When Push Comes to Shove: The Process of Forced Amalgamation in New South Wales Local Government, 2011/2017 Glenn Fahey, Brian Dollery and Joseph Drew Abstract: The controversial forced amalgamation component of the New South Wales Government’s Fit for the Future local government reform program culminated in compulsory council consolidation in May 2016 after a long and tortuous process commenced in August 2011. The municipal merger program has not only been characterised inter alia by significant shifts in the assessment criteria applied to councils and the associated evaluation of council performance (Drew and Dollery 2015b), but also by significant moral hazard in the selection of ‘delegates’ to evaluate proposed mergers and the subsequent choice of ‘administrators’ to run merged councils for an extended period of time. This paper examines the process of forced mergers and considers its efficacy and procedural fairness. 1. Introduction Across the globe, local government systems in a host of countries, including Australia, have undergone various kinds of reform (Denters and Rose 2005; Faulk and Hicks 2011; Lago-Penas and Martinez-Vazquez 2013). Whereas policymakers have used a range of different instruments, in Australian local government structural change by means of compulsory council consolidation has been the most favoured approach to reform (Dollery, Grant and Kortt 2012). To date, all Australian state and territory municipal systems, save Western Australia, have been subject to forced amalgamation. Indeed, New South Wales (NSW) local government is presently undergoing its second dose of compulsory consolidation since an earlier program of enforced council mergers in 2004 (Bell, Drew and Dollery, 2016). The proposition underlying all municipal merger programs implicitly assumes that industry structure has predictable and systematic effects on industry behaviour and industry performance. This concept originated in the industrial organization literature in the form of the structure- conduct-performance (SCP) paradigm developed by Mason (1949), Bain (1951) and other 1 economists. The SCP paradigm holds that a stable causal relationship exists between the structure of an industry, organizational conduct and organizational performance. In the realm of local government, proponents of structural reform invoke the logic of SCP by contending that ‘bigger is better’, ‘bigger is cheaper’ and sometimes even ‘bigger is smarter’. Accordingly, it is held that policymakers should implement municipal mergers so as to reduce the number of local councils thereby increasing their size. The resultant larger local authorities will then generate scale and scope economies, cost savings, efficiency gains, enhanced administrative and technical capacity, greater ‘strategic capacity’, and other desirable outcomes purportedly contingent upon an increase in size. These contentious claims have sparked an ongoing debate in the local government literature (see, for example, Boyne 1998; Oakerson 1999; Sancton, 2011). Notwithstanding the popularity of compulsory council consolidation in contemporary reform programs, the empirical literature has offered little support for the efficacy of municipal mergers (see, for instance, Lago-Penas and Martinez-Vazquez 2013). Despite the continuing controversy surrounding council amalgamation, typically centred on merger programs recommended by state government-initiated public inquiries (Dollery, Grant and Kortt 2012), Australian policymakers have periodically pursued forced merger programs. For example, under the auspices of the NSW Government’s Fit for the Future reform program, its local government system presently experiences an even more extensive program of municipal mergers than in the earlier 2004 round of NSW forced amalgamations (Tiley 2012). Empirical scholars of local government have analysed the impact of compulsory council consolidation in numerous countries. For instance, a substantial body of empirical work exists on amalgamation in American local government (see, for example, Leland and Thurmaier, 2010; 2 and Faulk and Hicks, 2011) and Canada (see, for instance, Reese 2004; and Vojnovic 2000). Scholars have also examined the consequences of local government amalgamation in a number of European countries. For example, contributors to the volume edited by Dollery and Robotti (2008) considered council mergers in France, Germany, Italy and Spain. Similarly, a Special Edition of Local Government Studies assessed European amalgamation programs in Eastern Europe (Swianiewicz and Mielczarek 2010), Denmark (Vrangbæk 2010), Germany (Wollmann 2010), Greece (Hlepas (2010), Macedonia (Kreci and Ymeri 2010), and Belgium and the Netherlands (De Ceunincka et al. 2010). In a double Special Edition of Public Finance and Management (volumes 13(2) and 13(3) in 2013) contributors examined the impact of mergers on fiscal viability in local government in Australia, England and Wales, Estonia, Finland, Korea, New Zealand and the United States. Similarly, numerous scholars, like Koike (2010), have considered the impact of extensive municipal mergers in Japanese local government. The bulk of this empirical literature is decidedly sceptical on the efficacy of compulsory amalgamation in improving the performance of local government irrespective of the chosen performance metric employed. To date, most research effort has focused largely on the impact of mergers on municipal performance rather than how the process of implementing mergers has affected the nature of the subsequent council consolidation (Dollery, Grant and Kortt 2012). However, in many local government systems, scholars have occasionally examined how the merger process itself has influenced the resultant merger outcome, including in the realm of Australian local government (see, for example, Dollery, Wallis and Crase 2007; Dollery, Ho Chong Mun and Alin 2008; Dollery, Crase and O’Keefe 2009). 3 In the context of the current NSW forced merger program, empirical scholars of local government reform have made a number of useful contributions in terms of how process has influenced subsequent outcomes. For example, Drew, Kortt and Dollery (2015) and Fahey, Drew and Dollery (2016) have thoroughly discredited the assumptions made by the Independent Local Government Review Panel (2013) in its final report Revitalising Local Government, finding that claimed gains from size and efficiency underlying the Government’s case for forced amalgamation in NSW to be largely false. Similarly, Drew and Dollery (2015a) have shown that while the Panel’s call for the abolition of rate-pegging was justified, it had erred in its analysis. In a further paper Drew and Dollery (2015b) demonstrated how the criteria for assessing council financial sustainability had not only shifted, but also become inconsistent over the course of the Fit for the Future process. Along analogous lines, Drew and Dollery (2015c) showed how depreciation could be manipulated by individual councils to modify their financial viability. In their analysis of KPMG’s (2015) modelling of the proposed NSW mergers, Drew and Dollery (2016) identified a host of errors, most notably in terms of redundancy costs. In addition to this work, Drew and Grant (2016) have undertaken a particularly insightful analysis of the processes followed under the auspices of the Fit for the Future program. Using the conceptual framework developed by Marsh and McConnell (2010), they show that the Fit for the Future program was characterised by significant ‘process failure’ especially from data distortions and the deliberate ‘gaming’ of performance criteria. This paper seeks to augment the Drew and Grant (2016) analysis of the Fit for the Future process by considering the mechanics of merger decision-making under the Local Government Act (1993) by appointed Delegates of 4 the NSW Boundaries Commission and subsequent choice of Administrators in terms of its efficacy and procedural fairness1. The paper is divided into four main parts. Section two briefly sketches the conceptual framework advanced by Marsh and McConnell (2010) which offers an analytical prism for the paper. Section three provides a synoptic account of the Fit for the Future reform by way of background, especially its most recent processes in terms of determining whether a given merger proposal was endorsed by Delegates. Section four focuses on the NSW Boundary Commission process, the appointment of Delegates to assess specific merger proposals and the subsequent nomination of Administrators for merged municipalities. The paper ends in section five with some brief concluding comments. 2. Conceptual Framework Scholars of contemporary policy evaluation from various disciplinary backgrounds are generally agreed that almost all public policy is flawed (Dye, 2005). For example, economists acknowledge that real-world public policymaking is routinely sub-optimal since the marginal social costs of public policies frequently exceed their marginal social benefits. Over more than a century a substantial body of thought has evolved which uses the tools of economic analysis to assess public policies, most recently in the public choice tradition of welfare economics. The result has been a voluminous literature on ‘government failure’ (see, for example, Wolf (1989), Wallis and Dollery (1999), Mueller (2003) and Dolfsma (2013) for surveys). 1 Procedural fairness is the common law principle which ensures probity of decision making and is often used in a fashion synonymous with Natural Justice. There