Appendix 3G Further Perspectives on the Financial Benefits of Local Government Amalgamations

3G-1 Appendix 3G Further Perspectives on the Financial Benefits of Local Government Amalgamations Appendix 3G has five sections which support the section in Chapter 3 on estimates of the financial benefits of local government amalgamations. The first section further examines the KPMG estimates that savings of up to $845 million per annum could be achieved in NSW through local government amalgamations. This first section also includes a critique of the KPMG estimates by Judith McNeill. The second section presents a Darwinian survival perspective to the debate on the preferred sizes of local governments. The third section briefly discusses the self-limiting effect whereby the strength of the argument in favour of local government amalgamations must in some senses diminish with each successfully achieved amalgamation. The fourth section, in Table 3G-3, provides a compilation of extracts from 113 Australian and international literature sources which provide valuable insights on the local government amalgamation debate generally and which appear to provide important lessons for this current study. KPMG's Financial Benefit Estimates Consultants KPMG explored four local government amalgamation options, and establishes estimates of cost savings possible through each of these options, in a 1998 report prepared for the Property Council of NSW. Table 3G-1 below summarises the key findings in this report, where savings estimates are based on 1995-96 data. Table 3G-1: KPMG (1998) Estimates of Cost Savings Possible Through Local Government Amalgamations in NSW Resultant Number Savings as Savings if Annual Savings of Councils Percentage of Extended Options Based on 1995-96 (Compared with $3,821 million Australia-wide Figures ($m) 177 in 1998) (%) ($m) Option 1: Amalgamation Into 20 845 22 2500 ROC Areas – "The 20 Option" Option 2: Merged 145 or 146 255 7 800 Metropolitan Councils Option 3: The Barnett 100 162-486 4 to 13 500 to 1500 Approach – "The 100 Option" Option 4: "The 50 Option" 50 600 (indicative only) 16 1800 Source: KPMG (1998: 1, 10, 97, 113) for first three columns 3G-2 The first three columns above are obtained directly from KPMG (1998: 1, 10, 97, 113). The second column from the right expresses savings estimates as a percentage of the $3,821 million total expenditure of NSW local government in 1995-96 (KMPG 198: 97). The rightmost column then provides an indicative estimate of cost savings possible if percentage savings estimated by KPMG for NSW were achieved Australia-wide. These Australia-wide estimates are simply the NSW savings estimates multiplied by three and expressed to the nearest $100 million, noting that Australia's population has remained very nearly exactly three times that of NSW in recent years. Option 1, "the 20 option", is based on the fact that 154 of NSW's 177 councils, at the time of the KPMG study, were members of 21 regional organisations of councils (ROCs), though some councils were members of more than one ROC (KPMG 1998: 97-98). So this option largely involves the formation of single councils in each ROC area. KPMG (1998: 98) explain the rationale behind their $845 million cost savings estimate for Option 1 as follows (emphasis KPMG's): We have taken each individual ROC and isolated the council with the lowest expenditure per capita as a potential gauge of efficiency. Based on this we have then identified the expenditure savings other councils within the ROC could potentially obtain in an amalgamated council. A total expenditure saving is then determined for each ROC. Based on this model for reform total savings across NSW local government could be as high as $845 million out of a total cost of $3,821 million. Option 2, "the Metropolitan Merger" or "Metropolitan Super Council" option, would involve the formation of just two or three "super councils" from 34 metropolitan councils which make up the bulk of the Sydney metropolitan area (excluding outer-metropolitan areas including Campbelltown, Liverpool, Penrith, Blue Mountains, Hawkesbury and Baulkham Hills). The $255 million annual savings estimate for Option 2 is based on the same basic rationale as that employed for Option 1. Ashfield and Rockdale are identified as the councils with the lowest per capita expenditure levels in two separate groups of metropolitan councils, and the $255 million figure is the sum of the savings that would be achieved if the "supercity" including Ashfield could achieve the Ashfield per capita expenditure level, and that including Rockdale could similarly match the Rockdale levels after amalgamation. No savings are assumed for Sydney City and South Sydney councils, however, because the per capita expenditure levels of these two councils are significantly higher than those of all other councils among the 34 considered, because of the special infrastructure responsibilities and low resident populations in these inner city areas (KPMG 1998: 101, 103). 3G-3 KPMG's Option 3 is based on the 1974 recommendation by Barnett and others to rationalise NSW's then 223 municipalities and shires into 97 district councils through a comprehensive amalgamation program (Barnett 1974: 11, 46, 67-72; KPMG 1998: 104-107). KPMG (1998: 104) claim that such a move to 100 or so councils could generate savings of at least $162 million per annum if "half of general administration costs" could be saved through the amalgamation process, and eventually a total of three times this amount – at least $486 million per annum – once "savings in plant, equipment and infrastructure" are achieved "over a period of time". Option 4, "the 50 Option" is a "hybrid" of Options 1 and 3 which would amalgamate "non urban councils down to a maximum of 30-34" and "metropolitan councils ... from 43 down to 10-14" (KPMG 1998: 108). KPMG claims that this option should achieve savings which "fall between" those estimated for Options 1 and 3, and hence "an indicative $600M p.a.". KPMG (1998: 108) note that this option follows work by Stephen Soul (see, for example, 1996a: 42; 1996b: 8-9) which defined "areas based on natural catchment boundaries which aim to establish urban and commercial similarities". If KPMG's estimations, as above, are broadly accurate, then cost savings, or financial benefits, in the order of 4 to 20 percent, or $150 million to $850 million per annum, could be achieved through local government amalgamations in NSW alone, and approximately $500 million to $2.5 billion per annum could be saved Australia-wide if similar programs were followed throughout the country. KPMG (1998: 112) claim that their "econometric analysis clearly indicates that economies of scale are achieved where councils catered to larger populations", and that a "clear finding from this report is the need for larger local government to ensure economies of scale are obtained". But many of the assumptions their estimates rely upon remain far from proven. The savings estimates for Options 1 and 2 might well be valid if the lowest expenditure council, in each ROC and metropolitan council grouping employed by KPMG, was both (1) genuinely the most efficient council of the group, and (2) similar enough to all other councils in the group – in all significant respects – to constitute a valid representative and benchmark for the group. But KPMG does not at any point demonstrate that minimal per capita expenditure implies maximal efficiency, and it is fully clear that minimal expenditure benchmark councils are often far from representative of the council groups they represent, especially for ROC groupings which include both densely populated urban councils and sparsely populated rural councils. The 3G-4 "methods of estimation of costs savings" employed by KPMG "are particularly unfair to rural and regional councils", according to McNeill (2000: 12). For the New England ROC area, for example, KPMG (1998: 98) estimate that $19 million per annum could be saved if the nine councils in the New England ROC area amalgamated into a single New England council, and the amalgamated council matched the Armidale per capita expenditure level, as shown in Table 3G-2 below, noting that $73.72 million less $54.43 million equals $19.29 million. Table 3G-2: Data Employed by KPMG (1998) to Estimate Cost Savings Possible if the Nine Councils in the New England ROC Area Amalgamated into a Single Council Expenditure ($) Per Population Per Capita if Per Capita Capita Area Expenditure Density Expenditure Savings Savings Council Population Level Matches Savings (km2) ($m) (persons ($ per ($m) (%) that of ($ per per km2) person) Armidale person) Armidale City Council 34 23,450 16.94 696.88 722 16.94 0.00 0.0 0 Dumaresq Shire Council 4168 3,880 6.69 0.93 1,724 2.80 3.89 58.1 1002 Glen Innes Municipal 69 6,570 7.07 95.33 1,076 4.75 2.32 32.9 354 Council Guyra Shire Council 4371 4,880 4.57 1.12 936 3.53 1.04 22.9 214 Inverell Shire Council 8623 16,420 15.71 1.90 957 11.86 3.85 24.5 234 Severn Shire Council 5826 3,090 3.94 0.53 1,275 2.23 1.71 43.3 553 Tenterfield Shire Council 7124 7,010 7.61 0.98 1,086 5.06 2.55 33.5 363 Uralla Shire Council 3215 6,420 6.32 2.00 984 4.64 1.68 26.6 262 Walcha Council 6410 3,630 4.87 0.57 1,342 2.62 2.25 46.2 619 New England Total 39839 75,350 73.72 1.89 978 54.43 19.29 26.2 256 Source: KPMG (1998, Appendix 4) According to McNeill (2004: 12), "it is in the presentation of the econometric analysis (Chapter 5) and the estimation of cost savings from amalgamations (Chapter 8)", as above, "where the arguments of the [KPMG] report are most seriously incomplete".

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