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Government: we don’t have to tell you anything, latest chapter in chaotic merger process

Brian Dollery

The chaotic NSW local government Fit for the Future process has already seen several twists and turns. Thus the criteria for evaluating councils have been frequently changed without explanation, councils earlier identified as ‘stand alone’ are now unaccountably up for forced amalgamation, and vice versa.

The latest twist comes with the belated release of the KPMG methodology report which shows how KPMG calculated purported ‘savings’ assumed to flow from forced mergers. Media sources report that KPMG has been paid $400,000 for its efforts.

Now it has also been revealed that in late February the Baird government used its numbers in Parliament to block the Opposition’s request for further release of all documents relating to forced council merger proposals, including the KPMG detailed financial analyses.  The reasons given are apparently commercial-in-confidence and Cabinet-in-confidence.

Close scrutiny of the KPMG methodology is revealing. The report is replete with grammatical errors, inconsistencies with previous KPMG reports, incompatibility with official reports – such as the Local Government Remuneration Tribunal report – errors of logic, gross oversimplifications and errors in selection of appropriate data.

For example, KPMG simply assumes – without any justification – that mergers will generate 3% savings for city councils and 2% for their country cousins in terms of ‘materials and contract expenditure’. However, in its report for a group of southern regional councils KPMG assumes only 1.5% for the same expenditure category.

The KPMG report is also noteworthy for what it conveniently neglects. For instance, KPMG simply ignores the costs of ‘service harmonisation’ post-amalgamation where service quality is equalised across the newly merged councils. We know from the 2008 Queensland mergers that the costs associated with service harmonisation are considerable.

Similarly, many obvious and well-known transitional costs are overlooked. For example, all newly merged councils must have a single HQ and the costs of relocation, new buildings, and a host of other expense factors must be taken into account in calculating the costs of amalgamation. KPMG has simply ignored these costs.

“understating costs of council mergers and overstating benefits”

In aggregate, it is clear that the net effect of these various ‘errors and omissions’ understates the costs of municipal mergers and overstates their benefits. This fits with earlier machinations by the NSW Government, which conveniently ignore not only the results of mergers in Queensland and other Australian states, but the consequences of the 2004 NSW amalgamation.

*Professor Brian Dollery is Director of the Centre for Local Government at the University of New England.

Local councils in crisis then and now

The following excerpts from a review of public enquiries into council amalgamations in Australia in all states provide riveting context for why we are where we are with forced mergers in NSW in 2016.  Reference at the end.

Australian local government confronts daunting financial problems, perhaps most acutely evident in the emergence of a severe backlog in local infrastructure maintenance and renewal.   Australian local government policy makers have relied to an unusual and extreme degree on compulsory council consolidation as the main policy instrument to tackle the financial crisis.

Commonwealth agencies and state and territory governments have concurrently sought to manipulate the conduct of councils by means of prescriptive legislation and hypothecated grant programs in order to influence the composition, quality and quantity of services provided. This has fostered a high degree of ‘cost-shifting’ through which additional responsibilities placed on local authorities are funded for fixed initial periods only, under-funded or not funded at all (Hawker Report, 2003).   \\\\\should be *** between each extracted para to denote they do not flow one from another  —- ignore/delete the line just cropped up I can’t!

The ongoing concentration on amalgamation as the primary policy instrument for local government reform underlines the traditional view of Australian local government policy makers that ‘bigger is better’ in local governance.

Advocates of amalgamation typically argue that it represents an effective method of enhancing the operational efficiency of local councils, improving their administrative and technical capacity, generating cost savings, strengthening strategic decision-making and fostering greater political power. By contrast, opponents of consolidation typically underline the divisive nature of amalgamations, the absence of supportive empirical evidence, the equivocal outcomes observed in case studies, and the diminution of local democracy…. Shared services [may] represent a superior means of securing any benefits attendant upon council size and its scale of operations

Almost universal consensus exists that Australian local government faces a financial crisis …. …..Furthermore, [a research estimate is] that the ‘average’ local authority would be required to expend a further $2.6 million to $3.3 million per year in order to eliminate the annual infrastructure deficit together with the accumulated infrastructure backlog.

While numerous measures can be identified which could effectively address these problems, such as more borrowing to fund long-lasting local infrastructure, greater intergovernmental transfers, higher fees and charges, and a sharper focus on shared services, state and territory governments have remained largely wedded to structural change through forced amalgamation as their primary remedial policy instrument.

[After eight national and state-based public enquiries] the weight of evidence derived from these public inquiries strongly supports the bulk of the academic literature in its scepticism over local government amalgamation as an efficacious instrument for improving the financial sustainability of local government. [Why? Possibilities] it would seem that the belief on the part of policy makers that substantial scale and scope economies could be realized was misplaced. Similarly, policy makers appear to have significantly under-estimated the costs associated with amalgamation in the Australian context. A third explanation could invoke arguments about the constraints on revenue-raising in the different Australian local government jurisdictions as the real cause of financial unsustainability rather than the structure of local government. Further research along these lines is required.

Extracts from An evaluation of amalgamation and financial viability in Australian local government, Dollery, Grant and Knott, Public Finance and Management Vol 13, pp. 215-238, 2013.

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