Municipal Efficiency Wp.Doc

DOcumento de trabajo WORKING PAPERS SERIES DEPARTAMENTO DE GESTIÓ N DE EMPRESAS • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • On the efficiency of the delivery of municipal services Francisco J. Arcelus Pablo Arocena Fermín Cabases Pedro Pascual DT 92/07 • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • Campus de Arrosadí a, 31006 Pamplona, Spain Tel/Phone: (+34)948.169.400 Fax: (+34)948.169.404 E-mail: [email protected] 1 On the efficiency of the delivery of municipal services Francisco J. Arcelus Emeritus Professor, University of New Brunswick, Canada Departamento de Gestión de Empresas Universidad Pública de Navarra, Campus de Arrosadía 31006 Pamplona, Navarra, Spain Phone: 34 948 169413; Fax; 34 94 8169404 E-mail: [email protected] Pablo Arocena Departamento de Gestión de Empresas Universidad Pública de Navarra Campus de Arrosadía 31006 Pamplona, Navarra, Spain Phone: 34 948 169684; Fax; 34 94 8169404 E-mail: [email protected] Fermín Cabasés Departamento de Economía Universidad Pública de Navarra, Campus de Arrosadía 31006 Pamplona, Navarra, Spain Phone: 34 948 168479; Fax; 34 94 169721. E-mail: [email protected] Pedro Pascual Departamento de Economía Universidad Pública de Navarra, Campus de Arrosadía 31006 Pamplona, Navarra, Spain Phone: 34 948 169361; Fax; 34 94 169721. E-mail: [email protected] Abstract This paper examines the main determinants of the efficiency of the local governments’ delivery of services, with special emphasis on the efficiency contribution resulting from the amalgamation of municipal services. The analysis centers upon a three-step procedure, using stochastic frontier regression analysis, whereby the first step identifies the variables that delimit the level of individual efficiency for each locality; the second step determines the factors that contribute to the level of inefficiency remaining in the system; and the third proceeds to estimate the parameters of the two models simultaneously. The results, based upon data from the municipalities of the autonomous community of Navarre, Spain, highlight the strong and positive impact upon the operating costs of the municipalities of the size of the population base, of the incidence of senior citizens in each community, of the level of housing stock and of available land in the public domain. The evidence also illustrates the substantial and positive, influence on the efficiency in the provision of municipal services in a given community of several socioeconomic factors. Included here are the density and size of its population, its level amalgamation of services, the saliency of taxes, as compared to transfers, in its operating budget and the magnitude of its accumulated past investment policies in infrastructures. Keywords:municipal services, amalgamation of services, efficiency, stochastic frontier analysis 2 1. Introduction This paper examines the main determinants of the efficiency of the local governments’ delivery of services, with special emphasis on the efficiency contribution resulting from the amalgamation of municipal services. The theoretical underpinnings of the present study rest on the well-know decentralization theorem of fiscal federalism (e.g. Oates, 1972) that establishes the higher efficiency of decentralized public provision over the centralized case, which is not so sensitive to the diversity of expenditure needs among territories. In fact, the first advantage often cited in favour of fiscal decentralization is economic efficiency, as the literature amply attests (e,g, Bukeley and Watson, 2007; Ezcurra and Pascual, 2007). From a normative point of view, the diversity of preferences among local jurisdictions is probably the best-known reason to advocate a decentralized structure of government. According to this theorem, “in the absence of cost- savings from the centralized provision of a good and of inter-jurisdictional externalities, the level of welfare will always be at least as high (and typically higher) if Pareto-efficient levels of consumption are provided in each jurisdiction than if any single uniform level of consumption is maintained across all jurisdictions” (Oates, 1972, p. 54). However, note that, for this prescription to hold, it is necessary to assume that the central government is not able to differentiate its provision among localities. Oates (1999) justifies such an assumption by means of the supposed better knowledge of state and local governments about the preferences and economic conditions of their constituency. The basic argument is that, even though governments at all jurisdictional levels seek to maximize the social welfare of their own citizenry, local governments can adjust better to the provision of services demanded by their voters. The reasons for this proposition is that, being at the closest level to their constituents, municipalities tend to be better able to overcome problems related to information asymmetry and to political restrictions from competing lower-level jurisdictions suffered by more centralized levels of government. For these reasons, government officials are more likely to allocate resources efficiently and do their best to provide optimal levels of economic development and public services when they are closer to the electorate. Further, when local jurisdictions have to fund the services they provide , they are more likely to do so at a cost-efficient level where the marginal benefits equals the marginal costs if services are decentralized rather than centralized (e.g. Tanzi, 1996) The empirical evidence presented in this paper focuses on the municipalities of the autonomous community of Navarre, Spain. Navarre represents an ideal geographical laboratory to study the efficiency of amalgamating the provision of local services across different municipalities, for three important reasons. First, there is a relatively sizable amalgamation in 3 their provision among different localities. Such occurrence is due to the wide population spread, the absence of administrative units of higher degree of aggregation, such as counties, the encouragement and incentives offered by the government of Navarre and the obvious scale returns inherent in the investments needed to provide these services. For these purposes, our data panel consolidates into a cost dependent variable all revenues and expenditures to provide these services, be they incurred by the municipalities themselves or by other entities at various levels of dissagregation. The second half of Table 1 shows how widespread this amalgamation process is, especially in water and sewage distribution and treatment, social services and particular administrative services. A key hypothesis of the present study is that such an amalgamation process leads to a more efficient management and distribution of the said services. Second, Navarre presents one of the most atomised local structure of the Spanish autonomous communities, both in terms of the number and of the population size of the municipalities within its midst (Cabasés et al, 2007). In 2004, as Table 1 indicates, there were 272 towns in Navarre, with an average population of 2,150, versus an average of 8,102 in Spain. Further, 70% (60.81% in Spain) of them had fewer than 1,000 residents that comprise only 9% (3.99 %) of the entire population. In contrast, the eight (622) cities with over 10,000 people accounted for approximately 53% (75%) of the total number of inhabitants. Such level of atomization reinforces the likelihood of towns amalgamating their services in different spatial patterns, creating “overlapping jurisdictions”, an important component of Buchanan’s (1965) theory of clubs. Third, Navarre enjoys considerable fiscal autonomy, atypical of the average Spanish autonomous community. It has full responsibility for collecting taxes that are a posteriori transferred in part to the central and to the local governments and receives a greater share of capital transfers. [PLEASE INSERT TABLE 1 ABOUT HERE] The paper proceeds along the following lines. First, we present a brief summary of the extant theoretical and empirical literature on the efficiency of local municipal services, followed by a description of the data and of the variables used in the development of the model. Then, we specify the model and describe the statistical methodology used for its estimation. An analysis of the empirical results and some concluding comments complete the paper. 2. Literature review In this section, we examine the literature on the primary difficulties in identifying and measuring the efficiency of municipal services and present the major methodological approaches used in its 4 measurement. Worthington and Dollery (2000) present an empirical survey of the literature on the subject. An update of the survey appears in Table 2. Both surveys classify the extant studies according to five criteria: the type of sample, the methodology, the variables used in the model, be them inputs, outputs or explanatory variables, the analytical techniques and the main findings. Our analysis of the literature follows this five-criterion approach. [PLEASE INSERT TABLE 2 ABOUT HERE] 2.1 Samples The nature of the samples used, both cross-sectional and panel in nature, their size and their geographical coverage, at various levels of disagregation, attests to the importance and popularity enjoyed by the study of municipal services throughout the world. There are recent studies from Australia (e.g.

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