Local Governments' efficiency: is there anything new after Troika's intervention in Portugal? Maria Basílio CIGES and Management Department, Polytechnic Institute of Beja (IPBeja), Escola Superior de Tecnologia e Gestão, R. Pedro Soares, Campus do Instituto Politécnico de Beja, 7800-295 Beja. Phone: +351 284 311 541 [email protected] Clara Pires CIGES and Management Department, Polytechnic Institute of Beja (IPBeja), Escola Superior de Tecnologia e Gestão, R. Pedro Soares, Campus do Instituto Politécnico de Beja, 7800-295 Beja. Phone: +351 284 311 541 [email protected] Carlos Borralho CIGES and Management Department, Polytechnic Institute of Beja (IPBeja), Escola Superior de Tecnologia e Gestão, R. Pedro Soares, Campus do Instituto Politécnico de Beja, 7800-295 Beja. Phone: +351 284 311 541 [email protected] José Pires dos Reis CIGES and Management Department, Polytechnic Institute of Beja (IPBeja), Escola Superior de Tecnologia e Gestão, R. Pedro Soares, Campus do Instituto Politécnico de Beja, 7800-295 Beja. Phone: +351 284 311 541 [email protected] Área Temática: I - Setor Público e Não Lucrativo Local Governments’ efficiency: is there anything new after Troika’s intervention in Portugal? ABSTRACT The austerity policies being implemented in many European countries and in Portugal, particularly as a consequence of the bailout agreement signed between the Portuguese Government and the Troika, bring measures to increase performance and reduce costs. The analysis of Local Governments’ efficiency and the assessment of its determinants is highly relevant for policy purposes. The aim of this research is to evaluate the efficiency of the 278 mainland municipalities in Portugal with a two-stage procedure, combining DEA methods in a first phase with fractional response models in the second stage. The analysis is performed for 2010 and 2015, before and after the Troika’s intervention in Portugal. Results show a similar pattern for both years, in the two stages. Performing a Chow test, no structural change occurred from 2010 to 2015, suggesting that the reforms implemented in municipalities did not succeed. Keywords: Municipalities, Data Envelopment Analysis, Efficiency, Fractional Response models. JEL classification: C14, C35, H72, D60 2 1. Introduction The topic of efficiency and performance measurement has been long investigated in public administration. Under the New Public Management paradigm which emerged in the 1980’s, the challenge has been to create governments that “works better but costs less”1. But how to reconcile the trade-off between more and better services to citizens with fewer resources? How to effectively measure governments’ outcomes? These are still questions hard to answer. In recent years this topic has taken a renewed importance. For countries like Portugal, due to its economic and financial situation that emerged from the sovereign and international crisis. In fact, from May 2011 to May 2014, the country was under an economic and financial assistance program negotiated between the Portuguese authorities and the European Commission (EC), the European Central Bank (ECB) and the International Monetary Fund (IMF) - the Troika. The bailout agreement required fiscal consolidation and several structural reforms. Among them, the reorganisation of local government administration in order to reduce the number of parishes,2 to improve efficiency and quality, and to reduce costs. The goal of this research is twofold. First, we assess the relative efficiency of each Portuguese municipality for the years 2010 and 2015, before and after Troika’s intervention in Portugal using Data Envelopment Analysis (DEA) methods - standard DEA and Inverted DEA. Second, we adopt fractional response models, to reveal potential determinants of these efficiency levels. It should be emphasized that as far as we know, no other study concerning Portuguese municipalities has used these methodologies. 1 This phrase turned into a slogan after the publication of a report in 1993, by Al Gore (then vice-president under the Bill Clinton presidency in the United States) untitled “Creating a Government that Works Better and Costs Less”. 2 The merger of civil parishes was one of the solutions suggested by the Troika to increase efficiency of local governments, in line with the argument of scale economies (Tavares et al., 2012). The number of parishes in Portugal was reduced from 4260 (in 2010) to 3092 (in 2015). 3 The main contribution of this research is to increase the discussion about efficiency and its drivers in Local Government entities and to provide empirical evidence about the impacts of the recent financial crisis on Portuguese municipalities. The plan of this paper is structured as follows. Section 2 provides a short description of the characteristics of Portuguese municipalities. Section 3 reviews some of the recent literature using DEA and second-stage procedures to evaluate local governments’ efficiency. Section 4 explains the research methodology and the econometric approach, detailing the data. Section 5 presents and discusses the results. Finally, Section 6 draws the main conclusions and avenues for future research are highlighted. 2. Characteristics of Portuguese Municipalities According to the Portuguese Constitution, there are three types of local governments: parishes (freguesias), municipalities, and administrative regions. From these three types, municipalities assume more importance, taking into account their political decision power and financial expression (Jorge et al., 2008). Parishes are small jurisdictions with few own competencies and administrative regions are not yet implemented in Portugal mainland. There are currently 308 municipalities, 278 are located in Portugal mainland and the remaining 30 are overseas municipalities belonging to the autonomous regions of Azores and Madeira. Local governments in Portugal have their own budgets and property, and are all subject to the same legal and institutional framework. Recent years have witnessed a progressive trend of decentralization of competencies from the Central Government to local authorities. However, the weight of local governments in general government finances is small compared to other European countries. As mentioned in Carvalho et al. (2016), local expenditures of Portuguese municipalities in 2015, accounted for only 15% of total public 4 expenditure and local revenue for 17% of total public revenue, which is the lowest when compared to the European average (29% and 32%, respectively). Municipal public expenditures are divided into capital and current expenditures. The former include investment, their main component, capital transfers to parishes, financial assets and liabilities, and other capital expenditures. As for current expenditures, their sub- components are expenditures on goods and services, financial expenditures, human resources, current transfers to parishes, and other current expenditures. The main sources of municipal revenue are transfers from the central government, local taxes (being the property tax the largest own-revenue source of municipalities) and other revenues (fees and fines, property income, and financial liabilities, among others). As mentioned in Costa, Veiga and Portela (2015), Portugal is an interesting case study because municipalities are all subject to the same rules and legislation and have the same policy instruments and resources at their disposal.3 Following the Local Administration Reform implemented in 2012, a number of legal reforms were introduced changing significantly the financial, control and reporting framework of Portuguese municipalities. Some of these changes resulted directly from the bailout agreement. The most significant legal diplomas are the current Local Finance Law (Law 73/2013) and Local Authorities Law (Law 75/2013). Portuguese municipalities’ main competences are established in art. 23 of this last diploma and includes: urban and rural infrastructure, energy, transport and communications, education, patrimony, culture and science, sports and leisure, healthcare, social services, housing, civil protection and police, environment and basic sanitation, consumer protection, social and economic development, territory organisation and external cooperation. 3 They may be considered a set of homogenous entities, a prerequisite to use a DEA approach. 5 3. Literature Review Performance and efficiency are difficult to measure, particularly for non-profit organizations. In what concerns local governments outcomes, it is even a more difficult task, given the nature of the services provided that are market-aside and difficult to valuate. One way to access efficiency is to use Cost Accounting information. Several attempts were made to develop a Cost Accounting subsystem to be applied to public entities; however the great majority of the municipalities have not implemented it yet. More recently, with the new accounting system (SNC-AP, the Accounting Standardization System for Public Administrations), it is expected to ascertain the cost of services provided by municipalities to the populations, and thus to allow an effective control of their efficiency and effectiveness (Carvalho et al., 2016). The implementation of Management Accounting systems in Public Administrations is of great importance in the current context in which the various entities are faced with the need to properly manage the resources at their disposal and to manage public institutions efficiently and economically. These systems