to adjust not only to a dif-

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ferent internal regime, but also to new external realities. It is therefore not at all surprising that elected representatives and council managers alike have experienced severe difficulties coming to terms with an entirely new environment. Despite these difficulties, much has been achieved. In essence, the institutional structure and managerial practices of Australian local government changed almost beyond recognition. As we argued earlier, under the influence of NPM councils have become much less hidebound and bureaucratic and much more responsive to changes in their outside environment. Local government managers now have much greater latitude to act autonomously in terms of the NPM doctrine of ‘letting managers manage’, but also simultaneously face much more accountability with the establishment of separate cost centres, which link administrative responsibility with resource expenditure. Employment patterns within the municipal sector appear to have changed to accommodate these new developments. Executive positions are now widely advertised to attract ‘new blood’, and executive recruitment is often aimed at hiring individuals from outside of the organisation in order to stimulate fresh approaches to the problems confronting local government. Managerial remuneration has risen proportionately over the past decade, occasionally to the chagrin of constituents. Commensurate with the greater challenges facing councils, managers now possess greater institutional freedom to pursue alternative solutions. Substantial change in the external economic environment has also fostered an institutional revolution in Australian local government. Microeconomic reform has resulted in a much more flexible and deregulated market economy in Australia, with significant repercussions for the entire public sector, including local government. In essence, the principle of competition, with its purported benefits of enhanced economic efficiency, has been brought to bear on individual councils. Compulsory competitive tendering and outsourcing have become standard instruments in the policy armouries of local governments in their quest for greater efficiency. With the contracting out of service production and delivery now a viable possibility for municipal managers, the nature of Australian local government is shifting from service production and provision to service provision per se. The old nexus between service provision and service production has been severed. Councils are now charged with providing services, in the sense of paying for their production and delivery, and then arranging the best possible means of actually producing these services. Production may occur entirely

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through outsourcing to the most economical contractors, remain an integral part of a council’s activities through ‘in-house’ manufacture, or be divided through some kind of public-private partnership. Emphasis is on providing ‘best value’ to ratepayers on a case-by-case basis. The efficiency-inducing impact of this change can hardly be over estimated. Instead of the old doctrinaire insistence on council provision and production of municipal services, with all of its notorious waste and inefficiency, the introduction of actual and potential competition for the right to produce and deliver services means that not only those activities subjected to competitive tender become subject to market forces, but also goods and services still produced in-house will be affected by the possibility of outsourcing. Thus even people and capital resources still hired directly by councils themselves to produce and deliver services are obliged to become more efficient under the threat of outsourcing. The introduction of the competitive principle to municipal activities has necessitated profound institutional changes in the operations of Australian local government. The relevant Commonwealth and state government empowering legislation had to be thoroughly digested and applied in practice — no mean feat in itself. Tender and other procedures had to be developed and perfected to meet the new challenges. Managers had to streamline existing council operations to ensure that they could rise to potential competition by contractors from the private sector. This meant inter alia extensive training for employees and frequent restructuring of service departments. At the same time, the global revolution in information technology had to be accommodated and incorporated into day-to-day operations. It is to the great credit of those people in Australian local government that these sea changes were navigated with great skill on the whole. One of the most important changes that have taken place in the institutional milieu of Australian local government resides in the nature of financial reporting. Christine Ryan (Chapter 4) outlines the substantial changes that have accompanied the introduction of AAS27 Financial Reporting by Governments that now forms the framework for all public agency reporting in Australia, including local government. This methodology obliged municipalities to move from cash-based reporting to accrual-based reporting. The rationale for this change derived from the need to provide financial information in a form more accessible to the general public and to bring accounting practice more into line with that employed in the private sector. Whilst the complexities of the new reporting framework appear to have been admirably

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mastered by many municipalities, Ryan nevertheless argues that two main conceptual problems remain unresolved. In the first instance, it is not at all clear that AAS27 is entirely suitable for the valuation of assets and the associated problem of asset depreciation in the public sector. And secondly, the question of revenue recognition is problematic. Ryan contends that, despite the progress that has been achieved in council financial reporting, these areas need to be revisited. In addition to the revolutionary transformation wrought by public sector reform, NPM and microeconomic reform, Australian local governments had to face at least three further sources of change. Andrew Johnson (Chapter 3) provides an excellent analysis of the triad of pressures brought to bear on councils by severe constraints on revenue raising, unfunded mandates from higher levels of government, and rapidly rising expectations from constituents. Johnson shows how the current financial crisis confronting Australian local government derives in part from the inability of municipalities to raise sufficient funds to adequately discharge their duties, especially in the area of infrastructure development and maintenance. Rate capping by state authorities, insufficiently indexed grants from state and Commonwealth governments, and a marked reluctance by the public to pay ‘realistic fees and charges’ have meant that the growth in local government income has been rapidly outstripped by the demands on its resources. This problem has been intensified over the past decade by the inexorable downward shift of responsibilities from higher tiers of government, which local government has been constitutionally powerless to resist. Moreover, not only have state governments, in particular, placed the burden of additional functions on the unwilling shoulders of councils, in many cases these responsibilities have been unaccompanied by additional resources, or at least insufficient resources. The need to augment and maintain a costly and aging physical infrastructure has further intensified upward cost pressures. Compounding these cost and revenue pressures has been a growing ‘expectations gap’ derived from changing public perspectives on the appropriate role of local government. Johnson argues persuasively that people are no longer satisfied by the traditional ‘services to property’ role of Australian local government and demand instead a new and more resource intensive ‘services to people’ orientation. A substantial and rapidly increasing divergence between the abilities of local governments and the desires of their constituent groups has resulted. One method of tackling the ostensibly intractable problem of inexorably rising costs and insufficient revenue resides in enhancing the

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efficiency of Australian local government. Andrew Worthington (Chapter 10) has demonstrated that tremendous progress has been made towards measuring efficiency in local government and establishing appropriate benchmarks against which to evaluate the operations of individual councils. We have seen that a number of reforms have sought to achieve the goal of greater economic efficiency. For instance, the managerial revolution in local governance, with its attendant internal changes to municipal operations, has been instigated in order to make councils more cost effective. Similarly, the introduction of the competitive principle also represents an attempt to boost the efficiency of municipal resource use by allowing managers to use the cheapest available organisational solution to service production and delivery. A third policy option has sought to improve municipal efficiency by enlarging individual councils through amalgamation. This policy is based on (the largely empirically unsubstantiated) proposition that substantial economies of scale and scope derive from municipal size. Thus councils with larger populations are deemed to be able to produce and deliver services at lower costs than their smaller counterparts. Although we will examine the question of amalgamations, as well as policy alternatives in the form of ‘virtual councils’ and resource sharing, later in this chapter, for the present we simply wish to emphasise the far-reaching nature of structural reform in Australian local government over the past decade. As Paul May has indicated (Chapter 5), amalgamation has not been applied uniformly across all state and territory jurisdictions in Australia. Indeed, a continuum exists from the drastic ‘forced’ amalgamations undertaken in Victoria at the one extreme, to the ‘voluntary’ and concomitantly leisurely pace of restructuring in New South Wales at the other extreme. Nevertheless, considered as a whole, amalgamation has served as one of the major sources of change in Australian local government and thus serves to illustrate further the massive transformation of the sector over the past decade. The fact the affected municipalities have overcome many of the hurdles involved in amalgamation again underlines how well the sector has coped with rapid change.

FUTURE DIRECTIONS S TAT E / L O C A L PA RT N E R S H I P AG R E E M E N T S

We have sought to stress the importance of developing suitable intergovernmental mechanisms if some of the issues that have been identified are to be successfully addressed. The benefits to be gained from

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encouraging such activity have not been lost on state governments: indeed, over the past two or three years, they appear to have adopted a far more inclusive approach to the local government sector. All states seem to have exhibited an increasing willingness to collaborate with municipal leaders and have begun to construct more extensive consultative arrangements to facilitate interaction. However, the nature of this involvement varies significantly across jurisdictions. Tasmania undoubtedly leads the field in terms of its ‘whole-of-government’ approach to engaging its municipalities. In 1999, the State Cabinet approved the development of a system of Partnership Agreements with the local government sector. These agreements are intended to improve service delivery, and achieve specified social, economic and environmental objectives. The Agreements work at three levels. The first involves senior state agency managers negotiating with individual councils. Both parties attempt to identify priority issues of mutual concern, and find suitable solutions. Projects undertaken so far relate to tourism, information technology, sport and recreation, health, and heritage. Each individual Agreement is personally signed by the Premier. A similar process takes place at the regional level and comprises groupings of councils. Finally, at the State level, the Premier’s Local Government Council has been set up to consider state-wide matters, such as waste management and planning coordination. The Council consists of representatives of the Tasmanian Local Government Association and senior officials of state agencies (Scott 2002). South Australia has gone down a similar path to Tasmania, but is somewhat less advanced. The State’s decision to move in this direction followed a review in the late 1990s that examined the scope of interaction between state agencies and local governments. When it transpired that this activity was quite extensive, State Cabinet decided to launch ‘The State/Local Government Partnerships Program’ in 2002. The new venture was to be shaped and implemented by an appointed forum. Chaired by the Minister of Local Government, the forum comprises representatives from the South Australian Local Government Association, metropolitan and rural members of parliament, chief executive officers (CEOs) from state agencies, and senior managers from councils. The Partnership Program is intended to be a functional reform process directed at improving cooperation between state and local governments and addressing strategic issues of importance. Recently, the program has begun to operate on a regional basis, though this is not yet as clearly articulated as the Tasmanian approach (Proctor 2002, pp.7–9).

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Victoria has similarly embarked upon a strategy that contains some of the elements of the South Australian and Tasmanian approaches. In the wake of the 1999 election, the State government sought to regenerate a collaborative working relationship with the councils. An annual Regional and Rural Mayors Summit, chaired jointly by the Minister for State and Regional Development, and the Minister for Local Government, has been formed. The Local Government Consultative Council, which meets four times each year, has also been convened by the Minister for Local Government. Municipalities are represented in regional groupings and meet with relevant state agency officials on particular issues. Moreover, a bi-monthly forum consisting of council chief executives and officers from the Department of Local Government is held to consider matters relating to management (Digby 2002, p.4). However, the Victorian initiative is clearly still in its early stages of development. Current initiatives in Western Australia are even more recent. A year after the election of the Gallop Government in 2001, Cabinet outlined measures to introduce a State-local partnership arrangement based on a set of agreed principles. The model involves the Western Australian Local Government Association working with State authorities on policy formulation and decision-making in areas where both spheres of government are major stakeholders. A critical feature of the new framework is the establishment of a State and Local Government Council to oversee the partnership process. The Council consists of the Premier, Treasurer, key ministers, and local government representatives. Initial deliberations will focus upon building consultative protocols, and developing a number of shared policy projects (Burges 2002, p.20). It remains to be seen how the outcomes of these intentions will actually evolve over the next few years In contrast to the broad approach of these states, Queensland and New South Wales have chosen agency or issue-centred strategies. Queensland’s Department of Local Government uses the Integrated Planning Act 1999 to coordinate state and local planning. The Act provides for the establishment of Regional Planning Advisory Committees that encompass two or more local government jurisdictions. These Committees are not general planning forums. Instead they have been created to formulate policy relating to specific economic, social or environmental concerns. The Advisory Committees can make recommendations, but these can only be implemented through the voluntary co-operation of constituent councils. The Committees are not incorporated and have

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no authority to manage funds. Their function is essentially that of planning and co-ordination. Seven such bodies have been established in Queensland since 1999 (Meppem et al. 2002, Appendix B). The Department of Urban Affairs and Planning in New South Wales has been given responsibilities similar to Queensland’s Department of Local Government; it employs the provisions of the Environmental Protection and Assessment Act to integrate the State’s planning procedures. Plan First (2001) brings together all the State’s environmental and related planning activities under one heading. Emulating the Tasmanian approach, Plan First operates at three broad levels. At the ground level, after due consultation with residents, individual councils prepare ‘whole of community’ land use strategies, which include economic and social perspectives. In regional terms, a forum consisting of community and business representatives, state agencies and members of parliament, generates cross-regional proposals. Finally, at the State level, the Department of Regional Affairs and Planning monitors and coordinates the relevant planning activities of all state agencies. The Minister presides over the entire process and may amend local and regional intentions to ensure they conform to State requirements. Plan First, however, differs from Queensland in so far as the local government sector is treated as only one participant among many. Clearly, of all the state strategies outlined above, the Tasmanian initiative would seem to offer the most potentially effective intergovernmental framework. Partnership Agreements embrace a ‘wholeof–government’ approach that provides for structured and equitable interaction between players. When supported by protocols and the imprimatur of the most senior echelons of the state government, agreements will possess a high degree of credibility. They also provide an appropriate forum in which to consider the issues raised in the previous sections: the need to reconsider the financial situation of local authorities, especially the unfunded mandate (this is taken up in more detail later in the chapter), and the respective roles and responsibilities of the two levels of government. There is obvious scope here, too, to apply the subsidiarity principle. Finally, a system-wide perspective such as this facilitates an honest appraisal of the extent of the disparities exiting between metropolitan and regional areas, and the best means of redressing them. However, significant obstacles stand in the way of developing inclusive partnership arrangements. Not least of these is the mutual suspicion that has existed between state and local governments in some states for many years, even decades. Recently, the National President of the Local

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Government Managers Association went so far as to observe that ‘we have seen some state governments regard local government with disdain’ (Oxley 2002, p.3). While this comment was directed largely at the Victorian reforms of the 1990s, it also reflects the frustration felt in some quarters at the sector’s long-standing subservience to state governments. Even in South Australia, where relations between local governments and state agencies have been relatively benign, breaking down adverse perceptions has required a determined effort. For instance, Proctor (2002, p.11) has noted that ‘while we can make a difference in the way individual public servants in state and local government relate to each other, it is a very slow process indeed achieving institutional change’. The creation of partnership agreements will clearly take patience and time and will need to be shaped by the particular political culture of the state involved. A second major obstacle confronting the emergence of comprehensive partnership agreements is the logistical difficulties involved in determining the shape of structural arrangements. How do officials align and co-ordinate dozens of state programs with 68 local governments, in the case of South Australia, or 156 in Queensland? No doubt one of the factors underlying the success of Tasmania’s approach is the relatively small size of the state, and the limited number of state agencies and councils (29 in all) involved. In the more populous jurisdictions that possess administrative and infrastructure frameworks of substantially greater complexity, the difficulties are significant. We suggest that one long-term solution to this problem may be to encourage the growth of Regional Organisations of Councils (ROCs). The benefits that these entities offer are taken up in the following section. R E G I O N A L O R G A N I S AT I O N S O F C O U N C I L S ( R O C S )

ROCs are voluntary groupings of neighbouring councils. Though not well known in the broader public arena, they have been an established feature of the Australian local government landscape for many years. The first ROC was established in Tasmania in 1922. Others were formed in all states over the course of the following decades. There was a sudden increase in the numbers established during the early to mid-1990s as a result of federal government support for regional development. By 1995, Northwood (1995, p.1) estimated that there were about 50 such bodies in Australia covering almost 45 per cent of councils, and around 75 per cent of the population. This number fell during the 1990s as a result of the amalgamation programs implemented by South Australia,

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Tasmania and Victoria. In 2001, it is estimated that there were some 30 to 40 ROCs in operation (Marshall and Witherby 2002, p.1). The majority of ROCs consist of between five and fifteen councils (with the largest having 18). Size and population varies enormously; the Western Sydney Regional Organisation of Councils (WSROC), for example, is formed from 11 councils, covers 5851 square kilometres, and contains 1 500 000 residents. By contrast, the Murray Regional Organisation of Councils has only 10 members, but is spread over 63 257 square kilometres (some 7.8 per cent of New South Wales) and comprises just 45 532 constituents. The average ROC is financed by a set fee from member councils, supplemented by a pro rata contribution based on population or rates income. Participating councils appoint two or three individuals to sit on the ROC board. These representatives almost always include the mayor, along with another councillor and/or the CEO. Most ROCs are supported by administrative structures and specialist committees. Joining a ROC offers a number of benefits for participating councils. Firstly, meetings provide an opportunity to exchange ideas and consider issues of common interest. Such interaction also allows (often) disparate entities to foster a sense of cohesion and regional identity. Secondly, forums of this nature encourage the development of common policy on issues such as housing, soil and water management and records management. Because ROCs have access to expertise, data and experience that is drawn from across a range of councils, outcomes are more likely to be well informed. Thirdly, ROCs can assist in the coordination and rationalisation of activities across jurisdictions. Outcomes may range from a quite modest brochure for walking trails, for instance, to a set of complex environmental planning documents. Fourthly, ROCs facilitate resource sharing and joint purchasing arrangements. Such practices allow members to develop superior technical specifications addressed to their particular needs, and to provide for economies of scale in the use of expensive equipment. Smaller regional groupings benefit in this regard at least as much as the larger urban ROCs. Over a three and half year period in the late 1990s, for example, the Riverina Eastern Regional Organisation of Councils (2001, p.6) delivered savings of over $2.5 million to its 13 members through joint purchasing. Finally, and perhaps most importantly, ROCs function as regional lobbyists. When a group of councils can provide a united front on a particular issue, their views will usually carry much greater weight with the

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relevant federal and state authorities. Submissions are also more likely to be thoroughly researched and better argued. There is little doubt that some ROCs have become highly refined and knowledgeable in the techniques and strategies they employ. It is clear that many have achieved significant successes with their lobbying activities. Probably the most impressive outcome in this regard was the Western Sydney Regional Organisation of Council’s success in persuading the New South Wales government to appoint a separate Minister for Western Sydney. Certainly, there have been some very successful ROCs in Australia in recent years that have benefited from most or even all of these factors. Moreover, successes have not been confined only to the metropolitan areas. Several groupings of councils in regional and remote areas have formed highly effective organisations. It remains true, nonetheless, that the largest and most influential ROCs are situated around the capital cities. Not all ROCs succeed. Some are uninspired groupings that achieve only just enough to keep the entity intact. Others are disbanded after only a short period. A few experience a period of considerable achievement and then cease to exist. It remains uncertain, however, just what combination of characteristics is necessary to create a high-performing ROC. There is no clear mix of such variables as rates income, geographical size, population density, cultural homogeneity, length of time since establishment, or industry type, which might explain why some ROCs are more successful than others. Rather, it seems that the critical attributes which contribute to a successful ROC are the intangible factors of commitment, teamwork, regional vision, trust, openness, communication, leadership, and a willingness to cooperate. These last features, of course, correspond quite closely with Wallis’ notion of ‘network’ forms of governance where players interact in terms of shared values and operational understandings. Indeed, from this perspective, ROCs offer a framework for providing a stable, long-term structure for regional governance in Australia. ROCs evolve from the bottom-up, creating their own institutional arrangements and infrastructure requirements as they grow. This approach ensures that each grouping is attuned and adaptive to its particular regional needs. Because they emerge from the grass roots, ROCs are likely to enjoy a legitimacy and credibility in the eyes of constituents that an imposed level of government would take many years to achieve. In the context of this chapter we suggest that such a system of regional governance is a desirable development in Australia. ROCs offer

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many of the benefits of larger, formal administrative structures while simultaneously preserving the autonomy and sense of community valued by individual local authorities. Moreover, the ROC concept remains equally applicable in an amalgamated local government environment: even the largest merged municipality is unlikely to cover a whole region. The post-amalgamation experience in Tasmania and South Australia indicates that the need for groupings of councils remain as strong as ever. Indeed, in both states new configurations of ROCs have begun to emerge. Possibly the most important characteristic of ROCs resides in the fact that they offer state governments a potentially very efficient and effective means of developing partnership arrangements. A ROC enables just a single point of contact for state agencies in areas such as health, housing and welfare. An arrangement of this sort facilitates a broad appreciation of regional requirements whilst at the same time catering for the needs of smaller areas. L O C A L G OV E R N M E N T E F F I C I E N C Y

As we argued earlier, much has been achieved in making Australian local government more efficient and effective. Managerial practice has improved sharply, institutional structures have been radically redesigned to promote efficiency-enhancing competition in the form of outsourcing and public-private partnerships, financial reporting has been strengthened, massive structural change has been absorbed, and in general councils are now much more client-focussed than in the past. Nevertheless, substantial problems remain to be satisfactorily resolved in future. In the first place, although Andrew Worthington cogently demonstrated that most of the technical obstacles to performance measurement have been overcome, fully transparent benchmarking has yet to materialise. This is in large part due to the fact that in many state jurisdictions, local governments still produce unaudited data on their own economic performance. Moreover, in some instances this data is tardy in forthcoming. Thus, despite significant econometric advances in the statistical measurement of economic efficiency, little reliance can often be placed on the results of benchmarking exercises because of flawed or incomplete data. In an era of public sector transparency, it is simply unacceptable that inefficient councils are permitted to disguise the fact that they lag behind their counterparts in service delivery. As Andrew Johnson has argued, local governments can hardly call for greater financial sacrifices

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from ratepayers and larger funding contributions from higher levels of government in the absence of reliable benchmarking data on their own performance. Moreover, it seems grossly inequitable that a ‘tail’ of poorly performing councils can wag the body of the ‘dog’ of municipalities genuinely attempting to lift their game. The long-run cumulative effect of a system of ‘self reporting’ that enables inept councils to conceal their inefficiencies will surely be a ‘race to the bottom’. There is thus an urgent need for state-based local government associations, such as the NSW Local Government and Shires Association, to ensure that accurate and timely data is employed in annual benchmarking exercises. This will have at least three beneficial effects. Firstly, public confidence in municipal performance appraisal will grow and with it the esteem in which local government is held. Secondly, state and Commonwealth governments will be reassured that the grant funds they transfer to local governments are diligently and efficiently expended. And finally, reliable benchmarking will enable individual councils to compare their own performance with like municipalities and adjust their behaviour accordingly. Various institutional possibilities for gathering accurate current data exist. Perhaps the ‘first-best’ option would be for local government representative bodies in each state and territory to lobby their provincial legislatures allow state departments of local government to collect and audit performance information under the force of law. Individual councils that fail to produce reliable information by an assigned date could be punished by a reduction in the level of their grants. Should this option be resisted by state authorities on cost or other grounds, then local government associations could simply collect the data themselves and submit it to external audit by public accounting companies. Whatever data collection and oversight procedure is employed, it is critical that it be transparent and trustworthy. Local government restructuring remains another concern. Although the process of local government consolidation is complete for all intents and purposes in some state jurisdictions, most notably Victoria and Tasmania, in other large states, like Western Australia and New South Wales, the prospects for restructuring have yet to be explored in detail. Proponents of municipal amalgamation have insisted that larger local governments can achieve significant economies of scale and scope with substantial cost savings. By contrast, opponents of amalgamation have typically disputed the existence of considerable scale and scope economies and pointed to practical problems faced by rural and

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regional councils situated vast distances from their neighbouring municipalities. Available Australian empirical evidence on economies of scale and scope is mixed and extant international data moot (see, for example, Byrnes and Dollery, 2002). In his chapter, Paul May argues that concerns over any adverse impact the amalgamation of small councils into larger administrative units on democratic representation can be met with the creation of ‘virtual councils’. According to this view, existing small councils can maintain their current representational structure whilst at the same time pooling and sharing resources with adjacent municipalities by forming virtual councils. Under this kind of ‘have your cake and eat it’ arrangement, the purported advantages of low ratios between voters and elected representatives can be conserved while simultaneously enjoying the alleged benefits of any scale and scope economies that may arise. Whereas utopian schemes of this ilk appear at first sight to resolve many of the potential trade-offs between democratic participation and economic efficiency, as May argues, the crux of the matter surely lies not only in the division of any pecuniary benefits, but also the allocation of costs. It is hard to see how these problems will be resolved in the fractious ‘real world’ of Australian local government. A much more promising (and older) alternative to amalgamated large councils resides in resource sharing between adjacent small councils. Dollery (1997) has argued that the resource-sharing model enjoys both theoretical and empirical support. For instance, councils are statutorily obliged to fulfil a number of different functions, many of which will have different geographic zones or (‘benefit regions’) over which their benefits are spread. Thus street lighting typically benefits people in the immediate vicinity whereas large public parks may attract people from afar. Spillovers (or externalities) of the latter kind lend themselves to cost-sharing arrangements between jurisdictions whose residents are likely to benefit. Similarly, in cases where economies of scale can be demonstrated, such as domestic waste tip sites, adjacent councils can benefit by sharing these resources and bearing the associated costs on a per capita (or equivalent) basis. If resource sharing is undertaken on a case-by-case basis, then the political pitfalls of virtual councils can be avoided since no formal and binding long-term agreement has been made to agglomerate all council functions. Trial and error in particular and promising service areas can be employed to test for the existence of scale economies, and if they do not generate significant cost savings then the resource-sharing ‘experiment’ can be abandoned.

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The essential point we seek to make in regard to local government restructuring in Australia is that this ‘unfinished’ process requires a good deal more attention in future. Both the theoretical and empirical arguments that ‘bigger is better’ are not presently convincing. Moreover, structural alternatives to amalgamation are available, such as resource sharing and virtual local government. Additional discourse and inquiry are urgently required in this area. G E N E R AT I N G D I S C O U R S E A N D I N Q U I RY

We conclude this chapter, and the volume, by addressing one of the most problematic issues facing local government today: the low profile of the sector in the public consciousness. Unlike its state and federal counterparts there is very little informed dialogue about the functions, structures and purposes of Australian local government. The last — and only — time such dialogue took place with a national focus occurred during the early 1980s, following the establishment of the Advisory Council for Inter-Government Relations (ACIR) by (then) Prime Minister Fraser. The Council subsequently produced 13 discussion papers and three reports on local government. Balmer (1989, p.7) observed that the Council’s great achievement lay in the following: [T]he debate it generated in local government circles. Each discussion paper was circulated in draft form and comment on its contents was encouraged. As the reports themselves were developed, they too were widely circulated and seminars held to discuss their tentative proposals, as well as written comment obtained from government departments and other agencies. This process resulted in public servants from all three spheres of government and the elected members of local government developing a deeper understanding of its place within the federal system and its potential for a more widespread contribution to public life’. Undoubtedly the Council’s efforts did a great deal to lift the public image of local government across Australia and helped persuade premiers to formally recognise the sector in state constitutions. They also encouraged federal authorities to put national constitutional recognition of local government to referendum in 1988 (which then failed to carry). Given the changed political climate, it is unlikely that another body like the ACIR will emerge in the near future. Rather, the role of the state and national local government associations probably offers the

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most likely possibility of promoting discourse. During the late 1980s and early 1990s the Australian Local Government Association (ALGA) set about revitalising the sector as a whole and, in particular, building a cohesive and co-ordinated stance on critical issues. The ALGA itself emerged as a forceful and influential lobby with a sophisticated and well-researched approach to policy development. The result was substantial success for the Association in persuading the federal government to support desired courses of action. During the late 1990s the ALGA has been redoubling its efforts to promote the importance of local authorities in national affairs. It has expanded its influence in critical forums and is now represented on 70 federal councils and committees. Such strategies have undoubtedly served to lift the profile of local authorities in professional circles around Australia. Many of the state associations have also worked hard to project local government more firmly into the community’s consciousness. Though these endeavours have certainly born much fruit, the raising of a national awareness of the achievements of councils continues to be hampered by the narrow territorial perspectives of some state associations. At the grass roots level, councillors and managers receive little information about what is taking place in other states. The partnership initiatives developed by Tasmania and South Australia, for example, though familiar to senior administrators in adjoining states, took a long time to filter down through the system. One of the benefits of having a federal structure is that it allows various jurisdictions to experiment with different approaches to policy issues. The outcomes of these experiments need to be widely disseminated for the benefit of the local government sector as a whole. Finally, the universities are well positioned to play a critical role in building local government’s public profile. They can contribute by offering courses that both recognise the distinctiveness of the sector, and provide appropriate training for municipal practitioners. As the sophistication and complexity of council activity increases, career-oriented managers are discovering — in line with their counterparts in other spheres of government — that they need to supplement their undergraduate degree with a post-graduate qualification. This has usually involved undertaking a Masters of Business Administration, or Masters of Public Policy/Public Management. The generic management skills imparted by qualifications such as these undoubtedly served local government well during the 1990s. It is doubtful, though, that they can continue to meet the evolving needs of

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the sector into the 2000s. Studies in business management are typically oriented towards the private sector, while public policy and public administration courses cater largely for more conventional government agencies. The specific requirements of local authorities, however, differ substantively not only from the private sector, but also increasingly from those of state and federal bodies. Characteristics which distinguish the operation of councils from other spheres of government have been alluded to in almost all the previous chapters contained in this volume. Two further examples are worth mentioning here. First, where there is a separation of roles between the legislature, executive and judiciary in state and federal of government, these roles are fused at the municipal level. This situation significantly alters the dynamics of institutional activity and the manner in which managers interact with elected members. Second, the strategic dimension of local government activity is especially difficult because managers have to adopt a ‘whole of community’ perspective. This involves attempting to embrace the competing demands of a spectrum of citizen interests, as well as delivering a diverse range of services. The complexity of this exercise in large urban municipalities probably exceeds that undertaken by any single state or federal government department. Practitioners need to understand and accommodate the nature of such activities if the local government sector is to function effectively and reach its full potential in the future. With local government growing in scope and maturity, and assuming an increasingly salient position as an economic driver in the national polity, it is time to develop university degrees designed specifically for needs of the sector. These courses would be constructed in close collaboration with industry bodies like the Local Government Managers Association, and offered at post-graduate level — perhaps as a Master of Local Governance. Serious engagement with the universities would bring the added benefit of generating increased academic interest in the sector (which is unfortunately very limited at the moment). Major research studies relating to local government serve to stimulate public debate about the role and direction of municipalities. Dialogue of this kind, in turn, can only promote the status and credibility of the sector as a whole.

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INDEX

AAS 27 Financial Reporting by Local Governments 6, 65, 66, 67, 70, 74, 75, 236–37 AAS 38 Revaluation of Non-Current Assets 68 Aboriginal and Torres Strait Islander communities 119 accessibility of local government 40 accounting accrual 64, 65, 74 cash 71 renewals 71–72 accounting standards 6, 65, 67, 68, 72 accrual accounting 64, 65, 74 achievements of local government 232–38 Advisory Council for Inter-Governmental Relations 153, 248 agency theory 219–20 agenda control 220 Aldrich, JH 216 Allan, P 88, 89, 90, 92, 96–97 amalgamation of local government 79–97, 109, 119–21, 238, 246 Ammons, DN 187 annual reports 60, 64–65 assets depreciation 69, 71–74 expenditure 39–40 maintenance 72–73 valuation 67–71 asymmetric information 163–64, 214, 219–21 Aulich, C 79, 85, 132, 136, 137 Australian Accounting Standards Board 65, 68, 71, 76 Australian Council of Auditors-General 67

Australian Institute of Urban Studies 93 Australian Local Government Association 147, 149, 249 Austria 18–19 autonomy fiscal see fiscal autonomy local government 16–17, 86 Bailey, S 212, 213, 214, 215, 217, 223, 225, 228 Baker, G 7–8, 117–38, 232 Balmain Peninsula 90–91 Balmer, C 248 Banker, RD 193 Barr, JL 226 Barry, BM 221, 226 Barton, A 66, 69 Belgium 18, 26–27, 28 Bell, C 105 benchmarking 245–46 Bjurek, H 189, 190, 192 Borzel, TJ 159, 161, 170 Boulding, KE 162 Boyne, GA 212, 213, 215, 217, 223, 228 Bradrach, J 162 Brennan, G 216 Breton, A 221 Brisbane City Council 136–37 Brock, WA 221–22 Buchanan, JM 216, 221 budgeting 126, 128 bureaucracy legal-rational model 124 Mintzberg’s concept 124 Cadbury Committee 140–41, 153, 156 Canada 18, 25, 30

INDEX

Carlon, T 69 Carnegie, G 70 cash accounting 71 Caulfield, J 5, 13–34, 232 Cetinic-Dorol, CJ 151 Chang, S 189, 194 Chapman, R 80, 87, 95 Charnes, A 193 chief executive officers creation of position 127–28 relationship with councillors 151–52 relationship with non-executive directors 152–53 role 139, 143–44, 147–51 turnover rate 152 citizens consultative committee 155 clientalism 14, 21 collections, publicly held 70 Commonwealth Financial Assistance Grant 44, 53, 56, 58 Commonwealth Grants Commission 41, 49, 61–62 communitarianism 101, 107 community, concept of 103–11 community attitudes towards local government 52–53, 232 community education in local government 59–60, 62 community expectations of local government 15, 37, 40, 49–51, 59–60 community participation in local government 59, 103 community representation 85 community studies 105 Community Support Fund 111 competition, forms of 213 compulsory competitive tendering 131, 235 condition-based depreciation 72 constitutional recognition of local government 1, 82, 85, 103 contracts, executive 128 Cook, WD 189, 190 Cooper, WW 193 corporate governance 139–41, 152–55, 234 local government 142–44 public sector 141–42 corporate management reforms 125–29 corporate structure 127, 235 corporations, as voters 114 corruption 119, 224 cost shifting 42, 44 in expenditure 48–49 in grant income 44–48 Council of Australian Governments 103 councillors ratio to population 81, 109 relationship with professional managers 151–52, 219

• 269

role 139, 143–47, 155 salaries 153 training 153–54 turnover rate 146 councils, number per state 83 Crime and Misconduct Commission 119 cyclical maintenance 72–73 data, benchmarking 245–46 data envelopment analysis 181, 182–86, 189, 190–91, 192–93 Davis, OA 226 De Borger, B 189, 191, 192, 194, 196, 197 deferred maintenance 72–73 Deller, SC 188, 189–90, 194 democracy, local 79, 101–16, 233–34 democratic representation 85–87 Denmark 18 depreciation 69, 71–74 deprival value 68 deterministic frontier approach 180–81, 182–83, 188–89 devolution of government responsibilities to local level 42, 173 distributional coalitions 223 diversity of local government 3–4, 80–82 Dollery, B 9–10, 79, 82, 84, 85, 95, 189, 194, 197, 212–28, 231–50, 247 Domberger, S 188 Downs, A 226 Eccles, R 162 economics, local government 234–38 economies of scale 79, 80, 87, 89, 90, 92, 120, 131, 247 education, post-graduate, in local government 249–50 efficiency and democratic representation 85–87 determinants 195–98 economic 222 effect of community characteristics on 196 effect of political composition of council on 195–96 political 222 selective 221 targets 61 efficiency measurement 176–211 difficulties in implementing 186–88 studies, local public services 188–95, 200–211 techniques 180–86 theory 179–81 efficiency reforms 62, 119, 138, 245–48 integrating with public policy 136–37 National Competition Policy 133–36 Victoria 129–32

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elected members see councillors elections media reporting 218 political significance 217 electoral system, local government 111–15 employment in local government 125, 127, 235 employment practices 129 Ernst and Young Management Consultants 52 European Union 173 ‘exit’ (means of influencing service provision) 213–14 expectations, public see community expectations of local government expenditure by local government 1, 49, 50, 51 external reporting 64–77 failure, local government see government failure fair value 68 Faith, RL 216 fees and charges, state government 48 Financial Assistance Grant, Commonwealth 44, 53, 56, 58 financial pressures on local government 38, 61–62 financial reforms 64 financial reporting 63–77, 236 Financial Reporting by Local Governments (AAS 27) 6, 65, 66, 67, 70, 74, 75, 236–37 financial statements 65 Finland 18, 26 fiscal autonomy 17–18, 28, 30, 31 measurement 28, 33 fiscal illusion 224–26 flypaper effect 224–25 Forsund, FR 189, 192 France 18, 26 franchise, local government 111–15 free-disposal hull approach 181, 182–84, 189, 191–92 functions of local government 82, 103, 233 funding, external, of local government 60–61 G4+1 (group) 76 Gaebler, T 136 Gambetta, D 167 Geelong, amalgamation of local government 94 general purpose financial reports 65–66 Germany 18, 22, 28, 30, 31 Gerritsen, R 128 Golany, B 193 goods and services tax 57

GOVERNMENT

governance corporate see corporate governance local, capacity of councils to supply 171–75 governance mechanisms hierarchical 164–66 market system 162–64 network 166–71 government failure 212–28 susceptibility of local government 215, 228 taxonomies 213–28 typology 212–13 Gramlich, EM 225 Granovetter, M 168 grants, central government 18–19 Commonwealth Financial Assistance Grant 44, 53, 56, 58 cost shifting 44–48 effects on local government expenditure 224–25 indexation 44, 47 revenue recognition 75 to Victorian local government 45–47 Grindle, M 215 GST (goods and services tax) 57 Guidelines to Reduce Conflict of Interest in Councils 154 Gustafsson, B 190, 192 Guyra Shire Council 48–49 Hallebone, EL 94 Halstead, JM 189, 190 Hampel Committee 141, 153, 154, 156 Hardin, R 221, 226 Haward, M 87, 95 Hawley, W 217 Hayes, K 189, 194 health care 48 heritage assets 69 Hindmoor, A 164, 165, 166, 167 Hirschman, AO 175, 213, 216 Hjalmarsson, L 189, 190–91, 192 Hood, C 14, 16 horizontal co-ordination 161 Howell, R 86 Hughes, OE 149 Iceland 18–19 Independent Commission Against Corruption 119 industrial relations 121–22 Industry Commission 187 information asymmetries see asymmetric information infrastructure, council-controlled 38–39 Inner Sydney Inquiry 87, 92, 93, 97 innovation in local government 122–23 Integrated Local Area Planning Scheme 147 interest-based networks 167–69

INDEX

interest groups 221–23 Ireland 18–19, 28 iron triangles 221–24, 234 issue networks 167–68 Italy 26 Jamar, MA 191, 192, 193, 194, 195 Japan 25–26 Johnson, A 5, 37–62, 237, 245–46 Jordan, G 166 Karpin Report on management 124 Kazakov, A 189, 190 Kenis, P 159 Kerr, R 217, 218 Kerstens, K 189, 191, 192, 194, 196, 197 Kiss, R 7, 81, 84, 86, 87, 101–16, 233 Kjulin, U 190, 192 Kluvers, R 128 KPMG 93 Krugman, P 169 land tax 52, 54–55 ‘land under roads’ valuation 70–71 Larsen, HO 15 leadership, local 124–25, 127 least squares econometric techniques 180, 181–82, 188 legislation 102, 103, 118 cost benefit analysis 42 implementation by local councils 40, 42–43 Integrated Planning Act 1999 240 Local Government Act 1993 127 Local Government (Financial Assistance) Act 1986 123 Local Government (Financial Assistance) Act 1995 56 legitimacy of local government 15, 104, 107–11 Leichhardt Council 90–91 liability 73, 75, 76 Llewellyn-Smith, M 95 local democracy model 79, 85, 136 local government acts 102, 103, 118 Local Government Development Program 147 Local Government Managers Association 147 Loughlin, M 217 Lowndes, V 161, 162–63, 164–65, 168, 169, 172 Maclellan, R 94 Magee, SP 221–22 Mahoney, ME 94–95 maintenance see assets, maintenance Management Plans, council 60 management practices 147–48 management reform 232–33

• 271

Commonwealth role 121–23 general manager’s role 125 states’ role 118–19 Manly Council 91 Marsh, D 169 Marshall, N 8, 9–10, 102, 139–56, 231–50 Martin, J 132, 138 May, P 6–7, 79–97, 238, 247 microeconomic reform 234–35 Miller, GJ 187 Mintzberg’s concept of bureaucracy 124 models of local government 79 Moe, TM 219 Moesen, W 189, 192, 196, 197 Moore, D 93, 130, 132 Morey, RC 193 Mueller, DC 216 Mulgan, R 151 multi-organisational partnerships 160–61 catalytic role of local government 172–73 co-ordination problems 161–71 complexity 163 information asymmetries 163–64 power asymmetries 163 ‘thin’ transactions 164 transaction costs 163–64, 165 Municipal Association of Victoria 143 Narayan, D 171 National Competition Policy 133–36, 234 National Local Government Training Board 122 National Office of Local Government 84, 232 National Review of Local Government Labour Markets 122, 147 Nelson, CH 190 Netherlands, The 18–19, 23, 28, 30 Networking the Nation program 123 networks 159–75, 234 new institutional economics 162 new public management 13–14, 19, 124–38, 232, 235 cross-country comparisons 15–16, 20–27, 27, 29, 32 New South Wales amalgamation of local government 92–93 size of local government 88 state-local government planning 241 voting provisions 113, 114 New South Wales Local Government Grants Commission 57 New Zealand 18–19, 21–22, 30, 84, 86 Newby, H 105 Northwood, K 242

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Norway 18, 26, 31 NPM see new public management Oakerson, R 88–89 Oates, WE 225 O’Dowd, MC 212 OECD (Organisation for Economic Cooperation and Development) 17–18, 28 Olson, M 221, 223, 226 organisational structure of local government 124 Osborne, D 136 out-sourcing 90, 235, 236 Pallot, J 70 partnership agreements, state/local 238–42 pensioner concessions 49 performance information 66, 77, 176, 246 performance measures, difficulties in implementing 186–88 Plan First 241 policing 48–49 policy advisers 220 policy communities 167–69 policy networks 159–75, 234 policy role, local government 4 political composition of council, effect on efficiency 195–96 political entrepreneurship 226–28 political parties 217 political representation 85–86 population size 81 per councillor 81, 109 relationship to political performance 85–86 Proctor, C 242 productivity 177–78, 179 Proeller, I 23 profile of local government 248–50 program management 126 program planning 128 public choice theory 212, 213, 216 public sector reporting 64–67 Putterill, M 189, 191, 192 Queensland amalgamation of local government 120 community attitude towards local government 232 reform of local government 134–36 state and local planning coordination 240–41 voting provisions 114 Randwick City Council 92–93 rate pegging 52 rate revenue 51–52

GOVERNMENT

reform, local government 13–34, 102 local democracy model 85, 136 process reforms 13 public management model 136 structural efficiency model 85, 136 structural reforms 13, 83–84 Regional Organisations of Councils 242–45 Reid, M 173 renewals accounting 71–72 rent-seeking activity 221–23 renter illusion 225–26 reporting external see external reporting financial see financial reporting public sector see public sector reporting reports, general purpose see general purpose financial reports research on local government 1–3 resource sharing 247 responsibilities of local government 82, 103, 233 Revaluation of Non-Current Assets (AAS 38) 68 revenue recognition 74–77 revenue sources for local government 18, 44, 45, 80–81 Rhodes, E 193 Rhodes, R 166, 169 Richardson, J 166 Rodden, J 224 role of local government 82, 103, 233 Roll, Y 189, 190, 193 Romer, T 220 Rose-Ackerman, S 224 Rosenthal, H 220 Rouse, P 189, 191, 192, 194 Royal Commission on Australian Government Administration 125 Rudnicki, ER 188 Ryan, B 87 Ryan, C 6, 63–78, 236 Ryan, D 189, 191, 192 safety, community 48–49 Sartor, F 91 Savery, N 94 Schedler, K 23 Schmidt, P 183 Schneider, V 159 Seiford, LM 190 Self, P 86 services, provision of 79, 82, 97, 235 cost 41, 49–51 impediments to 214 means of influencing 213–14 services centre, shared 89 ‘services to the person’ 3, 4, 49–51 ‘services to the property’ 2, 4, 49–50 Singh, S 224

INDEX

size of local government 80–82, 87–89 Skelcher, C 161, 162–63, 164–65, 168, 169, 172 Smith, W 84, 85 social capital 170–71 social services, provision of 49–51 Soul, S 82, 85, 88, 89 South Australia amalgamation of local government 95–96, 109, 120 efficiency gains 120–21 partnerships program 239, 242 Spain 18, 26, 30, 31 spatially divisible public goods 223–24 Sproats, K 87, 91, 97, 102 standards, accounting 6, 65, 67, 68, 72 state government fees and charges 48 statutory positions 124 stochastic frontier approach 181, 182–83, 189–90 Stronger Families and Communities Strategy 111 structural efficiency model 79, 85, 136 Sweden 18–19, 24, 30 Switzerland 18, 23, 30, 31 Sydney Inner Sydney Inquiry 87, 92, 93, 97 local government structure 87 Sydney City Council 92 Tasmania amalgamation of local government 95, 107–8, 109, 120, 121 partnership agreements 239, 241 voting provisions 113, 114 tax goods and services 57 land 52, 54–55 Teicher, J 94 tendering, compulsory competitive 131, 235, 236 Thornton, J 89 Tollison, RD 216, 221 Tonnies, F 105, 106 Tourism Task Force 93 town and shire clerks 124, 127 Townsend, MA 94 training 122, 153–54 transfers, revenue 74–75, 76–77 transparency 86, 245 trust 166 Tulkens, H 189, 191, 192, 193, 194, 195 Tullock, G 221 United Kingdom fiscal autonomy 28, 31 local government reform 91, 130 new public management development 20, 30 revenue sources 18–19

• 273

United States 24–25, 28, 30, 91 universities, role in building local government profile 249–50 urban parish 89 Urgent Issues Group 72, 73 user charges 18 Vanden Eeckaut, PJ 191, 192, 193, 194, 195 Vann Gramberg, B 94 Vanneste, J 189, 192, 196, 197 Veiderpass, A 190–91 Victoria amalgamation of local government 84, 86, 93–95, 102, 108–9, 120, 131 community building 111 efficiency reforms 129–32 grant funding 45–47 state-local government relationship 240 voting provisions 113, 114, 115 virtual councils 80, 89–91, 96, 247 Vitaliano, DF 189, 196–97 Viton, PA 189 ‘voice’ (means of influencing service provision) 213–14 voter apathy 216–19, 234 voting alternatives to 216 as consumption activity 216 postal 114–15 property-based 112–14, 115 voting provisions, local government 111–15 WA Inc Royal Commission 119 Wagner, A 51 Walker, RG 66, 69, 73 Wallis, J 8–9, 159–75, 212, 218, 221, 227, 233 Walzer, N 190 Weisbrod, BA 212, 218 Western Australia, state-local government partnership 240 Wettenhall, R 232 Whyard, M 128 Wilks, S 166 Wintrobe, R 219, 220, 221 Witherby, AW 87, 89 Wolnizer, P 70 Woolcock, M 171 World Bank 174–75 Worthington, A 9, 176–211, 189, 194, 196, 197, 224, 225, 238, 245 Wright, M 166 Young, L 221–22 Zwart, I 95

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DEVELOPING AUSTRALIA’S REGIONS: THEORY AND PRACTICE Andrew Beer, Alaric Maude and Bill Pritchard The press and contemporary political debate send conflicting messages about the economic future of Australia’s regions. Developing Australia’s Regions: Theory and Practice is a book that recognises that regions matter – what takes place in our diverse regions fundamentally determines the nation’s quality of life. This practical book draws upon regional development theory, and national and international experience, to set out the principles and strategies that can be used to establish a stronger future for our regions.

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